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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(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)
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New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
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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
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FORM 10-K ANNUAL REPORT - 1999
PRO-FAC COOPERATIVE, INC.
TABLE OF CONTENTS
PART I
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PAGE
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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
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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
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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.
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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.
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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:
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PRODUCT LINE BRAND NAME
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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
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(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.
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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
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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.
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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
<PAGE>
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
<TABLE>
<CAPTION>
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- -------- -----------
<S> <C> <C>
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
</TABLE>
10
<PAGE>
FACILITIES UTILIZED BY THE COOPERATIVE
<TABLE>
<CAPTION>
Type of Property (By Product Line) Location Square Feet
- ---------------------------------- --------- ------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Date Number of Shares Value of Shares
--------------- ---------------- ---------------
<S> <C> <C> <C>
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
====== =========
</TABLE>
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
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED OPERATING DATA:
(DOLLARS IN THOUSANDS, EXCEPT CAPITAL STOCK DATA)
<TABLE>
<CAPTION>
Fiscal Year Ended June
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
* 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
<PAGE>
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)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
--------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
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
===== ===== ====== ===== ===== =====
</TABLE>
(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
<PAGE>
NET SALES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
---------------------- --------------------- ----------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
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
======== ====== ======= ====== ====== =======
</TABLE>
(1) Includes net sales of operations sold.
See NOTE 3 to the "Notes to Consolidated Financial Statements."
OPERATING INCOME(1)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
--------------------- ----------------------- ---------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
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
===== ===== ====== ===== ===== =======
</TABLE>
(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
<PAGE>
TOTAL ASSETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
-------------------- --------------------- -------------------------
% of % of % of
$ Total $ Total $ Total
---- ----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
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
======= ===== ===== ===== ===== ======
</TABLE>
(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
<PAGE>
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.
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<PAGE>
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).
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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.
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<PAGE>
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.
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<PAGE>
Utilizing outstanding balances at June 26, 1999, the Term Loan Facility is
subject to the following amortization schedule.
<TABLE>
<CAPTION>
Fiscal Year Term Loan A Term Loan B Term Loan C Total
- ----------- ----------- ----------- ----------- ------
(Dollars in millions)
<S> <C> <C> <C> <C>
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
======= ====== ======= =======
</TABLE>
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.
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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.
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<PAGE>
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
<PAGE>
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 activities.
Agrilink has entered into certain financial instrument transactions to maintain
the desired level of exposure to the risk of interest rate fluctuations and to
minimize interest expense. More specifically, Agrilink entered into two interest
rate swap agreements with the Bank of Montreal. The agreements provide for fixed
interest rate payments by Agrilink in exchange for payments received at the
three-month LIBOR rate. See further discussion at NOTE 5 "Debt - Interest Rate
Protection Agreements" to the "Notes to Consolidated Financial Statements."
The following is a summary of Agrilink's interest rate swap agreements:
<TABLE>
<CAPTION>
June 26, 1999
-------------
<S> <C>
Interest Rate Swap:
Variable to Fixed - notional amount $250,000,000
Average pay rate 4.96-5.32%
Average receive rate 5.00%
Maturities through 2001
</TABLE>
Agrilink had a two-year option to extend the maturity date on one of the
interest rate swap agreements with a notional amount of $100,000,000. On June 8,
1999, Agrilink sold this option to Bank of Montreal for approximately
$2,050,000. The gain resulting from the sale is being recognized over the
remaining life of the interest rate swap.
While there is potential that interest rates will fall, and hence minimize the
benefits of Agrilink's hedge position, it is Agrilink's position that on a
long-term basis, the possibility of interest rates increasing exceeds the
likelihood of interest rates decreasing. Agrilink will, however, monitor market
conditions to adjust its position as it considers necessary.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
----
<S> <C>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary:
Management's Responsibility for Financial Statements........................................................... 26
Report of Independent Accountants.............................................................................. 27
Consolidated Financial Statements:
Consolidated Statement of Operations and Net Proceeds for the years ended
June 26, 1999, June 27, 1998, and June 29, 1996............................................................ 28
Consolidated Balance Sheet as of June 26, 1999 and June 27, 1998............................................. 29
Consolidated Statement of Cash Flows for the years ended June 26, 1999, June 27, 1998, and June 28, 1997 .. 30
Consolidated Statement of Changes in Shareholders' and Members' Capitalization and Redeemable Stock
for the years ended June 26, 1999, June 27, 1998, and June 28, 1997........................................ 32
Notes to Consolidated Financial Statements................................................................... 33
Selected Quarterly Financial Data............................................................................ 55
</TABLE>
25
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the financial
statements and related notes which begins on the page following the "Report of
Independent Accountants." These statements have been prepared in accordance with
generally accepted accounting principles.
The Cooperative's accounting systems include internal controls designed to
provide reasonable assurance of the reliability of its financial records and
the proper safeguarding and use of its assets. Such controls are monitored
through the internal and external audit programs.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants, who were responsible for conducting their examination
in accordance with generally accepted auditing standards. Their resulting report
is on the subsequent page.
The Board of Directors exercises its responsibility for these financial
statements. The independent accountants and internal auditors of the Cooperative
have full and free access to the Board. The Board periodically meets with the
independent accountants and the internal auditors, without management present,
to discuss accounting, auditing and financial reporting matters.
/s/ Dennis M. Mullen /s/ Earl L. Powers
- -------------------------------- ---------------------------------------
Dennis M. Mullen Earl L. Powers
President and Executive Vice President Finance and
Chief Executive Officer Chief Financial Officer
AGRILINK FOODS, INC. AGRILINK FOODS, INC.
Vice President Finance and
Assistant Treasurer
PRO-FAC COOPERATIVE, INC.
/s/ Stephen R. Wright
- -----------------------------------------
Stephen R. Wright
Executive Vice President Agriculture
AGRILINK FOODS, INC.
General Manager
PRO-FAC COOPERATIVE, INC.
August 23, 1999
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Pro-Fac Cooperative, Inc.
In our opinion, the consolidated financial statements listed under Item 8 of
this Form 10-K present fairly, in all material respects, the financial position
of Pro-Fac Cooperative, Inc. and its subsidiaries at June 26, 1999 and June 27,
1998, and the results of their operations and their cash flows for each of the
three fiscal years ended June 26, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Cooperative's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Our audits of the consolidated financial statements also included an audit of
the financial statement schedule listed in the accompanying index and appearing
under Item 14 of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein for the fiscal years ended June 26, 1999, June 27, 1998, and June 28,
1997 when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS LLP
/s/ PricewaterhouseCoopers LLP
- --------------------------------
Rochester, New York
August 23, 1999
27
<PAGE>
FINANCIAL STATEMENTS
PRO-FAC COOPERATIVE, INC. AND CONSOLIDATED SUBSIDIARIES - AGRILINK FOODS, INC.
AND AGRIFROZEN FOODS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND NET PROCEEDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------ -------------
<S> <C> <C> <C>
Net sales $ 1,238,946 $ 719,665 $ 730,823
Cost of sales (877,438) (524,082) (539,081)
----------- ---------- ----------
Gross profit 361,508 195,583 191,742
Selling, administrative, and general expenses (291,395) (141,739) (145,214)
Gains on sale of assets 64,734 0 3,565
Restructuring (5,000) 0 0
Income from Great Lakes Kraut Company 2,787 1,893 0
----------- ---------- ----------
Operating income 132,634 55,737 50,093
Interest expense (67,420) (30,767) (36,473)
Amortization of debt issue costs associated with the Bridge Facility (5,500) 0 0
----------- ---------- ----------
Pretax income before extraordinary item, cumulative effect of an accounting
change, dividends, and allocation of net proceeds 59,714 24,970 13,620
Tax provision (24,746) (7,840) (5,529)
----------- ---------- ----------
Income before extraordinary item, cumulative effect of an accounting change,
dividends, and allocation of net proceeds 34,968 17,130 8,091
Extraordinary item relating to the early extinguishment of debt (net of
income taxes) (18,024) 0 0
Cumulative effect of an accounting change (net of income taxes) 0 0 4,606
----------- ---------- ----------
Net income $ 16,944 $ 17,130 $ 12,697
=========== ========== ==========
Allocation of Net Proceeds:
Net income $ 16,944 $ 17,130 $ 12,697
Dividends on common and preferred stock (6,734) (6,328) (5,503)
----------- ---------- ----------
Net proceeds 10,210 10,802 7,194
Allocation to earned surplus (10,210) (4,662) (3,661)
------------ ---------- ----------
Net proceeds available to members $ 0 $ 6,140 $ 3,533
=========== ========== ==========
Allocation of net proceeds available to members:
Payable to members currently (25% of qualified proceeds
available to members in fiscal 1998 and 1997, respectively) $ 0 $ 1,535 $ 883
Allocated to members but retained by the Cooperative:
Qualified retains 0 4,605 2,650
----------- ---------- ----------
Net proceeds available to members $ 0 $ 6,140 $ 3,533
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
28
<PAGE>
PRO-FAC COOPERATIVE, INC. AND CONSOLIDATED SUBSIDIARIES - AGRILINK FOODS, INC.
AND AGRIFROZEN FOODS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
June 26, 1999 June 27, 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,540 $ 5,049
Accounts receivable, trade, less allowances for bad debts of $1,607 and $774, respectively 88,249 55,046
Accounts receivable, other 9,848 6,107
Income taxes refundable 11,295 0
Current deferred tax assets 16,160 4,849
Inventories -
Finished goods 284,863 111,153
Raw Materials and supplies 50,057 30,433
---------- --------
Total inventories 334,920 141,586
---------- --------
Current investment in CoBank 2,403 1,994
Prepaid manufacturing expense 18,217 8,404
Prepaid expenses and other current assets 27,883 12,989
---------- --------
Total current assets 515,515 236,024
Investment in CoBank 19,693 22,377
Investment in Great Lakes Kraut Company 6,679 6,584
Property, plant, and equipment, net 367,255 194,615
Assets held for sale at net realizable value 890 2,662
Goodwill and other intangible assets, less accumulated amortization of $22,031 and $13,634, respectively 260,733 94,744
Other assets 25,714 12,234
---------- --------
Total assets $1,196,479 $569,240
=========== ========
</TABLE>
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
<TABLE>
<S> <C> <C>
Current liabilities:
Notes payable $ 54,900 $ 0
Current portion of obligations under capital leases 208 256
Current portion of long-term debt 8,670 8,071
Accounts payable 107,159 72,690
Income taxes payable 0 4,046
Accrued interest 5,974 8,559
Accrued employee compensation 15,127 8,598
Other accrued expenses 64,603 19,013
Dividends payable 45 52
Amounts due AgriFrozen growers 1,453 0
Amounts due members 20,045 20,636
---------- --------
Total current liabilities 278,184 141,921
Obligations under capital leases 568 503
Long-term debt 702,322 229,937
Deferred income tax liabilities 23,072 32,457
Other non-current liabilities 32,222 23,053
Minority interest in AgriFrozen 8,000 0
---------- --------
Total liabilities 1,044,368 427,871
---------- --------
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation preference $10 per
share, authorized 500,000 shares; issued and outstanding 26,061
and 27,043, respectively 261 270
Common stock, par value $5, authorized - 7,000,000 shares
</TABLE>
<TABLE>
<CAPTION>
June 26, 1999 June 27, 1998
------------- -------------
<S> <C> <C> <C> <C>
Shares issued 1,995,740 1,825,863
Shares subscribed 384,649 160,629
--------- ---------
Total subscribed and issued 2,380,389 1,986,492
Less subscriptions receivable in installments (384,649) (160,629)
--------- ---------
Total issued and outstanding 1,995,740 1,825,863 9,979 9,129
========= =========
Shareholders' and members' capitalization:
Retained earnings allocated to members 25,573 29,765
Non-qualified allocation to members 2,050 2,660
Non-cumulative Preferred Stock, par value $25, authorized - 5,000,000 shares;
issued and outstanding - 39,635 and 45,001, respectively 991 1,125
Class A Cumulative Preferred Stock, liquidation preference $25 per share;
authorized 10,000,000 shares; issued and outstanding 3,694,495
and 3,503,199, respectively 92,362 87,580
Earned surplus 21,658 11,448
Accumulated other comprehensive income:
Minimum pension liability adjustment (763) (608)
---------- --------
Total shareholders' and members' capitalization 141,871 131,970
---------- --------
Total liabilities and capitalization $1,196,479 $569,240
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
29
<PAGE>
PRO-FAC COOPERATIVE, INC. AND CONSOLIDATED SUBSIDIARIES - AGRILINK FOODS, INC.
AND AGRIFROZEN FOODS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 16,944 $ 17,130 $ 12,697
Amount payable to members currently 0 (1,535) (883)
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item relating to the early extinguishment of debt
(net of income taxes) 18,024 0 0
Cumulative effect of an accounting change (net of income taxes) 0 0 (4,606)
Gains on sale of assets (64,734) 0 (3,565)
Loss on disposal of assets 353 0 0
Amortization of goodwill and other intangibles 9,396 3,581 4,092
Amortization of debt issue costs 7,678 800 800
Depreciation 24,752 18,009 22,680
Provision for deferred taxes 9,949 752 4,557
Provision for losses on accounts receivable 208 0 445
Equity in undistributed earnings of the Bank (520) (715) (1,143)
Change in assets and liabilities:
Accounts receivable 32 (9,294) (3,983)
Inventories 34,388 (25,654) (1,636)
Income taxes payable/refundable (5,231) (1,626) 2,272
Accounts payable and accrued expenses (52,639) 18,145 (922)
Amounts due to members (591) 4,845 7,033
Other assets and liabilities (16,078) (11,360) 530
--------- ---------- ---------
Net cash (used in)/provided by operating activities (18,069) 13,078 38,368
--------- ---------- ---------
Cash Flows from Investing Activities:
Purchase of property, plant, and equipment (23,787) (14,056) (13,691)
Proceeds from disposals 93,486 12,794 68,716
Proceeds from sales of idle facilities 1,427 0 4,465
Proceeds from investment in Bank 2,795 1,611 315
Cash paid for acquisitions (516,052) (7,423) 0
--------- ---------- ---------
Net cash (used in)/provided by investing activities (442,131) (7,074) 59,805
--------- ---------- ---------
Cash Flows from Financing Activities:
Net proceeds from note payable 54,900 0 0
Proceeds from issuance of long-term debt 720,045 11,180 0
Payments on long-term debt (287,574) (8,076) (97,854)
Payments on capital leases (282) (616) (503)
Cash paid for debt issuance costs (19,354) 0 0
Issuance of stock, net of repurchases 844 140 (260)
Cash paid in lieu of fractional shares 0 (9) 0
Cash portion of non-qualified conversion (153) (84) (88)
Cash dividends paid (6,735) (6,328) (5,503)
--------- ---------- ---------
Net cash provided by/(used in) financing activities 461,691 (3,793) (104,208)
--------- ---------- ---------
Net change in cash and cash equivalents 1,491 2,211 (6,035)
Cash and cash equivalents at beginning of period 5,049 2,838 8,873
--------- ---------- ---------
Cash and cash equivalents at end of period $ 6,540 $ 5,049 $ 2,838
======== ========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 70,005 $ 30,319 $ 36,907
========= ========== =========
Income taxes, net $ 14,742 $ 8,714 $ (1,300)
========= ========== =========
Acquisition of Agripac, Inc.:
Accounts receivable $ 12,563 $ 0 $ 0
Inventories 42,655 0 0
Property, plant, and equipment 26,727 0 0
Prepaid expenses and other current assets 1,063 0 0
Discount on subordinated note 8,157 0 0
Other non-current assets 4,000 0 0
Other accrued expenses (10,644) 0 0
Other non-current liabilities (4,000) 0 0
Minority interest (8,000) 0 0
--------- ---------- ---------
$ 72,521 $ 0 $ 0
Escrow to be refunded 6,413 0 0
--------- ---------- ---------
78,934 0 0
Discount on subordinated note (8,157) 0 0
--------- ---------- ---------
$ 70,777 $ 0 $ 0
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
PRO-FAC COOPERATIVE, INC. AND CONSOLIDATED SUBSIDIARIES - AGRILINK FOODS, INC.
