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 September 23, 2000
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 October 28, 2000.
Class A Common Stock - 2,170,422
Class B Common Stock - 723,229
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statements of Operations, Net Proceeds, and Comprehensive Income
(Unaudited)
(Dollars in Thousands)
Quarter Ended
-------------------------------------
September 23, September 25,
2000 1999
---------------- --------------
<S> <C> <C>
Net sales $ 302,489 $ 296,248
Cost of sales (216,839) (210,656)
---------- ----------
Gross profit 85,650 85,592
Selling, administrative, and general expense (64,337) (63,986)
Income from joint venture 275 491
---------- ----------
Operating income 21,588 22,097
Interest expense (21,526) (20,649)
---------- ----------
Income before taxes, dividends, and allocation of net proceeds 62 1,448
Tax provision (843) (1,045)
---------- ----------
Net (loss)/income $ (781) $ 403
========== ==========
Allocation of net proceeds:
Net (loss)/income $ (781) $ 403
Dividends on common and preferred stock (2,370) (2,103)
---------- ----------
Net deficit (3,151) (1,700)
Allocation from earned surplus 3,151 1,700
---------- ----------
Net proceeds available to Class A members $ 0 $ 0
========== ==========
Net proceeds available to members:
Estimated cash payment $ 0 $ 0
Qualified retains 0 0
---------- ----------
Net proceeds available to members $ 0 $ 0
========== ==========
Net (loss)/income $ (781) $ 403
Other comprehensive income
Unrealized gain on hedging activity 2,304 0
---------- ----------
Comprehensive income $ 1,523 $ 403
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Balance Sheets
(Dollars in Thousands) ASSETS
September 23, June 24, September 25,
2000 2000 1999
------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current assets: (Unaudited) (Unaudited)
Cash and cash equivalents $ 6,268 $ 4,994 $ 10,832
Accounts receivable, trade, net 124,996 101,065 114,017
Accounts receivable, other 17,845 10,488 14,695
Income taxes refundable 3,807 9,869 4,079
Current deferred tax assets 12,176 12,176 16,160
Inventories 454,565 341,931 488,286
Current investment in CoBank 1,951 2,927 1,602
Prepaid manufacturing expense 0 26,364 114
Prepaid expenses and other current assets 24,955 19,688 22,938
--------- --------- ----------
Total current assets 646,563 529,502 672,723
Investment in CoBank 16,203 16,203 19,693
Investment in joint venture 7,049 6,775 7,170
Property, plant, and equipment, net 342,518 348,359 364,118
Assets held for sale, at net realizable value 339 339 1,172
Goodwill and other intangible assets, net 256,135 258,545 262,059
Other assets 29,585 27,543 25,615
----------- ---------- ----------
Total assets $ 1,298,392 $1,187,266 $1,352,550
=========== ========== ==========
Liabilities and Shareholders' and Members' Capitalization
Current liabilities:
Notes payable - Agrilink $ 99,000 $ 49,800 $ 165,600
Current portion of debt - AgriFrozen 79,426 0 0
Current portion of obligations under capital leases 218 218 208
Current portion of long-term debt 16,595 16,583 16,580
Accounts payable 100,374 89,612 119,384
Accrued interest 16,449 11,398 11,552
Accrued employee compensation 12,975 11,216 15,194
Other accrued expenses 64,253 66,397 79,214
Dividends payable 0 41 0
Amounts due Class B members 1,811 2,060 6,864
Amounts due Class A members 29,913 21,696 29,032
----------- --------- ----------
Total current liabilities 421,014 269,021 443,628
Obligations under capital leases 520 520 568
Long-term debt 639,280 679,205 694,761
Deferred tax liabilities 36,824 36,825 23,072
Other non-current liabilities 33,758 33,852 31,886
Non-controlling interest in AgriFrozen 8,000 8,000 8,000
----------- ---------- ----------
Total liabilities 1,139,396 1,027,423 1,201,915
----------- ---------- ----------
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation preference $10 per
share, authorized 500,000 shares; issued and
outstanding 23,644, 23,644, and 26,061 shares, respectively 237 237 261
Class A common stock, par value $5, authorized 5,000,000 shares
September 23, June 24, September 25,
2000 2000 1999
------------ -------- --------------
Shares issued 2,132,981 2,132,981 2,040,568
Shares subscribed 233,977 233,977 346,229
--------- --------- ---------
Total subscribed and issued 2,366,958 2,366,958 2,386,797
Less subscriptions receivable in installments (233,977) (233,977) (346,229)
--------- --------- ---------
Total issued and outstanding 2,132,981 2,132,981 2,040,568 10,665 10,665 10,203
========= ========= =========
Class B common stock, par value $5, authorized 2,000,000
shares; issued and outstanding 723,229, 723,229, and
0, respectively 0 0 0
Shareholders' and members' capitalization:
Retained earnings allocated to members 16,591 16,591 25,573
Non-qualified allocation to members 300 300 2,050
Non-cumulative preferred stock, par value $25; authorized -
5,000,000 shares; issued and outstanding 34,400,
34,400, and 39,635, respectively 860 860 991
Class A cumulative preferred stock, liquidation preference
$25 per share; authorized 10,000,000 shares; issued and
outstanding 4,249,007, 4,249,007 and 3,694,495 shares,
respectively 106,225 106,225 92,362
Special membership interests 0 0 0
Earned surplus 22,339 25,490 19,958
Accumulated other comprehensive income/(loss):
Unrealized gain on hedging activity 2,304 0 0
Minimum pension liability adjustment (525) (525) (763)
----------- ---------- ----------
Total shareholders' and members' capitalization 148,094 148,941 140,171
----------- ---------- ----------
Total liabilities and capitalization $ 1,298,392 $1,187,266 $1,352,550
=========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Quarter Ended
-------------------------------------
September 23, September 25,
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)/income $ (781) $ 403
Adjustments to reconcile net (loss)/income to net cash used in operating activities:
Depreciation 8,230 8,466
Interest-in-kind on subordinated promissory note 402 384
Amortization of goodwill and other intangibles 2,514 2,105
