Page 1 of 21 Pages
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
File Number 0-20539
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-6036816
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
90 Linden Place, PO Box 682, Rochester, NY 14603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (716) 383-1850
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of January 29, 2000.
Class A Common Stock - 2,113,180
<PAGE>
2
PART I. FINANCIAL INFORMATION
<TABLE>
ITEM I. FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statement of Operations and Net Proceeds
(Unaudited)
(Dollars in Thousands)
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
December 25, December 26, December 25, December 26,
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 380,485 $ 376,703 $ 676,733 $ 559,282
Cost of sales (252,244) (254,563) (463,698) (390,445)
---------- ----------- ---------- ----------
Gross profit 128,241 122,140 213,035 168,837
Selling, administrative, and general expense (90,790) (92,118) (153,978) (127,001)
Income from joint venture 1,204 1,053 1,695 1,689
Gain on sales of assets 2,293 0 2,293 64,202
---------- ----------- ---------- ----------
Operating income 40,948 31,075 63,045 107,727
Interest expense (21,835) (18,613) (42,484) (26,949)
Amortization of debt issues costs associated with a
Bridge Facility 0 (5,500) 0 (5,500)
---------- ----------- ---------- ----------
Income before taxes, dividends, allocation of net proceeds, and
extraordinary item 19,113 6,962 20,561 75,278
Tax provision (4,633) (1,893) (5,678) (26,900)
---------- ----------- ---------- ----------
Income before dividends, allocation of net proceeds, and
extraordinary item 14,480 5,069 14,883 48,378
Extraordinary item relating to the early extinguishment of debt
(net of income taxes) 0 0 0 (18,024)
---------- ----------- ---------- ----------
Net income $ 14,480 $ 5,069 $ 14,883 $ 30,354
========== =========== ========== ==========
Allocation of net proceeds:
Net income $ 14,480 $ 5,069 $ 14,883 $ 30,354
Dividends on common and preferred stock (1,603) (1,524) (3,706) (3,502)
---------- ----------- ---------- ----------
Net proceeds 12,877 3,545 11,177 26,852
Allocation to earned surplus (6,301) (1,083) (4,601) (22,385)
---------- ----------- ---------- ----------
Net proceeds available to members $ 6,576 $ 2,462 $ 6,576 $ 4,467
========== =========== ========== ==========
Net proceeds available to members:
Estimated cash payment $ 1,644 $ 616 $ 1,644 $ 1,117
Qualified retains 4,932 1,846 4,932 3,350
---------- ----------- ---------- ----------
Net proceeds available to members $ 6,576 $ 2,462 $ 6,576 $ 4,467
========== =========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
3
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Balance Sheet (Unaudited)
<CAPTION>
(Dollars in Thousands) ASSETS December 25, June 26, December 26,
1999 1998 1998
----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 10,489 $ 6,540 $ 18,434
Accounts receivable, trade, net 122,849 88,249 103,991
Accounts receivable, other 13,163 9,848 17,195
Income taxes refundable 0 11,295 0
Current deferred tax asset 16,160 16,160 13,336
Inventories -
Finished goods 392,564 284,863 323,984
Raw materials and supplies 45,186 50,057 48,178
---------- ---------- ----------
Total inventories 437,750 334,920 372,162
---------- ---------- ----------
Current investment in CoBank 801 2,403 665
Prepaid manufacturing expense 1,821 18,217 1,792
Prepaid expenses and other current assets 22,805 27,883 19,122
---------- ---------- ----------
Total current assets 625,838 515,515 546,697
Investment in CoBank 19,693 19,693 22,377
Investment in Great Lakes Kraut Company 8,374 6,679 8,274
Property, plant, and equipment, net 349,459 367,255 312,344
Assets held for sale, at net realizable value 329 890 920
Goodwill and other intangible assets, net 259,832 260,733 339,639
Other assets 29,073 25,714 23,659
---------- ---------- ----------
Total assets $1,292,598 $1,196,479 $1,253,910
========== ========== ==========
Liabilities and Shareholders' and Members' Capitalization
Current liabilities:
Notes payable $ 123,700 $ 54,900 $ 85,000
Current portion of obligations under capital leases 208 208 256
Current portion of long-term debt 16,580 8,670 5,100
Accounts payable 98,591 107,159 102,508
Income taxes payable 549 0 8,911
Accrued interest 8,594 5,974 4,074
Accrued employee compensation 15,229 15,127 12,703
Other accrued expenses 92,480 64,603 90,479
Dividends payable 15 45 17
Amounts due AgriFrozen growers 0 1,453 0
Amounts due members 25,171 20,045 31,550
---------- ---------- ----------
Total current liabilities 381,117 278,184 340,598
Obligations under capital leases 568 568 503
Long-term debt 687,025 702,322 680,994
Deferred income tax liabilities 23,072 23,072 34,644
Other non-current liabilities 30,733 32,222 29,906
Minority interest in AgriFrozen 8,000 8,000 0
---------- ---------- ----------
Total liabilities 1,130,515 1,044,368 1,086,645
---------- ---------- ----------
Commitments and contingencies
Class B cumulative redeemable preferred stock liquidation preference $10 per
share, authorized - 500,000 shares; issued and outstanding 26,061, 26,061, and
28,634 shares, respectively 261 261 286
Class A common stock, par value $5, authorized - 5,000,000 shares
December 25, June 26, December 26,
1999 1999 1998
------------ -------- ------------
Shares issued 2,083,601 1,995,740 1,853,481
Shares subscribed 303,196 384,649 858,955
--------- --------- ---------
Total subscribed and issued 2,386,797 2,380,389 2,712,436
Less subscriptions receivable in installments (303,196) (384,649) (858,955)
--------- --------- ---------
Total issued and outstanding 2,083,601 1,995,740 1,853,481 10,418 9,979 9,267
========= ========= =========
Class B common stock, par value $5, authorized
2,000,000 shares 0 0 0
Shareholders' and members' capitalization:
Retained earnings allocated to members 30,505 25,573 33,122
Non-qualified allocation to members 2,050 2,050 2,660
Non-cumulative preferred stock, par value $25; authorized -
5,000,000 shares; issued and outstanding - 39,635,
39,635, and 45,001, respectively 991 991 1,125