AND AGRIFROZEN FOODS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Acquisition of Erin's Gourmet Popcorn:
Inventories $ 33 $ 0 $ 0
Property, plant, and equipment 26 0 0
Goodwill and other intangible assets 554 0 0
--------- --------- ---------
$ 613 $ 0 $ 0
========= ========= =========
Acquisition of Dean Foods Vegetable Company:
Accounts receivable $ 24,201 $ 0 $ 0
Inventories 195,674 0 0
Prepaid expenses and other current assets 6,374 0 0
Property, plant, and equipment 157,227 0 0
Assets held for sale 49 0 0
Goodwill and other intangible assets 178,377 0 0
Accounts payable (40,865) 0 0
Accrued employee compensation (8,437) 0 0
Other accrued expenses (74,845) 0 0
Long-term debt (2,752) 0 0
Subordinated promissory note (22,590) 0 0
Deferred tax asset 30,645 0 0
Other assets and liabilities, net (2,453) 0 0
--------- --------- ---------
$ 440,605 $ 0 $ 0
========= ========= =========
Acquisition of J.A. Hopay Distributing Co., Inc.:
Accounts receivable $ 420 $ 0 $ 0
Inventories 153 0 0
Property, plant and equipment 51 0 0
Goodwill and other intangible assets 3,303 0 0
Other accrued expenses (251) 0 0
Obligation for covenant not to compete (1,363) 0 0
---------- --------- ---------
$ 2,313 $ 0 $ 0
========= ========= =========
Acquisition of DelAgra:
Accounts receivable $ 0 $ 403 $ 0
Inventories 0 3,212 0
Prepaid expenses and other current assets 0 81 0
Property, plant, and equipment 0 1,842 0
Goodwill and other intangible assets 0 1,508 0
Other accrued expenses 0 (433) 0
--------- --------- ---------
$ 0 $ 6,613 $ 0
========= ========= =========
Acquisition of C&O Distributing Company:
Property, plant, and equipment $ 0 $ 54 $ 0
Goodwill 0 756 0
--------- --------- ---------
$ 0 $ 810 $ 0
========= ========= =========
Investment in Great Lakes Kraut Company:
Inventories $ 0 $ 2,175 $ 0
Prepaid expenses and other current assets 0 409 0
Property, plant, and equipment 0 6,966 0
Other accrued expenses 0 (62) 0
--------- --------- ---------
$ 0 $ 9,488 $ 0
========= ========= =========
Supplemental schedule of non-cash investing and financing activities:
Conversion of retains to preferred stock $ 4,648 $ 6,967 $ 3,275
========= ========= =========
Net proceeds allocated to members but retained by the Cooperative $ 0 $ 4,605 $ 2,650
========= ========= =========
Capital lease obligations incurred $ 320 $ 222 $ 206
========= ========= =========
Notes from Nalley Canada Ltd. forgiven in acquisition $ 0 $ 0 $ 4,986
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
PRO-FAC COOPERATIVE, INC. AND CONSOLIDATED SUBSIDIARIES - AGRILINK FOODS, INC.
AND AGRIFROZEN FOODS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
AND REDEEMABLE STOCK
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------
June 26, June 27, June 28,
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Retained earnings allocated to members:
Qualified retains:
Balance at beginning of period $ 29,765 $ 31,920 $ 32,318
Net proceeds allocated to members 0 4,605 2,650
Converted to preferred stock (4,191) (6,751) (3,048)
Cash paid in lieu of fractional shares (1) (9) 0
---------- ---------- ----------
Balance at end of period 25,573 29,765 31,920
---------- ---------- ----------
Non-qualified retains:
Balance at beginning of period 2,660 2,960 3,275
Distribution of non-qualified retains -
Cash paid (153) (84) (88)
Converted to preferred stock (457) (216) (227)
----------- ---------- -----------
Balance at end of period 2,050 2,660 2,960
---------- ---------- ----------
Total retains allocated to members at end of period 27,623 32,425 34,880
---------- ---------- ----------
Non-cumulative preferred stock:
Balance at beginning of period 1,125 1,345 2,645
Conversion to cumulative preferred stock (134) (220) (1,300)
---------- ---------- -----------
Balance at end of period 991 1,125 1,345
---------- ---------- ----------
Cumulative preferred stock:
Balance at beginning of period 87,580 80,393 75,818
Converted from non-cumulative preferred stock 134 220 1,300
Converted from non-qualified retains 457 216 227
Converted from qualified retains 4,191 6,751 3,048
---------- ---------- ----------
Balance at end of period 92,362 87,580 80,393
---------- ---------- ----------
Earned surplus (unallocated and apportioned):
Balance at beginning of period 11,448 6,786 3,125
Allocation to earned surplus 10,210 4,662 3,661
---------- ---------- ----------
Balance at end of period 21,658 11,448 6,786
---------- ---------- ----------
Accumulated other comprehensive income:
Balance at beginning of period (608) 0 0
Minimum pension liability adjustment (155) (608) 0
---------- ---------- ----------
Balance at end of period (763) (608) 0
----------- ---------- ----------
Total shareholders' and members' capitalization $ 141,871 $ 131,970 $ 123,404
========== ========== ==========
Redeemable stock:
Class B cumulative preferred stock:
Balance at beginning of period $ 270 $ 315 $ 334
(Repurchased)/issued, net (9) (45) (19)
---------- ---------- ----------
Balance at end of period $ 261 $ 270 $ 315
========== ========== ==========
Common stock:
Balance at beginning of period $ 9,129 $ 8,944 $ 9,185
Issued/(repurchased), net 850 185 (241)
---------- ---------- ----------
Balance at end of period $ 9,979 $ 9,129 $ 8,944
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
32
<PAGE>
PRO-FAC COOPERATIVE, INC. AND CONSOLIDATED SUBSIDIARIES
AGRILINK FOODS, INC. AND AGRIFROZEN FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Pro-Fac Cooperative, Inc. ("Pro-Fac" or the "Cooperative") is an agricultural
cooperative which processes and markets crops grown by its members through its
wholly-owned subsidiary Agrilink Foods, Inc. ("Agrilink") and through its
subsidiary AgriFrozen Foods, Inc. ("AgriFrozen") in which it has a controlling
interest.
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. 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 in Mexico, are within the United States.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, which requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
FISCAL YEAR: The fiscal year of Pro-Fac ends on the last Saturday in June.
Fiscal 1999, 1998, and 1997 each comprised 52 weeks.
CONSOLIDATION: The consolidated financial statements include the Cooperative and
its subsidiaries, Agrilink and AgriFrozen. The financial statements are after
elimination of intercompany transactions and balances. Investments in
affiliates, owned more than 20 percent but not in excess of 50 percent, are
recorded under the equity method of accounting.
RECLASSIFICATION: Certain items for fiscal 1998 and 1997 have been reclassified
to conform with the current presentation.
ADOPTION OF SFAS NO. 130: Effective June 28, 1998, the Cooperative adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." Comprehensive income is defined as the change in equity
of a business during a period from transactions and other events and
circumstances from non-owner sources. Under SFAS No. 130, the term
"comprehensive income" is used to describe the total of net earnings plus other
comprehensive income. The Cooperative includes minimum pension liability
adjustments within comprehensive income. The adoption of SFAS No. 130 did not
have a material effect on the Cooperative's results of operations or financial
position.
ADOPTION OF SFAS NO. 131: Effective June 28, 1998 the Cooperative adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 replaces the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Cooperative's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
This change in approach and the adoption of SFAS No. 131 did not affect the
Cooperative's results of operations or financial position.
As management makes the majority of its operating decisions based upon the
Company's significant product lines, the Company has elected to utilize
significant product lines in determining its operating segments. The Company's
four primary operating segments are as follows: vegetables, fruits, snacks, and
canned meals. See NOTE 8 to the "Notes to Consolidated Financial Statements."
RESTRUCTURING: During the third quarter of fiscal 1999, Agrilink began
implementation of a corporate-wide restructuring program. The overall objectives
of the plan are to reduce expenses, improve productivity, and streamline
operations. The total restructuring charge amounted to $5.0 million and was
primarily comprised of employee termination benefits. 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 remaining
termination benefits will be liquidated during fiscal 2000.
EXTRAORDINARY ITEM RELATING TO THE EARLY EXTINGUISHMENT OF DEBT: During fiscal
1999, Agrilink refinanced its existing indebtedness, including its 12 1/4
percent Senior Subordinated Notes due 2005 and its then existing bank debt.
Premiums and breakage
33
<PAGE>
fees associated with early redemptions and other fees incurred amounted to $18.0
million (net of applicable income taxes of $10.4 million). See NOTE 3 to the
"Notes to Consolidated Financial Statements."
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. Management
believes this change is preferable because it provides a better matching of
costs with related revenues when evaluating interim financial statements. 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.
Management does not believe that the difference in accounting methodologies for
spare parts had any material impact on historical financial statements.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include short-term
investments with maturities of three months or less. There were no such
short-term investments at June 26, 1999 or June 27, 1998.
INVENTORIES: Inventories are stated at the lower of cost or market on the
first-in, first-out ("FIFO") method. Reserves recorded at June 26, 1999 and June
27, 1998 were $8,401,000 and $391,000, respectively.
INVESTMENT IN COBANK: The Cooperative's investment in CoBank was required as a
condition of previous borrowings. These securities are not physically issued by
CoBank, but rather the Cooperative is notified as to their monetary value. The
investment is carried at cost plus the Cooperative's share of the undistributed
earnings of CoBank (that portion of patronage refunds not distributed currently
in cash).
Earnings on the Cooperative's investment in the Bank in fiscal year 1999, 1998,
and 1997 amounted to $743,000, $1,023,000, and $1,633,000, respectively.
During fiscal 1999, all outstanding obligations due CoBank were repaid. In
conjunction with the operating policy of CoBank, the Cooperative's investment
will be liquidated over a five-year period.
PREPAID MANUFACTURING EXPENSE: Allocation of manufacturing overhead to finished
goods produced is on the basis of a production period; thus at the end of each
period, manufacturing costs incurred by seasonal plants, subsequent to the end
of previous pack operations, are deferred and included in the accompanying
balance sheet. Such costs are applied to finished goods during the next
production period and recognized as an element of costs of goods sold.
PROPERTY, PLANT, AND EQUIPMENT AND RELATED LEASE ARRANGEMENTS: Property, plant,
and equipment are depreciated over the estimated useful lives of the assets
using the straight-line method, half-year convention, over 4 to 40 years.
Lease arrangements are capitalized when such leases convey substantially all of
the risks and benefits incidental to ownership. Capital leases are amortized
over either the lease term or the life of the related assets, depending upon
available purchase options and lease renewal features.
Assets held for sale are separately classified on the balance sheet. The
recorded value represents an estimate of net realizable value.
GOODWILL AND OTHER INTANGIBLES: Goodwill and other intangible assets include the
cost in excess of the fair value of net tangible assets acquired in purchase
transactions and acquired non-competition agreements and trademarks. Goodwill
and other intangible assets, stated net of accumulated amortization, are
amortized on a straight-line basis over 3 to 35 years. The Cooperative
periodically assesses whether there has been a permanent impairment in the value
of goodwill. This is accomplished by determining whether the estimated,
undiscounted future cash flows from operating activities exceed the carrying
value of goodwill as of the assessment date. Should aggregate future cash flows
be less than the carrying value, a writedown would be required, measured by the
difference between the discounted future cash flows and the carrying value of
goodwill.
OTHER ASSETS: Other assets are primarily comprised of debt issuance costs. The
debt issuance costs are amortized over the term of the debt. Amortization
expense incurred, including $5,500,000 of fees associated with the Bridge
Facility in fiscal 1999, were $7,678,000, $800,000 and $800,000 in fiscal 1999,
1998, and 1997, respectively.
INCOME TAXES: Income taxes are provided on non-patronage income for financial
reporting purposes. Deferred income taxes resulting from temporary differences
between financial reporting and tax reporting as well as from the issuance of
non-qualified retains are appropriately classified in the balance sheet.
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<PAGE>
PENSION: The Cooperative and its subsidiaries have several pension plans and
participate in various union pension plans which on a combined basis cover
substantially all employees. Charges to income with respect to plans sponsored
by the Cooperative and its subsidiaries are based upon actuarially determined
costs. Pension liabilities are funded by periodic payments to the various
pension plan trusts.
DERIVATIVE FINANCIAL INSTRUMENTS: The Cooperative does not engage in interest
rate speculation. Derivative financial instruments are utilized to hedge
interest rate risks and are not held for trading purposes.
Agrilink has entered into interest rate swap agreements to limit exposure to
interest rate movements. Net payments or receipts are accrued into prepaid
expenses and other current assets and/or other accrued expenses and are recorded
as adjustments to interest expense. Interest rate instruments are entered into
for periods no greater than the life of the underlying transaction being hedged.
Management anticipates that all interest rate derivatives will be held to
maturity. Any gains or losses on prematurely terminated interest rate
derivatives will be recognized over the remaining life, if any, of the
underlying transaction as an adjustment to interest expense.
COMMODITIES OPTIONS CONTRACTS: In connection with the purchase of certain
commodities for anticipated manufacturing requirements, the Cooperative
occasionally enters into options contracts as deemed appropriate to reduce the
effect of price fluctuations. These options contracts are accounted for as
hedges and, accordingly, gains and losses are deferred and recognized in cost of
sales as part of the product cost. These activities are not significant to the
Cooperative's operations as a whole.
CASUALTY INSURANCE: The Cooperative is insured for workers compensation and
automobile liability through a primarily self-insured program. The Cooperative
accrues for the estimated losses from both asserted and unasserted claims. The
estimate of the liability for unasserted claims arising from unreported
incidents is based on an analysis of historical claims data. The accrual for
casualty insurance at June 26, 1999 and June 27, 1998 was $6.3 million and $3.3
million, respectively.
ENVIRONMENTAL EXPENDITURES: Environmental expenditures that pertain to current
operations are expensed or capitalized consistent with the Cooperative's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations that do not contribute to current
or future revenues are expensed. Liabilities are recorded when remedial
activities are probable, and the cost can be reasonably estimated.
ADVERTISING: Production costs of commercials and programming are charged to
operations in the year first aired. The cost of other advertising promotion and
marketing programs are charged in the year incurred. Advertising expense
incurred in fiscal 1999, 1998, and 1997 amounted to $38,192,000, $9,878,000, and
$8,736,000, respectively.
EARNINGS PER SHARE DATA OMITTED: Earnings per share amounts are not presented as
earnings are not distributed to members in proportion to their common stock
holdings. Earnings (representing those earnings derived from patronage-sourced
business) are distributed to members in proportion to the dollar value of
deliveries under Pro-Fac contracts rather than based on the number of shares of
common stock held.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used by the Cooperative in estimating the fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS AND NOTES PAYABLE: The carrying amount
approximates fair value because of the short maturity of these
instruments.
LONG-TERM INVESTMENTS: The carrying value of the investment in CoBank
was $22.1 million at June 26, 1999. As there is no market price for
this investment, a reasonable estimate of fair value is not possible.
LONG-TERM DEBT: The fair value of the long-term debt is estimated based
on the quoted market prices for the same or similar issues or on the
current rates offered for debt of the same remaining maturities. See
NOTE 5 to the "Notes to Consolidated Financial Statements."
35
<PAGE>
NOTE 2. AGREEMENTS WITH AGRILINK AND AGRIFROZEN
AGRILINK: The contractual relationship between Pro-Fac and Agrilink is defined
in the Pro-Fac Marketing and Facilitation Agreement (the "Pro-Fac Marketing
Agreement"). Under the Pro-Fac Marketing Agreement, Agrilink 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 Pro-Fac
Marketing Agreement.
Under the Pro-Fac Marketing Agreement, Agrilink paid Pro-Fac $62.2 million,
$58.5 million, and $51.4 million as CMV for crops purchased from Pro-Fac in
fiscal years 1999, 1998, and 1997, respectively. Excluding the value of raw
agricultural products purchased in conjunction with the DFVC and AgriFrozen
acquisitions, the crops purchased by Agrilink from Pro-Fac represented
approximately 71 percent, 76 percent, and 71 percent of all raw agricultural
crops purchased by Agrilink in fiscal 1999, 1998, and 1997, respectively.
Under the Pro-Fac Marketing 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. The volume and type of
crops to be purchased by Agrilink under the Pro-Fac Marketing Agreement are
determined pursuant to its annual profit plan, which requires the approval of a
majority of the Disinterested Directors of Agrilink. 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) of Agrilink. In years in which Agrilink has
losses on Pro-Fac Products, Agrilink 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) of Agrilink.
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 in losses of certain operations
of the business. For fiscal years ended 1998 and 1997, such additional patronage
income amounted to $12.5 million and $10.3 million, respectively. For fiscal
1999, there was no additional patronage income. Under the Pro-Fac Marketing
Agreement, Pro-Fac is required to reinvest at least 70 percent of the additional
patronage income in Agrilink. Subsequent to the acquisition date, Pro-Fac has
invested an additional $29.9 million in Agrilink.
AGRIFROZEN: The contractual relationship between Pro-Fac and AgriFrozen is
defined in a Marketing and Facilitation Agreement between Pro-Fac and
AgriFrozen. Under this agreement, AgriFrozen will purchase raw products from
Pro-Fac and will process and market the finished products. AgriFrozen will pay
Pro-Fac 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. The
agreement permits AgriFrozen to pay 20 percent in cash and retain 80 percent of
its earnings on Pro-Fac products as working capital.
Under the Marketing and Facilitation Agreement between AgriFrozen and Pro-Fac,
the Board of Directors of AgriFrozen is required to consist of: (i) at least
three and as many as five directors who are individuals who currently serve as
directors of Pro-Fac and who are chosen by Pro-Fac's Board of Directors; (ii)
one director who is nominated by the president of Agrilink from among Agrilink's
management employees; and (iii) any number of disinterested directors who are to
be elected from individuals suggested by the president of Agrilink.
Disinterested directors are persons who are neither employees, shareholders, nor
otherwise affiliated with Pro-Fac or AgriFrozen, but may include a disinterested
director of Agrilink.