Amortization of debt issue costs and discount on subordinated promissory notes 1,292 1,140
Equity in undistributed earnings of joint venture (275) (491)
Change in assets and liabilities:
Accounts receivable (31,288) (30,615)
Inventories and prepaid manufacturing expense (86,270) (135,263)
Income taxes refundable 6,062 7,216
Accounts payable and other accrued expenses 15,387 37,158
Amounts due Class A members 8,217 8,987
Amounts due Class B members (249) (81)
Other assets and liabilities, net (4,998) 4,110
----------- -----------
Net cash used in operating activities (81,757) (96,481)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (8,448) (8,672)
Proceeds from disposals 5,057 273
Proceeds from investment in CoBank 976 801
----------- -----------
Net cash used in investing activities (2,415) (7,598)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 94,000 110,700
Payments on long-term debt (6,184) (450)
Issuances of common stock 0 224
Cash dividends paid (2,370) (2,103)
----------- -----------
Net cash provided by financing activities 85,446 108,371
----------- -----------
Net change in cash and cash equivalents 1,274 4,292
Cash and cash equivalents at beginning of period 4,994 6,540
----------- -----------
Cash and cash equivalents at end of period $ 6,268 $ 10,832
=========== ===========
<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
The Cooperative: Pro-Fac Cooperative, Inc. is an agricultural cooperative which
processes and markets crops grown by its members through its wholly-owned
subsidiary Agrilink Foods, Inc. ("Agrilink Foods") 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"). Unless
the context otherwise requires, the terms "Cooperative" and "Pro-Fac" refer to
Pro-Fac Cooperative, Inc. and its subsidiaries.
Agrilink Foods has four primary product lines including: vegetables, fruits,
snacks, and canned meals. 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.
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulations
S-X. Accordingly, they do not include all of the information required by GAAP
for complete financial statement presentation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations have been included. Operating
results for the quarter ended September 23, 2000 are not necessarily the results
to be expected for other interim periods or the full year. 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 for the
fiscal year ended June 24, 2000.
Consolidation: The consolidated financial statements include the Cooperative and
its subsidiaries, Agrilink Foods 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 2000 have been reclassified to
conform with the current period presentation.
NOTE 2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On June 25, 2000, the Cooperative adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires the recognition of all derivative financial instruments as either
assets or liabilities in the Consolidated Balance Sheet and measurement of those
instruments at fair value. Changes in the fair values of those derivatives will
be reported in earnings or other comprehensive income depending on the use of
the derivative and whether it qualifies for hedge accounting. The accounting for
gains and losses associated with changes in the fair value of a derivative and
the effect on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting
changes in the fair value or cash flow of the asset or liability hedged. Under
the provisions of SFAS No. 133, the method that will be used for assessing the
effectiveness of a hedging derivative, as well as the measurement approach for
determining the ineffective aspects of the hedge, must be established at the
inception of the hedge.
The Cooperative, as a result of its operating and financing activities is
exposed to changes in foreign currency exchange rates, certain commodity prices,
and interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Cooperative may enter into derivative contracts.
The adoption of SFAS No. 133 did not materially affect the Cooperative's results
of operations or financial position.
Foreign Currency: Agrilink Foods manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by Agrilink Foods are denominated in Mexican pesos.
Agrilink Foods has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. During fiscal 2000, the
Agrilink Foods entered into cash flow hedges for the Mexican peso with maturity
dates ranging from July 2000 to April 2001. At September 23, 2000, the fair
value
<PAGE>
of the open contracts was an after-tax gain of $0.2 million, recorded in
accumulated other comprehensive income in shareholders' equity. Amounts deferred
to accumulated other comprehensive income will be reclassified into cost of
goods sold within the next 12 months.
During the first quarter of fiscal 2001, approximately $0.3 million was
reclassified from other comprehensive income to cost of goods sold. Hedge
ineffectiveness was insignificant.
Commodity Prices: Agrilink Foods is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, Agrilink Foods designates
soybean oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. At September 23, 2000, Agrilink Foods had open soybean oil contracts
hedging approximately 70 percent of its planned soybean oil requirements during
fiscal 2001. The fair value of these open contracts was $64,800 at September 23,
2000. During the first quarter of fiscal 2001, an immaterial loss on these
contracts was recorded in cost of goods sold. All open contracts mature by
January 2001.
Agrilink Foods is exposed to commodity price risk related to forecasted
purchases of corrugated (unbleached kraftliner) in its manufacturing process. To
mitigate this risk, Agrilink Foods designates a swap agreement as a cash flow
hedge of its forecasted corrugated purchases. At September 23, 2000, Agrilink
Foods had an open swap hedging approximately 80 percent of its planned
corrugated requirements. The fair value of this agreement was immaterial at
September 23, 2000. The termination date for the agreement is June 2001.