Class A cumulative preferred stock, liquidation preference
$25 per share; authorized - 10,000,000 shares; issued and
outstanding 3,694,495, 3,694,495 and 3,503,199 shares, respectively 92,362 92,362 87,580
Special membership interests 0 0 0
Earned surplus 26,259 21,658 33,833
Accumulated other comprehensive income:
Minimum pension liability adjustment (763) (763) (608)
---------- ---------- ----------
Total shareholders' and members' capitalization 151,404 141,871 157,712
---------- ---------- ----------
Total liabilities and capitalization $1,292,598 $1,196,479 $1,253,910
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
4
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statement of Cash Flows
(Dollars in Thousands)
<CAPTION>
(Unaudited)
Six Months Ended
-----------------------------------
December 25, December 26,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,883 $ 30,354
Amounts payable to members (1,644) (1,117)
Adjustments to reconcile net income to net cash used in operating activities:
Extraordinary item relating to the early extinguishment of debt (net of income taxes) 0 18,024
Gain on sales of assets (2,293) (64,202)
Loss on disposal of assets 0 353
Depreciation 16,838 13,484
Amortization of goodwill and other intangibles 4,332 5,136
Interest in-kind on Subordinated Promissory Note 776 0
Amortization of debt issue costs and discount on subordinated promissory notes 2,357 6,277
Equity in undistributed earnings of Great Lakes Kraut Company (1,695) (1,689)
Change in assets and liabilities:
Accounts receivable (38,286) (37,944)
Inventories (128,434) (51,538)
Income taxes refundable/(payable) 11,844 15,328
Accounts payable and other accrued expenses 21,781 (19,504)
Amounts due to members 5,126 10,914
Other assets and liabilities 2,738 (6,230)
----------- -----------
Net cash used in operating activities (91,677) (82,354)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (16,009) (8,561)
Proceeds from disposals 53,497 84,427
Proceeds from investment in CoBank 1,602 1,329
Cash paid for acquisitions 0 (442,918)
----------- -----------
Net cash provided by/(used in) investing activities 39,090 (365,723)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 68,800 85,000
Proceeds from issuance of long-term debt 0 677,507
Payments on long-term debt (8,997) (278,873)
Cash paid for debt issuance costs 0 (18,824)
Issuances of common stock 439 154
Cash dividends paid (3,706) (3,502)
----------- -----------
Net cash provided by financing activities 56,536 461,462
----------- -----------
Net change in cash and cash equivalents 3,949 13,385
Cash and cash equivalents at beginning of period 6,540 5,049
----------- -----------
Cash and cash equivalents at end of period $ 10,489 $ 18,434
=========== ===========
<FN>
(Table continued on next page)
</FN>
</TABLE>
<PAGE>
5
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statement of Cash Flows
(Dollars in Thousands)
<CAPTION>
(Unaudited)
(Table continued from previous page)
Six Months Ended
---------------------------------
December 25, December 26,
1999 1998
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Acquisition of Dean Foods Vegetable Company -
Accounts receivable $ 24,201
Current deferred tax asset 30,645
Inventories 195,674
Prepaid expenses and other current assets 6,374
Property, plant and equipment 154,527
Assets held for sale at net realizable value 49
Goodwill and other intangible assets 182,010
Accounts payable (40,865)
Accrued employee compensation (8,437)
Other accrued expenses (75,778)
Long-term debt (2,752)
Subordinated promissory note (22,590)
Other assets and liabilities, net (2,453)
----------
$ 440,605
==========
Acquisition of J.A. Hopay Distributing Co., Inc. -
Accounts receivable $ 420
Inventories 153
Property, plant and equipment 51
Goodwill and other intangible assets 3,303
Other accrued expenses (251)
Obligation for covenant not to compete (1,363)
----------
$ 2,313
==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
PRO-FAC COOPERATIVE, 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 PF Acquisition II, Inc. in which it has a controlling interest. PF
Acquisition II, Inc. conducts business under the name AgriFrozen Foods
("AgriFrozen").
Agrilink has four primary product lines including: vegetables, fruits, snacks,
and canned meals. AgriFrozen has vegetables as its 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 unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
these periods. The following summarizes the significant accounting policies
applied in the preparation of the accompanying financial statements. These
financial statements should be read in conjunction with the financial statements
and accompanying notes contained in the Pro-Fac Cooperative, Inc. Form 10-K/A-1
for the fiscal year ended June 26, 1999.
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 1999 have been reclassified to
conform with the current presentation.
NOTE 2. ACQUISITIONS
Agripac Frozen Vegetable Business: On February 23, 1999, AgriFrozen acquired the
frozen vegetable business of Agripac, Inc. ("Agripac"), an Oregon cooperative.
AgriFrozen was formed in January 1999 under the corporation laws of New York. 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 net 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. In
addition, AgriFrozen is paying $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. Final allocations of purchase price
were made in the third and fourth quarters of fiscal 1999.
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 currently up to $55 million of revolving credit
borrowings (the "CoBank Revolving Credit Facility") 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. In fact, 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.
<PAGE>
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.
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. DFVC 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, 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.
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. Final
allocations of purchase price were made in the third and fourth quarters of
fiscal 1999.
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 1999 fiscal year.