NOTE 3. ACQUISITIONS AND DISPOSALS
FISCAL 1999 -
AGRIPAC FROZEN VEGETABLE BUSINESS: On February 23, 1999, PF Acquisition II,
Inc., which does business under the name AgriFrozen Foods ("AgriFrozen"),
acquired the frozen vegetable business of Agripac, Inc. ("Agripac"), an Oregon
cooperative. AgriFrozen, Inc. was formed in January 1999 under the corporation
laws of New York State. AgriFrozen was formed to acquire substantially all of
the assets of Agripac related to its frozen vegetable processing business. 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,
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<PAGE>
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 purchase price for the assets was $80.5 million. AgriFrozen paid an
additional $7.8 million in related expenses, including $6.4 million to prior
member-growers of Agripac to obtain crop delivery agreements with AgriFrozen,
and transaction expenses and miscellaneous costs totaling $1.4 million.
AgriFrozen expects to pay an additional $1.2 million in severance costs
associated with the acquisition and the implementation of AgriFrozen's business
plan. In connection with, and as a condition to the consummation of the
acquisition, AgriFrozen entered into a sufficient number of crop delivery
contracts with prior member growers of Agripac acceptable to AgriFrozen.
The acquisition was accounted for under the purchase method of accounting. Under
purchase accounting tangible and identifiable intangible assets acquired are
recorded at their respective fair values. The valuations and other studies which
will provide the basis for such an allocation have not progressed to a stage
where there is sufficient information to make a final allocation in the
accompanying financial statements. Accordingly, the purchase accounting
adjustments made in the accompanying financial statements are preliminary.
In order to consummate the acquisition, AgriFrozen (i) entered into a credit
facility with CoBank (the "CoBank Credit Facility") providing for $30 million of
term loan borrowings and a revolving credit facility (the "CoBank Revolving
Credit Facility") of $55 million in fiscal 2000 and $50 million in each year
thereafter and (ii) issued a $12 million Subordinated Promissory Note to CoBank.
Neither Pro-Fac nor Agrilink guaranteed the debts of AgriFrozen or otherwise
pledged any of their respective properties as security for the CoBank financing.
All of AgriFrozen's indebtedness is expressly without recourse to Pro-Fac and
Agrilink.
Phase I environmental audits were performed on the facilities acquired from
Agripac, including lease properties. A number of environmental conditions
requiring remedial action have been identified, but none of them individually,
or in the aggregate, are expected to exceed the $4.0 million of debt reduction
for environmental remediation to be provided by CoBank.
As part of its business strategy, AgriFrozen has also entered into an
administrative services agreement with Agrilink to provide it with certain
management consulting and administrative services.
The effects of the Agripac acquisition are not material and accordingly, have
been excluded from the pro forma information presented below.
SALE OF ADAMS BRAND PEANUT BUTTER OPERATIONS: On January 29, 1999, Agrilink sold
the Adams brand peanut butter operations to the J.M. Smucker Company. Agrilink
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.
ERIN'S GOURMET POPCORN: On January 5, 1999, Agrilink announced that it acquired
the assets of Erin's Gourmet Popcorn ("Erin's"), a Seattle-based, ready-to-eat
popcorn manufacturer. The acquisition was accounted for as a purchase. The
purchase price was approximately $0.6 million. Intangibles of approximately $0.6
million were recorded in conjunction with this transaction and are being
amortized over 3 to 30 years.
The effects of the Erin's acquisition are not material, and accordingly, have
been excluded from the pro forma information presented below.
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, Freshlike and Veg-All, and
various private
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<PAGE>
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.
The DFVC Acquisition was accounted for under the purchase method of accounting.
Under purchase accounting, tangible and identifiable intangible assets acquired
and liabilities assumed were recorded at their respective fair values. Goodwill
associated with the DFVC Acquisition is being amortized over 30 years.
The following unaudited pro forma financial information presents a summary of
consolidated results of operations of Pro-Fac and DFVC as if the acquisition had
occurred at the beginning of the 1998 fiscal year.
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------
June 26, 1999 June 27, 1998
-------------- -------------
<S> <C> <C>
Net sales $1,336.0 $1,242.6
Income/(loss) before extraordinary items $ 25.1 $ (0.3)
Net income/(loss) $ 7.1 $ (0.3)
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and include adjustments for additional depreciation expense and
amortization and interest expense on acquisition debt. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination been in effect at the beginning of the 1998 fiscal year, or of
the future operations of the consolidated entities.
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 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 item 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 - "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.
J.A. HOPAY DISTRIBUTING CO, INC.: Effective July 21, 1998, Agrilink acquired
J.A. Hopay Distributing Co., Inc. ("Hopay") of Pittsburgh, Pennsylvania. Hopay
distributed snack products for Snyder of Berlin, one of the Company's businesses
included within its snack foods unit. The acquisition was accounted for as a
purchase. The purchase price (net of liabilities assumed) was approximately $2.3
million. Intangibles of approximately $3.3 million were recorded in conjunction
with this transaction and are being amortized over 5 to 30 years.
The effects of the Hopay acquisition are not material and, accordingly, have
been excluded from the above pro forma presentation.
FISCAL 1998 -
MICHIGAN DISTRIBUTION CENTER: Effective March 31, 1998, Agrilink entered into a
multiyear logistics 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. Agrilink received proceeds of $12.6 million for the equipment and
facility which were applied to outstanding bank loans. No significant gain or
loss occurred as a result of this transaction.
DELAGRA CORP.: Effective March 30, 1998, Agrilink 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
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<PAGE>
purchase price was approximately $6.6 million. Goodwill of approximately $0.6
million and $0.9 million for a covenant not to compete were received in
conjunction with this transaction These amounts are being amortized over 30 and
5 years, respectively.
C&O DISTRIBUTING COMPANY: Effective March 9, 1998, Agrilink acquired the
majority of assets and the business of C&O Distributing Company of Canton, Ohio.
C&O distributed snack products for Snyder of Berlin, one of Agrilink's
businesses included within its snack foods unit. The acquisition was accounted
for as a purchase. The purchase price was approximately $0.8 million.
Intangibles of approximately $0.8 million were recorded in conjunction with this
transaction and are being amortized over 30 years.
FORMATION OF NEW SAUERKRAUT COMPANY: 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, 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.
Summarized financial information of Great Lakes Kraut Company is as follows:
CONDENSED STATEMENT OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------
June 26, 1999 June 27, 1998
-------------- -------------
<S> <C> <C>
Net sales $ 30,174 $ 27,620
Gross profit $ 9,392 $ 7,439
Operating income $ 6,267 $ 4,411
Net income $ 5,575 $ 3,786
CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
Current assets $ 14,112 $ 10,668
Noncurrent assets $ 21,669 $ 18,884
Current liabilities $ 13,237 $ 6,483
Noncurrent liabilities $ 5,736 $ 6,261
</TABLE>
FISCAL 1997 -
GEORGIA FROZEN 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 will manage its facility and all frozen food transportation operations
of Agrilink in Georgia and New York. Agrilink received proceeds of approximately
$9.1 million which were applied to outstanding bank loans. No significant gain
or loss occurred as a result of this transaction.
INFORMATION SERVICES REORGANIZATION: On June 19, 1997, Systems & Computer
Technology Corporation ("SCT") and Agrilink announced they signed a major
outsourcing services and software agreement effective June 30, 1997. The
ten-year agreement, valued at approximately $50 million, is for SCT's, OnSite
outsourcing services.
SALE OF NEW YORK CANNED VEGETABLE BUSINESSES: On May 6, 1997, Seneca Foods
Corporation ("Seneca") acquired the Agrilink Leicester, New York production
facility and the LeRoy, New York distribution center, as well as the Blue Boy
brand.
Agrilink received proceeds of approximately $29.4 million which were applied to
outstanding bank debt. No significant gain or loss occurred as a result of this
transaction.
This transaction also included an agreement requiring Agrilink to handle all
vegetable sourcing for Seneca at its New York plants. This agreement initially
has a minimum ten-year term.
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<PAGE>
BROOKS FOODS: On April 30, 1997, Hoopeston Foods acquired certain assets from
the Brooks Foods operating facility. The purchase price of approximately $2.1
million was paid with $400,000 in cash and a $1.7 million ten-year note. The
proceeds were applied to outstanding bank loans. No significant gain or loss
occurred as a result of this transaction. In addition, the two companies entered
into a copack and warehouse agreement under which Hoopeston will produce,
package, and warehouse certain products.
NALLEY CANADA LTD.: On June 26, 1995, Agrilink sold Nalley Canada Ltd., located
in Vancouver, British Columbia, to a management group. The operations were sold
for approximately $8.0 million. Approximately, $4.0 million was received in
cash. The remainder of the proceeds were received through a series of long-term
notes with maturities between 1998 and 2005. The notes included an interest rate
of 12 1/4 percent.
In April 1997, Agrilink acquired certain businesses from Nalley Canada Ltd. The
acquired operations include a $12.0 million consumer products business, which
markets throughout the western Provinces of Canada. The purchase price of
approximately $5.0 million was paid through the forgiveness of various long-term
receivables (including interest earned) issued to Agrilink in connection with
its sale of the stock of Nalley Canada Ltd. in 1995.
FINGER LAKES PACKAGING: On October 9, 1996, Agrilink completed the sale of
Finger Lakes Packaging, Inc. ("Finger Lakes Packaging"), a subsidiary of
Agrilink 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 on this transaction. Agrilink received
proceeds of approximately $30.0 million. Proceeds from this sale were applied to
outstanding bank loans. The transaction also included a long-term supply
agreement between Silgan and Agrilink.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT AND RELATED OBLIGATIONS
The following is a summary of property, plant and equipment and related
obligations at June 26, 1999 and June 27, 1998:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 26, 1999 June 27, 1998
------------------------------------- ------------------------------------------
Owned Leased Owned Leased
Assets Assets Total Assets Assets Total
--------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Land $ 19,864 $ 0 $ 19,864 $ 5,772 $ 0 $ 5,772
Land improvements 7,907 0 7,907 3,949 0 3,949
Buildings 112,229 395 112,624 71,342 395 71,737
Machinery and equipment 296,658 827 297,485 163,177 990 164,167
Construction in progress 19,507 0 19,507 14,421 0 14,421
--------- ------- -------- ---------- -------- ----------
456,165 1,222 457,387 258,661 1,385 260,046
Less accumulated depreciation (89,568) (564) (90,132) (64,678) (753) (65,431)
--------- ------- -------- ---------- -------- ----------
Net $ 366,597 $ 658 $367,255 $ 193,983 $ 632 $ 194,615
========= ======= ======== ========== ======== ==========
Obligations under capital leases(1) $ 776 $ 759
Less current portion (208) (256)
------- --------
Long-term portion $ 568 $ 503
======= ========
</TABLE>
(1) Represents the present value of net minimum lease payments calculated at the
Cooperative's incremental borrowing rate at the inception of the leases,
which ranged from 6.3 to 9.8 percent.
Interest capitalized in conjunction with construction amounted to approximately
$259,000 and $248,000 in fiscal 1999 and 1998, respectively.
40
<PAGE>
The following is a schedule of future minimum lease payments together with the
present value of the minimum lease payments related to capitalized leases, both
as of June 26, 1999.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Ending Last Capital Operating Total Future
Saturday In June Leases Leases Commitment
----------------------- -------- --------- ------------
<S> <C> <C> <C>
2000 $ 296 $ 9,444 $ 9,740
2001 219 7,379 7,598
2002 147 5,501 5,648
2003 115 4,352 4,467
2004 102 2,027 2,129
Later years 113 12,567 12,680
------- -------- --------
Net minimum lease payments 992 $ 41,270 $ 42,262
======== ========
Less amount representing interest (216)
-------
Present value of minimum lease payments $ 776
=======
</TABLE>
Total rent expense related to operating leases (including lease arrangements of
less than one year which are not included in the previous table) amounted to
$15,352,000, $12,250,000, and $11,204,000 for fiscal years 1999, 1998, and 1997,
respectively.
NOTE 5. DEBT
The following is a summary of long-term debt outstanding:
<TABLE>
<CAPTION>
June 26, 1999 Total
-------------------------------------------- June 27,
Agrilink AgriFrozen Total 1998
-------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Bank Debt $ 446,600 $ 30,000 $ 476,600 $ 72,400
Senior Subordinated Notes 200,015 0 200,015 160,000
Subordinated Promissory Note (net of discount) 23,372 4,006 27,378 0
Other 6,999 0 6,999 5,608
----------- --------- ---------- -----------
Total Debt 676,986 34,006 710,992 238,008
Less Current Portion (8,670) 0 (8,670) (8,071)
----------- --------- ---------- -----------
Total Long-Term Debt $ 668,316 $ 34,006 $ 702,322 $ 229,937
=========== ========= ========== ===========
</TABLE>
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 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.
41
<PAGE>
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 million from the Term A Facility to the Term B and Term
C Facilities in increments of $25 million.
Utilizing outstanding balances at June 26, 1999, the Term Loan Facility is
subject to the following amortization schedule:
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Fiscal Year Term Loan A Term Loan B Term Loan C Total
- ----------- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C>
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
======= ====== ======= =======
</TABLE>
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 on the Term
Loan Facility 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
(excluding AgriFrozen), current and future subsidiaries 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, Pro-Fac negotiated an amendment to the original
covenants. In conjunction with this amendment, Pro-Fac 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.
INTEREST RATE PROTECTION AGREEMENTS: Agrilink has entered into a three-year
interest rate swap agreement with the Bank of Montreal in the notional amount of
$150 million. The swap agreement provides for an interest rate of 4.96 percent
over the term of the swap payable by Agrilink in exchange for payments at the
published three-month LIBOR. In addition, Agrilink entered into a separate
interest rate swap agreement with the Bank of Montreal in the notional amount of
$100 million for an initial period of three years. This swap agreement provides
for an interest rate of 5.32 percent over the term of the swap, payable by
Agrilink in exchange for payments at the published three-month LIBOR. Agrilink
entered into these agreements in order to manage its interest rate risk by
exchanging its floating rate interest payments for fixed rate interest payments.
Agrilink had a two-year option to extend the maturity date on one of the
interest rate swap agreements with a notional amount of $100,000,000. On June 8,
1999, Agrilink sold this option to Bank of Montreal for approximately
$2,050,000. The gain resulting from the sale is being recognized over the
remaining interest rate swap life.
42
<PAGE>
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 the Cooperative'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.
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.
REVOLVING CREDIT FACILITY ("NOTES PAYABLE"): Borrowings under Agrilink's
Revolving Credit Facility (excluding AgriFrozen) were as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Balance at end of period $ 18,900 $ 0 $ 0
Rate at fiscal year end 8.2% 0.0% 0.0%
Maximum outstanding during the period $ 116,200 $ 66,000 $65,000
Average amount outstanding during the period $ 76,700 $ 51,300 $34,300
Weighted average interest rate during the period 7.8% 7.0% 7.3%
</TABLE>
Agrilink also maintains a Letter of Credit Facility which provides for the
issuance of letters of credit through September 1999. As of June 26, 1999, there
were $16.2 million letters of credit outstanding. Management anticipates timely
renewals of the Letter of Credit facilities.
43
<PAGE>
OTHER DEBT: Other debt of $7.0 million carries rates up to 10 percent at June
26, 1999.
MATURITIES: Total long-term debt maturities during each of the next five fiscal
years for debt associated with Agrilink are as follows: 2000, $8.7 million;
2001, $16.5 million; 2002, $11.1 million; 2003, $11.1 million; and 2004, $11.4
million. Provisions of the Term Loan require annual payments on the last day of
each September of each year (commencing September 30, 1999) in an amount equal
to the "annual cash sweep" (equivalent to approximately 75 percent of net income
adjusted for certain cash and non-cash items) for the preceding fiscal year. As
of June 26, 1999, Agrilink had satisfied its obligation under this provision.
Provisions of the Term Loan Facility also require that cash proceeds from the
sale of businesses be applied to the Term Loan Facility.
FAIR VALUE: The estimated fair value of Agrilink's long-term debt outstanding
was approximately $673.7 million and $249.8 million at June 26, 1999 and June
27, 1998, respectively. The fair value for long-term debt was estimated using
either quoted market prices for the same or similar issues or the current rates
offered to Agrilink for debt with similar maturities.
AGRIFROZEN DEBT
COBANK CREDIT FACILITY (BANK DEBT): In connection with the acquisition of
Agripac's frozen vegetable processing business, AgriFrozen entered into a CoBank
Credit Facility with CoBank. The CoBank Credit Facility consists of a $30
million Term Loan Facility and a Revolving Credit Facility both facilities
mature June 29, 2002. The Revolving Credit Facility commitment is $55 million
for fiscal 2000 and in each year thereafter it is $50 million.
The CoBank term loan facility bears interest, at the option of AgriFrozen, at a
fixed or variable rate. The fixed rate represents the CoBank cost of funds plus
4.19 percent. The variable rate is CoBank's "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 the revolving credit facility
advances. There is an interest cap, which includes the fees on the CoBank
Revolving Credit Facility, of $1.9 million 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 or amendments 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%. 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.
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.
44
<PAGE>
REVOLVING CREDIT FACILITY ("NOTES PAYABLE"): Borrowings under AgriFrozen's
Revolving Credit Facility were as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Ended
June 26, 1999
-----------------
<S> <C>
Balance at end of period $ 36,000
Rate at fiscal year end 9.25%
Maximum outstanding during the period $ 36,970
Average amount outstanding during the period $ 11,548
Weighted average interest rate during the period 9.25%
</TABLE>
FAIR VALUE: The estimated fair value of AgriFrozen's long-term debt outstanding
was approximately $34.0 million at June 26, 1999. The fair value for long-term
debt was estimated using the current rates offered to AgriFrozen for debt with
similar maturities.
