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- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------
Form 10-Q
---------
Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ---- to ----
Registration Statement (Form S-4) Number 33-56517
AGRILINK FOODS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
New York 16-0845824
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
</TABLE>
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-0670
(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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of January 30,1999
Common Stock: 10,000
Page 1 of 21 Pages
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
Agrilink Foods, Inc.
Consolidated Statement of Operations
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ---------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 376,703 $ 202,672 $ 559,282 $ 379,069
Cost of sales (254,563) (140,092) (390,445) (270,840)
----------- ----------- ----------- -----------
Gross profit 122,140 62,580 168,837 108,229
Selling, administrative, and general expense (92,103) (41,463) (126,970) (74,253)
Gain on sale of aseptic operations 0 0 64,202 0
Income from Great Lakes Kraut Company LLC 1,053 960 1,689 960
----------- ----------- ----------- -----------
Operating income before dividing with Pro-Fac 31,090 22,077 107,758 34,936
Interest expense (18,613) (7,969) (26,949) (15,607)
Amortization of debt issue costs associated with the
Bridge Facility (5,500) 0 (5,500) 0
----------- ----------- ----------- -----------
Pretax income before dividing with Pro-Fac and
before extraordinary item 6,977 14,108 75,309 19,329
Pro-Fac share of income before extraordinary item (4,000) (7,054) (9,658) (9,665)
----------- ----------- ----------- -----------
Income before taxes and before extraordinary item 2,977 7,054 65,651 9,664
Tax provision (1,375) (3,204) (25,709) (4,397)
----------- ----------- ----------- -----------
Income before extraordinary item 1,602 3,850 39,942 5,267
Extraordinary item relating to the early extinguishment
of debt (net of income taxes and after dividing with Pro-Fac) 0 0 (16,366) 0
----------- ----------- ------------ -----------
Net income $ 1,602 $ 3,850 $ 23,576 $ 5,267
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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<PAGE>
Agrilink Foods, Inc.
Consolidated Balance Sheet
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 26, June 27, December 27,
1998 1998 1997
------------ ------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,340 $ 5,046 $ 6,676
Accounts receivable trade, net 103,991 55,046 59,209
Accounts receivable, other 19,732 3,575 2,655
Current deferred tax asset 13,129 4,642 8,198
Inventories -
Finished goods 323,984 111,153 138,318
Raw materials and supplies 49,678 30,433 30,277
---------- -------- --------
Total inventories 373,662 141,586 168,595
---------- -------- --------
Current investment in CoBank 665 1,994 316
Prepaid manufacturing expense 292 8,404 283
Prepaid expenses and other current assets 19,122 12,989 12,519
---------- -------- --------
Total current assets 548,933 233,282 258,451
Investment in CoBank 22,377 22,377 24,320
Investment in Great Lakes Kraut Company 8,274 6,584 7,545
Property, plant and equipment, net 312,344 194,615 208,102
Assets held for sale at net realizable value 920 2,662 3,453
Goodwill and other intangible assets, net 346,267 94,744 94,551
Other assets 23,600 12,175 13,910
Note receivable due from Pro-Fac 9,400 0 0
---------- -------- --------
Total assets $1,272,115 $566,439 $610,332
========== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable $ 85,000 $ 0 $ 58,700
Current portion of obligations under capital leases 256 256 558
Current portion of long-term debt 5,100 8,071 8,071
Accounts payable 102,366 70,125 42,533
Income taxes payable 8,701 3,943 6,760
Accrued interest 4,074 8,559 8,717
Accrued employee compensation 12,703 8,598 9,265
Other accrued expenses 90,479 19,013 26,274
Current liability due to Pro-Fac 29,364 6,642 7,180
---------- -------- --------
Total current liabilities 338,043 125,207 168,058
Obligations under capital leases 503 503 817
Long-term debt 457,200 69,937 66,188
Senior subordinated notes 200,015 160,000 160,000
Subordinated promissory note 30,407 0 0
Deferred income tax liabilities 35,341 33,154 40,902
Other non-current liabilities 32,445 23,053 22,661
---------- -------- --------
Total liabilities 1,093,954 411,854 458,626
---------- -------- --------
Commitments and contingencies
Shareholder's Equity:
Common stock, par value $.01;
10,000 shares outstanding, owned by Pro-Fac 0 0 0
Accumulated other comprehensive income:
Minimum pension liability adjustment (608) (608) 0
Additional paid-in capital 167,071 167,071 158,317
Retained earnings (accumulated deficit) 11,698 (11,878) (6,611)
---------- -------- --------
Total shareholder's equity 178,161 154,585 151,706
---------- -------- --------
Total liabilities and shareholder's equity $1,272,115 $566,439 $610,332
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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Agrilink Foods, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
(Dollars in Thousands) December 26, December 27,
1998 1997
----------- ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 23,576 $ 5,267
Adjustments to reconcile net income to net cash used in operating activities -
Gain on the sale of the aseptic operations (64,202) 0
Extraordinary item relating to the early extinguishment of debt 16,366 0
Loss on disposal of assets 353 0
Amortization of goodwill and other intangibles 5,136 1,956
Amortization of debt issue costs (including fees associated with the Bridge Facility) 6,277 400
Depreciation 13,484 9,102
Equity in undistributed earnings of Great Lakes Kraut Company (1,689) (960)
Change in assets and liabilities:
Accounts receivable (40,481) (10,390)
Inventories (51,538) (55,865)
Income taxes payable 15,221 1,608
Accounts payable and other accrued expenses (19,578) 4,043
Due to Pro-Fac 14,980 2,868
Other assets and liabilities (698) (13,434)
-------- --------
Net cash used in operating activities (82,793) (55,405)
-------- --------
Cash Flows From Investing Activities:
Purchase of property, plant and equipment (8,561) (6,803)
Proceeds from disposals 84,427 362
Proceeds from investment in CoBank 1,329 631
Cash paid for acquisitions (445,918) 0
-------- --------
Net cash used in investing activities (368,723) (5,810)
-------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of short-term debt 177,000 58,700
Payments on short-term debt (92,000) 0
Proceeds from issuance of long-term debt 677,507 8,700
Proceeds from Great Lakes Kraut Company 0 3,000
Payments on long-term debt (278,873) (5,345)
Cash paid for debt issuance costs (18,824) 0
-------- --------
Net cash provided by financing activities 464,810 65,055
-------- --------
Net change in cash and cash equivalents 13,294 3,840
Cash and cash equivalents at beginning of period 5,046 2,836
-------- --------
Cash and cash equivalents at end of period $ 18,340 $ 6,676
======== ========
</TABLE>
(Table continued on next page)
4
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Agrilink Foods, Inc.
Consolidated Statement of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------
(Table Continued from Previous Page) December 26, December 27,
1998 1997
-------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Acquisition of Dean Foods Vegetable Company
Accounts receivable $ 24,201
Inventories 190,501
Prepaid expenses and other current assets 1,948
Current deferred tax asset 6,300
Property, plant and equipment 131,648
Assets held for sale 49
Goodwill and other intangible assets 253,593
Accounts payable (40,840)
Accrued employee compensation (8,437)
Other accrued expenses (80,153)
Long-term debt (2,752)
Subordinated promissory note (30,000)
Other assets and liabilities, net (2,453)
--------
$443,605
========
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
========
Investment in Great Lakes Kraut Company
Inventories $ 2,175
Prepaid expenses and other current assets 409
Property, plant and equipment 6,966
Other accrued expenses (62)
--------
$ 9,488
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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AGRILINK FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles, and in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
these periods. Agrilink Foods, Inc. ("Agrilink" or the "Company") is a wholly
owned subsidiary of Pro-Fac Cooperative, Inc. ("Pro-Fac" or the "Cooperative").