Six Months Ended
(Dollars in Millions) December 26, 1998
-----------------
Net sales $ 656.3
Income before extraordinary item $ 33.2
Net income $ 15.2
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 1999 fiscal year, or of
the future operations of the consolidated entities.
Concurrently with the DFVC Acquisition, Agrilink refinanced its 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 the $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 "Subordinated Bridge Facility") and (iii) issued the
$30 million Subordinated Promissory Note to
<PAGE>
Dean Foods. The Subordinated Bridge Facility was repaid during November of 1998
principally with the proceeds from the issuance of Senior Subordinated Notes
(the "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.
Debt issue costs of $5.5 million associated with the Subordinated Bridge
Facility were expensed during the quarter ended December 26, 1998.
NOTE 3. 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 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, under the
Pro-Fac Marketing Agreement, in any year in which Agrilink has earnings on
products which were processed from crops supplied by Class A Pro-Fac members
("Pro-Fac Products"), Agrilink pays to Class A members of Pro-Fac, as additional
patronage income, 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 Class A 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. Earnings and losses are determined
at the end of the fiscal year, but are accrued on an estimated basis during the
year. Under the Pro-Fac Marketing Agreement, Pro-Fac is required to reinvest at
least 70 percent of the additional patronage income 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 Class B 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.
<PAGE>
9
NOTE 4. DEBT
<TABLE>
Summary of Long-Term Debt:
<CAPTION>
(Dollars in Thousands)
December 25, 1999
--------------------------------------- June 26, December 26,
Agrilink AgriFrozen Total 1999 1998
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Term Loan Facility $ 437,700 $ 30,000 $ 467,700 $ 476,600 $ 455,000
Senior Subordinated Notes 200,015 0 200,015 200,015 200,015
Subordinated Promissory Notes (net of discount) 24,749 4,240 28,989 27,378 23,372
Other 6,901 0 6,901 6,999 7,707
---------- -------- ---------- ---------- ----------
Total debt 669,365 34,240 703,605 710,992 686,094
Less current portion (16,580) 0 (16,580) (8,670) (5,100)
---------- -------- ---------- ---------- ----------
Total long-term debt $ 652,785 $ 34,240 $ 687,025 $ 702,322 $ 680,994
========== ======== ========== ========== ==========
</TABLE>
NOTE 5. OTHER MATTERS
Sale of Midwest Private Label Canned Vegetable Business: On November 8, 1999,
Agrilink completed the sale of its Midwest private label canned vegetable
business to Seneca Foods. Included in this transaction was Agrilink's Arlington,
Minnesota facility. Agrilink received proceeds of approximately $42.4 million
which were applied to outstanding bank loans. In addition, Seneca Foods issued
to Agrilink a $5.0 million unsecured subordinated promissory note due February
8, 2009. This transaction did not include Agrilink's retail branded canned
vegetables, Veg-All and Freshlike. No significant gain or loss was recognized on
this transaction.
On December 17, 1999, Agrilink completed the sale of its Cambria, Wisconsin
processing facility to Del Monte. The sale includes an agreement for Del Monte
to produce a portion of Agrilink's product needs during the 2000 packing season.
Agrilink received proceeds of approximately $10.5 million which were applied to
bank loans. A gain of approximately $2.3 million was recognized on this
transaction.
Restructuring: During the third quarter of fiscal 1999, Agrilink completed a
corporate-wide restructuring program. The overall objectives of the plan were 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 five percent of the
work force. Reductions in personnel include operational and administrative
positions. Of this charge, $2.3 million has been liquidated to date, and the
remaining termination benefits are anticipated to be liquidated by June 2000.
NOTE 6: OPERATING SEGMENTS
The Cooperative is organized by product line for management reporting with
operating income being the primary measure of segment profitability.
Accordingly, no items below operating earnings are allocated to segments. The
Cooperative's four primary operating segments are as follows: vegetables,
fruits, 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, soups, and various other ready-to-eat prepared meals. Branded products
within the canned meal category include Nalley. Other product lines primarily
represent salad dressings. Branded products within the "other category" include
Bernstein's and Nalley.
<PAGE>
The following table illustrates the Cooperative's operating segment information:
<TABLE>
(Dollars in Millions)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
December 25, December 26, December 25, December 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales:
Vegetables $ 271.2 $ 254.6 $ 471.5 $ 333.4
Fruits 45.6 43.3 68.9 68.4
Snacks 22.0 22.6 43.4 44.4
Canned Meals 18.4 17.9 35.0 32.7
Other 13.2 12.1 27.9 25.5
-------- --------- -------- ---------
Continuing segments 370.4 350.5 646.7 504.4
Businesses sold1 10.1 26.2 30.0 54.9
-------- --------- -------- ---------
Total $ 380.5 $ 376.7 $ 676.7 $ 559.3
======== ========= ======== =========
Operating income:
Vegetables2 $ 28.6 $ 19.1 $ 43.6 $ 22.5
Fruits 6.3 6.7 9.6 8.9
Snacks 1.4 1.6 2.9 3.6
Canned Meals 2.6 1.7 4.5 3.1
Other 0.6 1.0 1.5 1.0
-------- --------- -------- ---------
Continuing segments 39.5 30.1 62.1 39.1
Businesses sold1 (0.9) 1.0 (1.4) 4.5
-------- --------- -------- ---------
Total 38.6 31.1 60.7 43.6
Gain on sales of assets 2.3 0.0 2.3 64.2
-------- --------- -------- ---------
Total consolidated operating income 40.9 31.1 63.0 107.8
Interest expense (21.8) (18.6) (42.5) (27.0)
Amortization of debt issue costs associated with a Bridge Facility 0.0 (5.5) 0.0 (5.5)
-------- --------- -------- ---------
Income before taxes, dividends, allocation of net proceeds
and extraordinary item $ 19.1 $ 7.0 $ 20.5 $ 75.3
======== ========= ======== =========
<FN>
1 Includes the Midwest private label canned vegetable business sold in fiscal
2000 and the aseptic and peanut butter businesses sold in fiscal 1999.