NOTE 6. TAXES ON INCOME
Taxes on income before extraordinary item and the cumulative effect of an
accounting change include the following:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Federal -
Current $ 12,781 $ 6,214 $ 658
Deferred 8,972 1,201 4,409
-------- ------- --------
21,753 7,415 5,067
State and foreign -
Current 2,016 874 314
Deferred 977 (449) 148
-------- ------- --------
2,993 425 462
-------- ------- --------
$ 24,746 $ 7,840 $ 5,529
======== ======= ========
</TABLE>
45
<PAGE>
A reconciliation of the consolidated effective tax rate to the amount computed
by applying the federal income tax rate to income before taxes, extraordinary
item, and cumulative effect of an accounting change, is as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------
June 26, June 27, June 28,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income tax provision 35.0% 35.0% 34.0%
State and foreign income taxes, net of federal income tax effect 3.5 2.3 3.6
Allocation to members 0.0 (8.6) (1.7)
Goodwill amortization 5.9 3.9 7.6
Dividend received deduction (0.4) (1.2) (3.5)
Other (net) (1.4) 0.0 0.6
------ ----- -----
Effective Tax Rate 42.6% 31.4% 40.6%
====== ===== =====
</TABLE>
The consolidated deferred tax (liabilities)/assets consist of the following:
<TABLE>
<CAPTION>
June 26, 1999 June 27, 1998
------------- -------------
<S> <C> <C>
Liabilities:
Depreciation $ (28,468) $ (44,611)
Goodwill and other intangible assets (1,379) (333)
Prepaid manufacturing expense (7,086) (3,270)
Accounts receivable (220) (201)
Prepaid expenses and other current assets (1,672) 0
Discount on Subordinated Promissory Notes (2,882) 0
---------- ----------
(41,707) (48,415)
---------- ----------
Assets:
Non-qualified retains 697 904
Inventories 9,182 2,089
Credits and operating loss carryforwards 1,538 6,573
Accrued employee compensation 5,316 3,594
Insurance accruals 4,422 1,987
Pension/OPEB accruals 7,353 6,928
Restructuring reserves 5,665 321
Promotional reserves 867 1,890
Other 1,164 2,071
---------- ----------
36,204 26,357
---------- ----------
Net deferred liabilities (5,503) (22,058)
Valuation allowance (1,409) (5,550)
---------- ----------
$ (6,912) $ (27,608)
========== ==========
</TABLE>
During fiscal year 1999, Agrilink utilized the $5.5 million of net operating
loss carryforwards ($1.9 million of tax). The benefits for these net operating
losses had been recorded in previous years.
During fiscal year 1996, Agrilink sold the stock of its wholly-owned subsidiary
Curtice Burns Meat Snacks, Inc. Substantially all of the assets of this
subsidiary were previously sold. This sale and other sales resulted in a capital
loss of $40.4 million ($15.7 million of tax). As of the date of sale, a full
valuation allowance had been recorded against the capital loss carryforward as
it was more likely than not that a tax benefit would not be realized. During
fiscal year 1997, however, Agrilink disposed of its Finger Lakes Packaging
subsidiary, its New York canned vegetable operation, and a distribution center
in Georgia. During fiscal year 1998, a distribution center in Michigan was
disposed of. During fiscal year 1999, the Company disposed of its aseptic and
peanut butter businesses. As a result of these disposals, Agrilink utilized all
of its capital loss carryforward of $13.7 million ($5.3 million of tax), $5.1
million ($2.0 million of tax), and $21.6 million ($8.4 million of tax) in fiscal
1999, 1998, and 1997, respectively. As of June 26, 1999, Agrilink
46
<PAGE>
does not have any remaining capital loss carryforward available. As the related
valuation allowance was established in conjunction with the acquisition of
Agrilink by Pro-Fac, the recognition of this capital loss carryforward reduced
goodwill.
In January 1995, the Boards of Directors of Agrilink and Pro-Fac approved
appropriate amendments to the Bylaws of Agrilink to allow Agrilink to qualify as
a cooperative under Subchapter T of the Internal Revenue Code. In August 1995,
Agrilink and Pro-Fac received a favorable ruling from the Internal Revenue
Service approving the change in tax treatment effective for fiscal 1996. This
ruling also confirmed that the change in Agrilink tax status would have no
effect on Pro-Fac's ongoing treatment as a cooperative under Subchapter T of the
Internal Revenue Code of 1986.
NOTE 7. PENSIONS, PROFIT SHARING, AND OTHER EMPLOYEE BENEFITS
PENSIONS: The Cooperative has primarily noncontributory defined benefit plans
covering most employees. The benefits for these plans are based primarily on
years of service and employees' pay near retirement. The Cooperative's funding
policy is consistent with the funding requirements of Federal law and
regulations. Plan assets consist principally of common stocks, corporate bonds
and US government obligations.
The Cooperative also participates in several union sponsored pension plans. It
is not possible to determine the Cooperative's relative share of the accumulated
benefit obligations or net assets for these plans.
Pension cost for fiscal years ended 1999, 1998, and 1997 includes the following
components:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Pension Benefits
-------------------------------------------------
Fiscal Years Ended
-------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 101,504 $ 86,775 $ 87,674
Service cost 4,727 2,796 2,915
Interest cost 6,953 6,776 6,637
Plan participants' contributions 242 168 279
Amendments 0 74 0
Actuarial loss/(gain) 4,976 13,437 (2,171)
Benefits paid (7,569) (8,522) (8,559)
---------- ---------- ----------
Benefit obligation at end of period 110,833 101,504 86,775
--------- ---------- ----------
Change in plan assets:
Fair value of assets at beginning of period 107,253 88,979 89,716
Actual return on Plan assets 8,000 26,371 4,884
Employer contribution 257 257 2,659
Plan participants' contributions 242 168 279
Benefits paid (7,569) (8,522) (8,559)
--------- ---------- ----------
Fair value of assets at end of period 108,183 107,253 88,979
--------- ---------- ----------
Plan funded status: (2,650) 5,749 2,204
Unrecognized prior service cost (131) (147) (243)
Unrecognized actuarial gain (10,810) (19,055) (15,421)
Union plans (31) (106) (122)
--------- ---------- ----------
Accrued benefit liability prior to additional minimum liability (13,622) (13,559) (13,582)
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability (14,385) (14,167) (13,997)
Accumulated other comprehensive income 763 608 415
--------- ---------- ----------
Net amount recognized $ (13,622) $ (13,559) $ (13,582)
=========- ========== ==========
Weighted-average assumptions:
Discount rate 7.0% 7.0% 8.0%
Expected return on plan assets 10.0% 10.0% 10.0%
Rate of compensation increase 4.5% 4.5% 4.5%
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits
------------------------------------------------
Fiscal Years Ended
------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 4,727 $ 2,796 $ 2,915
Interest cost 6,953 6,776 6,637
Expected return on plan assets (10,528) (8,708) (8,947)
Amortization of prior service cost (15) (22) (22)
Amortization of gain (741) (593) (802)
Union costs 81 88 70
------- -------- -------
Net periodic cost/(benefit) $ 477 $ 337 $ (149)
======= ======== =======
</TABLE>
The Cooperative maintains a non-tax qualified Supplemental Executive Retirement
Plan which provides additional retirement benefits to two prior executives that
retired prior to November 4, 1994.
On January 28, 1992, the Cooperative adopted a Non-Qualified Excess Benefit
Retirement Plan which serves to provide employees with the same retirement
benefit they would have received from Agrilink's retirement plan under the
career average base pay formula, but for changes required under the 1986 Tax
Reform Act and the compensation limitation under Section 401(a)(17) of the
Internal Revenue Code having been revised in the 1992 Omnibus Budget Reform Act.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the two non-qualified retirement plans with accumulated
benefit obligations in excess of plan assets were:
<TABLE>
<CAPTION>
Supplemental Executive Retirement Plan Excess Benefit Retirement Plan
--------------------------------------------- ----------------------------------------------
Fiscal Years Ended Fiscal Years Ended
--------------------------------------------- ----------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997 June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Projected benefit obligation $ 1,895 $ 1,939 $ 1,843 $ 1,128 $ 850 $ 652
Accumulated benefit obligation 1,895 1,939 1,843 855 651 575
Plan assets 0 0 0 0 0 0
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: Generally, other than pensions, the
Cooperative does not pay retirees' benefit costs. Isolated exceptions exist,
which have evolved from union negotiations, early retirement incentives and
existing retiree commitments from acquired companies.
The Cooperative has not prefunded any of its retiree medical or life insurance
liabilities. Consequently there are no plan assets held in a trust, and there is
no expected long-term rate of return assumption for purposes of determining the
annual expense.
48
<PAGE>
The plan's funded status was as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Other Benefits
------------------------------------------------
Fiscal Years Ended
------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 2,758 $ 2,604 $ 2,695
Service cost 90 6 8
Interest cost 250 198 199
Increase due to acquisition 2,065 0 0
Actuarial loss 1,932 322 49
Benefits paid (588) (372) (347)
--------- -------- ---------
Benefit obligation at end of period 6,507 2,758 2,604
--------- -------- ---------
Change in plan assets:
Fair value of assets at beginning of period 0 0 0
Employer contribution 588 372 347
Benefits paid (588) (372) (347)
--------- -------- ---------
Fair value of assets at end of period 0 0 0
--------- -------- ---------
Plan funded status: (6,507) (2,758) (2,604)
Unrecognized actuarial loss/(gain) 1,886 (46) (378)
--------- -------- ----------
Accrued benefit liability prior to additional minimum liability (4,621) (2,804) (2,982)
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability (4,621) (2,804) (2,982)
--------- -------- ---------
Net amount recognized $ (4,621) $ (2,804) $ (2,982)
========= ======== =========
Weighted-average assumptions:
Discount rate 7.0% 7.0% 8.0%
Expected return on plan assets N/A N/A N/A
Rate of compensation increase N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Other Benefits
--------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 90 $ 6 $ 8
Interest cost 250 198 199
Amortization of (gain)/loss 0 (10) (15)
--------- -------- ---------
Net periodic benefit cost $ 340 $ 194 $ 192
========= ======== =========
</TABLE>
For measurement purposes, a 9.0 percent rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal 1998. The rate was
assumed to decrease gradually to 5.0 percent for 2007 and remain at that level
thereafter.
The Cooperative sponsors benefit plans that provide postretirement medical and
life insurance benefits for certain current and former employees. For the most
part, current employees are not eligible for the postretirement medical
coverage. As such, the assumed health care trend rates have an insignificant
effect on the amounts reported for the postretirement benefits plan.
One-percentage point change in the assumed health care trend rates would have
the following effect:
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components $ 14,513 $ (21,813)
Effect on postretirement benefit obligation $ 337,985 $ (316,150)
</TABLE>
49
<PAGE>
RETIREMENT SAVINGS AND INCENTIVE PLAN: Under the Retirement Savings and
Incentive Plan ("RSIP"), the Cooperative makes an incentive contribution to the
Plan if certain pre-established earnings goals are achieved. In addition, the
Cooperative contributes 401(k) matching contributions to the Plan for the
benefit of employees who elect to defer a portion of their salary into the plan.
During fiscal 1999, 1998, and 1997 the Cooperative allocated $888,000, $475,000,
and $500,000, respectively, in the form of matching contributions and $0,
$400,000, and $400,000, respectively, in the form of incentive contributions for
the benefit of its employees.
LONG-TERM INCENTIVE PLAN: On June 24, 1996, the Cooperative introduced a
long-term incentive program, the Agrilink Foods Equity Value Plan, which
provides performance units to a select group of management. The future value of
the performance units is determined by the Cooperative's performance on earnings
and debt repayment. The performance units vest 25 percent each year after the
first anniversary of the grant, becoming 100 percent vested on the fourth
anniversary of grant. One-third of the appreciated value of units in excess of
the initial grant price is paid as cash compensation over each of the subsequent
three years. The final value of the performance units is determined on the
fourth anniversary of grant. The total units granted were 398,241 at $26.00 per
unit in 1999, 308,628 at $21.88 per unit in 1998, 176,278 at $25.04 per unit in
1997, and 248,511 at $13.38 per unit in 1996. Units forfeited include 9,418 at
$21.88, 18,362 at $25.04, and 27,165 at $13.38. During fiscal 1997,
approximately $1.5 million was allocated to this plan.
The value of the grants from the Agrilink Foods Equity Value Plan will be based
on the Cooperative's future earnings and debt repayment.
EMPLOYEE STOCK PURCHASE PLAN: During fiscal 1996 the Cooperative introduced an
Employee Stock Purchase Plan which affords employees the opportunity to purchase
semi-annually, in cash or via payroll deduction, shares of Class B Cumulative
Pro-Fac Preferred Stock to a maximum value of 5 percent of salary. The purchase
price of such shares is par value, $10 per share. During fiscal 1999, 1998, and
1997, 26,061, 27,043, and 31,435 shares, respectively, were held by employees,
and there were no shares subscribed to as of June 26, 1999.
NOTE 8. OPERATING SEGMENTS
During fiscal 1999, the Cooperative adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise" (SFAS 131).
SFAS No. 131 establishes requirements for reporting information about operating
segments and establishes standards for related disclosures about products and
services, and geographic areas. SFAS No. 131 also replaces the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of reportable
segments. As management makes the majority of its operating decisions based upon
the Cooperative's significant product lines, The Cooperative has elected to
utilize significant product lines in determining its operating segments. The
Cooperative's four primary operating segments are as follows: vegetables, fruit,
snacks, and canned meals.
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 snacks 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,
stew, and soups, and various other ready-to-eat prepared meals. Branded products
within the canned meals category include Nalley. Other product lines primarily
represent salad dressings. Branded products within the "other category" include
Bernstein's and Nalley.
50
<PAGE>
The following table illustrates the Cooperative's operating segment information:
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales:
Vegetables $ 887.2 $ 280.8 $ 271.4
Fruits 111.5 119.7 116.7
Snacks 87.9 83.7 86.0
Canned Meals 64.2 64.0 63.7
Other 51.0 58.6 62.6
----------- ---------- ---------
Continuing segments 1,201.8 606.8 600.4
Businesses sold 37.1 112.9 130.4
----------- ---------- ---------
Total $ 1,238.9 $ 719.7 $ 730.8
=========== ========== =========
Operating income:
Vegetables(1) $ 51.5 $ 15.8 $ 12.0
Fruits 8.7 19.0 17.4
Snacks 3.5 7.4 7.7
Canned Meals 6.7 7.8 6.9
Other 2.6 0.6 1.2
----------- ---------- ---------
Continuing segments operating income 73.0 50.6 45.2
Corporate Overhead (2.9) (8.7) (10.3)
----------- ---------- ---------
Continuing operations 70.1 41.9 34.9
Businesses sold and other non-recurring 2.9 13.8 11.6
----------- ---------- ---------
Total 73.0 55.7 46.5
Gains on sale of assets 64.7 0.0 3.6
Restructuring expense (5.0) 0.0 0.0
----------- ---------- ---------
Total consolidated operating income 132.7 55.7 50.1
Interest expense (67.4) (30.7) (36.5)
Amortization of debt issue costs associated with the Bridge Facility (5.5) 0.0 0.0
----------- ---------- ---------
Pretax income before extraordinary item, cumulative
effect of an accounting change,
dividends and allocation of net proceeds $ 59.8 $ 25.0 $ 13.6
=========== ========== =========
Total Assets:
Vegetables $ 945.1 $ 284.5 $ 234.6
Fruits 86.0 79.1 82.6
Snacks 37.5 37.3 34.5
Canned Meals 43.8 45.3 47.8
Other 40.3 43.3 51.5
----------- ---------- ---------
Continuing segments 1152.7 489.5 451.0
Corporate 41.8 39.1 46.6
Businesses sold 1.1 37.9 48.1
Assets held for sale 0.9 2.7 0.9
----------- ---------- ---------
Total $ 1,196.5 $ 569.2 $ 546.6
=========== ========== =========
Depreciation expense:
Vegetables $ 17.5 $ 9.0 $ 12.7
Fruits 2.3 3.5 4.0
Snacks 1.7 1.6 1.6
Canned Meals 1.2 1.0 1.0
Other 1.0 1.4 1.3
----------- ---------- ---------
Continuing segments 23.7 16.5 20.6
Corporate 0.2 0.2 0.2
Businesses sold 0.9 1.3 1.9
----------- ---------- ---------
Total $ 24.8 $ 18.0 $ 22.7
=========== ========== =========
Amortization Expense:
Vegetables $ 7.0 $ 1.1 $ 1.4
Fruits 0.1 0.3 0.5
Snacks 0.9 0.6 0.6
Canned meals 0.7 0.8 0.8
Other 0.6 0.6 0.6
----------- ---------- ---------
Continuing segments 9.3 3.4 3.9
Businesses sold 0.1 0.2 0.2
----------- ---------- ---------
Total $ 9.4 $ 3.6 $ 4.1
=========== ========== =========
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) Fiscal Years Ended
------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Capital expenditures:
Vegetables $ 19.5 $ 8.0 $ 8.3
Fruits 1.3 1.5 2.0
Snacks 2.0 1.8 1.2
Canned Meals 0.6 0.5 0.5
Other 0.3 0.4 0.2
----------- ---------- ---------
Continuing Segments 23.7 12.2 12.2
Businesses sold 0.1 1.9 1.5
----------- ---------- ---------
Total $ 23.8 $ 14.1 $ 13.7
=========== ========== =========
</TABLE>
(1) The vegetable product line includes earnings derived from Agrilink's
investment in Great Lakes Kraut Company of $2.8 million and $1.9 million
in fiscal 1999 and fiscal 1998, respectively. See NOTE 3 to the "Notes to
Consolidated Financial Statements" - "Acquisitions and Disposals -
Formation of New Sauerkraut Company."