Interest Rates: Agrilink Foods is exposed to interest rate risk primarily
through its borrowing activities. The majority of Agrilink Foods' long-term
borrowings are variable rate instruments. Agrilink Foods entered into two
interest rate swap contracts under which Agrilink Foods agrees to pay an amount
equal to a specified fixed rate of interest times a notional principal amount,
and to receive in return an amount equal to a specified variable rate of
interest times the same notional principal amount. The notional amounts of the
contract are not exchanged and no other cash payments are made. The two interest
rate swap contracts were entered into with a major financial institution in
order to minimize credit risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month LIBOR of 6.77 percent as of September 23, 2000) on $150 million
notional amount of indebtedness. Agrilink Foods had a second interest rate swap
contract to pay a fixed rate of interest (5.32 percent) and receive a variable
rate of interest (three-month LIBOR of 6.77 percent as of September 23, 2000) on
$100 million notional amount of indebtedness. Approximately 59 percent of the
underlying debt is being hedged with these interest rate swaps.
Agrilink Foods designates these interest rate swap contacts as cash flow hedges.
At September 23, 2000, the fair value of the contracts was an after-tax gain of
$2.1 million, recorded in accumulated other comprehensive income in
shareholder's equity.
To the extent that any of these contracts are not considered effective in
offsetting the change in the value of the interest payments being hedged, any
changes in fair value relating to the ineffective portion of these contacts are
immediately recognized in income. However, the net gain or loss on the
ineffective portion of these interest rate swap contracts was not material
during the first quarter of fiscal 2001. Amounts deferred to other comprehensive
income will be reclassified into interest expense over the life of the swap
contracts.
NOTE 3. DISPOSITIONS
Sale of Pickle Business: On June 23, 2000, Agrilink Foods sold its pickle
business based in Tacoma Washington to Dean Pickle and Specialty Products
Company. This business included pickle, pepper, and relish products sold
primarily under the Nalley and Farman's brand names. Agrilink Foods will
continue to contract pack Nalley and Farman's pickle products for a period of
two years at the existing Tacoma processing plant which Agrilink Foods will
operate.
In a related transaction, on July 21, 2000, Agrilink Foods sold the machinery
and equipment utilized in the production of pickles and other related products
to Dean Pickle and Specialty Products Company. No significant gain or loss was
recognized on this transaction. The Company received proceeds of $5.0 million
which were applied to bank loans ($3.2 million of which was applied to the term
loan facility and $1.8 million of which was applied to the Agrilink Foods'
revolving credit facility).
Sale of Midwest Private Label Canned Vegetable Business: On November 8, 1999,
Agrilink Foods completed the sale its Midwest private label canned vegetable
business to Seneca Foods, which included the Arlington, Minnesota facility.
Agrilink Foods received
<PAGE>
proceeds of approximately $42.4 million which were applied to outstanding
borrowings. In addition, Seneca Foods issued to Agrilink Foods a $5.0 million
unsecured subordinated promissory note due February 8, 2009. This transaction
did not include the Agrilink Foods' retail branded canned vegetables, Veg-All
and Freshlike. No significant gain or loss was recognized on this transaction.
NOTE 4. AGREEMENTS WITH AGRILINK FOODS AND AGRIFROZEN
Agrilink Foods: The contractual relationship between Pro-Fac and Agrilink Foods
is defined in the Pro-Fac Marketing and Facilitation Agreement (the Pro-Fac
Marketing Agreement"). Under the Pro-Fac Marketing Agreement, Agrilink Foods
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 Foods, it may
be more or less than the price Agrilink Foods would pay in the open market in
the absence of the Pro-Fac Marketing Agreement.
Under the Pro-Fac Marketing Agreement, Agrilink Foods is required to have on its
board of directors individuals 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's board of
directors. The volume and type of crops to be purchased by Agrilink Foods from
Pro-Fac 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 Foods. In addition, in any year in which
Agrilink Foods has earnings on products which were processed from crops supplied
by Pro-Fac ("Pro-Fac Products"), Agrilink Foods pays to 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 Foods.
In years in which Agrilink Foods has losses on Pro-Fac Products, Agrilink Foods
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 Foods. Additional patronage income is paid to
Pro-Fac for services provided to Agrilink Foods, 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 Foods.
Amounts received by Pro-Fac from Agrilink Foods for the three months ended
September 23, 2000 and September 25, 1999 include: commercial market value of
crops delivered, $48.4 million and $53.3 million, respectively; and additional
proceeds from profit sharing provisions of, $34,000 and $0.7 million,
respectively.
AgriFrozen: The contractual relationship between Pro-Fac and AgriFrozen is
defined in a marketing and facilitation agreement between Pro-Fac and AgriFrozen
(the "AgriFrozen Marketing Agreement"). Under this agreement, AgriFrozen
purchases raw products from Pro-Fac and processes and markets 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, AgriFrozen will
distribute such earnings to members of Pro-Fac. However, in the event AgriFrozen
experiences any losses, 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. Earnings and
losses are determined at the end of the fiscal year, but are accrued on an
estimated basis during the year. Under the AgriFrozen Marketing Agreement,
AgriFrozen paid Pro-Fac $7.5 million in CMV for crops purchased in the three
months ended September 23, 2000.
Under the AgriFrozen Marketing Agreement, 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 Foods from among Agrilink Foods' management employees; and
(iii) any number of disinterested directors who are to be elected from
individuals suggested by the president of Agrilink Foods. 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 Foods.