2 The vegetable product line includes earnings derived from Agrilink's
investment in Great Lakes Kraut Company of $1.2 million and $1.1 million for
the three months ended December 25, 1999 and December 26, 1998, respectively,
and $1.7 million for both the six months ended December 25, 1999 and December
26, 1998.
</FN>
</TABLE>
NOTE 7. 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 ("New Notes") 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.
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.
<PAGE>
<TABLE>
(Dollars in Millions)
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -------------------------------
December 25, December 26, December 25, December 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Summarized Statement of Operations:
Net sales $ 20.9 $ 3.0 $ 39.2 $ 6.3
Gross profit 17.4 1.4 31.8 3.0
Income from continuing operations 17.6 0.3 31.7 0.6
Net income 11.4 0.3 20.6 0.6
Summarized Balance Sheet:
Current assets $ 2.9 $ 1.9
Noncurrent assets 214.3 7.0
Current liabilities 7.7 0.8
</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 is 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 8. OTHER MATTERS
Dividends: Subsequent to quarter end, the Cooperative declared a cash dividend
of $.43 per share on the Class A Cumulative Preferred Stock. These dividends
approximate $1.8 million and were paid on January 31, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for changes
in the Unaudited Consolidated Statement of Operations and Net Proceeds in the
second quarter and first six months of fiscal 2000 versus such periods in 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 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 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 results of operations by product line for
the three and six months ended December 25, 1999 and December 26, 1998.
<PAGE>
<TABLE>
EBITDA1,2
<CAPTION>
(Dollars in Millions)
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
December 25, December 26, December 25, December 26,
1999 1998 1999 1998
------------------- ------------------ ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------- ------- ------ ----- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vegetables $ 37.0 75.2% $ 28.9 65.1% $ 60.0 73.3% $ 34.8 55.9%
Fruits 6.7 13.6 7.2 16.2 10.4 12.7 9.9 15.9
Snacks 2.1 4.3 2.1 4.7 4.5 5.5 4.8 7.7
Canned Meals 3.1 6.3 2.3 5.2 5.4 6.6 4.2 6.8
Other 1.0 2.0 1.4 3.2 2.4 2.9 1.8 2.9
------ ----- ------ ----- ------- ----- -------- -----
Continuing operations 49.9 101.4 41.9 94.4 82.7 101.0 55.5 89.2
Businesses sold3 (0.7) (1.4) 2.5 5.6 (0.8) (1.0) 6.7 10.8
------ ----- ------ ----- ------- ----- -------- -----
Total $ 49.2 100.0% $ 44.4 100.0% $ 81.9 100.0% $ 62.2 100.0%
====== ===== ====== ===== ======= ===== ======== =====
<FN>
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, interest expense, amortization of debt issues
costs associated with a 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 gain on sales of assets. See NOTES 2 and 5 to the "Notes to Consolidated Financial Statements."
3 Represents the operating results of the Midwest private label canned
vegetable business sold in fiscal 2000 and the operating results of the
aseptic and peanut butter operations sold in fiscal 1999. See NOTES 2 and 5
to the "Notes to Consolidated Financial Statements."
</FN>
</TABLE>
<TABLE>
Net Sales
(Dollars in Millions)
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
December 25, December 26, December 25, December 26,
1999 1998 1999 1998
------------------- ------------------ ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
--------- -------- -------- ------ --------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vegetables $271.2 71.3% $254.6 67.6% $471.5 69.7% $333.4 59.6%
Fruits 45.6 12.0 43.3 11.5 68.9 10.2 68.4 12.2
Snacks 22.0 5.8 22.6 6.0 43.4 6.4 44.4 7.9
Canned Meals 18.4 4.8 17.9 4.7 35.0 5.2 32.7 5.9
Other 13.2 3.5 12.1 3.2 27.9 4.1 25.5 4.6
------ ----- ------ ----- ------ ----- ------ -----
Continuing segments 370.4 97.4 350.5 93.0 646.7 95.6 504.4 90.2
Businesses sold1 10.1 2.6 26.2 7.0 30.0 4.4 54.9 9.8
------ ----- ------ ----- ------ ----- ------ -----
Total $380.5 100.0% $376.7 100.0% $676.7 100.0% $559.3 100.0%
====== ===== ====== ===== ====== ===== ====== =====
<FN>
1 Includes net sales of the Midwest private label canned vegetable business
sold in fiscal 2000 and net sales of the aseptic and peanut butter operations
sold in fiscal 1999. See NOTES 2 and 5 to the "Notes to Consolidated
Financial Statements."
</FN>
</TABLE>
<PAGE>
<TABLE>
Operating Income1
<CAPTION>
(Dollars in Millions)
Three Months Ended Six Months Ended
------------------------------------------ -------------------------------------------
December 25, December 26, December 25, December 26,
1999 1998 1999 1998
------------------- ------------------ ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ------- ------- ------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vegetables $ 28.6 74.1% $ 19.1 61.4% $ 43.6 71.8% $ 22.5 51.6%
Fruits 6.3 16.3 6.7 21.6 9.6 15.8 8.9 20.4
Snacks 1.4 3.6 1.6 5.1 2.9 4.8 3.6 8.3
Canned Meals 2.6 6.7 1.7 5.5 4.5 7.4 3.1 7.1
Other 0.6 1.6 1.0 3.2 1.5 2.5 1.0 2.3
------ ----- ------- ----- ------- ----- ------ ------
Continuing segments 39.5 102.3 30.1 96.8 62.1 102.3 39.1 89.7
Businesses sold2 (0.9) (2.3) 1.0 3.2 (1.4) (2.3) 4.5 10.3
------ ----- ------- ----- ------- ----- ------ -----
Total $ 38.6 100.0% $ 31.1 100.0% $ 60.7 100.0% $ 43.6 100.0%
====== ===== ======= ===== ======= ===== ====== =====
<FN>
1 Excludes the gain on sales of assets. See NOTES 2 and 5 to the "Notes to Consolidated Financial Statements."
2 Represents the operating results of the Midwest private label canned
vegetable business sold in fiscal 2000 and operating results of the aseptic
and peanut butter operations sold in fiscal 1999. See NOTES 2 and 5 to the
"Notes to Consolidated Financial Statements."