NOTE 9. COMMON STOCK AND CAPITALIZATION
The following table illustrates the Cooperative's shares authorized, issued, and
outstanding at June 26, 1999 and June 27, 1998.
<TABLE>
<CAPTION>
Shares Issued and Outstanding
-------------------------------
Fiscal Years Ended
Par Shares -------------------------------
Value Authorized June 26, 1999 June 27, 1998
----- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Class A Common Stock $ 5.00 5,000,000 1,995,740 1,825,863
Class B Common Stock $ 5.00 2,000,000 0 0
Non-Cumulative Preferred Stock $25.00 5,000,000 39,635 45,001
Class A Cumulative Preferred Stock $ 1.00 10,000,000 3,694,495 3,503,199
Class B Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class C Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class D Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class E Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class B, Series I 10% Cumulative Preferred Stock $ 1.00 5,000,000 26,061 27,043
</TABLE>
On March 4, 1999, the Cooperative authorized up to $15,000,000 of special
membership interests which shall have a stated value equal to such interests'
face amount. There were no special membership interest issued or outstanding in
fiscal 1999.
COMMON STOCK: The common stock purchased by members is related to the crop
delivery of each member. Regardless of the number of shares held, each member
has one vote. As of June 26, 1999, there were 645 holders of the common stock.
Common stock may be transferred to another grower only with approval of the
Pro-Fac Board of Directors. If a member ceases to be a producer of agricultural
products which is marketed through the Cooperative, then it must sell its common
stock to another grower acceptable to the Cooperative. If no such grower is
available to purchase the stock, then the member must provide one year's advance
written notice of its intent to withdraw, after which the Cooperative must
purchase its common stock at par value. There is no established public trading
market for the common stock of the Cooperative.
In fiscal 1999 and 1998, dividends on Class A Common Stock were paid at a rate
of 5.0 percent. No dividends on Class A Common Stock were paid in fiscal 1997.
At June 26, 1999 and June 27, 1998, there were outstanding subscriptions, at par
value, of 384,649 and 160,629 shares for Class A Common Stock, respectively.
These shares are issued as subscription payments are received.
Except for the Class B, Series I, 10 Percent Cumulative Preferred Stock, all
preferred stock outstanding originated from the conversion at par value of
retains. Preferred Stock is non-voting, except that the holders of preferred and
common stock are entitled to vote as separate classes on certain matters which
would affect or subordinate the rights of the class.
On August 23, 1995, the Cooperative commenced an offer to exchange one share of
its Class A Cumulative Preferred Stock (liquidation preference $25 per share)
for each of its existing Non-cumulative Preferred Stock (liquidation preference
$25 per share). Pro-Fac's Class
52
<PAGE>
A Cumulative Preferred Stock is listed under the symbol PFACP on the National
Market System of the National Association of Securities Dealers Automated
Quotation System ("Nasdaq"). As of June 26, 1999, the number of Class A
Cumulative Preferred Stock record holders was 1,848.
The "Class B, Series I, 10 Percent Cumulative Preferred Stock (the "Class B
Stock") is issued to employees pursuant to an Employee Stock Purchase Plan. At
least once a year, Pro-Fac plans to offer to repurchase at least 5 percent of
the outstanding shares of Class B Stock.
The dividend rates for the preferred stock outstanding are as follows:
<TABLE>
<S> <C>
NON-CUMULATIVE PREFERRED STOCK $1.50 per share paid annually at the discretion of the Board.
CLASS A CUMULATIVE PREFERRED STOCK $1.72 per share annually, paid in four quarterly installments of
$.43 per share
CLASS B, SERIES I, 10 PERCENT CUMULATIVE PREFERRED STOCK $1.00 per share paid annually.
</TABLE>
Subsequent to June 26, 1999, the Cooperative declared a cash dividend of $1.50
per share on the Non-cumulative Preferred Stock and $.43 per share on the Class
A Cumulative Preferred Stock. These dividends amounted to $1.6 million and were
paid in July 1999.
RETAINED EARNINGS ALLOCATED TO MEMBERS ("RETAINS"): Retains arise from patronage
income, and are allocated to the accounts of members within 8.5 months of the
end of each fiscal year.
QUALIFIED RETAINS: Qualified retains are freely transferable. At the
discretion of the Board of Directors qualified retains may mature into
preferred stock in December of the fifth year after allocation.
Qualified retains are taxable income to the member in the year the
allocation is made.
NON-QUALIFIED RETAINS: Non-qualified retains may not be sold or
purchased. At the discretion of the Board of Directors the
non-qualified retains allocation may be redeemed in five years through
partial payment in cash and issuance of preferred stock. The
non-qualified retains will not be taxable to the member until the year
of redemption.
Non-qualified retains may be subject to later adjustment if such is
deemed necessary by the Board of Directors because of events which may
occur after the retains were allocated.
Beginning with the retains issued in 1995, the maturity of all future retains,
if approved by the Board of Directors, will result in the issuance of Class A
Cumulative Preferred Stock.
EARNED SURPLUS (UNALLOCATED AND APPORTIONED): Earned surplus consists of
accumulated income after distribution of earnings allocated to members,
dividends and after state and federal income taxes. Earned surplus is reinvested
in the business in the same fashion as retains.
NOTE 10. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation, wholly-owned
subsidiaries of Agrilink ("Subsidiary Guarantors") and Pro-Fac, have jointly and
severally, fully and unconditionally guaranteed, on a senior subordinated basis,
the obligations of Agrilink with respect to Agrilink's 11 7/8 percent Senior
Subordinated Notes due 2008 and the New Credit Facility. The covenants in the
New Notes and the New Credit Facility do not restrict the ability of the
Subsidiary Guarantors to make cash distributions to Agrilink.
53
<PAGE>
Separate financial statements and other disclosures concerning the Subsidiary
Guarantors are not presented because management has determined that such
financial statements and other disclosures are not material. Accordingly, set
forth below is certain summarized financial information derived from unaudited
historical financial information for the Subsidiary Guarantors, on a combined
basis.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
Fiscal Year Ended
-----------------------------------------------
June 26, June 27, June 28,
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
SUMMARIZED STATEMENT OF OPERATIONS:
Net sales/royalty income $ 33,026 $ 12,086 $ 10,542
Gross profit 23,641 5,123 4,554
Income from continuing operations 20,732 1,002 910
Net income 13,401 1,002 910
SUMMARIZED BALANCE SHEET:
Current assets $ 1,759 $ 2,033
Noncurrent assets 217,684 7,129
Current liabilities 8,290 1,267
</TABLE>
On March 2, 1999, Agrilink transferred trademarks valued at $212.6 million to
Linden Oaks Corporation. By consolidating the trademarks into a separate
subsidiary, Agrilink will be able to monitor more closely and efficiently the
benefits associated with its trademarks. The royalty fees that are earned by
Linden Oaks Corporation in connection with the trademarks are insignificant with
respect to the Consolidated Statement of Operations and Net Proceeds.
NOTE 11. SUBSEQUENT EVENTS AND OTHER MATTERS
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.
ARLINGTON CANNED VEGETABLE FACILITY FIRE: In January 1999, a plant operated by
Agrilink in Arlington, Minnesota, was damaged by fire. All material costs
associated with the repairs and business interruption are anticipated to be
covered under insurance policies.
ALTON WAREHOUSE: In January 1999, a warehouse owned by Agrilink in Alton, New
York, was damaged when excessive snowfall caused the roof to collapse. All
material costs associated with the repairs are anticipated to be covered under
insurance policies.
LEGAL MATTERS: The Cooperative is party to various litigation and claims arising
in the ordinary course of business. Management and legal counsel for the
Cooperative are of the opinion that none of these legal actions will have a
material effect on the financial position of the Cooperative.
COMMITMENTS: Agrilink has guaranteed an approximate $1.4 million loan for the
City of Montezuma to renovate a sewage treatment plant operated in Montezuma on
behalf of the City.
54
<PAGE>
PRO-FAC COOPERATIVE, INC.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the fiscal year ended June 26, 1999 appears
in the following table. All quarters reflect 13-week periods.
In the opinion of management, all adjustments necessary for a fair presentation
of the unaudited quarterly data have been made.
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
<TABLE>
<CAPTION>
Quarters
----------------------------------------------------------------------------------
Fiscal 1999 1 2 3 4 Total Year
---------- ----------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Net sales $ 182,579 $ 376,703 $ 361,235 $ 318,429 $ 1,238,946
Gross profit $ 46,697 $ 122,140 $ 110,388 $ 82,283 $ 361,508
Income before extraordinary item, cumulative
effect of an accounting change, dividends,
and allocation of net proceeds $ 68,316 $ 6,962 $ (1,405) $ (14,159) $ 59,714
Net income $ 25,285 $ 5,069 $ (2,841) $ (10,569) $ 16,944
Cash dividends declared per share on
Class A Cumulative Preferred Stock $ .43 $ .43 $ .43 $ .43 $ 1.72
Market price per share on Class A
Cumulative Preferred Stock (Nasdaq)
High $ 20.375 $ 20.000 $ 19.875 $ 19.500 $ 20.375
Low $ 19.000 $ 18.813 $ 18.000 $ 17.500 $ 17.500
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
55
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS
MANAGEMENT AND DIRECTORS OF PRO-FAC
<TABLE>
<CAPTION>
Date
Name of Birth Positions
------------ -------- ----------------------
<S> <C> <C>
BRUCE R. FOX 1947 President and Director
STEVEN D. KOINZAN 1948 Treasurer and Director
TOM R. CRONER 1942 Secretary and Director
EARL L. POWERS 1944 Vice President Finance and Assistant Treasurer
STEPHEN R. WRIGHT 1947 Assistant Treasurer and General Manager
DALE W. BURMEISTER 1940 Director
ROBERT V. CALL, JR. 1926 Director
GLEN LEE CHASE 1937 Director
KENNETH A. DAHLSTEDT 1954 Director
ROBERT DEBADTS 1957 Director
KENNETH A. MATTINGLY 1948 Director
ALLAN W. OVERHISER 1960 Director
PAUL E. ROE 1939 Director
DARELL SARFF 1949 Director
</TABLE>
BRUCE R. FOX has been a Director of Pro-Fac since 1974. For information
regarding Mr. Fox, see "Management and Directors of Agrilink."
STEVEN D. KOINZAN has been a Director of Pro-Fac since 1983. For information
regarding Mr. Koinzan, see "Management and Directors of Agrilink."
TOM R. CRONER has been a Director of Pro-Fac since 1985 and a member of Pro-Fac
since 1973. He was elected Secretary on March 27, 1995. Mr. Croner is a dairy
and potato farmer (T-Rich Inc.; Berlin, Pennsylvania).
EARL L. POWERS has been Vice President Finance and Assistant Treasurer of
Pro-Fac since 1997. For information regarding Mr. Powers, see "Management and
Directors of Agrilink."
STEPHEN R. WRIGHT has been General Manager of Pro-Fac since March 1995, having
previously served as Assistant General Manager since November 1994. For
information regarding Mr. Wright, see "Management and Directors of Agrilink."
DALE W. BURMEISTER has been a Director of Pro-Fac since 1992 and a member of
Pro-Fac since 1974. Mr. Burmeister is a fruit and vegetable grower (Lakeshore
Farms, Inc.; Shelby, Michigan).
ROBERT V. CALL, JR. has been a Director of Pro-Fac since 1962. For information
regarding Mr. Call, see "Management and Directors of Agrilink."
GLEN LEE CHASE has been a Director of Pro-Fac since 1989 and a member of Pro-Fac
since 1984. Mr. Chase is a peanut, poultry, grain and vegetable farmer (Chase
Farms Inc.; Oglethorpe, Georgia).
KENNETH A. DAHLSTEDT was elected a Director of Pro-Fac in February 1998 and has
been a member of Pro-Fac since 1983.
ROBERT DEBADTS was elected a Director of Pro-Fac in January 1997 and has been a
member of Pro-Fac since 1978. Mr. DeBadts is a fruit grower (Lake Breeze Fruit
Farms, Inc.; Sodus, New York).
56
<PAGE>
KENNETH A. MATTINGLY has been a Director of Pro-Fac since 1993 and a member of
Pro-Fac since 1978. Mr. Mattingly is a vegetable and grain farmer (M-B Farms
Inc.; LeRoy, New York).
ALLAN W. OVERHISER has been a Director of Pro-Fac since March 1994 and a member
of Pro-Fac since 1984. Mr. Overhiser is a fruit farmer (A.W. Overhiser Orchards;
South Haven, Michigan).
PAUL E. ROE has been a Director of Pro-Fac since 1986 and a member of Pro-Fac
since 1961. Mr. Roe is a vegetable, grain and dry bean farmer (Roe Acres, Inc.;
Bellona, New York).
DARELL SARFF was elected a Director of Pro-Fac in February 1997 and has been a
member of Pro-Fac since 1988. Mr. Sarff is a grain and vegetable farmer (Sarff
Farms; Chandlerville, Illinois).
TERM OF OFFICE: Directors of Pro-Fac are elected for three-year terms. Officers
of Pro-Fac are elected for one-year terms.
MANAGEMENT AND DIRECTORS OF AGRILINK
MANAGEMENT AND DIRECTORS: Effective upon consummation of the acquisition of
Agrilink by Pro-Fac, Pro-Fac established a management structure for Agrilink,
providing for a Board of Directors consisting of one management director,
Pro-Fac Directors and Disinterested Directors. The number of Pro-Fac Directors
is equal to the number of Disinterested Directors. The Chairman of the Board is
a Pro-Fac Director. The management and directors are listed below. The
Cooperative may in the future expand the Board of Directors, but Pro-Fac has
undertaken to cause the Cooperative to maintain a Board on which the number of
Pro-Fac Directors does not exceed the number of Disinterested Directors. The
Senior Subordinated Notes - 11 7/8 Percent (due 2008) provide that there will be
a Change of Control if, for a period of 120 consecutive days, the number of
Disinterested Directors on the Board of Directors of the Cooperative is less
than the greater of (i) two and (ii) the number of directors who are also
directors, members or affiliates of the Cooperative. The New Credit Facility
provides that there will be a change of control if the number of Pro-Fac
directors exceeds the number of disinterested directors.
Set forth below is certain information concerning the individuals who serve as
directors and officers of the Cooperative.
<TABLE>
<CAPTION>
Year of
Name Birth Positions
--------------- ----- ---------------------------------------------------
<S> <C> <C>
DENNIS M. MULLEN(1) 1953 President and Chief Executive Officer and Director
WILLIAM D. RICE 1934 Senior Vice President Strategic Development and Secretary
EARL L. POWERS 1944 Executive Vice President and Chief Financial Officer
STEPHEN R. WRIGHT 1947 Executive Vice President Agriculture
DAVID M. MEHALICK 1956 Vice President and Legal Counsel
ROBERT V. CALL, JR.(2) 1926 Director and Chairman of the Board
BRUCE R. FOX(2) 1947 Director
CORNELIUS D. HARRINGTON, JR.(3) 1927 Director
STEVEN D. KOINZAN(2) 1948 Director
WALTER F. PAYNE(3) 1936 Director
FRANK M. STOTZ(3) 1930 Director
(1) Management Director.
(2) Pro-Fac Director.
(3) Disinterested Director.
</TABLE>
57
<PAGE>
DENNIS M. MULLEN has been the President and Chief Executive Officer since
January 1997 and a Director of Agrilink since May 1996. He was Chief Operating
Officer from May 1996 to January 1997 and Executive Vice President since January
1996. He had been President and Chief Executive Officer of Curtice Burns Foods
from March 1993 to May 1996. He was Senior Vice President and Business Unit
Manager Food Service of Curtice Burns Foods from 1991 to 1993, and Senior Vice
President-Custom Pack Sales for Nalley from 1990 to 1991. Prior to employment
with Agrilink, he was President and Chief Executive Officer of Globe Products
Company. He currently serves on the Board of Directors for Grocery Manufacturers
of America, National Food Processors Association, the Popcorn Institute, United
Way of Greater Rochester, Genesee Valley American Heart Association, and the
Rochester Institute of Technology School of Food, Hotel, and Travel Management's
National Advisory Board.
WILLIAM D. RICE has been Senior Vice President Strategic Development since
February 1997 and Secretary of Agrilink since 1989. He was Chief Financial
Officer from 1969 to February 1997. He was Treasurer of Agrilink from 1975 to
1996. He was Vice President-Finance of Agrilink from 1969 to 1991. He was
Assistant Treasurer of Pro-Fac from 1970 to February 1997 (Management Chief
Financial Officer for Pro-Fac).