<PAGE>
NOTE 5. INVENTORIES
The major classes of inventories are as follows:
September 23, June 24, September 25,
2000 2000 1999
------------- ---------- -------------
Finished goods $ 408,016 $ 290,195 $ 440,091
Raw materials and supplies 46,549 51,736 48,195
---------- ---------- ---------
$ 454,565 $ 341,931 $ 488,286
========== ========== =========
NOTE 6. DEBT
<TABLE>
Summary of Long-Term Debt:
(Dollars in Thousands) September 23, 2000 June 24, September 25,
--------------------------------------------
Agrilink Foods AgriFrozen Total 2000 1999
---------------- ------------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Term Loan Facility $ 422,400 $ 30,000 $ 452,400 $ 458,300 $ 476,400
Senior Subordinated Notes 200,015 0 200,015 200,015 200,015
Subordinated Promissory Note (net of discount) 26,909 4,626 31,535 30,637 28,177
Other 6,551 44,800 51,351 6,836 6,749
---------- -------- ---------- ---------- ----------
Total debt 655,875 79,426 735,301 695,788 711,341
Less current portion (16,595) (79,426) (96,021) (16,583) (16,580)
---------- -------- ---------- ---------- ----------
Total long-term debt $ 639,280 $ 0 $ 639,280 $ 679,205 $ 694,761
========== ======== ========== ========== ==========
</TABLE>
Amendments to Agrilink Foods' Term Loan Facility: The Agrilink Foods' term loan
facility contains customary covenants and restrictions on Agrilink Foods' and
the Cooperative'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) covenants which
require 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 Inc., a subsidiary of Pro-Fac, are not
consolidated with Pro-Fac for purposes of determining debt covenant compliance.
During the first quarter of fiscal 2001, Agrilink Foods negotiated an amendment
to the covenants outlined under the credit facility. In consideration for this
amendment, Agrilink Foods incurred a fee of approximately $1.7 million. This fee
is being amortized over the life of the credit facility. Pursuant to the
amendment, the interest rates were modified and the credit facility currently
bears interest, at Agrilink Foods' 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)
1.25 percent for loans under the Revolving Credit Facility and the Term A
Facility, (y) 3.00 percent for loans under the Term B Facility and (z) 3.25
percent for loans under the Term C Facility and (ii) in the case of LIBOR loans,
(x) 3.00 percent for loans under the Revolving Credit Facility and the Term A
Facility, (y) 4.00 percent for loans under the Term B Facility and (z) 4.25
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. Pro-Fac and Agrilink Foods are in compliance with all
covenants, restrictions, and requirements under the terms of the credit facility
as amended.
Credit Agreement and Subordinated Note Agreement of AgriFrozen: Under
AgriFrozen's CoBank Credit Facility, AgriFrozen is able, under certain
conditions, to borrow up to $50.0 million for seasonal working capital purposes
under the CoBank Revolving Credit Facility. As of September 23, 2000, (i) cash
borrowings outstanding under the CoBank Revolving Credit Facility were $44.8
million, and (ii) additional availability under the CoBank Revolving Credit
Facility, after taking into account the amount of borrowings, was $5.2 million.
The CoBank Revolving Credit Facility requires that AgriFrozen meet certain
financial tests and ratios and comply with certain restrictions and limitations.
CoBank has verbally agreed to forbear from enforcing rights or exercising
remedies in respect of existing noncompliance with certain financial tests and
ratios and existing noncompliance with certain restrictions and limitations.
Such forbearance is for an indefinite duration and could be withdrawn by CoBank
at any time. AgriFrozen continues its negotiations with CoBank concerning these
areas and to increase the borrowing limit under the CoBank Revolving Credit
Facility. In light of these circumstances, there can be no assurance that the
cash flow generated by operations and the amounts available under the CoBank
Revolving Credit Facility will provide adequate liquidity to fund the working
capital needs and capital expenditures of AgriFrozen.
AgriFrozen's obligations are not guaranteed by Pro-Fac or Agrilink Foods and are
expressly nonrecourse as to Pro-Fac and Agrilink Foods. As such, these current
circumstances of AgriFrozen's debt and liquidity will not affect the business of
Pro-Fac or Agrilink Foods.
NOTE 7. OTHER MATTERS
Restructuring: During the third quarter of fiscal 1999, Agrilink Foods began
implementation of 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 and have improved annual earnings by approximately $8.0
million. Through September 23, 2000, $4.3 million of this charge has been
liquidated and the remaining termination benefits will be liquidated during
fiscal 2001.
NOTE 8. 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 income 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, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, and
Brooks Chili Beans. 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 meal
category include Nalley. Other product lines primarily represent salad
dressings. Branded products within the "other category" include Bernstein's and
Nalley.