</FN>
</TABLE>
CHANGES FROM SECOND QUARTER FISCAL 2000 TO SECOND QUARTER FISCAL 1999
The net income for the second quarter of fiscal 2000 of $14.5 million represents
a $9.4 million increase as compared to the second quarter of fiscal 1999 net
income of $5.1 million. Comparability of net income is, however, difficult
because the results of the second quarter of fiscal 1999 were impacted by the
amortization of debt issue costs associated with the Subordinated Bridge
Facility. Accordingly, management believes, to summarize results, an evaluation
of EBITDA from continuing segments, as presented on page 12, is more appropriate
as it allows the operations of the business to be reviewed in a more consistent
manner.
EBITDA from continuing segments increased $8.0 million, or 19.1 percent, to
$49.9 million in the second quarter of the current fiscal year from $41.9
million in the second quarter of the prior fiscal year.
The vegetable product line accounts for $8.1 million of the increase in EBITDA
from continuing segments and is primarily attributable to the inclusion of
results from the Agripac acquisition (the acquisition was completed in February
1999) and improvements at the Agrilink operating level. Improvements at Agrilink
primarily resulted from changes in product mix, and a reduction in product costs
resulting from the synergistic savings achieved from the DFVC Acquisition. The
vegetable category, however, has been negatively impacted by industry market
conditions within the frozen vegetable segment as a result of lower consumer
demand. The decrease in consumer demand has impacted both the Cooperative's
brand and private label product lines, however, the impact has been felt to a
greater extent within the private label category. According to industry data,
for the last 52-week period, there has been an overall decrease in the frozen
vegetable category of 3.3 percent. For the same 52-week period, the decrease in
the private label category was 8.8 percent.
The Cooperative's fruit product line showed a decrease of $0.5 million due to an
increase in raw product costs in the current year and a change in the timing of
various promotional programs.
The snack product line EBITDA is consistent with the prior quarter.
Canned meals increased $0.8 million primarily due to improvements in volume and
production efficiencies within the chili category.
The other product line showed a decrease of $0.4 million due to changes in
product mix.
<PAGE>
Net Sales: Total net sales for the second quarter increased $3.8 million, or 1.0
percent, to $380.5 million in the second quarter of fiscal 2000 from $376.7
million in the second quarter of fiscal 1999. Excluding businesses sold, net
sales increased by $19.9 million to $370.4 million in the second quarter of
fiscal 2000 from $350.5 million in the second quarter of fiscal 1999. This
change is primarily attributable to the Agripac acquisition, completed in
February 1999, which accounted for additional net sales of $25.0 million in
fiscal 2000. This increase was offset by the decline resulting from lower
consumer demand and competitive pressures.
Net sales for the fruit product line increased $2.3 million in the second
quarter of fiscal 2000 to $45.6 million from $43.3 million in the second quarter
of fiscal 1999 primarily as a result of improvements in volume due to a return
to historic pricing and promotional strategies.
Net sales for the snack product line decreased $0.6 million in the second
quarter of fiscal 2000 to $22.0 million from $22.6 million in the second quarter
of fiscal 1999 primarily within the popcorn category.
Canned meals increased $0.5 million primarily attributable to improvements in
volume within the chili category.
The other category increased $1.1 million in the second quarter of fiscal 2000
to $13.2 million from $12.1 million in the second quarter of fiscal 1999
primarily as a result of changes in product mix.
Operating Income: Excluding the impact of businesses sold and the gain on sales
of assets, operating income increased from $30.1 million in the second quarter
of fiscal 1999 to $39.5 million in the second quarter of fiscal 2000. This
represents an improvement of $9.4 million or 31.2 percent.
The vegetable product line showed operating income improvements of $9.5 million
or 49.7 percent in the second quarter of fiscal 2000. While the category showed
a modest decline in sales, the Agrilink vegetable product line has benefited
from a change in product mix and a reduction in product costs as previously
highlighted. In addition, the Agripac acquisition accounted for additional
operating income of $2.1 million.
The Cooperative's fruit category showed a decrease of $0.4 million due to an
increase in raw product costs in the current year and a change in the timing of
various promotional programs.
Snacks showed a modest decline of $0.2 million from $1.6 million in the second
quarter of fiscal 1999 to $1.4 million in the second quarter of fiscal 2000.
Canned meals showed an increase of $0.9 million due primarily to the
improvements in volume and production efficiencies within the chili category as
highlighted above.
The other product category showed a decrease of $0.4 million due to changes in
product mix.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $1.3 million as compared with the second quarter
of the prior fiscal year. This improvement is primarily attributable to a
decrease in selling expenses due to personnel reductions and other consolidation
efforts at Agrilink of $3.2 million. This decrease, however, has been offset by
costs attributable to the Agripac acquisition of $1.9 million.
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture formed between Agrilink and
Flanagan Brothers, Inc. on July 1, 1997. There has been no significant change in
the operations of the joint venture for the second quarter of fiscal 2000
compared with the prior year.