These financial statements should be read in conjunction with the financial
statements and accompanying notes contained in the Company's Form 10-K/A-1 for
the fiscal year ended June 27, 1998.
Consolidation: The consolidated financial statements include the Company and its
wholly owned subsidiaries after elimination of intercompany transactions and
balances. Investments in affiliates owned more than 20 percent but not in excess
of 50 percent are recorded under the equity method of accounting.
Reclassification: Certain items for fiscal 1998 have been reclassified to
conform with the current presentation.
Adoption of SFAS No. 130: Effective June 28, 1998, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity of a business
during a period from transactions and other events and circumstances from
non-owner sources. Under SFAS No. 130, the term "comprehensive income" is used
to describe the total of net earnings plus other comprehensive income which for
the Company includes foreign currency translation adjustments and minimum
pension liability adjustments. The adoption of SFAS No. 130 did not have a
material effect on the Company's results of operations or financial position.
Adoption of SFAS No. 131: Effective June 28, 1998 the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect the Company's results of operations
or financial position.
Derivative Financial Instruments: The Company does not engage in interest rate
speculation. Derivative financial instruments are utilized to hedge interest
rate risks and are not held for trading purposes.
The Company enters into interest rate swap agreements to limit exposure to
interest rate movements. Net payments or receipts are accrued into prepaid
expenses and other current assets and/or other accrued expenses and are recorded
as adjustments to interest expense. Interest rate instruments are entered into
for periods no greater than the life of the underlying transaction being hedged.
Management anticipates that all interest rate derivatives will be held to
maturity. Any gains or losses on prematurely terminated interest rate
derivatives will be recognized over the remaining life, if any, of the
underlying transaction as an adjustment to interest expense.
NOTE 2. ACQUISITIONS
Acquisition of 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 "Acquisition"). In connection with the 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
"Subordinated Promissory Note"), as consideration for the Acquisition. The
Company has the right, exercisable until July 15, 1999, to require Dean Foods,
jointly with the Company, to treat the Acquisition as an asset sale for tax
purposes under Section 338(h)(10) of the Internal Revenue Code. In order to
exercise that election, the Company will pay $13.2 million to Dean Foods. The
Company intends to exercise that election.
After the Acquisition, DFVC was merged into the Company, and Dean Foods
Vegetable Company became a business unit of the Company known as Agrilink Foods
Vegetable Company ("AFVC"). DFVC has been one of the leading processors of
vegetables in
6
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the United States, selling its products under well-known brand names, such as
Birds Eye, Freshlike and Veg-All, and private labels. The Company believes that
the 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 Acquisition was accounted for under the purchase method of accounting. Under
purchase accounting, tangible and identifiable intangible assets acquired and
liabilities assumed will be recorded at their respective fair values. The
valuations and other studies which will provide the basis for such an allocation
have not progressed to a stage where there is sufficient information to make a
final allocation in the accompanying financial statements. Accordingly, the
purchase accounting adjustments made in the accompanying financial statements
are preliminary. Once an allocation is determined, in accordance with generally
accepted accounting principles, any remaining excess of purchase cost over net
assets acquired will be adjusted through goodwill.
The following unaudited pro forma financial information presents a summary of
consolidated results of operations of the Company and the acquired Dean Foods
Vegetable Company as if the acquisition had occurred at the beginning of the
1998 fiscal year.
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------
December 26, 1998 December 27, 1997
----------------- -----------------
<S> <C> <C>
Net sales $656.3 $ 622.2
Income (loss) before extraordinary items $ 24.8 $ (1.7)
Net income (loss) $ 8.4 $ (1.7)
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and include adjustments for additional depreciation expense and
amortization and interest expense on acquisition debt. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination been in effect at the beginning of the 1998 fiscal year, or of
the future operations of the consolidated entities.
Concurrently with the Acquisition, Agrilink refinanced its existing indebtedness
(the "Refinancing"), including its 12.25 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.
In order to consummate the Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink: (i) entered into a new credit facility (the
"New Credit Facility") providing for $455 million of term loan borrowings (the
"Term Loan Facility") and up to $200 million of revolving credit borrowings (the
"Revolving Credit Facility"), (ii) entered into and drew upon a $200 million
bridge loan facility (the "Bridge Facility") and (iii) issued the $30 million
Subordinated Promissory Note to Dean Foods. The Bridge Facility was repaid
during November of 1998 principally with the proceeds from a new Senior
Subordinated Note Offering (see NOTE 4 - "Debt - 11 7/8 Percent Senior
Subordinated Notes due 2008"). Debt issue costs of $5.5 million associated with
the Bridge Facility were expensed during the quarter ended December 26, 1998.
J.A. Hopay Distributing Co, Inc.: Effective July 21, 1998, the Company acquired
J.A. Hopay Distributing Co., Inc. ("Hopay") of Pittsburgh, Pennsylvania. Hopay
distributes snack products for Snyder of Berlin, one of the Company's business
units within its Snack Foods Group. The acquisition was accounted for as a
purchase. The purchase price (net of liabilities assumed) was approximately $2.3
million. Intangibles of approximately $3.3 million were recorded in conjunction
with this transaction and are being amortized over 5 to 30 years.
The effects of the Hopay acquisition are not material and, accordingly, have
been excluded from the above pro forma presentation.
NOTE 3. AGREEMENTS WITH PRO-FAC
The Company's contractual relationship with Pro-Fac is defined in the Pro-Fac
Marketing and Facilitation Agreement ("Agreement"). Under the Agreement, the
Company pays Pro-Fac the commercial market value ("CMV") for all crops supplied
by Pro-Fac. CMV is defined as the weighted average price paid by other
commercial processors for similar crops sold under preseason contracts and in
the
7
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open market in the same or competing market area. Although CMV is intended
to be no more than the fair market value of the crops purchased by Agrilink, it
may be more or less than the price Agrilink would pay in the open market in the
absence of the Agreement.
Under the Agreement, the Company 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 Agreement are determined pursuant to
its annual profit plan, which requires the approval of a majority of the
Disinterested Directors. In addition, under the Agreement, in any year in which
the Company has earnings on products which were processed from crops supplied by
Pro-Fac ("Pro-Fac Products"), the Company pays to Pro-Fac, as additional
patronage income, 90 percent of such earnings, but in no case more than 50
percent of all pretax earnings (before dividing with Pro-Fac) of the Company. In
years in which the Company has losses on Pro-Fac Products, the Company reduces
the CMV it would otherwise pay to Pro-Fac by up to 90 percent of such losses,
but in no case by more than 50 percent of all pretax losses (before dividing
with Pro-Fac) of the Company. Additional patronage income is paid to Pro-Fac for
services provided to Agrilink, including the provision of a long term, stable
crop supply, favorable payment terms for crops, and the sharing of risks of
losses of certain operations of the business. Earnings and losses are determined
at the end of the fiscal year, but are accrued on an estimated basis during the
year. Under the Agreement, Pro-Fac is required to reinvest at least 70 percent
of the additional patronage income in Agrilink.
Amounts received by Pro-Fac from Agrilink for the six months ended December 26,
1998 and December 27, 1997 include: commercial market value of crops delivered,
$63.0 and $57.1 million, respectively; and additional proceeds from
profit/(loss) sharing provisions, $8.0 million and $9.7 million, respectively.
In the first quarter of fiscal 1999, the Company reclassified a $9.4 million
demand receivable due from Pro-Fac reflecting the conversion of such receivable
to a non-interest bearing long-term obligation due from Pro-Fac having a 10-year
maturity.