<PAGE>
<TABLE>
The following table illustrates the Cooperative's operating segment information:
(Dollars in Millions) Quarter Ended
----------------------------------------------
September 23, 2000 September 25, 1999
------------------ ------------------
<S> <C> <C>
Net Sales:
Vegetables $ 225.2 $ 190.3
Fruits 25.5 23.3
Snacks 23.4 21.4
Canned Meals 15.7 16.6
Other 12.7 14.7
--------- --------
Continuing segments 302.5 266.3
Businesses sold1 0.0 29.9
--------- --------
Total $ 302.5 $ 296.2
========= ========
Operating income:
Vegetables2 $ 12.8 $ 14.7
Fruits 3.8 3.3
Snacks 1.7 1.5
Canned Meals 2.5 1.9
Other 0.8 0.9
--------- --------
Continuing segments 21.6 22.3
Businesses sold1 0.0 (0.2)
--------- --------
Total consolidated operating income 21.6 22.1
Interest expense (21.5) (20.7)
--------- --------
Income before taxes, dividends, and allocation of net proceeds $ 0.1 $ 1.4
========= ========
<FN>
1 Includes the private label canned vegetable business and the pickle business
sold in fiscal 2000.
2 The vegetable product line includes earnings derived from Agrilink Foods'
investment in a joint venture of $0.3 million and $0.5 million in fiscal 2001
and fiscal 2000, respectively.
</FN>
</TABLE>
NOTE 9. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation wholly-owned
subsidiaries of Agrilink Foods ("Subsidiary Guarantors"), and Pro-Fac, have
jointly and severally, fully and unconditionally guaranteed, on a senior
subordinated basis, the obligations of Agrilink Foods with respect to Agrilink
Foods' 11-7/8 percent Senior Subordinated Notes due 2008 (the "Notes") and the
Credit Facility. The covenants in the Notes and the Credit Facility do not
restrict the ability of the Subsidiary Guarantors to make cash distributions to
Agrilink Foods.
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.
(Dollars in Thousands)
Quarter Ended
September 23, September 25,
2000 1999
--------------- --------------
Summarized Statement of Operations:
Net sales $ 18,943 $ 18,262
Gross profit 14,842 14,384
Income from continuing operations 15,669 14,132
Net income 10,185 9,186
<PAGE>
(Dollars in Thousands)
Quarter Ended
September 23, September 25,
2000 1999
--------------- --------------
Summarized Balance Sheet:
Current assets $ 3,266 $ 2,511
Noncurrent assets 209,901 215,813
Current liabilities 7,041 5,583
NOTE 10. 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 October 31, 2000.
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 of Financial Condition and Results of Operations (pages 11 to 14) 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 changes in consumer demand;
|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 the realization of anticipated synergies in operations and the
timing of any such synergies), 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pro-Fac Cooperative, Inc. is an agricultural cooperative corporation formed in
1960 under the Cooperative Corporation Laws of New York to process and market
crops grown by its members. Unless the context otherwise requires, the terms
"Cooperative" and "Pro-Fac" refer to Pro-Fac Cooperative, Inc. and its
subsidiaries.
The purpose of this discussion is to outline the significant reasons for
material changes in the Unaudited Consolidated Statement of Operations, Net
Proceeds, and Comprehensive Income in the first quarter of fiscal 2001 versus
such periods in fiscal 2000.
<PAGE>
Pro-Fac Cooperative, Inc.'s ("Pro-Fac" or the "Cooperative") wholly-owned
subsidiary, Agrilink Foods, Inc. ("Agrilink Foods") has four primary product
lines including: vegetables, fruits, snacks and canned meals. The Cooperative's
subsidiary, AgriFrozen, in which it has a controlling interest, 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 vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, and
Brooks Chili Beans. 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 months ended September 23, 2000 and September 25, 1999.
EBITDA1
(Dollars in Millions)
Quarter Ended
------------------------------------------
September 23, September 25,
2000 1999
------------------- ------------------
% of % of
$ Total $ Total
---------- -------- ---------- ------
Vegetables $20.9 64.7% $ 22.4 68.5%
Fruits 4.4 13.6 3.7 11.4
Snacks 2.8 8.7 2.4 7.3
Canned Meals 2.8 8.7 2.3 7.3
Other 1.4 4.3 1.4 4.0
----- ----- ------ ------
Continuing operations 32.3 100.0 32.2 98.5
Businesses sold2 0.0 0.0 0.5 1.5
----- ----- ------ ------
Total $32.3 100.0% $ 32.7 100.0%
===== ===== ====== ======
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") is
defined as the sum of pretax income, dividends, allocation of net proceeds,
interest expense, 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 Represents the operating results of the private label canned vegetable
business and pickle business sold in fiscal 2000. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
<PAGE>
Net Sales
(Dollars in Millions)
Quarter Ended
------------------------------------------
September 23, September 25,
2000 1999
------------------- ------------------
% of % of
$ Total $ Total
---------- -------- ---------- -------
Vegetables $225.2 74.5% $ 190.3 64.2%
Fruits 25.5 8.4 23.3 7.9
Snacks 23.4 7.7 21.4 7.2
Canned Meals 15.7 5.2 16.6 5.6
Other 12.7 4.2 14.7 5.0
------ ----- ------- ------
Continuing segments 302.5 100.0 266.3 89.9
Businesses sold1 0.0 0.0 29.9 10.1
------ ----- ------- ------
Total $302.5 100.0% $ 296.2 100.0%
====== ===== ======= =====
1 Represents net sales of the private label canned vegetable business and
pickle business sold in fiscal 2000. See NOTE 3 to the "Notes to Consolidated
Financial Statements."