Gain on Sales of Assets: On December 17, 1999, Agrilink sold its Cambria,
Wisconsin facility to Del Monte. Agrilink received proceeds of approximately
$10.5 million which were applied to bank loans. A gain of approximately $2.3
million was recognized on this transaction.
<PAGE>
Interest Expense: Interest expense increased $3.2 million to $21.8 million in
the second quarter of fiscal 2000 from $18.6 million in the second quarter of
fiscal 1999. This increase is primarily associated with additional debt to
finance the Agripac acquisition and an overall increase in interest rates.
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 "Subordinated Bridge Facility"). The Subordinated Bridge
Facility was repaid with the proceeds from the new senior subordinated note
offering (see NOTE 2 - "Acquisitions"). Debt issuance costs associated with the
Subordinated Bridge Facility were $5.5 million and were fully amortized during
the second quarter of fiscal 1999.
Tax Provision: The provision for taxes increased $2.7 million to $4.6 million in
the second quarter of fiscal 2000 from $1.9 million in the second quarter of
fiscal 1999. The increase is a result of the improvement 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.
CHANGES FROM FIRST SIX MONTHS FISCAL 2000 TO FIRST SIX MONTHS FISCAL 1999
The net income for the first six months of fiscal 2000 of $14.9 million
represents a $15.5 million decrease as compared to the first six months of
fiscal 1999 net income of $30.4 million. Comparability of net income is,
however, difficult because the results of the first six months of fiscal 1999
were significantly impacted by a gain on the sales of assets, an extraordinary
item relating to the early extinguishment of debt and the amortization of debt
issue costs associated with the Subordinated Bridge Facility. In addition,
fiscal 2000 results reflect six months of interest expense in the current year
versus three months in the prior year for the additional debt associated with
the acquisition of DFVC which occurred on September 24, 1998 and the additional
debt associated with the Agripac acquisition which occurred on February 23,
1999. Accordingly, management believes, to summarize results, an evaluation of
EBITDA from continuing segments, as presented on page 12, is more appropriate as
it allows the operations of the business to be reviewed in a more consistent
manner.
EBITDA from continuing segments increased $27.2 million, or 49.0 percent, to
$82.7 million in the first six months of the current fiscal year from $55.5
million in the first six months of the prior fiscal year.
The vegetable product line accounts for $25.2 million of the increase in EBITDA
from continuing segments in the current year and is primarily attributable to
the DFVC and Agripac acquisitions. As a result of the date of acquisition, the
operating results for the DFVC Acquisition have been included for six months in
fiscal 2000 and for three months in fiscal 1999. The operating results for the
Agripac acquisition have been included for six months in fiscal 2000 and not at
all in fiscal 1999 results.
In addition, this operating segment has benefited from the inclusion of the
Birds Eye, Freshlike, and Veg-All brands and the higher margins associated with
branded product lines. As outlined earlier, the frozen vegetable category has,
however, been negatively impacted by market conditions within this segment as a
result of lower consumer demand. The decrease in consumer demand has impacted
both the Cooperative's brand and private label product lines, however, the
impact has been felt to a greater extent within the private label category.
The Cooperative's fruit product line showed an improvement of $0.5 million due
to the inclusion in the first six months of fiscal 1999 results of $0.9 million
of expenses associated with a new product launch. In addition, while volume has
increased in the current year, fiscal 2000 results have been negatively impacted
by an increase in raw product costs.
The snack product line showed a modest decrease of $0.3 million.
Canned meals increased $1.2 million primarily due to improvements in volume and
production efficiencies within the chili category.
The other product line showed improvements of $0.6 million due to changes in
product mix.
Net Sales: Total net sales increased $117.4 million, or 21.0 percent, to $676.7
million in the first six months of fiscal 2000 from $559.3 million in the first
six months of fiscal 1999. Excluding businesses sold, net sales increased by
$142.3 million to $646.7 million in the first six months of fiscal 2000 from
$504.4 million in the first six months of fiscal 1999. This improvement is
primarily attributable to an increase of $138.1 million within the vegetable
product line. The Birds Eye, Freshlike, and Veg-All brands accounted for
incremental sales of $86.2 million in the current year due to the inclusion of
six months of results in fiscal 2000 versus three months of results in fiscal
1999. In addition, AgriFrozen accounted for additional sales of $43.0 million.
<PAGE>
Net sales for the fruit product line increased $0.5 million in the first six
months of fiscal 2000 to $68.9 million from $68.4 million in the first six
months of fiscal 1999 primarily as a result of improvements in volume.
Net sales for the snack product line decreased $1.0 million in the first six
months of fiscal 2000 to $43.4 million from $44.4 million in the first six
months of fiscal 1999. Sales declines within the popcorn category of $1.3
million were attributable to competitive pressures. The potato chip and other
snack categories showed increases of $0.3 million due to improvements in volume.
Canned meals increased $2.3 million primarily attributable to improvements in
volume within the chili category.
The other category increased $2.4 million in the first six months of fiscal 2000
to $27.9 million from $25.5 million in the first six months of fiscal 1999
primarily as a result of changes in product mix.
Operating Income: Excluding the impact of businesses sold and the gain on sales
of assets, operating income increased from $39.1 million in the first six months
of fiscal 1999 to $62.1 million in the first six months of fiscal 2000. This
represents an improvement of $23.0 million or 58.8 percent.
Vegetables showed improvements of $21.1 million or 93.8 percent. The change is
primarily attributable to the inclusion of product lines obtained in conjunction
with the DFVC Acquisition for an additional three months in fiscal 2000 results.