EARL L. POWERS has been Executive Vice President and Chief Financial Officer
since February 1997. He was Vice President and Corporate Controller from March
1993 to February 1997, and Vice President Finance and Management Information
Systems, Curtice Burns Foods business unit of Agrilink from 1991 to March 1993.
Prior to joining Agrilink, he was Controller of various Pillsbury Company
divisions 1987-1990 and various other executive management positions at the
Pillsbury Company 1976-1987.
STEPHEN R. WRIGHT has been Executive Vice President since November 6, 1996. He
was Senior Vice President - Procurement of Agrilink from November 1994 and Vice
President -- Procurement for Agrilink from 1990 to November, 1994, having served
as Director of Commodities and Administration Services for Agrilink from 1988 to
1990. He became General Manager of Pro-Fac in March 1995.
DAVID M. MEHALICK joined Agrilink May 1, 1999 as Vice President and General
Counsel. Prior to employment with Agrilink, he practiced law in the firm of
Harris Beach & Wilcox from 1981 to 1999.
ROBERT V. CALL, JR. has been a Director of Agrilink since the completion of the
Pro-Fac acquisition of Agrilink. Mr. Call had been a Director of the predecessor
entity since 1986 until completion of the acquisition (at which time he resigned
and was reappointed). He has been a Director of Pro-Fac since 1962. He was
President of Pro-Fac from 1986 to March 27, 1995, having served as Treasurer
from 1973 to 1984. He has been a member of Pro-Fac since 1961. He is a
vegetable, fruit and grain farmer (My-T Acres, Inc., Batavia, NY).
BRUCE R. FOX has been a Director of Agrilink since the completion of the Pro-Fac
acquisition of Agrilink. He has been a Director of Pro-Fac since 1974. He was
Treasurer of Pro-Fac from 1984 until March 27, 1995, when he was elected
President. He has been a member of Pro-Fac since 1974. Mr. Fox is a fruit and
vegetable grower (N.J. Fox & Sons, Inc., Shelby, MI).
CORNELIUS D. HARRINGTON, prior to his retirement, was President of the Bank of
New England-West in Springfield, MA and a predecessor to the Bank of New
England-West from 1978 to December 1990. He was Chief Executive Officer of the
Bank of New England-West from 1984 to December 1990. Until 1987, he served as
Chairman of the Board of Directors of BayState Medical Center in Springfield,
MA. He is a former Director of the Farm Credit Bank of Springfield since January
1994.
STEVEN D. KOINZAN has been a Director of Agrilink since the completion of the
Pro-Fac acquisition of Agrilink. He has been a Director of Pro-Fac since 1983.
He was Secretary of Pro-Fac from March 1993 until March 27, 1995, when he was
elected Treasurer. He has been a member of Pro-Fac since 1979. Mr. Koinzan is a
popcorn, field corn and soybean farmer (Koinzan Farms; Norden, Nebraska).
WALTER F. PAYNE has been a Director of Agrilink since January 1996 and President
and Chief Executive Officer of Blue Diamond Growers since 1992. He held various
positions at Blue Diamond Growers between 1973 and 1992. He is currently on the
Board of Directors of the Almond Board of California and the International Nut
Council, and the National Council of Farmer Cooperatives, and a member of the
Board of Trustees for the Graduate Institute of Cooperative Leadership.
FRANK M. STOTZ has been a Director of Agrilink since the completion of the
Pro-Fac acquisition of Agrilink. Mr. Stotz retired in 1994 from his position as
Senior Vice President - Finance of Bausch & Lomb Incorporated. Before joining
Bausch & Lomb in that capacity in 1991, Mr. Stotz was a partner with Price
Waterhouse. He joined Price Waterhouse in Chicago in 1954, was admitted to
partnership in 1966 and retired from the firm in 1991 to join Bausch & Lomb.
From 1980 to 1991, he was partner in charge of the
58
<PAGE>
Rochester office of Price Waterhouse. Mr. Stotz serves on the Board of Trustees
of The Automobile Club of Rochester.
TERM OF OFFICE: All directors of Agrilink will hold office from the date of
election until the next annual meeting of the shareholder or until their
successors are duly elected and qualified. Each executive officer of Agrilink
will hold office from the date of election until his successor is elected or
appointed.
There are no family relationships between any Director, executive officer, or
any person nominated or chosen by Agrilink to become a Director or executive
officer.
ITEM 11. EXECUTIVE COMPENSATION
The following tables show the cash compensation and certain other components of
the compensation of the chief executive officer and four other most highly
compensated executive officers of the Cooperative, earned during fiscal years
ended June 26, 1999, June 27, 1998, and June 28, 1997 (collectively, the "Named
Executive Officers").
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation(1) RSIP/
------------------------- Matching
Name and Principal Position Year Salary Bonus(2) Contributions
- ---------------------------- ---- --------- --------- --------------
<S> <C> <C> <C> <C>
DENNIS M. MULLEN - 1999 $ 500,000 $ 0 $ 4,241
President and Chief Executive Officer and Director 1998 $ 432,256 $ 216,000 $ 7,783
1997 $ 349,181 $ 210,000 $ 8,013
WILLIAM D. RICE - 1999 $ 271,014 $ 0 $ 4,781
Senior Vice President Strategic Development and Secretary 1998 $ 273,342 $ 100,000 $ 5,019
1997 $ 259,422 $ 107,000 $ 5,990
EARL L. POWERS 1999 $ 260,096 $ 0 $ 5,124
Executive Vice President Finance and Chief Financial Officer 1998 $ 239,327 $ 140,000 $ 7,106
1997 $ 187,179 $ 107,000 $ 4,492
STEPHEN R. WRIGHT 1999 $ 205,999 $ 0 $ 3,762
Executive Vice President Agriculture 1998 $ 200,154 $ 100,000 $ 5,446
1997 $ 180,043 $ 80,000 $ 4,321
DAVID M. MEHALICK(3) 1999 $ 36,923 $ 0 $ 0
Vice President and Legal Counsel
</TABLE>
(1) No Named Executive Officer has received personal benefits during the period
in excess of the lesser of $50,000 or 10 percent of annual salary.
(2) Pursuant to the Management Incentive Plan of Agrilink (the "Incentive
Plan"), additional compensation is paid if justified by the activities of
the officers and employees eligible under the Incentive Plan and by the
earnings of Agrilink and of Pro-Fac Cooperative, Inc. ("Pro-Fac").
(3) Mr. Mehalick's employment with Agrilink began May 1, 1999.
59
<PAGE>
LONG-TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Estimated Future Payouts
Under Non-Stock Price Based Plans
---------------------------------
(b) (c)
Number of Shares Performance or Other (d) (e)
(a) Units or Other Period Until Maturation Threshold Target
Name Rights Granted (1) or Payout ($ or #) ($ or #)(2)
-------- ------------------ ------------------- ----------- -----------
<S> <C> <C> <C> <C>
Dennis M. Mullen 82,850 6/23/2003 $0 $0
William D. Rice 34,078 6/23/2003 $0 $0
Earl L. Powers 34,176 6/23/2003 $0 $0
Stephen R. Wright 22,403 6/23/2003 $0 $0
David M. Mehalick 27,838 6/23/2003 $0 $0
</TABLE>
(1) On June 23, 1999, Agrilink issued performance units under the Agrilink
Foods Equity Value Plan ("EVP") to a select group of management. The future
value of the performance units is determined by Agrilink's performance on
earnings and debt repayment. The performance units vest 25 percent each
year after the first anniversary of the grant, becoming 100 percent vested
on the fourth anniversary of grant. One-third of the appreciated value of
units in excess of the initial grant price is paid as cash compensation
over the subsequent three years. The final value of the 1999 performance
units is determined on the fourth anniversary of grant.
(2) The value of the June 23, 1999 grants from the Agrilink Foods Equity Value
Plan will be based on Agrilink's future earnings and debt repayment. The
beginning value of these performance units was set at a level requiring
improved earnings and debt-repayment performance. The target payouts shown
above are based on the value of the performance units at fiscal 1999
earnings and debt levels and would yield no payout from the plan at those
levels. If future performance equals fiscal 1999 performance, no payouts
will be made from the plan relative to the options granted on June 23,
1999.
RETIREMENT PLANS: Agrilink's Master Salaried Retirement Plan (the "Pension
Plan") provides defined retirement benefits for its officers and all salaried
and clerical personnel. The compensation upon which the pension benefits are
determined is included in the salary columns of the "Summary Compensation
Table."
For retirement before age 65, the annual benefits are reduced by an amount for
each year prior to age 65 at which such retirement occurs so that if retirement
occurs at age 55, the benefits are 70 percent of those payable at age 65.
The approximate number of years of Plan participation under Agrilink's Pension
Plan as of June 26, 1999, of the Executive Officers listed in the Summary
Compensation Table are as follows: Dennis M. Mullen-9, William D. Rice-28, Earl
L. Powers-8, Stephen R. Wright-25 and David M. Mehalick-0.
On January 28, 1992, Agrilink adopted an Excess Benefit Retirement Plan which
serves to provide employees with the same retirement benefit they would have
received from Agrilink's Master Salaried Retirement Plan under the career
average base pay formula, but for changes required under the 1986 Tax Reform Act
and the compensation limitation under Section 401(a)(17) of the Internal Revenue
Code, which was $150,000 on January 1, 1994, having been revised in the 1992
Omnibus Budget Reform Act.
60
<PAGE>
The following table shows the estimated pension benefits payable to a covered
participant, at age 65, at the specified final average pay, and years of
credited service levels under Agrilink's Master Salaried Retirement Plan and the
Excess Benefit Retirement Plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Plan Participation
Final ---------------------------------------------------------------------------
Average Pay 15 20 25 30 35
- ----------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$125,000 $ 21,699 $ 28,394 $ 34,950 $ 41,660 $ 48,545
150,000 26,949 35,394 43,700 52,160 60,795
175,000 32,199 42,394 52,450 62,660 73,045
200,000 37,449 49,394 61,200 73,160 85,295
225,000 42,699 56,394 69,950 83,660 97,545
250,000 47,949 63,394 78,700 94,160 109,795
275,000 53,199 70,394 87,450 104,660 122,045
300,000 58,449 77,394 96,200 115,160 134,295
325,000 63,699 84,394 104,950 125,660 146,545
350,000 68,949 91,394 113,700 136,160 158,795
375,000 74,199 98,394 122,450 146,660 171,045
400,000 79,449 105,394 131,200 157,160 183,295
</TABLE>
TERMINATION PROTECTION PROVISIONS: Agrilink has adopted a Salary Continuation
Agreement for Mr. Mullen, whereby, two years of salary and benefits continuation
will be provided if Mr. Mullen's employment is involuntarily terminated for
reasons other than for "cause" as such term is defined in the Agreement. In
addition, this agreement provides Mr. Mullen with a retention bonus in an amount
equal to one year of his base salary as of September 1, 1998 if he continues to
provide services to the Company through August 31, 2000 in accordance to the
reasonable terms and conditions of his employment.
DIRECTORS' COMPENSATION: In fiscal 1999, non-employee directors who were
designated by Pro-Fac received an annual stipend of $6,000 per year, plus $200
per day for attending Board or Committee meetings. The Pro-Fac President
receives an annual stipend of $12,000 per year, plus $400 per day for attending
Board or Committee meetings. In fiscal 1999, all other outside directors,
Messrs. Harrington, Payne, and Stotz received an annual rate of $18,000 in
addition to $600 per day. The Chairman of the Board receives a fixed amount in
lieu of the standard attendance fees and annual stipend. Agrilink accrued a
fixed amount of $24,700 for Mr. Call as Chairman of the Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of July 31, 1999, with
respect to (i) each person known by Pro-Fac to own beneficially 5 percent or
more of any class of Pro-Fac's voting securities, (ii) each director and Named
Executive Officer of Pro-Fac and (iii) all directors and officers of Pro-Fac as
a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name Title of Class Beneficial Ownership(a) Class(b)
- ------------------------------ ---------------------------- ----------------------- ----------
<S> <C> <C> <C>
CHERRY CENTRAL COOPERATIVE, INC. Common 345,912 17.33%
PO Box 988 Class A Cumulative Preferred 63,804 1.73%
Traverse City, MI 49685
MICHIGAN BLUEBERRY GROWERS ASSOC. Common 116,400 5.83%
PO Drawer B Class A Cumulative Preferred 16,028 0.43%
Grand Junction, MI 49056
DALE E. BURMEISTER Common 7,606(c) 0.38%
Class A Cumulative Preferred 1,110(c) 0.03%
Class A Cumulative Preferred 9,439 0.26%
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name Title of Class Beneficial Ownership(a) Class(b)
- ------------------------------- ----------------------------- ------------------------ ---------
<S> <C> <C> <C>
ROBERT V. CALL, JR. Common 37,310(d) 1.87%
Class A Cumulative Preferred 25,319(d) 0.69%
Class A Cumulative Preferred 14,194(e) 0.38%
Class A Cumulative Preferred 5,361(f) 0.15%
Class A Cumulative Preferred 1,506 0.04%
GLEN LEE CHASE Common 9,472(g) 0.47%
Class A Cumulative Preferred 6,474(g) 0.18%
TOM R. CRONER Common 3,776(h) 0.19%
Class A Cumulative Preferred 11,215(i) 0.30%
KENNETH A. DAHLSTEDT Common 6,262 0.31%
Class A Cumulative Preferred 1,000(l) 0.03%
Class A Cumulative Preferred 105 0.00%
ROBERT DEBADTS Common 11,873(j) 0.59%
Class A Cumulative Preferred 8,658(j) 0.23%
Class A Cumulative Preferred 100(k) 0.00%
BRUCE R. FOX Common 21,757(m) 1.09%
Class A Cumulative Preferred 8,758(m) 0.24%
Class A Cumulative Preferred 6,179(n) 0.17%
Class A Cumulative Preferred 1,085 0.03%
Class A Cumulative Preferred 820 0.02%
STEVEN D. KOINZAN Common 8,280 0.41%
Class A Cumulative Preferred 3,165 0.09%
DAVID M. MEHALICK None 0 0.00%
KENNETH A. MATTINGLY Common 8,609(o) 0.43%
Class A Cumulative Preferred 5,099(o) 0.14%
DENNIS M. MULLEN None 0 0.00%
ALLAN W. OVERHISER Common 2,880(p) 0.13%
Class A Cumulative Preferred 1,743(p) 0.05%
EARL L. POWERS None 0 0.00%
WILLIAM D. RICE None 0 0.00%
PAUL E. ROE Common 17,590(q) 0.88%
Class A Cumulative Preferred 2,700(q) 0.07%
DARELL SARFF Common 2,136 0.11%
Class A Cumulative Preferred 609 0.02%
STEPHEN R. WRIGHT Class A Cumulative Preferred 1,140 0.03%
ALL DIRECTORS AND OFFICERS AS A GROUP Common 137,551 6.89%
Class A Cumulative Preferred 115,779 3.13%
</TABLE>
62
<PAGE>
(a) Certain of the directors named above may have the opportunity, along with
the other members producing a specific crop, to acquire beneficial
ownership of additional shares of the common stock of Pro-Fac within a
period of approximately 60 days commencing February 1, 1996 if Pro-Fac
determines that a permanent change is required in the total quantity of
that particular crop.
(b) In the above table, each director who has direct beneficial ownership of
common or preferred shares by reason of being the record owner of such
shares has sole voting and investment power with respect to such shares,
while each director who has direct beneficial ownership of common or
preferred shares as a result of owning such shares as a joint tenant has
shared voting and investment power regarding such shares. Each director
who has indirect beneficial ownership of common or preferred shares
resulting from his status as a shareholder or a partner of a corporation
or partnership which is the record owner of such shares has sole voting
and investment power if he controls such corporation or partnership. If
he does not control such corporation or partnership, he has shared voting
and investment power. Pro-Fac does not believe that the percentage
ownership of any such corporation or partnership by a director is
material, since in the aggregate no director beneficially owns in excess
of 5 percent of either the common or preferred shares of Pro-Fac.
(c) Record ownership by Lakeshore Farms, Inc.
(d) Record ownership by My-T Acres, Inc.
(e) Record ownership by My-T Acres, Inc. Employee Profit Sharing Plan
(f) Record ownership by Call Farms, Inc.
(g) Record ownership by Chase Farms, Inc.
(h) Record ownership by Richard Croner & Son
(i) Record ownership by T-Rich, Inc.
(j) Record ownership by Lake Breeze Farm, Inc.
(k) Record ownership jointly with spouse
(l) Record ownership by Ag-Pro, Inc.
(m) Record ownership by N.J. Fox & Sons, Inc.
(n) Record ownership by K. Fox
(o) Record ownership by M-B Farms, Inc.
(p) Record ownership by A.W. Overhiser Orchards
(q) Record ownership by Roe Acres, Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
Cherry Central Cooperative, Inc. filed a late Form 4 reporting a single
transaction.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management believes all such transactions were on terms no less favorable to the
Cooperative than could have been reached with unaffiliated third parties.