Operating Income
(Dollars in Millions)
Quarter Ended
------------------------------------------
September 23, September 25,
2000 1999
------------------- ------------------
% of % of
$ Total $ Total
---------- -------- ---------- ------
Vegetables $12.8 59.2% $14.7 66.5%
Fruits 3.8 17.6 3.3 14.9
Snacks 1.7 7.9 1.5 6.8
Canned Meals 2.5 11.6 1.9 8.6
Other 0.8 3.7 0.9 4.1
----- ----- ----- ------
Continuing operations 21.6 100.0 22.3 100.9
Businesses sold1 0.0 0.0 (0.2) (0.9)
----- ----- ------ -------
Total $21.6 100.0% $22.1 100.0
===== ===== ===== ======
1 Represents the operating results of the private label canned vegetable
business and pickle business sold in fiscal 2000. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
CHANGES FROM FIRST QUARTER FISCAL 2001 TO FIRST QUARTER FISCAL 2000
Net income for the first quarter of fiscal 2001 showed a decline as compared to
the first quarter of fiscal 2000. However, net sales from continuing segments
increased $36.2 million, or 13.6 percent. Approximately $10.7 million of the net
sales improvement was attributable to an increase in frozen vegetable sales,
while an additional $21.5 million was associated with various co-pack agreements
into which Agrilink Foods has recently entered. In the first quarter of fiscal
2001, Agrilink Foods also experienced an increase in its manufacturing costs
associated with lower than anticipated crop intake in the eastern part of the
country and experienced an increase of $2.1 million in administrative and
general expenses. This increase was primarily associated with an investment in
its infrastructure development and the timing of various promotional and
marketing efforts. Administrative and general expense at AgriFrozen, however,
declined by $1.8 million due primarily to various consolidation efforts.
Management continues to focus efforts on cost savings initiatives to reduce its
overall spending and improve profitability.
Management also utilizes an evaluation of EBITDA from continuing segments, as
presented on page 11 as a measure of performance. Excluding businesses sold,
EBITDA from continuing segments increased $0.1 million to $32.3 million in the
first quarter of the
<PAGE>
current fiscal year from $32.2 million in the first quarter of the prior fiscal
year. A detailed accounting of the significant reasons for changes in net sales
and EBITDA by product line follows.
Vegetable sales increased $34.9 million or 18.3 percent. This growth is
primarily attributable to a $7.7 million increase in sales in Agrilink Foods'
branded frozen vegetables primarily within the Birds Eye brand. For the 12 weeks
ended September 17, 2000, the total frozen vegetable category unit sales
percentage change versus a year ago, as reported by Information Resources Inc.,
is down 2.1 percent. The Birds Eye brand unit volume in the same timeframe is up
5.0 percentage points while the category leader is down 7.5 percentage points.
The Birds Eye brand unit share change in the same timeframe is up 1.0 percentage
points, the category leader is down 1.1 percentage points. In addition, volume
improvements in private label and food service accounted for $2.0 million of the
quarterly increase. Further, various Agrilink Foods' co-pack agreements for
canned vegetables in the Midwest and for pickles in the Northwest in total
accounted for $21.5 million. While these co-pack agreements typically yield
lower margins than Agrilink Foods' other product lines, they do provide for
greater utilization of manufacturing facilities. Although vegetables experienced
an increase in net sales, EBITDA decreased $1.5 million, including a $2.0
million decrease at Agrilink Foods offset by a $0.5 million increase at
AgriFrozen. The reduction at Agrilink Foods is attributable to competitive
pressures experienced within the non-branded segment of Agrilink Foods'
businesses, which has resulted in lower margins. In addition, as highlighted
above, Agrilink Foods has experienced an increase in its manufacturing costs and
various selling, administrative, and general expenses which negatively impacted
the results of the vegetable product line in the first quarter of fiscal 2001.
Further, the improvement in EBITDA at AgriFrozen of $0.5 million results from
that entity's loss of $3.9 million being reflected as a reduction in CMV payable
to the Class B AgriFrozen Growers. In accordance with the AgriFrozen Marketing
Agreement, in the event AgriFrozen experiences any losses, AgriFrozen will
deduct the losses from the total CMV payable. Such earnings and/or losses are
determined at the end of the fiscal year, but are accrued on an estimated basis
during the year.
Net sales for the fruit product line increased $2.2 million, or 9.4 percent,
while EBITDA increased $0.7 million, or 18.9 percent. These improvements were
primarily the result of increased branded volume in this category which
typically yield higher margins.
Net sales for the snack product line increased $2.0 million, or 9.3 percent,
primarily due to increased volume within the potato chip category. Accordingly,
EBITDA also showed improvements of $0.4 million, or 16.7 percent. EBITDA further
benefited from lower packaging costs and the impact in fiscal 2000 of residual
strike related costs at the Cooperative's Snyder of Berlin facility. This matter
was settled in July 2000, and management believes its current relationship with
these employees is good.
Net sales for canned meals decreased $0.9 million, or 5.4 percent. However,
EBITDA increased $0.5 million from $2.3 million to $2.8 million. The increase in
EBITDA primarily resulted from changes in product mix and the timing of various
promotional programs.
The other product line, which primarily represents dressings, experienced a
decrease in net sales of approximately $2.0 million, or 13.6 percent, due
primarily to a decline in unit volume associated with a private label customer.
EBITDA, however, remained consistent as the decrease in private label sales was
offset with branded sales at a higher margin. In addition, the Cooperative
benefited from reductions in product costs, primarily due to oils.