The fiscal 2000 results of Agrilink have also benefited from a reduction in
overall production costs. This improvement primarily reflects the synergistic
savings achieved from the DFVC Acquisition and other business consolidation
efforts. In addition, the Agripac acquisition accounted for additional operating
income of $3.4 million in the current year. As the Agripac acquisition was
completed on February 23, 1999, there are no results for this entity included in
the first six months of the prior year.
The Cooperative's fruit category showed an improvement of $0.7 million in the
first six months of fiscal 2000 versus the first six months of fiscal 1999. This
improvement results from the inclusion in fiscal 1999 of $0.9 million of costs
associated with a new product launch. No such costs were incurred in fiscal
2000. In addition, although the Cooperative has experienced improvements in
volume within the fruit product line, fiscal 2000 results have been negatively
impacted by an increase in raw product costs.
Snacks showed a decline of $0.7 million from $3.6 million in the first six
months of fiscal 1999 to $2.9 million in the first six months of fiscal 2000.
The decrease primarily resulted from a decline within the popcorn category and a
modest decline within the potato chip and other snack categories due to an
increase in costs.
Canned meals showed an increase of $1.4 million due primarily to the
improvements in volume and production efficiencies within the chili category as
highlighted above.
The other product category showed improvements of $0.5 million due to changes in
product mix.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $27.0 million as compared with the first six
months of the prior fiscal year. The increase is primarily attributable to the
inclusion of the DFVC operation for six months in fiscal 2000 versus three
months in fiscal 1999, as well as the inclusion of the Agripac acquisition in
fiscal 2000. The Cooperative has experienced a decrease in selling expenses due
to restructuring and consolidation efforts.
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture formed between Agrilink and
Flanagan Brothers, Inc. on July 1, 1997. There has been no significant change in
the operations of the joint venture for the first six months of fiscal 2000
compared with the first six months of fiscal 1999.
Gain on Sales of Assets: On December 17, 1999, Agrilink sold its Cambria,
Wisconsin facility to Del Monte. Agrilink received proceeds of approximately
$10.5 million which were applied to bank loans. A gain of approximately $2.3
million was recognized on this transaction.
In conjunction with the DFVC Acquisition, Agrilink sold its aseptic operation to
Dean Foods in fiscal 1999. The final purchase price of $80 million was
determined in the third quarter of fiscal 1999 based upon an appraisal performed
by an independent appraiser.
Interest Expense: Interest expense increased $15.5 million to $42.5 million in
the first six months of fiscal 2000 from $27.0 million in the first six months
of fiscal 1999. This increase is associated with additional debt utilized to
finance the DFVC and Agripac
<PAGE>
acquisitions and higher levels of seasonal borrowings to fund additional working
capital requirements associated with 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 "Subordinated Bridge Facility"). The Subordinated Bridge
Facility was repaid with the proceeds from the new senior subordinated note
offering (see NOTE 2 - "Acquisitions"). Debt issuance costs associated with the
Subordinated Bridge Facility were $5.5 million and were fully amortized during
the second quarter of fiscal 1999.
Tax Provision: The provision for taxes decreased $21.2 million to $5.7 million
in the first six months of fiscal 2000 from $26.9 million in the first six
months of fiscal 1999. Of this decrease, $25.0 million is attributable to the
provision associated with the fiscal 1999 gain on sale of the aseptic
operations. The remaining variance was impacted by the improvement 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.
Extraordinary Item Relating to the Early Extinguishment of Debt: Concurrently
with the DFVC Acquisition, Agrilink refinanced its existing indebtedness,
including its 12 1/4 percent Senior Subordinated Notes due 2005 (see NOTE 2 -
"Acquisitions") 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) and were recognized in the first
quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the "Unaudited
Consolidated Statement of Cash Flows" for the first six months of fiscal 2000
compared to the first six months of fiscal 1999.
Net cash used in operating activities increased $9.3 million over the first six
months of the prior fiscal year. This increase primarily results from an
increase in inventories due to the harvesting of crops and related production
activities during this time offset by variances within accounts payable and
other accruals due to the timing of liquidation of outstanding balances.
Net cash used in investing activities in the first six months of fiscal 1999 was
impacted by the DFVC Acquisition and the sale of the aseptic operations. The
purchase of property, plant and equipment increased $7.4 million to $16.0
million for the first six months of fiscal 2000 from $8.6 million for the first
six months of fiscal 1999. The increase was primarily utilized to support
additional operating facilities acquired in conjunction with the DFVC and
Agripac acquisitions.
Net cash provided by financing activities in the first six months of fiscal 1999
was significantly impacted by the DFVC Acquisition and the activities completed
concurrent with the acquisition to refinance existing indebtedness.
AGRILINK DEBT
Borrowings: Under Agrilink's New Credit Facility, Agrilink is able to borrow up
to $200 million for seasonal working capital purposes under the Revolving Credit
Facility. The Revolving Credit Facility may also be utilized in the form of
letters of credit.
As of December 25, 1999, (i) cash borrowings outstanding under the Revolving
Credit Facility were $73.6 million, (ii) there were $15.8 million in letters of
credit outstanding, and (iii) additional availability under the Revolving Credit
Facility, after taking into account the amount of borrowings and letters of
credit outstanding, was $110.6 million. Agrilink believes that the cash flow
generated by operations and the amounts available under the Revolving Credit
Facility provide adequate liquidity to fund working capital needs and capital
expenditures.
Certain financing arrangements require that Pro-Fac and Agrilink meet certain
financial tests and ratios and comply with certain restrictions and limitations.
As of December 25, 1999, Pro-Fac and Agrilink are in compliance with all such
covenants, restrictions, and limitations.
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 has 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.
<PAGE>
The following is a summary of Agrilink's interest rate swap agreements:
December 25, 1999
Interest Rate Swap:
Variable to Fixed - notional amount $250,000,000
Average pay rate 4.96 - 5.32%
Average receive rate 6.085%
Maturities through 2001
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.