NOTE 4. DEBT
New Credit Facility: In connection with the Acquisition, the Company entered
into the New Credit Facility with Harris Bank as Administrative Agent and Bank
of Montreal as Syndication Agent, and the lenders thereunder. The Credit
Facility consists of the $200 million Revolving Credit Facility and the $455
million Term Loan Facility. The Term Loan Facility is comprised of the Term A
Facility, which has a maturity of five years, the Term B Facility, which has a
maturity of six years, and the Term C Facility, which has a maturity of seven
years. The Revolving Credit Facility has a maturity of five years.
The New Credit Facility bears interest, at the Company's option, at the
Administrative Agent's alternate base rate or the London Interbank Offered Rate
("LIBOR") plus, in each case, applicable margins of: (i) in the case of
alternate base rate loans, (x) 1.00 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 2.75 percent for loans under the Term B
Facility and (z) 3.00 percent for loans under the Term C Facility and (ii) in
the case of LIBOR loans, (x) 2.75 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 3.75 percent for loans under the Term B
Facility and (z) 4.00 percent for loans under the Term C Facility. The
Administrative Agent's "alternate base rate" is defined as the greater of: (i)
the prime commercial rate as announced by the Administrative Agent or (ii) the
Federal Funds rate plus 0.50 percent. In addition, the Company will pay a
commitment fee calculated at a rate of 0.50 percent per annum on the daily
average unused commitment under the Revolving Credit Facility.
Beginning with the reporting period ending March 31, 1999, the applicable
margins for the New Credit Facility will be subject to possible reductions based
on the ratio of consolidated debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA") (each as defined in the New Credit
Facility).
Upon consummation of the Acquisition, the Company drew $455 million under the
Term Loan Facility, consisting of $100 million, $175 million and $180 million of
loans under the Term A Facility, Term B Facility and Term C Facility,
respectively. Additionally, the Company drew $93 million under the Revolving
Credit Facility for seasonal working capital needs and $14.3 million under the
Revolving Credit Facility was issued for letters of credit. During December
1998, the Company's primary lender exercised its right under the New Credit
Facility to transfer $50 million from the Term A Facility to the Term B and Term
C Facilities in increments of $25 million.
8
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The Term Loan Facility will be subject to the following amortization schedule.
<TABLE>
<CAPTION>
Fiscal Year Term Loan A Term Loan B Term Loan C Total
- ----------- ----------- ----------- ----------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
1999 $ 0.0 $ 0.2 $ 0.2 $ 0.4
2000 7.5 0.4 0.4 8.3
2001 10.0 0.4 0.4 10.8
2002 10.0 0.4 0.4 10.8
2003 10.0 0.4 0.4 10.8
2004 12.5 0.4 0.4 13.3
2005 0.0 197.8 0.4 198.2
2006 0.0 0.0 202.4 202.4
------- ------ ------- -------
$ 50.0 $200.0 $205.0 $ 455.0
======= ====== ======= =======
</TABLE>
The Term Loan Facility is subject to mandatory prepayment under various
scenarios as defined in the New Credit Facility.
The Company's obligations under the New Credit Facility are secured by a
first-priority lien on: (i) substantially all existing or after-acquired assets,
tangible or intangible, (ii) the capital stock of certain of Pro-Fac's current
and future subsidiaries, and (iii) all of the Company's rights under the
agreement to acquire DFVC (principally indemnification rights) and the Pro-Fac
Marketing and Facilitation Agreement. The Company's obligations under the New
Credit Facility are guaranteed by Pro-Fac and certain of the Company's current
and future, if any, subsidiaries.
The New Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on sale-leaseback transactions, consolidations, mergers, sale of
assets, transactions with affiliates and investments and (iii) limitations on
dividend and other distributions. The New Credit Facility also contains
financial covenants requiring Pro-Fac to maintain a minimum level of
consolidated EBITDA, a minimum consolidated interest coverage ratio, a minimum
consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio
and a minimum level of consolidated net worth. Pro-Fac and the Company are in
compliance with all covenants, restrictions and requirements under the terms of
the New Credit Facility.
Interest Rate Protection Agreements: The Company has entered into a three-year
interest rate swap agreement with the Bank of Montreal in the notional amount of
$150 million. The swap agreement provides for an interest rate of 4.96 percent
over the term of the swap payable by the Company in exchange for payments at the
published three-month LIBOR. In addition, the Company entered into a separate
interest rate swap agreement with the Bank of Montreal in the notional amount of
$100 million for an initial period of three years, which may be extended, at the
Company's option, for an additional two-year period. This swap agreement
provides for an interest rate of 5.32 percent over the term of the swap, payable
by the Company in exchange for payments at the published three-month LIBOR. The
Company entered into these agreements in order to manage its interest rate risk
by exchanging its floating rate interest payments for fixed rate interest
payments.
11 7/8 Percent Senior Subordinated Notes (due 2008): To extinguish the
Subordinated Bridge Facility, the Company issued 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 and is
payable semiannually in arrears on May 1 and November 1.
The New Notes represent general unsecured obligations of the Company,
subordinated in right of payment to certain other debt obligations of the
Company (including the Company's obligations under the New Credit Facility). The
New Notes are guaranteed by Pro-Fac and certain of the Company's current and
future, if any, subsidiaries.
The New Notes contain customary covenants and restrictions on the Company's
ability to engage in certain activities, including, but not limited to: (i)
limitations on the incurrence of indebtedness and liens; (ii) limitations on
consolidations, mergers, sales of assets, transactions with affiliates; and
(iii) limitations on dividends and other distributions. The Company is in
compliance with all covenants, restrictions, and requirements under the New
Notes.
Subordinated Bridge Facility: To complete the Acquisition, the Company entered
into a Subordinated Bridge Facility (the "Bridge Facility"). During November
1998, the net proceeds from the sale of the New Notes, together with borrowings
under the Revolving Credit Facility, were used to repay all the indebtedness
outstanding ($200 million plus accrued interest) under the Bridge Facility.
9
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The outstanding indebtedness under the Bridge Facility accrued interest at an
approximate rate per annum of 10 1/2 percent. Debt issuance costs associated
with the Bridge Facility of $5.5 million were fully amortized during the quarter
ended December 26, 1998.
Subordinated Promissory Note: As partial consideration for the Acquisition,
the Company issued to Dean Foods the Subordinated Promissory Note for $30
million aggregate principal amount due November 22, 2008. Interest on the
Subordinated Promissory Note is payable quarterly in arrears commencing
December 31, 1998, at a rate per annum of 5 percent until November 22, 2003,
and at a rate of 10 percent thereafter. Interest accruing through November
22, 2003 is required to be paid in kind through the issuance by the Company
of additional subordinated promissory notes identical to the Subordinated
Promissory Note. In December 1998, the Company satisfied this requirement
through the issuance of an additional promissory note for $0.4 million.
Interest accruing after November 22, 2003 is payable in cash. The
Subordinated Promissory Note may be prepaid at the Company's option without
premium or penalty.
The Subordinated Promissory Note is expressly subordinate to the New Notes
and the New Credit Facility and contains no financial covenants. The
Subordinated Promissory Note is guaranteed by Pro-Fac.
12 1/4 Percent Senior Subordinated Notes (due 2005): In conjunction with the
Acquisition, the Company repurchased $159,985,000 principal amount of its Old
Notes, of which $160 million aggregate principal amount was previously
outstanding. The Company paid a total of approximately $184 million to
repurchase the Old Notes, including interest accrued thereon of $2.9 million.