Operating Income: Excluding the impact of businesses sold, operating income
decreased from $22.1 million in the first quarter of fiscal 2000 to $21.6
million in the first quarter of fiscal 2001. This represents a decrease of $0.5
million or 2.3 percent. Significant variances are highlighted above in the
discussion of EBITDA and net sales from continuing segments.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $0.3 million, or 0.5 percent, as compared with
the first quarter of the prior fiscal year. Agrilink Foods accounts for $2.1
million of the increase and, as noted above, the increase is primarily
attributable to an investment in the Agrilink Foods' infrastructure development
and information system needs, along with the timing of various promotional and
marketing efforts. This increase was offset by a decline at AgriFrozen of $1.8
million due primarily 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 between Agrilink Foods and
Flanagan Brothers, Inc. Earnings from the joint venture decreased $0.2 million
as compared to the prior year and is the result of changes in sales mix to a
greater percentage of industrial sales versus branded product sales. Management
expects this trend to reverse during the second quarter.
Interest Expense: Interest expense increased $0.9 million to $21.5 million in
the first quarter of fiscal 2001 from $20.6 million in the first quarter of
fiscal 2000. The increase was due to an increase in the weighted average
interest rate of 0.50 percent. This increase was offset by lower average
outstanding balances during the quarter of approximately $37.3 million due to
<PAGE>
timing of working capital requirements, primarily within inventory. The Company
has focused efforts during the first quarter on inventory reduction to reduce
its seasonal borrowings.
Tax Provision: The provision for taxes decreased $0.2 million to $0.8 million in
the first quarter of fiscal 2001 from $1.0 million in the first quarter of
fiscal 2000 and was 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.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the "Unaudited
Consolidated Statement of Cash Flows" for the first quarter of fiscal 2001
compared to the first quarter of fiscal 2000.
Net cash used in operating activities decreased $14.7 million over the first
quarter of the prior fiscal year. This decrease primarily results from a
decrease in inventories due to both management efforts to reduce outstanding
inventory levels and the late harvesting of crops in the eastern part of the
country as a result of weather conditions 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 quarter of fiscal 2001
decreased $5.2 million from the first quarter of fiscal 2000. The change was
primarily a result of $5.0 million in proceeds received in fiscal 2001 in
conjunction with the sale of pickle machinery and equipment. See NOTE 3 to the
"Notes to Consolidated Financial Statements."
Net cash provided by financing activities decreased $22.9 million. This was due
to a decline in the net cash used in operating activities as described above
which resulted in a decrease in the short-term borrowing requirements. In
addition, the increase in payments on long-term debt was impacted by $3.2
million of mandatory prepayments in fiscal 2001 as a result of the sale of
pickle equipment and $2.5 million was attributable to required repayments.
AGRILINK FOODS DEBT
Borrowings: Under Agrilink Foods' existing credit facility, Agrilink Foods 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 September 23, 2000, (i) cash borrowings outstanding under the Revolving
Credit Facility were $99.0 million, (ii) there were $15.9 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 $85.1 million. Agrilink Foods 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 Foods meet
certain financial tests and ratios and comply with certain restrictions and
limitations. During the first quarter of fiscal 2001, Agrilink Foods negotiated
an amendment to the covenants outlined under its credit facility. Refer to NOTE
6 of the "Consolidated Financial Statements" for further details. As of
September 23, 2000, Pro-Fac and Agrilink Foods are in compliance with all
covenants, restrictions, and limitations under the terms of the credit facility
as amended.
AGRIFROZEN DEBT
Borrowings: Under AgriFrozen's CoBank Credit Facility, AgriFrozen is able, under
certain conditions, to borrow up to $50.0 million for seasonal working capital
purposes under the CoBank Revolving Credit Facility. As of September 23, 2000,
(i) cash borrowings outstanding under the CoBank Revolving Credit Facility were
$44.8 million, and (ii) additional availability under the CoBank Revolving
Credit Facility, after taking into account the amount of borrowings, was $5.2
million. The CoBank Revolving Credit Facility requires that AgriFrozen meet
certain financial tests and ratios and comply with certain restrictions and
limitations.
CoBank has verbally agreed to forbear from enforcing right or exercising
remedies in respect of existing noncompliance with certain financial tests and
ratios and existing noncompliance with certain restrictions and limitations.
Such forbearance is for an indefinite duration and could be withdrawn by CoBank
at any time. AgriFrozen continues its negotiations with CoBank concerning these
areas of negotiations, and to increase the borrowing limit under the CoBank
Revolving Credit Facility. In light of these circumstances,
<PAGE>
there can be no assurance that the cash flow generated by operations and the
amounts available under the CoBank Revolving Credit Facility will provide
adequate liquidity to fund the working capital needs and capital expenditures of
AgriFrozen.
AgriFrozen's obligations are not guaranteed by Pro-Fac or Agrilink Foods and are
expressly nonrecourse as to Pro-Fac and Agrilink Foods. As such, these current
circumstances of AgriFrozen's debt and liquidity will not affect the business of
Pro-Fac or Agrilink Foods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Cooperative and its subsidiaries, as a result of its operating and financing
activities, is exposed to changes in foreign currency exchange rates, certain
commodity prices, and interest rates, which may adversely affect its results of
operations and financial position. In seeking to minimize the risks and/or costs
associated with such activities, the Cooperative, through its subsidiaries, may
enter into derivative contracts.
Foreign Currency: Agrilink Foods manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by Agrilink Foods are denominated in Mexican pesos.