AGRIFROZEN DEBT
Borrowings: Under AgriFrozen's CoBank Credit Facility, AgriFrozen is able to
borrow up to $55.0 million for seasonal working capital purposes under the
CoBank Revolving Credit Facility.
As of December 25, 1999, (i) cash borrowings outstanding under the CoBank
Revolving Credit Facility were $50.1 million, and (ii) additional availability
under the CoBank Revolving Credit Facility, after taking into account the amount
of borrowings, was $4.9 million. AgriFrozen believes that the cash flow
generated by operations and the amounts available under the CoBank Revolving
Credit Facility provide adequate liquidity to fund working capital needs and
capital expenditures.
AgriFrozen's obligations are not guaranteed by Pro-Fac or Agrilink and are
expressly nonrecourse as to Pro-Fac and Agrilink.
Certain financing arrangements require that AgriFrozen meet certain financial
tests and ratios and comply with certain restrictions and limitations. As of
December 25, 1999, AgriFrozen was in compliance with all such covenants,
restrictions, and limitations.
OTHER MATTERS
Restructuring: During the third quarter of fiscal 1999, Agrilink completed a
corporate-wide restructuring program. The overall objectives of the plan were 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 (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 five percent of the
work force. Reductions in personnel include operational and administrative
positions. Of this charge, $2.3 million has been liquidated to date, and the
remaining termination benefits are anticipated to be liquidated by June 2000.
Short- and Long-Term Trends: 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.
Management believes that the decrease in consumer demand may result in an
increased supply throughout the industry. Accordingly, management anticipates
pricing, consistent with prior years, may be negatively impacted during the
third and fourth quarters.
Year 2000 Readiness Disclosure: The Cooperative has not experienced any
significant Year 2000 related system failures nor, to management's knowledge,
have any of Pro-Fac's suppliers. The Cooperative intends to continue to monitor
and test systems for ongoing Year 2000 compliance; however, management cannot
guarantee that the systems of other companies upon which operations rely could
not be affected by issues associated with the Year 2000 conversion.
<PAGE>
All material costs associated with Agrilink's Year 2000 compliance project were
covered under its service agreement with Systems and Computer Technology
Corporation ("SCT"). Agrilink's ten-year agreement with SCT is currently valued
at $50 million and is for SCT's OnSite outsourcing services, which includes
assistance in solving the Year 2000 issue. These amounts have been funded
through operating cash flows.
Prior to AgriFrozen's acquisition of Agripac's frozen vegetable processing
business, the Cooperative conducted an analysis of Agripac's associated computer
hardware and software systems. Based on this analysis, AgriFrozen has replaced
its computer hardware with year 2000 ready hardware and will enter into a
sublease with Agrilink pursuant to which it will license Agrilink's software
systems. Costs of $0.7 million associated with AgriFrozen's Year 2000 compliance
project were primarily covered under its service agreement with EDS or internal
resources. These amounts have been funded through operating cash flows.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Cooperative makes oral and written statements that may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange
Commission ("SEC") in its rules, regulations, and releases. The Cooperative
desires to take advantage of the "safe harbor" provisions in the Act for
forward-looking statements made from time to time, including, but not limited
to, the forward-looking information contained in the Management's Discussion and
Analysis (pages 11 to 19) and other statements made in this Form 10-Q and in
other filings with the SEC.
The Cooperative cautions readers that any such forward-looking statements made
by or on behalf of the Cooperative are based on management's current
expectations and beliefs but are not guarantees of future performance. Actual
results could differ materially from those expressed or implied in the
forward-looking statements. Among the factors that could impact the
Cooperative's ability to achieve its goals are:
|X| the impact of strong competition in the food industry;
|X| the impact of weather on the volume and quality of raw product;
|X| the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
|X| the continuation of the Cooperative's success in integrating operations
(including whether the anticipated cost savings in connection with its
acquisitions will be realized and the timing of any such realization), and
the availability of acquisition and alliance opportunities;
|X| the Cooperative's ability to achieve gains in productivity and improvements
in capacity utilization; and
|X| the Cooperative's ability to service debt.
MARKET AND INDUSTRY DATA
Unless otherwise stated herein, industry and market share data used throughout
this Form 10-Q 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 data and makes no representation to its accuracy.
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the period to which
this report relates.
Date Item
November 24, 1999 Item 5 - Other Events
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: February 7, 2000 BY:/s/ Stephen R. Wright
---------------- ---------------------------
STEPHEN R. WRIGHT
GENERAL MANAGER
Date: February 7, 2000 BY:/s/ Earl L. Powers
---------------- --------------------------
EARL L. POWERS
VICE PRESIDENT FINANCE AND
ASSISTANT TREASURER
(Principle Financial Officer and
Principle Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pro-Fac
Cooperative, Inc. Form 10-Q December 25, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000202932
<NAME> Pro-Fac Cooperative, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> JUN-24-2000
<PERIOD-START> JUN-27-1999
<PERIOD-END> DEC-25-1999
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<SECURITIES> 0
<RECEIVABLES> 136,012
<ALLOWANCES> 0
<INVENTORY> 437,750
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<PP&E> 450,260
<DEPRECIATION> 100,801
<TOTAL-ASSETS> 1,292,598
<CURRENT-LIABILITIES> 381,117
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93,353
<COMMON> 10,418
<OTHER-SE> 58,051
<TOTAL-LIABILITY-AND-EQUITY> 1,292,598
<SALES> 676,733
<TOTAL-REVENUES> 676,733
<CGS> 463,698
<TOTAL-COSTS> 463,698
<OTHER-EXPENSES> 149,990
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<INTEREST-EXPENSE> 42,484
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<NET-INCOME> 14,883
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