Holders who tendered consented to certain amendments to the indenture relating
to the Old Notes, which eliminated or amended substantially all the restrictive
covenants and certain events of default contained in such indenture. The Company
may repurchase the remaining Old Notes in the future in open market
transactions, privately negotiated purchases or otherwise.
NOTE 5. OTHER MATTERS
Erin's Gourmet Popcorn: On January 5, 1999, the Company announced that it
acquired the assets of Erin's Gourmet Popcorn, a Seattle-based, ready-to-eat
popcorn manufacturer. The business was merged into Agrilink's Auburn, Washington
snack company, Tim's Cascade Chips. The acquisition was accounted for as a
purchase. The purchase price was approximately $0.6 million.
Agripac, Inc.: On December 15, the Company and Pro-Fac announced that Pro-Fac
has entered into a letter of intent for Pro-Fac to acquire the frozen vegetable
business of Agripac, Inc. ("Agripac"), an Oregon cooperative. Agripac, which
processes frozen and canned vegetables in the Northwest, reported approximately
$180 million in aggregate sales for fiscal 1998 (including both frozen and
canned vegetables). Agripac operates eight plant facilities located in the
states of Oregon and Washington and employs approximately 600 people. It
currently sources from approximately 190 growers in the Northwest.
PF Acquisition II, Inc. ("PF Acquisition") was formed in January 1999 under the
corporation laws of New York State. It is a wholly owned subsidiary of Pro-Fac.
The PF Acquisition was formed to acquire substantially all of the assets of
Agripac related to its frozen vegetable (and not canned) processing business for
a purchase price of approximately $90 million. In connection with, and as a
condition to consummation of, the Acquisition, PF Acquisition must enter into a
sufficient number of crop delivery contracts with Agripac growers acceptable to
PF Acquisition. 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
its assets relating to its frozen food packaging business to PF Acquisition.
Neither the Company nor Pro-Fac will loan or otherwise contribute any funds to
PF Acquisition, or guarantee or otherwise secure with the Company's or Pro-Fac's
assets the indebtedness of PF Acquisition, in connection with the acquisition.
It is anticipated that the Company will enter into an administrative services
agreement with PF Acquisition to provide it with certain administrative support
in exchange for a management fee.
The closing of the acquisition is subject to numerous conditions, including the
Bankruptcy Court's approval of the proposed sale to PF Acquisition, Agripac's
existing lenders providing sufficient financing for the acquisition and for
working capital, finalization of agreements, board approval, regulatory
approval, and due diligence.
J.M. Smucker Company to Purchase Adams Brand Peanut Butter Business: On January
29, 1999, the Company announced that the Adams brand peanut butter business was
sold to the J.M. Smucker Company.
Formation of New Sauerkraut Company: Effective July 1, 1997, the Company and
Flanagan Brothers, Inc. of Bear Creek, Wisconsin, contributed all their
sauerkraut production related assets to form a new sauerkraut company. This new
company, Great
10
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<PAGE>
Lakes Kraut Company, operates as a New York limited liability company, with
ownership split equally between the two companies. The joint venture is
accounted for using the equity method of accounting.
Arlington Canned Vegetable Facility Fire: In January 1999, a plant operated by
the Company's AFVC business unit, located in Arlington, Minnesota, was damaged
by fire. All material costs associated with the repairs and business
interruption are anticipated to be covered under the Company's insurance
policies.
Alton Warehouse: In January 1999, a warehouse owned by the Company's CBF
business unit, located in Alton, New York, was damaged when excessive snowfall
caused the roof to collapse. All material costs associated with the repairs are
anticipated to be covered under the Company's insurance policies.
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 in the second quarter and
first half of fiscal 1999 versus such periods in fiscal 1998.
Agrilink Foods, Inc. ("Agrilink" or the "Company") has four primary business
units: Curtice Burns Foods ("CBF"), Agrilink Foods Vegetable Company ("AFVC"),
Nalley Fine Foods ("Nalley"), and its Snack Foods group. Each business unit
offers different products and is managed separately. The majority of each of the
business units' net sales are within the United States. In addition, all of the
Company's operating facilities, except for one facility in Mexico, are within
the United States.
The creation of the AFVC business unit occurred as a result of the Company's
acquisition of the Dean Foods Vegetable Company, the frozen and canned vegetable
business of Dean Foods Company, on September 24, 1998 ("DFVC Acquisition").
After the acquisition, the Dean Foods Vegetable Company was merged into
Agrilink, and Dean Foods Vegetable Company became a business unit of Agrilink
known as "Agrilink Foods Vegetable Company" or "AFVC."
The CBF business unit produces products in several food categories, including
fruit fillings and toppings; canned and frozen fruits and vegetables, and
popcorn. The AFVC business unit produces canned and frozen vegetables. The
Nalley business unit produces canned meat products (such as chilies and stews),
pickles, salad dressings, peanut butter, salsa, and syrup. (As outlined at NOTE
5 to the "Notes to Consolidated Financial Statements," the Company disposed of
its peanut butter operations in the third quarter of fiscal 1999.) The snack
foods business unit consists of the Snyder of Berlin, Husman Snack Foods, and
Tim's Cascade Chip businesses. This business unit produces and markets potato
chips and other snack items.
The following tables illustrate the results of operations by business unit for
the three- and six-month periods ended December 26, 1998 and December 27, 1997,
and the Company's total assets by business unit as of December 26, 1998 and
December 27, 1997.
Net Sales
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------- --------------------------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
--------------- ------------------ ------------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
---------- -------- ---------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF $ 115.4 30.6% $ 114.6 56.5% $ 212.1 37.9% $202.3 53.4%
AFVC 198.3 52.7 0.0 0.0 198.3 35.4 0.0 0.0
Nalley Fine Foods 40.8 10.8 41.9 20.7 79.8 14.3 84.8 22.4
Snack Foods Group 18.6 4.9 17.2 8.4 36.7 6.6 34.5 9.1
------- ----- -------- ------ ------- ------- ------ ------
Subtotal ongoing operations 373.1 99.0 173.7 85.6 526.9 94.2 321.6 84.9
Businesses sold(1) 3.6 1.0 29.0 14.4 32.4 5.8 57.5 15.1
------- ----- -------- ------ ------- ------- ------ ------
Total $ 376.7 100.0% $ 202.7 100.0% $ 559.3 100.0% $379.1 100.0%
======= ===== ======== ====== ======= ======= ====== ======
</TABLE>
(1) Includes net sales of the aseptic and peanut butter businesses. See NOTES 2
and 5 to the "Notes to Consolidated Financial Statements."
11
<PAGE>
<PAGE>
Operating Income(1)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------- ---------------------------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
--------------- -------------- ------------- ------------
% of % of % of % of
$ Total $ Total $ Total $ Total
---------- -------- ---------- ------ -------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF $ 11.5 37.0% $ 16.1 72.8% $ 17.6 40.4% $ 22.2 63.5%
AFVC 15.5 49.9 0.0 0.0 15.5 35.5 0.0 0.0
Nalley Fine Foods 3.2 10.3 3.6 16.3 4.9 11.2 6.9 19.8
Snack Foods Group 2.0 6.4 1.9 8.6 4.3 9.9 4.0 11.5
Corporate overhead (1.2) (3.9) (3.7) (16.7) (2.5) (5.7) (5.7) (16.3)
------ ----- ------- ------- ------- ------ ------- ------
Subtotal ongoing operations 31.0 99.7 17.9 81.0 39.8 91.3 27.4 78.5
Businesses sold(2) 0.1 0.3 4.2 19.0 3.8 8.7 7.5 21.5
------ ----- -------- ------- ------- ------ ------- -----
Total(3) $ 31.1 100.0% $ 22.1 100.0% $ 43.6 100.0% $ 34.9 100.0%
====== ====== ======== ======= ======= ====== ======= =====
</TABLE>
(1) Excludes the gain on the sale of the aseptic business.