BORROWINGS BY PRO-FAC: The New Credit Facility and Senior Subordinated Notes -
11? Percent (due 2008) permit Agrilink to make demand loans to Pro-Fac for
working capital purposes in amounts not to exceed $40.0 million at any time,
each such loan to bear interest at a rate equal to the rate in effect on the
date of such loan under the Revolving Credit Facility. The loan balance is
required to be reduced to zero for a period of not less than 15 consecutive days
in each fiscal year. Except for the foregoing provision and except for Pro-Fac's
guarantee of the Senior Subordinated Notes - 11 7/8 Percent (due 2008) and the
New Credit Facility, as long as Pro-Fac has the right to borrow under the
Pro-Fac Marketing and Facilitation Agreement, the Senior Subordinated
Notes - 11 7/8 Percent (due 2008) do not permit Pro-Fac to incur any other
indebtedness.
EQUITY OWNERSHIP IN COBANK: As part of its historical lending arrangements with
CoBank, which is a cooperative, Pro-Fac made investments in the bank. The
Cooperative made these investments through (i) a capital purchase obligation
equal to a percentage, set annually based on CoBank's capital needs, of its
interest paid to CoBank and (ii) a patronage rebate on interest paid by the
63
<PAGE>
Cooperative to CoBank based on CoBank's earnings, which is paid in cash and
capital certificates. As of June 26, 1999, the amount of the Cooperative's
investment in CoBank was approximately $22.1 million.
During fiscal 1999, all outstanding obligations due CoBank were paid. In
conjunction with the operating policy of CoBank, the Cooperative's investment
will be liquidated over a five-year period.
PURCHASE OF CROPS FROM PRO-FAC: Each of the members of Pro-Fac sells crops to
Pro-Fac pursuant to a general marketing agreement between such member and
Pro-Fac, which crops in turn are sold to the Cooperative pursuant to the Pro-Fac
Marketing and Facilitation Agreement. During fiscal 1999, the following
directors and executive officers of Pro-Fac directly or through sole
proprietorships or corporations, sold crops to Pro-Fac and provided harvesting,
trucking and waste removal services to Agrilink for the following aggregate
amounts:
<TABLE>
<CAPTION>
Gross Purchases
Relationship In Fiscal 1999
NAME To Pro-Fac (Dollars in Thousands)
-------------------------- -------------------- ----------------------
<S> <C> <C>
DALE E. BURMEISTER................................................ Director $ 284
ROBERT V. CALL, JR................................................ Director $3,795
GLEN LEE CHASE.................................................... Director $ 155
TOM R. CRONER..................................................... Director and Secretary $ 78
KENNETH A. DAHLSTEDT.............................................. Director $ 238
ROBERT DEBADTS.................................................... Director $ 489
BRUCE R. FOX...................................................... Director and President $1,226
STEVEN D. KOINZAN................................................. Director and Treasurer $ 532
KENNETH A. MATTINGLY.............................................. Director $1,417
ALLAN W. OVERHISER................................................ Director $ 48
PAUL E. ROE....................................................... Director $1,063
DARELL SARFF...................................................... Director $ 187
</TABLE>
DIRECTORS AND OFFICERS LIABILITY INSURANCE
As authorized by New York law and in accordance with the policy of that state,
the Cooperative has obtained insurance from Chubb Group Insurance insuring the
Cooperative against any obligation it incurs as a result of its indemnification
of its officers and directors, and insuring such officers and directors for
liability against which they may not be indemnified by the Cooperative. This
insurance has a term expiring on October 15, 1999, at an annual cost of
approximately $130,000. As of this date, no sums have been paid to any officers
or directors of the Cooperative under this indemnification insurance contract.
64
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
THE FOLLOWING APPEARS IN ITEM 8 OF THIS REPORT:
<TABLE>
<CAPTION>
ITEM PAGE
------ -----
<S> <C>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary:
Management's Responsibility for Financial Statements................................................................. 26
Report of Independent Accountants.................................................................................... 27
Consolidated Financial Statements for the years ended June 26, 1999, June 27,
1998, and June 28, 1997:
Consolidated Statement of Operations and Net Proceeds for the years ended
June 26, 1999, June 27, 1998, and June 28, 1997.................................................................... 28
Consolidated Balance Sheet at June 26, 1999 and June 27, 1998...................................................... 29
Consolidated Statement of Cash Flows for the years ended June 26, 1999, June 27, 1998, and June 28, 1997......... 30
Consolidated Statement of Changes in Shareholders' and Members' Capitalization and Redeemable Stock
for the years ended June 26, 1999, June 27, 1998, and June 28, 1997.............................................. 32
Notes to Consolidated Financial Statements....................................................................... 33
Selected Quarterly Financial Data................................................................................ 55
</TABLE>
(2) THE FOLLOWING ADDITIONAL FINANCIAL DATA ARE SET FORTH HEREIN:
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
PRO-FAC COOPERATIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------
June 26, 1999 June 27, 1998 June 28, 1997
------------- --------------- -------------
<S> <C> <C> <C>
Allowance for doubtful accounts
Balance at beginning of period $ 774,000 $ 970,000 $ 836,000
Additions charged to expense 208,000 17,000 446,000
Deductions (280,000) (213,000) (312,000)
Increase due to acquisition* 905,000 0 0
------------ ------------- -------------
Balance at end of period $ 1,607,000 $ 774,000 $ 970,000
============ ============= =============
Inventory reserve**
Balance at beginning of period $ 391,000 $ 362,000 $ 485,000
Net change (921,000) 29,000 (123,000)
Increase due to acquisition* 8,931,000 0 0
------------ ------------- -------------
Balance at end of period $ 8,401,000 $ 391,000 $ 362,000
============ ============= =============
Tax valuation allowance***
Balance at beginning of period $ 5,550,000 $ 6,212,000 $ 17,983,000
Net change (4,141,000) (662,000) (11,771,000)
------------ ------------- -------------
Balance at end of period $ 1,409,000 $ 5,550,000 $ 6,212,000
============ ============= =============
</TABLE>
* Represents balance acquired in conjunction with the DFVC and Agripac
acquisitions.
** Difference between FIFO cost and market applicable to inventories.
*** See further discussion regarding tax matters at NOTE 6 to the "Notes to
Consolidated Financial Statements."
Schedules other than those listed above are omitted because they are either not
applicable or not required, or the required information is shown in the
financial statements or the notes thereto.
65
<PAGE>
(3) The following exhibits are filed herein or have been previously
filed with the Securities and Exchange Commission:
(b) REPORT ON FORM 8-K
No reports on Form 8-K were filed in the fourth quarter of
fiscal 1999.
(c) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------
<S> <C>
3.1(11) Restated Certificate of Incorporation of Pro-Fac Cooperative, Inc.
3.2(11) Bylaws of Pro-Fac Cooperative, Inc. as amended.
4.1(10) Indenture, dated as of November 18, 1998, between
Agrilink Foods, Inc., the Guarantors named therein
and IBJ Schroder Bank & Trust Company, Inc. as
Trustee.
4.2(10) Form of 11 7/8 Percent Senior Subordinated Notes due 2008
(included as Exhibit B to Exhibit 4.1).
4.3(2) Indenture, dated as of November 3, 1994 (the
"Indenture"), among PFAC, Pro-Fac and IBJ Schroder
Bank & Trust Cooperative ("IBJ"), as Trustee, as
amended by First Supplemental Indenture, dated as
of November 3, 1994, each with respect to Agrilink
12.25 percent Senior Subordinated Notes due 2005
(the "Notes").
10.6(2) Marketing and Facilitation Agreement, dated as of
November 3, 1994, between Pro-Fac and Agrilink.
10.7(2) Management Incentive Plan, as amended.
10.8(2) Supplemental Executive Retirement Plan, as amended.
10.10(2) Master Salaried Retirement Plan, as amended.
10.11(2) Non-Qualified Profit Sharing Plan, as amended.
10.12(2) Excess Benefit Retirement Plan.
10.13 Salary Continuation Agreement - Dennis M. Mullen.
10.15(1) Second Amendment to Non-Qualified Profit Sharing Plan.
10.18(4) Equity Value Plan Adopted on June 24, 1996.
10.21(6) OnSite Services Agreement with Systems & Computer Technology.
10.22(6) Raw Product Supply Agreement with Seneca Foods Corporation.
10.23(6) Reciprocal Co-Pack Agreement with Seneca Foods Corporation.
10.25(8) Second Supplemental Indenture dated November 10, 1997.
10.26 Third Supplemental Indenture dated September 24, 1998.
10.27(9) Credit Agreement among Agrilink Foods, Inc.,
Pro-Fac Cooperative, Inc., and Harris Trust and
Savings Bank, and Bank of Montreal, Chicago Branch,
and the Lenders from time to time party hereto,
dated September 23, 1998.
10.29(9) Subordinated Promissory Note among Agrilink Foods, Inc.
and Dean Foods Company, dated as of September 23, 1998.
10.30(11) Service Agreement among Agrilink Foods, Inc., and
PF Acquisition II, Inc., dated as of February 22,
1999.
</TABLE>
66
<PAGE>
(c) EXHIBITS (CONTINUED):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------------------------------------------------
<S> <C>
10.31(11) Amendment to Marketing and Facilitation Agreement between
Agrilink Foods, Inc. and Pro-Fac dated September 23, 1998.
10.32(11) Marketing and Facilitation Agreement, dated as of
February 22, 1999, between Pro-Fac and PF
Acquisition II, Inc.
10.33(11) Credit Agreement among PF Acquisition II, Inc. and
CoBank as administrative agent for the lenders
thereunder, dated February 22, 1999.
10.34(11) Subordinated Promissory Note among PF Acquisition II, Inc.
and CoBank, dated February 22, 1999.
10.35(11) Asset Purchase Agreement between PF Acquisition II. Inc.,
Pro-Fac Cooperative, Inc. and Agripac, Inc., Debtor and
Debtor-In-Possession dated February 12, 1999.
18(5) Accountant's Report Regarding Change in Accounting Method
21.1 List of Subsidiaries.
23.1(8) Accountant's Consent Regarding the Agrilink Foods Employee
Stock Purchase Plan
27 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference from Registration Statement No. 33-60273.
(2) Incorporated by reference from Registration Statement No. 33-56517, as
amended.
(3) Incorporated by reference from the Registrant's 1995 Annual Report on
Form 10-K.
(4) Incorporated by reference from the Registrant's 1996 Annual Report on
Form 10-K.
(5) Incorporated by reference from the Registrant's 1997 First Quarter Report
on Form 10-Q.
(6) Incorporated by reference from Registrant's 1997 Annual Report on
Form 10-K.
(7) Incorporated by reference from Registrant's Fiscal 1998 First Quarter
Report on Form 10-Q.
(8) Incorporated by reference from Registrant's Fiscal 1998 Annual Report on
Form 10-K.
(9) Incorporated by reference from Registrant's fiscal 1999 First Quarter
Report on Form 10-Q.
(10) Incorporated by reference from Registration Statement No. 333-70143, as
amended.
(11) Incorporated by reference from Registrant's fiscal 1999 Third Quarter
Report on Form 10-Q.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: September 20, 1999 BY: /s/ Stephen R. Wright
------------------ -----------------------
STEPHEN R. WRIGHT
GENERAL MANAGER
Date: September 20, 1999 BY: /s/ Earl L. Powers
------------------ -----------------------
EARL L. POWERS
VICE PRESIDENT FINANCE AND
ASSISTANT TREASURER
(Principal Financial Officer and
Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints STEPHEN R. WRIGHT and EARL L. POWERS, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments to this Annual Report on Form
10-K and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby satisfying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
68
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- --------------- --------------
<S> <C> <C>
/s/ Bruce R. Fox President and Director August 18, 1999
- -----------------------------------
(BRUCE FOX)
/s/ Steven D. Koinzan Treasurer and Director August 18, 1999
- -----------------------------------
(STEVEN D. KOINZAN)
/s/ Tom R. Croner Secretary and Director August 18, 1999
- -----------------------------------
(TOM R. CRONER)
/s/ Dale W. Burmeister Director August 18, 1999
- -----------------------------------
(DALE W. BURMEISTER)
/s/ Robert V. Call, Jr. Director August 18, 1999
- -----------------------------------
(ROBERT V. CALL, JR.)
/s/ Glen Lee Chase Director August 18, 1999
- -----------------------------------
(GLEN LEE CHASE)
/s/ Kenneth A. Dahlstedt Director August 18, 1999
- -----------------------------------
(KENNETH A. DAHLSTEDT)
/s/ Robert DeBadts Director August 18, 1999
- -----------------------------------
(ROBERT DEBADTS)
/s/ Kenneth A. Mattingly Director August 18, 1999
- -----------------------------------
(KENNETH A. MATTINGLY)
/s/ Allan W. Overhiser Director August 18, 1999
- -----------------------------------
(ALLAN W. OVERHISER)
/s/ Paul E. Roe Director August 18, 1999
- -----------------------------------
(PAUL E. ROE)
/s/ Darell Sarff Director August 18, 1999
- -----------------------------------
(DARELL SARFF)
/s/ Stephen R. Wright Assistant Treasurer and August 18, 1999
- ----------------------------------- General Manager
(STEPHEN R. WRIGHT) (Principal Executive Officer)
/s/ Earl L. Powers Vice President Finance and August 18, 1999
- ----------------------------------- Assistant Treasurer
(EARL L. POWERS) (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
69
<PAGE>
Exhibit 10.13
SALARY CONTINUATION AGREEMENT
This Agreement, dated the 18th day of August, 1999, between Agrilink
Foods, Inc., a New York corporation (the "Employer"), with offices at 90 Linden
Place, Rochester, New York 14625, and Dennis M. Mullen (the "Employee"),
residing at 15 Merry Creek Crossing, Pittsford, New York 14534.
WHEREAS, the Employer employs the Employee, and the Employee shall
serve as the Employer's president and chief executive officer, and
WHEREAS, the Employer and Employee wish to provide for the retention of
the Employee, and for the continuation of the Employee's salary in certain
events of termination of employment,
NOW, THEREFORE, the parties agree as follows:
1. CONSIDERATION. The parties hereby acknowledge that this Agreement is
entered into for good and sufficient consideration, the receipt of
which is hereby acknowledged by each of the parties.
2. COMPENSATION AND BENEFITS.
(a) Salary. As compensation for services of the Employee, the Employer
shall pay to the Employee an annual salary determined from time to
time by the Board of Directors of the Employer, in accordance with
its compensation policies.
(b) Incentive Compensation. In addition, the Employee shall participate
in, and shall be entitled to, additional compensation under the
Employer's Management Incentive Plan at an entitlement rate to be
determined from time to time by the Board of Directors of the
Employer, in accordance with its compensation policies.
(c) Retention Bonus. In addition, if the Employee continues providing
services to the Employer through August 31, 2001 in accordance to
the reasonable terms and conditions of his employment, the Employee
shall be entitled to, and shall receive a retention bonus in an
amount equal to $500,000. The Employee may elect to defer some or
all of the retention bonus
<PAGE>
Exhibit 10.13
by making such an election within 30 days of the effective date of
this Agreement. In the event the Employee dies, becomes disabled as
defined in Section 3(b), or is Terminated without Cause as defined
in Section 3(c) prior to August 31, 2001, the Employer shall pay to
the Employee a pro-rata amount of his retention bonus, in accordance
with the provisions of subsection (a), (b), or (c) of Section 3
within 10 days of the such an event. In the event the Employee is
Terminated for Cause as defined in Section 3(d), or should
voluntarily terminate his employment as described in Section 3(e)
prior to August 31, 2001, the Employee shall not be entitled to, and
no portion shall be paid of, the retention bonus.
(d) Benefits. The Employee shall be entitled to receive health
insurance, disability insurance, and all other employee benefits
consistent with the Employer's employee benefit policies for
executives as determined from time to time by the Board of Directors
of the Employer. Notwithstanding the foregoing, the Employee
expressly acknowledges that the salary continuation benefits under
this Agreement are provided in lieu of any other severance
arrangements normally provided by the Employer to its executive
employees.
(e) For purposes of this Agreement, the Employee's "Salary" shall mean
the sum of (i) the Employee's annual salary, as then in place at the
time of such determination, and (ii) the average Management
Incentive Program award received by the Employee for the two (2)
most recently completed fiscal years of the Employer.
3. TERMINATION.
(a) Death. If the Employee dies during employment with the Employer,
the Employer shall continue the Employee's salary, defined in
Section 2(e), for a period of twenty-four (24) months. Such salary
continuation payments are in addition to all life insurance benefits
the Employee is entitled to receive under any life insurance
policies provided to the Employee pursuant to Section 2(d). In
addition, the Employer shall pay to the employee a pro-rated
retention bonus, such pro-rated amount to be determined by
multiplying the retention bonus amount by the following: (a) the
number of the Employee's full or partial months of employment during
the period of August 31,
<PAGE>
Exhibit 10.13
1998 through his date of death; divided by (b) 36 months. The
Employer may, in its sole discretion, acquire a life insurance
policy or policies to fund any obligation it may have under this
Section 3(a). Such salary continuation payments and pro-rated
retention bonus shall be paid to the Employee's estate. In the event
of death, the Employee's Salary shall be determined as of the date
of death.