Agrilink Foods has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. During fiscal 2000, Agrilink
Foods entered into cash flow hedges for the Mexican peso with maturity dates
ranging from July 2000 to April 2001. At September 23, 2000, the fair value of
the open contracts was an after-tax gain of $0.2 million, recorded in
accumulated other comprehensive income in shareholder's equity. Amounts deferred
to accumulated other comprehensive income will be reclassified into cost of
goods sold within the next 12 months. During the first quarter of fiscal 2001,
approximately $0.3 million was reclassified from other comprehensive income to
cost of goods sold. Hedge ineffectiveness was insignificant.
Foreign Currency
Forward
-------------------
Contract amounts 101,000,000 Pesos
Weighted average settlement exchange rate 10.3579%
Commodity Prices: Agrilink Foods is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, Agrilink Foods designates
soybean oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. At September 23, 2000, Agrilink Foods had open soybean oil contracts
hedging approximately 70 percent of its planned soybean oil requirements during
fiscal 2001. The fair value of these open contracts was $64,800 at September 23,
2000. During the first quarter of fiscal 2001, an immaterial loss on these
contracts was recorded in cost of goods sold. All open contracts mature by
January 2001.
Options
Soybean Oil
Contract amounts 24 million pounds
Weighted average strike $.1825/pound
Agrilink Foods is exposed to commodity price risk related to forecasted
purchases of corrugated (unbleached kraftliner) in its manufacturing process. To
mitigate this risk, Agrilink Foods designates a swap agreement as a cash flow
hedge of its forecasted corrugated purchases. At September 23, 2000, Agrilink
Foods had an open swap hedging approximately 80 percent of its planned
corrugated requirements. The fair value of this agreement was immaterial at
September 23, 2000. The termination date for the agreement is June 2001.
<PAGE>
Swap
Corrugated
(Unbleached Kraftliner)
Notional amount 30,000 short tons
Average paid rate $475/short ton
Average receive rate Floating rate/short ton - $475
Maturities through June 2001
Interest Rates: The Cooperative is exposed to interest rate risk primarily
through its borrowing activities. The majority of the Cooperative's long-term
borrowings are variable rate instruments. The Cooperative entered into two
interest rate swap contracts under which the Cooperative agrees to pay an amount
equal to a specified fixed rate of interest times a notional principal amount,
and to receive in return an amount equal to a specified variable rate of
interest times the same notional principal amount. The notional amounts of the
contract are not exchanged and no other cash payments are made. The two interest
rate swap contracts were entered into with a major financial institution in
order to minimize credit risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month LIBOR of 6.77 percent as of September 23, 2000) on $150 million
notional amount of indebtedness. Agrilink Foods had a second interest rate swap
contract to pay a fixed rate of interest (5.32 percent) and receive a variable
rate of interest (three-month LIBOR of 6.77 percent as of September 23, 2000) on
$100 million notional amount of indebtedness. Approximately 59 percent of the
underlying debt is being hedged with these interest rate swaps.
Agrilink Foods designates these interest rate swap contacts as cash flow hedges.
At September 23, 2000, the fair value of the contracts was an after-tax gain of
$2.1 million, recorded in accumulated other comprehensive income in
shareholders' equity.
To the extent that any of these contracts are not considered effective in
offsetting the change in the value of the interest payments being hedged, any
changes in fair value relating to the ineffective portion of these contacts are
immediately recognized in income. However, the net gain or loss on the
ineffective portion of these interest rate swap contracts was not material
during the first quarter of fiscal 2001. Amounts deferred to other comprehensive
income will be reclassified into interest expense over the life of the swap
contracts.
The following is a summary Agrilink Foods' interest rate swap agreements:
September 23, 2000
Interest Rate Swap:
Variable to Fixed - notional amount $250,000,000
Average pay rate 4.96 - 5.32%
Average receive rate Floating rate - 6.77%
Maturities through 2001
Although it is possible that interest rates will decrease and thereby minimize
the benefits of the hedge position, Agrilink Foods believes that on a long-term
basis the possibility of interest rates exceeding the interest rate swap is not
likely. Agrilink Foods will, however, monitor market conditions to adjust its
position as it considers necessary.
OTHER MATTERS
Restructuring: During the third quarter of fiscal 1999, Agrilink Foods began
implementation of 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 and have improved annual earnings by approximately $8.0
million. Through September 23, 2000, $4.3 million of this charge has been
liquidated and the remaining termination benefits will be liquidated during
fiscal 2001.
<PAGE>
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.
The effect of the 2000 growing season on fiscal 2001 financial results cannot be
estimated until late 2000 or early calendar 2001 when harvesting is complete and
when local and national supplies can be determined.
MARKET AND INDUSTRY DATA
Unless otherwise stated herein, industry and market share data used throughout
this discussion was derived from industry sources believed by the Company 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 Company has not independently verified such
data and makes no representation to its accuracy.
<TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 10-Q
(a) Exhibits
Exhibit Number Description
-------------- ----------------------------------------------------------------------
<S> <C>
10.1 Sixth Amendment to Credit Agreement (filed as Exhibit 10.21 to Pro-Fac's
Registration Statement on Form S-2 Filed October 18, 2000 (Registration
No. 333-47364) and incorporated herein by reference).
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed in the first quarter of fiscal 2001.
</TABLE>
<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: November 6, 2000 BY: /s/ Earl L. Powers
---------------- ---------------------------------
EARL L. POWERS
VICE PRESIDENT FINANCE AND
ASSISTANT TREASURER
(On Behalf of the Registrant and as
Principle Financial Officer and
Principle Accounting Officer)