(2) Represents the operating earnings of the aseptic and peanut butter
businesses. See NOTES 2 and 5 to the "Notes to Consolidated Financial
Statements."
(3) Operating income less interest expense and amortization of debt issue costs
associated with the Bridge Facility of $24.1 million and $8.0 million for
the three months ended December 26, 1998 and December 27, 1997,
respectively; and $32.4 million and $15.6 million for the six months ended
December 26, 1998 and December 27, 1997, respectively, results in pretax
income before dividing with Pro-Fac and before extraordinary item. Interest
expense allocated to business units is not considered a critical component
by management when evaluating success.
12
<PAGE>
<PAGE>
EBITDA (1, 2)
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------------------- ---------------------------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
------------------ ------------------- ----------------- -------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
---------- -------- ---------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBF 14.7 33.1% $ 19.4 70.5% $ 23.4 37.6% $ 28.9 62.8%
AFVC 23.7 53.4 0.0 0.0 23.7 38.1 0.0 0.0
Nalley Fine Foods 4.3 9.7 4.9 17.8 7.4 11.9 9.5 20.7
Snack Foods Group 2.5 5.6 2.3 8.4 5.3 8.5 4.9 10.7
Corporate overhead (1.1) (2.5) (3.7) (13.4) (2.3) (3.7) (5.6) (12.2)
------ ----- -------- ------ ------- ------ ------- ------
Subtotal ongoing operations 44.1 99.3 22.9 83.3 57.5 92.4 37.7 82.0
Businesses sold(3) 0.3 0.7 4.6 16.7 4.7 7.6 8.3 18.0
------ ----- -------- ------ ------- ------ ------- -----
Total $ 44.4 100.0% $ 27.5 100.0% $ 62.2 100.0% $ 46.0 100.0%
====== ===== ======== ===== ======= ====== ======= =====
</TABLE>
(1) Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
is defined as the sum of pretax income before dividing with Pro-Fac and
before extraordinary item, interest expense, amortization of debt issue
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 Company believes EBITDA is a
financial indicator of a company's ability to service debt. EBITDA as
calculated by Agrilink may not be comparable to calculations as presented
by other companies.
(2) Excludes the gain on the sale of the aseptic business.
(3) Represents the operating earnings of the aseptic and peanut butter
businesses (see NOTES 2 and 5 to the "Notes to Consolidated Financial
Statements").
Total Assets
(Dollars in Millions)
<TABLE>
<CAPTION>
December 26, December 27,
1998 1997
-------------------------- -------------------------
% of % of
$ Total $ Total
---------- --------- ---------- ------
<S> <C> <C> <C> <C>
CBF $ 390.6 30.7% $ 356.6 58.4%
AFVC 621.7 48.9 0.0 0.0
Nalley Fine Foods 137.2 10.8 141.0 23.1
Snack Foods Group 32.2 2.5 26.9 4.4
Corporate 78.0 6.1 46.7 7.7
--------- ------ -------- -----
Subtotal ongoing operations 1,259.7 99.0 571.2 93.6
Businesses sold(1) 12.4 1.0 39.1 6.4
--------- ------ -------- -----
Total $ 1,272.1 100.0% $ 610.3 100.0%
========= ====== ======== =====
</TABLE>
(1) Includes the assets of the aseptic and peanut butter businesses. See
NOTES 2 and 5 to the "Notes to Consolidated Financial Statements."
13
<PAGE>
<PAGE>
CHANGES FROM SECOND QUARTER FISCAL 1999 TO SECOND QUARTER FISCAL 1998
Net income for the second quarter of fiscal 1999 of $1.6 million represented a
$2.3 million decrease as compared to the second quarter of fiscal 1998 net
income of $3.9 million. Net income for the second quarter of fiscal 1999 was
significantly impacted by the increase in interest expense associated with the
DFVC Acquisition and the amortization of debt issue costs associated with the
Bridge Facility. Accordingly, management believes an evaluation of EBITDA is
appropriate as it allows the operations of the business to be reviewed in a more
consistent manner. Excluding the operating results from businesses sold, EBITDA
for the continuing business increased $21.2 million, or 92.6 percent, to $44.1
million in the second quarter of the current fiscal year from $22.9 million in
the second quarter of the prior fiscal year. This increase primarily results
from the inclusion of the AFVC business unit in the fiscal 1999 year-to-date
results. The DFVC Acquisition was completed on September 24, 1998. EBITDA of
AFVC of approximately $23.7 million was offset by a minor decrease of
approximately $2.5 million at the Company's preexisting operations. The decline
at CBF of $4.7 million was primarily attributable to a decrease in volume within
the fruit category (approximately $3.9 million), and a $0.4 million decrease
within the vegetable category attributable to product mix. The decline of EBITDA
at Nalley of $0.6 million was primarily attributable to product mix. The EBITDA
within the Snack Foods Group increased $0.2 million due to increases in net
sales. The decline in corporate overhead results primarily from a reduction in
incentive costs.
Net Sales: Total net sales for the quarter increased $174.0 million, or 85.8
percent, to $376.7 million in the second fiscal quarter of fiscal 1999 from
$202.7 million in the second quarter of fiscal 1998. Excluding businesses sold,
net sales increased by $199.4 million to $373.1 million in the second quarter of
fiscal 1999 from $173.7 million in the second quarter of fiscal 1998. The
increase in net sales from ongoing operations came primarily from the addition
of the AFVC business unit which reported net sales of $198.3 million. Net sales
for the remaining business units were relatively consistent with that of the
prior fiscal year. The Company did however, experience reductions within the
fruit category at CBF which were offset by increases within the vegetable
category.
Gross Profit: Gross profit of $122.1 million in the quarter ended December 26,
1998 increased approximately $59.5 million, or 95.0 percent, from $62.6 million
in the quarter ended December 27, 1997. Excluding the impact of businesses sold,
gross profit increased $65.1 million or 115.6 percent. Gross profit at AFVC was
approximately $67.6 million for the second quarter of fiscal 1999. Gross profit
for the remaining businesses declined $2.5 million primarily attributable to
changes in product mix and product costs.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $50.6 million as compared with the second
quarter of the prior fiscal year. The inclusion of AFVC accounted for $52.2
million of such increase. This amount was offset by a reduction in incentive
costs recorded within the quarter.
Income from Great Lakes Kraut Company: This amount represents earnings received
from the investment in Great Lakes Kraut Company, a joint venture formed between
Agrilink and Flanagan Brothers, Inc. See NOTE 5 - "Other Matters - Formation of
New Sauerkraut Company" to the "Notes to Consolidated Financial Statements"
included herein.
Interest Expense: Interest expense increased $10.6 million to $18.6 million
in the second quarter of fiscal 1999 from $8.0 million in the second
quarter of fiscal 1998. This increase is associated with debt from the DFVC
Acquisition and higher levels of seasonal borrowings at the existing
operations due to an earlier intake of crops (and therefore the resultant
increase in inventory).
Amortization of Debt Issue Costs Associated with the Bridge Facility: In order
to consummate the DFVC Acquisition, the Company entered into a $200 million
bridge loan facility (the "Bridge Facility"). The Bridge Facility was repaid
with the proceeds from the new senior subordinated note offering (see NOTE 4 -
"Debt - 11 7/8 Percent Senior Subordinated Notes (due 2008)"). Debt issuance
costs associated with the Bridge Facility were $5.5 million and were fully
amortized during the quarter.