(b) Disability. If the Employee becomes disabled due to a physical or
mental disability, the Employer shall continue the Employee's
salary, as defined in Section 2(e), for a period of twenty-four
(24) months, provided, however, that such salary continuation
payments shall be offset by the amount, if any, which the Employee
shall receive under any short-term or long-term program of the
Employer. In addition, the Employer shall pay to the employee a
pro-rated retention bonus, such pro-rated amount to be determined
by multiplying the retention bonus amount by the following: (a) the
number of the Employee's full or partial months of employment during
the period of August 31, 1998 through his date of disability,
divided by (b) 36 months. The Employer may, in its sole discretion,
acquire a disability policy or policies to fund any obligation it
may have under this Section 3(b). For purposes of this Section 3(b),
the Employee shall be deemed disabled if the Board of Directors of
the Employer shall in good faith find, on the basis of medical
evidence submitted to it, that the Employee suffers from a mental or
physical condition or impairment which precludes the resumption of
his usual and customary duties, and if such impairment or condition
is likely to last for period of more than six (6) months. In the
event of a disability, the Employee's Salary shall be determined as
of the date of the onset of the Employee's disability.
(c) Termination Without Cause. The Employer may terminate the Employee
without cause. For purposes of this Agreement, the term "cause"
shall have the meaning set forth in Section 3(d) hereof. In the
event the Employer terminates the Employee without cause, the
Employer shall continue the Employee's salary, as defined in Section
2(e), for a period of twenty-four (24) months. In addition, the
Employer shall pay to the employee a pro-rated retention bonus, such
pro-rated amount to be determined by multiplying the retention bonus
amount by the following: (a) the
<PAGE>
Exhibit 10.13
number of the Employee's full or partial months of employment during
the period of August 31, 1998 through his date of termination,
divided by (b) 36 months.
(d) Termination for Cause. The Employer may terminate the Employee for
cause. For purposes of this Agreement, the Employer shall have cause
to terminate the Employee in the event of (i) Employee's conviction
of or plea of guilty or nolo contendere to a felony, or (ii) the
Employee's commission of a fraudulent or deliberately dishonest act
which has an adverse impact on the business of the Employer, or
(iii) the Employee's material breach of this Agreement or the
reasonable terms and conditions of his employment. In the event the
Employee is terminated for cause, the Employer shall have no further
obligation under this Agreement.
(e) Voluntary Termination By the Employee. The Employee may terminate
employment voluntarily upon reasonable notice to the Employer. If
the Employee terminates employment voluntarily, the Employer shall
have no further obligation under this Agreement.
4. CHANGE OF CONTROL.
(a) Notwithstanding the provisions of Section 3, in the event of a
Termination, as defined below, of the Employee within two (2) years
after a Change of Control, as defined below, the Employer shall
continue the Employee's Salary as defined in Section 2(e), for a
period of twenty-four (24) months. In addition, should such
Termination occur prior to September 1, 2001, the Employer shall
also pay to the Employee the entire amount of his retention bonus,
as if he had continued his employment through August 31, 2001. The
payments provided in the Section 4(a) shall be in lieu of, and not
in addition to, the payments defined in Section 3(c).
(b) Termination. For purposes of this Section 4, "Termination" shall
mean (i) termination by the Employer of the employment of the
Employee for any reason other than on account of the Employee's
death, disability, or for cause, as defined in Section 3(d), or (ii)
resignation of the Employee for Good Reason, as defined below.
(c) Change of Control. For purposes of this Section 4, a Change of
Control shall be deemed to have occurred if (i) anyone other than
Pro-Fac Cooperative, Inc. or any of its affiliates,
<PAGE>
Exhibit 10.13
including a "group" (as defined in Section 13(d)(3) of the
Securities and Exchange Act of 1934 (the "1934 Act") becomes the
"beneficial owner" (within the meaning of Section 13(d)(3) under the
1934 Act) of a majority of the common stock of the Employer; or (ii)
the Employer is a party to a merger, consolidation, or other
business combination in which it is not the surviving corporation,
or sells or transfers all of a major portion of its assets to any
other person (any of the foregoing constituting a "Business
Combination"); or (iii) as a result of, or in connection with, any
cash tender or exchange offer, purchase of stock, Business
Combination, or contested election, or any combination of the
foregoing transactions (a "Transaction"), the persons who were
directors of the Employer before the Transaction shall cease to
constitute a majority of the Board of Directors of the Employer or
any Successor Corporation. "Successor Corporation" means the
surviving, resulting or transferee corporation in a Business
Combination, or if such corporation is a direct or indirect
subsidiary of another corporation, the parent corporation of such
surviving, resulting or transferee corporation.
(d) Good Reason. For purposes of this Section 4, "Good Reason" shall
mean the occurrence of one of the following events: (i) the
assignment of the Employee to any duties materially inconsistent
with the Employee's positions, duties, responsibilities and status
with the Employer immediately prior to the occurrence of a Change of
Control; or (ii) a reduction in the Employee's annual salary or
annual incentive opportunity; or (iii) the Employer requires the
Employee to be based anywhere other than his office location
immediately preceding the occurrence of the Change of Control or one
of the principal executive offices of the Employer; or (iv) the
liquidation, dissolution, consolidation or merger of the Employer or
transfer of all or a significant portion of its assets, unless a
successor or successors (by merger, consolidation, or otherwise) to
which all or a significant portion of the Employer's assets have
been transferred assumes all duties and obligations of the Employer
under this Agreement. The Employee's right to terminate employment
for Good Reason shall not be affected by the Employee's incapacity
due to physical or mental illness. The Employee's continued
employment shall not
<PAGE>
Exhibit 10.13
constitute a consent to or waiver of rights with respect to any
circumstances constituting Good Reason herein.
5. Benefits. In the event the Employee is entitled to salary
continuation payments under the provisions of subsection (a), (b),
or (c) of Section 3 or under the provisions of Section 4, the
Employer shall continue to provide to the Employee or, in the case
of death, to the Employee's surviving spouse or estate, during the
period of such salary continuation payments all welfare benefits on
the same terms and conditions as the Employer is providing such
benefits to its executive employees under its employee benefit
policies for executives. For purposes of this Section 5, welfare
benefits shall include, by way of example and not limitation, health
insurance benefits, life insurance benefits, disability insurance
benefits, and the like, and shall exclude, by way of example, and
not limitation, participation in any defined benefit plan, defined
contribution plan, 'SS'401(k) plan, or non-qualified deferred
compensation plan.
6. MISCELLANEOUS.
(a) Unfunded Plan. This Agreement shall not require the Employer to
segregate any assets with respect to the benefits which may be paid
under it. Neither the Employer nor the Board of Directors shall be
deemed to be a trustee of any amounts to be paid under this
Agreement. Any liability of the Employer shall be based solely upon
the contractual obligations created by this Agreement and no such
obligations shall be deemed to be secured by any pledge or an
encumbrance on any property of the Employer.
(b) Termination and Amendment. This Agreement has been approved by the
Agrilink Foods, Inc. Board of Directors on August 18, 1999 as
evidenced by the execution of this Agreement. This Agreement shall
remain in effect until August 31, 2001: provided, however, that in
the event of a Change of Control, as defined in Section 4, before
the Agreement otherwise ceases to be effective, this Agreement shall
remain in existence for two (2) years after the date of such Change
of Control. The Termination of this Agreement shall not impair or
abridge the obligations of the Employer accrued prior to the date of
such action. The Employer may extend the term of this Agreement by
approval of the Board of Directors. It is the intention of the
<PAGE>
Exhibit 10.13
Board of Directors to review this Agreement annually to consider
extending the expiration date. Prior to August 31, 2001, the
Agreement shall be amended, abandoned, or terminated only with the
written consent of the Employee prior to the effective date of such
amendment, abandonment, or termination. By signature below, the
Employee hereby consents to the termination of the existing Salary
Continuation Agreement dated August 19, 1998.
(c) Governing Law. This Agreement shall be governed by the laws of the
State of New York.
IN WITNESS WHEREOF, this Agreement has been executed on the date
first above written.
AGRILINK FOODS, INC.
By: /s/ Robert Call
---------------------
Robert Call
Title: Chairman, Agrilink Foods, Inc.
Date:
------------------------------------------
Agreed: /s/ Dennis Mullen
----------------------------------------
Dennis M. Mullen
Title: President and CEO, Agrilink Foods, Inc.
Date:
-------------------------------------------
<PAGE>
Exhibit 10.26
THIRD SUPPLEMENTAL INDENTURE dated as of September 24, 1998, among Agrilink
Foods, Inc. (formerly Curtice-Burns Foods, Inc., the successor by merger to PF
Acquisition Corp.), a New York corporation (the "Company"), and IBJ Schroder
Bank & Trust Company, a New York banking corporation, as trustee (the
"Trustee").
The parties to this Supplemental Indenture entered into an Indenture dated
as of November 3, 1994, as supplemented by the First Supplemental Indenture
dated as of November 3, 1994 and the Second Supplemental Indenture dated as of
November 10, 1997 (as supplemented, the "Indenture"), among such parties,
Pro-Fac Cooperative, Inc., a New York cooperative corporation ("Pro-Fac"), and
the Subsidiary Guarantors named therein (the "Subsidiary Guarantors" and,
together with Pro-Fac, the "Guarantors"), providing, among other things, for the
authentication, delivery and administration of the Company's 12 1/4% Senior
Subordinated Notes due 2005 (the "Securities").
Pursuant to an Offer to Purchase and Consent Solicitation dated August 21,
1998 (the "Tender Offer"), the Company has offered to repurchase all of its
existing Securities outstanding. Additionally, in connection with the Tender
Offer, the Company proposed certain amendments (the "Proposed Amendments") to
the Indenture.
Pursuant to Section 9.2 of the Indenture, the Holders (as defined in the
Indenture) of at least 75% of the outstanding principal amount of the Securities
currently outstanding have approved such Proposed Amendments, as described in
this Supplemental Indenture.
The Company has directed the Trustee to execute and deliver this
Supplemental Indenture in accordance with the terms of the Indenture.
In consideration of the premises, the parties mutually agree as follows for
the benefit of each other and for the equal and ratable benefit of the Holders
of the Securities:
SECTION 1. Amendments to Indenture. The Indenture is hereby amended as
follows:
1.1. The following Sections are eliminated from the Indenture in their
entirety, and shall have no force and effect from the date of this Supplemental
Indenture:
a. Section 4.8 (Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock);
b. Section 4.9 (Limitation on Liens);
c. Section 4.10 (Limitation on Restricted Payments);
d. Section 4.12 (Transactions with Affiliates);
e. Section 4.13 (Limitation on Sale and Leaseback Transactions);
<PAGE>
Exhibit 10.26
f. Section 4.15 (Limitation on Dividends and Other Payment Restrictions
Affecting Subsidiaries);
g. Section 4.18 (Limitation on Certain Transactions with Pro-Fac); and
h. Section 4.19 (Limitation on Other Senior Subordinated Indebtedness).
1.2. Clause (i) of the second sentence of the definition of "Senior
Indebtedness" in Section 1.1 of the Indenture is deleted in its entirety, and
the Roman numerals (ii) and (iii) of the second sentence of such definition are
deleted and replaced with the Roman numerals (i) and (ii), respectively. The
definition of "Senior Indebtedness" is further amended by adding the following
sentence at the end of such definition: "Senior Indebtedness may, at the option
of the Company, include the following Indebtedness, which shall (if the Company
so elects) rank senior in right to the Securities for all purposes under the
Indenture: (i) up to $200 million aggregate principal amount of the Company's
Senior Subordinated Notes due 2008, if and when issued and (ii) up to $200
million aggregate principal amount in Indebtedness provided through a back-up or
bridge facility, if and when arranged so long as such back-up or bridge facility
is entered into in connection with the Acquisition (as defined in the Tender
Offer) and the related transactions, and including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, in each case as amended, modified, renewed, restated,
refunded, replaced or refinanced in whole or in part from time to time."
1.3. Section 4.11 (Disposition of Proceeds of Asset Sales) of the Indenture
is amended by deleting the first word "The" of subsection (a) thereof and
replacing it with the words "From and after February 1, 2000, the" and deleting
the parenthetical "(each of the foregoing, an "Asset Sale")" in subsection (a)
thereof and replacing it with the parenthetical "(each of the foregoing that is
consummated on or after February 1, 2000, an "Asset Sale")".
1.4. Section 5.1 (When Company May Merge, Etc.) of the Indenture is amended
by (i) deleting clause (iv) of the first sentence thereof in its entirety and
deleting the word "and" preceding such clause (iv) and (ii) inserting the word
"and" after the word "judgment;" and before clause (iii) of the first sentence
of such Section.
1.5. Section 6.1 (Events of Default) is amended by deleting subsections
(a)(v) and (a)(vii) thereof. Section 6.1 is further amended by deleting clause
(iii) from subsection (a) thereof and replacing it with the following:
"(iii) failure by the Company or any Subsidiary to comply with the
provisions of Section 5.1."
SECTION 2. Notification to Holders. The Company shall notify the Holders
(as defined in the Indenture) in accordance with Section 9.2 of the Indenture of
the execution of this Supplemental Indenture. Any failure of the Company to mail
such notice, or any defect therein, shall not, however, in any way impair or
affect the validity of any such supplemental indenture.
2
<PAGE>
Exhibit 10.26
SECTION 3. Receipt by Trustee. In accordance with Section 7.2 of the
Indenture, the parties acknowledge that the Trustee has received an Officers'
Certificate and Opinion of Counsel (each as defined in the Indenture) as
conclusive evidence that this Supplemental Indenture complies with the
applicable requirements of the Indenture.
SECTION 4. No Other Changes. Except as amended by this Supplemental
Indenture, all of the provisions of the Indenture shall remain in full force and
effect. The Indenture, as amended hereby, shall remain in full force and effect,
in accordance with its terms.
SECTION 5. Miscellaneous. All agreements of the Company and the Trustee, as
amended hereby, shall bind the Company and the Trustee, respectively, and their
respective successors. The parties may sign any number of counterparts of this
Supplemental Indenture. Each such counterpart shall be an original, but all of
them together represent the same agreement. The internal laws of the State of
New York shall govern this Supplemental Indenture, without regard to principles
of conflicts of law.
SECTION 6. Severability. In case any provision in this Supplemental
Indenture shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby, and a Holder shall have no claim therefor against any party
hereto.
3
<PAGE>
Exhibit 10.26
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first written above.
AGRILINK FOODS, INC.
By: /s/ Dennis Mullen
---------------------------------------------
Name: Dennis Mullen
Title: President, CEO
IBJ SCHRODER BANK & TRUST COMPANY,
as Trustee
By: /s/ Terence Rawlins
---------------------------------------------
Name: Terence Rawlins
Title: Assistant Vice President
4
<PAGE>
Exhibit 10.26
Each Guarantor confirms that its Guarantee (as defined in the Indenture)
shall apply to the Company's obligations under the Securities and the Indenture,
as amended hereby, and acknowledges and agrees that such Guarantee is in full
force and effect as of the date hereof.
CURTICE-BURNS EXPRESS, INC.
By: /s/ Earl L. Powers
--------------------------------------
Name: Earl L. Powers
Title: Vice President, Treasurer
PRO-FAC HOLDING COMPANY OF IOWA, INC.
By: /s/ Earl L. Powers
--------------------------------------
Name: Earl L. Powers
Title: Secretary
SEASONAL EMPLOYERS, INC.
By: /s/ Earl L. Powers
-------------------------------------
Name: Earl L. Powers
Title: Vice President, Treasurer
KENNEDY ENDEAVORS, INCORPORATED
By: /s/ Earl L. Powers
-------------------------------------
Name: Earl L. Powers
Title: Vice President
PRO-FAC COOPERATIVE, INC.
By: /s/ Earl L. Powers
------------------------------------
Name: Earl L. Powers
Title: Vice President Finance
5
<PAGE>
EXHIBIT 21.1
PRO-FAC COOPERATIVE, INC.
SUBSIDIARIES OF THE REGISTRANT
Curtice Burns Export Corporation
Curtice Burns Express, Inc.*
Kennedy Endeavors, Inc.
Seasonal Employers, Inc.
CBF Company of Canada Limited
Snyder Distributing, Inc.
Linden Oaks Corporation
Birds Eye de Mexico, S.A. de C.V.
BEMSA Holding, Inc.
*Inactive Corporations
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the
Consolidated Statement of Operations and Accumulated Earnings/(Deficit),
Consolidated Balance Sheet, and Consolidated Statement of Cash Flows and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000202932
<NAME> PRO-FAC COOPERATIVE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUN-26-1999
<CASH> 6,540
<SECURITIES> 0
<RECEIVABLES> 99,704
<ALLOWANCES> 1,607
<INVENTORY> 334,920
<CURRENT-ASSETS> 515,515
<PP&E> 457,387
<DEPRECIATION> 90,132
<TOTAL-ASSETS> 1,196,479
<CURRENT-LIABILITIES> 278,184
<BONDS> 0
261
93,353
<COMMON> 9,979
<OTHER-SE> 48,518
<TOTAL-LIABILITY-AND-EQUITY> 1,196,479
<SALES> 1,238,946
<TOTAL-REVENUES> 1,238,946
<CGS> 877,438
<TOTAL-COSTS> 877,438
<OTHER-EXPENSES> 228,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,920
<INCOME-PRETAX> 59,714
<INCOME-TAX> 24,746
<INCOME-CONTINUING> 34,968
<DISCONTINUED> 0
<EXTRAORDINARY> 18,024
<CHANGES> 0
<NET-INCOME> 16,944
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