Provision for Taxes: The provision for taxes decreased $1.8 million to $1.4
million in the second quarter of fiscal 1999 from $3.2 million in the second
quarter of fiscal 1998. Of this decrease, $2.1 million is attributable to the
benefit recorded in conjunction with the amortization of debt issue costs
associated with the Bridge Facility. The remaining variance results from the
change in earnings before tax. Agrilink's effective tax rate is negatively
impacted by the non-deductibility of certain amounts of goodwill.
CHANGES FROM FIRST SIX MONTHS FISCAL 1999 TO FIRST SIX MONTHS FISCAL 1998
Net income for the first six months of fiscal 1999 of $23.6 million represented
a $18.3 million increase over the first six months of fiscal 1998 net income of
$5.3 million. Net income for the first half of fiscal 1999 was impacted by the
gain on the sale of the aseptic operations, the increase in interest expense
associated with the DFVC Acquisition, the amortization of debt issue costs
associated with the Bridge Facility, and the extraordinary item relating to the
early extinguishment of debt. Accordingly, management believes an
14
<PAGE>
<PAGE>
evaluation of EBITDA is appropriate as it allows the operations of the business
to be reviewed in a more consistent manner. Total EBITDA for the first six
months of fiscal 1999 (excluding the extraordinary charge relating to the early
extinguishment of debt) was $62.2 million as compared to $46.0 million in the
first six months of fiscal 1998. Excluding the operating results from businesses
sold and the gain from businesses sold, EBITDA for the continuing business
increased $19.8 million, or 52.5 percent, to $57.5 million in the first six
months of the current fiscal year from $37.7 million in the first six months of
the prior fiscal year. This increase primarily results from the inclusion of the
AFVC business unit in fiscal 1999. EBITDA of AFVC of approximately $23.7 million
was offset by a decrease within the Company's preexisting operations of
approximately $3.9 million. A decline at CBF of $5.5 million was primarily due
to reductions within the fruit category (approximately $5.7 million) as a result
of changes in product mix. The decline at Nalley of $2.1 million was due
primarily to the recognition of a favorably settled outstanding tax claim with
the state of Washington for $1.4 million in the first six months of the prior
fiscal year and a reduction in the dressing and canned product lines due to
competitive pressures. The EBITDA within the Snack Foods Group increased $0.4
million due to increases in net sales. The decline in corporate overhead results
primarily from a reduction in incentive costs.
Net Sales: Total net sales for the first six months increased $180.2 million, or
47.5 percent, to $559.3 million in the fiscal first six months of fiscal 1999
from $379.1 million in the first six months of fiscal 1998. Excluding businesses
sold, net sales increased by $205.3 million, or 63.8 percent, to $526.9 million
in the first six months of fiscal 1999 from $321.6 million in the first six
months of fiscal 1998.
The increase in net sales came primarily from the addition of the AFVC business
unit which reported net sales of $198.3 million.
The Company's preexisting operations accounted for an increase of $7.0 million.
Net sales for CBF increased $9.8 million. This increase was attributable to
improvements in volume primarily within vegetables (approximately $17.4 million)
offset by a decrease within the fruit category due to changes in product mix
(approximately $6.1 million). Net sales for the remaining categories at CBF were
relatively consistent with that of the first six months of the prior fiscal
year.
Net sales for Nalley decreased $5.0 million as compared with the first six
months of the prior fiscal year as gains in the pickle category were offset by
reductions in the dressing and canned product lines. Within the pickle category,
net sales for the first six months of fiscal 1999 increased $1.4 million as a
result of increased volume in the food service channel. Competitive pressures on
volume and price resulted in a $4.4 million decrease in net sales for dressings
and a $2.0 million decrease in the canned category.
Net sales for the Snack Foods Group increased by $2.2 million, or 6.4 percent,
to $36.7 million in the first six months of fiscal 1999 as a result of new
business.
Gross Profit: Gross profit of $168.8 million in the first six months ended
December 26, 1998 increased approximately $60.6 million, or 56.0 percent, from
$108.2 million in the first six months ended December 27, 1997. Excluding the
impact of businesses sold, gross profit increased $65.7 million or 68.2 percent.
Gross profit at AFVC was approximately $67.6 million for the six months ended
December 27, 1998.
The decrease in gross profit at the CBF business unit (excluding the aseptic
business) was $1.4 million primarily attributable to changes in product mix and
product costs. Overall, gross profit at Nalley (excluding the peanut butter
business) decreased $1.9 million due primarily to the reductions in net sales
outlined above. Increases in net sales within the Snack Foods Group resulted in
margin improvements of $1.4 million.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $52.7 million as compared with the first six
months of the prior fiscal year. The inclusion of AFVC accounted for $52.2
million of such increase.
Gain on Sale of Aseptic Operations: In conjunction with the Acquisition, the
Company sold its aseptic business to Dean Foods. A gain of approximately $64.2
million was recognized on this disposal reflecting a value for this business of
approximately $83 million (based upon a preliminary appraised value given to the
Company by an independent appraiser). This amount was used to offset borrowings
necessary to complete the Acquisition.
Income from Great Lakes Kraut Company: This amount represents earnings received
from the investment in Great Lakes Kraut Company, a joint venture formed between
Agrilink and Flanagan Brothers, Inc. See NOTE 5 - "Other Matters - Formation of
New Sauerkraut Company" to the "Notes to Consolidated Financial Statements"
included herein.
15
<PAGE>
<PAGE>
Interest Expense: Interest expense increased $11.3 million to $26.9 million in
the first six months of fiscal 1999 from $15.6 million in the first six months
of fiscal 1998. This increase is associated with debt from the DFVC Acquisition
and higher levels of seasonal borrowings at the existing operations due to an
earlier intake of crops (and therefore the resultant increase in inventory).
Amortization of Debt Issue Costs Associated with a Bridge Facility: In order to
consummate the DFVC Acquisition, the Company entered into a $200 million bridge
loan facility (the "Bridge Facility"). The Bridge Facility was repaid with the
proceeds from the new senior subordinated note offering (see NOTE 4 - "Debt -
11 7/8 Percent Senior Subordinated Notes due 2008"). Debt issuance costs
associated with the Bridge Facility were $5.5 million and were fully amortized
during the second quarter.
Provision for Taxes: The provision for taxes increased $21.3 million to $25.7
million in the first six months of fiscal 1999 from $4.4 million in the first
six months of fiscal 1998. Of this net increase, $25.0 million is attributable
to the provision associated with the gain on the sale of the aseptic business.
The amount was offset by a $2.1 million benefit associated with the amortization
of debt issue costs associated with the Bridge Facility. The remaining variance
results from the change in earnings before tax. Agrilink's effective tax rate is
negatively impacted by the non-deductibility of certain amounts of goodwill.
Extraordinary Item Relating to the Early Extinguishment of Debt: Concurrently
with the Acquisition, the Company refinanced its existing indebtedness,
including its 12.25 percent Senior Subordinated Notes due 2005 and its then
existing bank debt. Premiums and breakage fees associated with early redemptions
and other fees incurred amounted to $16.4 million (net of income taxes of $10.4
million and after allocation to Pro-Fac of $1.7 million).
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 1999
compared to the first six months of fiscal 1998.
Net cash used in operating activities increased $27.4 million over the first
half of the prior fiscal year. This increase primarily results from a variance
within accounts receivable and accounts payable due to the timing of liquidation
of outstanding balances. Such variances have been impacted by the inclusion of
operating activities of AFVC. In addition, the variance within income taxes
payable was impacted by the provision recorded on the gain from the sale of the
aseptic operations.
Net cash used in investing activities increased significantly due to the DFVC
Acquisition offset by the subsequent sale of the aseptic business and the
disposal of an idle facility held for sale. The purchase of property, plant and
equipment increased $1.8 million to $8.6 million for the six months ended
December 26, 1998 from $6.8 million for the six months ended December 27, 1997
and was for general operating purposes.
Net cash provided by financing activities also increased significantly due to
the DFVC Acquisition and the activities completed concurrent with the
Acquisition to refinance existing indebtedness. See further discussion at
"Liquidity and Capital Resources" below and at NOTE 4 - "Debt" to the "Notes to
Consolidated Financial Statements" included herein.
In addition, seasonal borrowings increased during the first six months of fiscal
1999 due to both the earlier intake of crops and the resultant increase in
inventory levels and the operating activities associated with the DFVC
Acquisition.
New Credit Facility: In connection with the Acquisition, the Company entered
into the New Credit Facility with Harris Bank as Administrative Agent and Bank
of Montreal as Syndication Agent, and the lenders thereunder. The Credit
Facility consists of the $200 million Revolving Credit Facility and the $455
million Term Loan Facility. The Term Loan Facility is comprised of the Term A
Facility, which has a maturity of five years, the Term B Facility, which has a
maturity of six years, and the Term C Facility, which has a maturity of seven
years. The Revolving Credit Facility has a maturity of five years.
The New Credit Facility bears interest, at the Company's option, at the
Administrative Agent's alternate base rate or LIBOR plus, in each case,
applicable margins of: (i) in the case of alternate base rate loans, (x) 1.00
percent for loans under the Revolving Credit Facility and the Term A Facility,
(y) 2.75 percent for loans under the Term B Facility and (z) 3.00 percent for
loans under the Term C Facility and (ii) in the case of LIBOR loans, (x) 2.75
percent for loans under the Revolving Credit Facility and the Term A Facility,
(y) 3.75 percent for loans under the Term B Facility and (z) 4.00 percent for
loans under the Term C Facility. The Administrative Agent's "alternate base
rate" is defined as the greater of: (i) the prime commercial rate as announced
by the Administrative Agent or (ii) the Federal Funds rate plus 0.50 percent. In
addition, the Company will pay a commitment fee calculated at a rate of 0.50
percent per annum on the daily average unused commitment under the Revolving
Credit Facility.
16
<PAGE>
<PAGE>
Beginning with the reporting period ending March 31, 1999, the applicable
margins for the New Credit Facility will be subject to possible reductions based
on the ratio of consolidated debt to EBITDA (each as defined in the New Credit
Facility).
Upon consummation of the Acquisition, the Company drew $455 million under the
Term Loan Facility, consisting of $100 million, $175 million and $180 million of
loans under the Term A Facility, Term B Facility and Term C Facility,
respectively. Additionally, the Company drew $93 million under the Revolving
Credit Facility for seasonal working capital needs and $14.3 million under the
Revolving Credit Facility was issued for letters of credit. During December
1998, the Company's primary lender exercised its right under the New Credit
Facility to transfer $50 million from the Term A Facility to the Term B and Term
C Facilities in increments of $25 million.
The Term Loan Facility will be subject to the following amortization schedule.
<TABLE>
<CAPTION>
Fiscal Year Term Loan A Term Loan B Term Loan C Total
- ----------- ----------- ----------- ----------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
1999 $ 0.0 $ 0.2 $ 0.2 $ 0.4
2000 7.5 0.4 0.4 8.3
2001 10.0 0.4 0.4 10.8
2002 10.0 0.4 0.4 10.8
2003 10.0 0.4 0.4 10.8
2004 12.5 0.4 0.4 13.3
2005 0.0 197.8 0.4 198.2
2006 0.0 0.0 202.4 202.4
------- ------ ------- -------
$ 50.0 $200.0 $ 205.0 $ 455.0
======= ====== ======= =======
</TABLE>
The Term Loan Facility is subject to mandatory prepayment under various
scenarios as defined in the New Credit Facility.
The Company's obligations under the New Credit Facility are secured by a
first-priority lien on: (i) substantially all existing or after-acquired assets,
tangible or intangible, (ii) the capital stock of certain of Pro-Fac's current
and future subsidiaries, and (iii) all of the Company's rights under the
agreement to acquire DFVC (principally indemnification rights) and the Pro-Fac
Marketing and Facilitation Agreement. The Company's obligations under the New
Credit Facility are guaranteed by Pro-Fac and certain of the Company's current
and future, if any, subsidiaries.
The New Credit Facility contains customary covenants and restrictions on the
Company's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on sale-leaseback transactions, consolidations, mergers, sale of
assets, transactions with affiliates and investments and (iii) limitations on
dividend and other distributions. The New Credit Facility also contains
financial covenants requiring Pro-Fac to maintain a minimum level of
consolidated EBITDA, a minimum consolidated interest coverage ratio, a minimum
consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio
and a minimum level of consolidated net worth. Pro-Fac and the Company are in
compliance with all covenants, restrictions and requirements under the terms of
the New Credit Facility.
11 7/8 Percent Senior Subordinated Notes (Due 2008): To extinguish the Bridge
Facility, the Company issued 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 and is payable
semiannually in arrears on May 1 and November 1.
The New Notes represent general unsecured obligations of the Company,
subordinated in right of payment to certain other debt obligations of the
Company (including the Company's obligations under the New Credit Facility). The
New Notes are guaranteed by Pro-Fac and certain of the Company's current and
future, if any, subsidiaries.
The New Notes contain customary covenants and restrictions on the Company's
ability to engage in certain activities, including, but not limited to: (i)
limitations on the incurrence of indebtedness and liens; (ii) limitations on
consolidations, mergers, sales of assets, transactions with affiliates; and
(iii) limitations on dividends and other distributions. The Company is in
compliance with all covenants, restrictions, and requirements under the New
Notes.
Subordinated Bridge Facility: To complete the Acquisition, the Company entered
into the Bridge Facility. During November 1998, the net proceeds from the sale
of the New Notes, together with borrowings under the Revolving Credit Facility,
were used to repay all
17
<PAGE>
<PAGE>
the indebtedness outstanding ($200 million plus accrued interest) under the
Bridge Facility. The outstanding indebtedness under the Bridge Facility accrued
interest at an approximate rate per annum of 10 1/2 percent. Debt issuance costs
associated with the Bridge Facility of $5.5 million were fully amortized during
the quarter ended December 26, 1998.
Subordinated Promissory Note: As partial consideration for the Acquisition, the
Company issued to Dean Foods the Subordinated Promissory Note for $30 million
aggregate principal amount due November 22, 2008. Interest on the Subordinated
Promissory Note is payable quarterly in arrears commencing December 31, 1998, at
a rate per annum of 5 percent until November 22, 2003, and at a rate of 10
percent thereafter. Interest accruing through November 22, 2003 is required to
be paid in kind through the issuance by the Company of additional subordinated
promissory notes identical to the Subordinated Promissory Note. In December
1998, the Company satisfied this requirement through the issuance of an
additional promissory note for $0.4 million. Interest accruing after November
22, 2003 is payable in cash. The Subordinated Promissory Note may be prepaid at
the Company's option without premium or penalty.
The Subordinated Promissory Note is expressly subordinate to the New Notes and
the New Credit Facility and contains no financial covenants. The Subordinated
Promissory Note is guaranteed by Pro-Fac.
12 1/4 Percent Senior Subordinated Notes (Due 2005): In conjunction with the
Acquisition, the Company repurchased $159,985,000 principal amount of its Old
Notes, of which $160 million aggregate principal amount was previously
outstanding. The Company paid a total of approximately $184 million to
repurchase the Old Notes, including interest accrued thereon of $2.9 million.
Holders who tendered consented to certain amendments to the indenture relating
to the Old Notes, which eliminated or amended substantially all the restrictive
covenants and certain events of default contained in such indenture. The Company
may repurchase the remaining Old Notes in the future in open market
transactions, privately negotiated purchases or otherwise.
Interest Rate Risk Management: The Company is subject to market risk from
exposure to changes in interest rates based on its financing activities. The
Company 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, the Company has entered into two
interest rate swap agreements with the Bank of Montreal. The agreements provide
for fixed interest rate payments by the Company in exchange for payments
received at the three-month LIBOR rate. See further discussion at NOTE 4 "Debt -
Interest Rate Protection Agreements" to the "Notes to Consolidated Financial
Statements" included herein.
The following is a summary of the Company's interest rate swap agreements:
<TABLE>
<CAPTION>
December 26, 1998
-------------------
<S> <C>
Interest Rate Swap:
Variable to Fixed - notional amount $250,000,000
Average pay rate 4.96-5.32%
Average receive rate 5.28%
Maturities through 2001
</TABLE>
The Company has the option of extending one of the interest rate swap
agreements, with a notional amount of $100,000,000 and expiration date of
October 5, 2001, for an additional two years through October 5, 2003.
While there is potential that interest rates will fall, and hence minimize the
benefits of the Company's hedge position, it is the Company's position that on a
long-term basis, the possibility of interest rates increasing exceeds the
likelihood of interest rates decreasing. The Company will, however, monitor
market conditions to adjust its position as it considers necessary.
OTHER MATTERS
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.
18
<PAGE>
<PAGE>
The effect of the 1998 growing season on fiscal 1999 financial results cannot be
estimated until early calendar 1999 when local and national supplies can be
determined.
Year 2000 Readiness Disclosure: A full inventory and analysis of business
applications and related software was performed and the Company determined that
it will be required to modify or replace certain portions of its software so
that its computer systems will be Year 2000 compliant. These modifications and
replacements are being and will continue to be made in conjunction with the
Company's overall information systems initiatives. No major delay in these
initiatives is anticipated.
In addition, the Company is contacting non-information technology vendors to
ensure that any of their products that are currently in use can adequately deal
with the change in century. Areas being addressed include full reviews of
manufacturing equipment, telephone and voice mail systems, security systems, and
other office/site support systems. Based upon preliminary information, the costs
of addressing potential problems are not expected to have a material adverse
impact on the Company's financial position, results of operations, or cash flows
in future periods. Accordingly, the cost of the project is being funded through
operating cash flows.
The Company has initiated formal communications with significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. However, there
can be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have material adverse effect on the Company. Accordingly, the Company plans
to devote the necessary resources to resolve all significant Year 2000 issues in
a timely manner.
The Company expects to complete the Year 2000 project during the fall of 1999.
Based on the progress made to date (which includes compliant systems in place
and in production), the Company does not believe any material exposure to
significant business interruption exists. In the event some of the remaining
elements of the Company's Year 2000 compliance project are delayed, procedures
have been addressed to ensure alternative workaround initiatives are completed.
On June 19, 1997, Systems & Computer Technology Corporation ("SCT") and the
Company announced a major outsourcing services and software agreement effective
June 30, 1997. The ten-year agreement, valued at approximately $50 million, is
for SCT's OnSite outsourcing services, ADAGE ERP software and implementation
services and assistance in solving the Year 2000 issue.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Company 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 Company 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 10 to 18) and other statements made in this Form 10-Q and in
other filings with the SEC.
The Company cautions readers that any such forward-looking statements made by or
on behalf of the Company 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 Company's ability to achieve
its goals are:
the impact of strong competition in the food industry;
the impact of weather on the volume and quality of raw product;
the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
the continuation of the Company's success in integrating operations and the
availability of acquisition and alliance opportunities;
the Company's ability to achieve gains in productivity and improvements in
capacity utilization; and
the ability to integrate AFVC into the business of the Company and the
extent to which anticipated cost savings in connection with the
Acquisition will be realized and the timing of any such realization.
19
<PAGE>
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit Number Description
<S> <C>
4.1(1) Indenture, dated as of November 18, 1998, between Agrilink
Foods, Inc., the Guarantors named therein and IBJ
Schroder Bank & Trust Company, Inc. as Trustee.
4.2(1) Form of 11 7/8 Senior Subordinated Notes due 2008 (included
as Exhibit B to Exhibit 4.1).
4.3(1) Registration Rights Agreement, dated as of November 18,
1998, among Agrilink Foods, Inc. Pro-Fac Cooperative, Inc.,
Warburg Dillon Read LLC, and Nesbitt Burns Securities Inc.
10.1(2) Credit Agreement among Agrilink Foods, Inc., Pro-Fac
Cooperative, Inc., and Harris Trust and Savings Bank, and
Bank of Montreal, Chicago Branch, and the Lenders from
time to time party hereto, dated September 23, 1998.
10.2(2) $200,000,000 Senior Subordinated Credit agreement among
Agrilink Foods, Inc., Pro-Fac Cooperative, Inc., and
Warburg Dillon Read LLC and UBS AG, Stamford Branch, and
the Lenders from time to time party hereto, dated
September 23, 1998.
10.3(2) Subordinated Promissory Note among Agrilink Foods, Inc. and
Dean Foods Company, dated as of September 23, 1998.
27 Financial Data Schedule
</TABLE>
(1) Incorporated by reference from Registrant's Form S-4 filed January 5, 1999.
(2) Incorporated by reference from Registrant's fiscal 1999 first quarter
report on Form 10-Q filed November 6, 1998.
(b) The following reports on Form 8-K were filed during the period to which
this report relates:
<TABLE>
<CAPTION>
Date Item
------ ------
<S> <C>
October 5, 1998 Item 2 - Acquisition or Disposition of Assets
December 3, 1998 Item 2 - Acquisition or Disposition of Assets; and
Item 7 - Financial Statements and Exhibits
</TABLE>
20
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
AGRILINK FOODS, INC.
Date: February 9, 1999 By: /s/ Earl L. Powers
----------------------------- --------------------------------
EARL L. POWERS
VICE PRESIDENT FINANCE AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer
and Principal Accounting Officer)
</TABLE>
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Agrilink
Foods, Inc. Form 10-Q for the period ended December 26, 1998 and is qualified
in its entirety by reference to such financial statement.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> DEC-26-1998
<CASH> 18,340
<SECURITIES> 0
<RECEIVABLES> 123,723
<ALLOWANCES> 0
<INVENTORY> 373,662
<CURRENT-ASSETS> 548,933
<PP&E> 394,809
<DEPRECIATION> 82,465
<TOTAL-ASSETS> 1,272,115
<CURRENT-LIABILITIES> 338,043
<BONDS> 200,015
0
0
<COMMON> 0
<OTHER-SE> 178,161
<TOTAL-LIABILITY-AND-EQUITY> 1,272,115
<SALES> 559,282
<TOTAL-REVENUES> 559,282
<CGS> 390,445
<TOTAL-COSTS> 390,445
<OTHER-EXPENSES> 70,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,449
<INCOME-PRETAX> 65,651
<INCOME-TAX> 25,709
<INCOME-CONTINUING> 39,942
<DISCONTINUED> 0
<EXTRAORDINARY> 16,366
<CHANGES> 0
<NET-INCOME> 23,576
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
