Page 1 of 20 Pages
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 25, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-70143
AGRILINK FOODS, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-0845824
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-6070
(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 April 29, 2000.
Common Stock: 10,000
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
Agrilink Foods, Inc.
Consolidated Statement of Operations
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
------------ ----------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales $ 279,000 $ 352,185 $ 912,703 $ 911,467
Cost of sales (192,443) (243,706) (621,108) (634,151)
---------- ---------- ---------- ----------
Gross profit 86,557 108,479 291,595 277,316
Selling, administrative, and general expense (65,200) (86,776) (214,638) (213,746)
Gains on sales of assets 0 532 2,293 64,734
Restructuring 0 (5,000) 0 (5,000)
Income from joint venture 543 728 2,238 2,417
---------- ---------- ---------- ----------
Operating income before dividing with Pro-Fac 21,900 17,963 81,488 125,721
Interest expense (19,910) (19,366) (58,936) (46,315)
Amortization of debt issue costs associated with a Bridge Facility 0 0 0 (5,500)
---------- ---------- ---------- ----------
Pretax income/(loss) before dividing with Pro-Fac and
before extraordinary item 1,990 (1,403) 22,552 73,906
Pro-Fac share of (income)/loss before extraordinary item (996) 2,188 (11,278) (7,470)
---------- ---------- ---------- ----------
Income before taxes and before extraordinary item 994 785 11,274 66,436
Tax provision (423) (892) (4,804) (26,601)
---------- ---------- ---------- ----------
Income/(loss) before extraordinary item 571 (107) 6,470 39,835
Extraordinary item relating to the early extinguishment
of debt (net of income taxes and after dividing with Pro-Fac) 0 0 0 (16,366)
---------- ---------- ---------- ----------
Net income/(loss) $ 571 $ (107) $ 6,470 $ 23,469
========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Agrilink Foods, Inc.
Consolidated Balance Sheet
(Dollars in Thousands)
(Unaudited)
<CAPTION>
March 25, June 26, March 27,
2000 1999 1999
------------- ---------- -------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 8,452 $ 6,540 $ 7,464
Accounts receivable trade, net 100,594 81,430 100,592
Accounts receivable, other 6,045 6,184 5,753
Income taxes refundable 0 9,360 0
Current deferred tax asset 15,565 15,565 13,129
Inventories -
Finished goods 291,626 247,389 281,428
Raw materials and supplies 44,759 46,181 43,501
---------- ---------- ----------
Total inventories 336,385 293,570 324,929
---------- ---------- ----------
Current investment in CoBank 4,355 2,403 3,198
Prepaid manufacturing expense 9,039 18,217 9,607
Prepaid expenses and other current assets 18,668 17,989 19,382
---------- ---------- ----------
Total current assets 499,103 451,258 484,054
Investment in CoBank 15,440 19,693 19,699
Investment in Great Lakes Kraut Company 9,013 6,679 9,001
Property, plant and equipment, net 321,440 339,753 335,727
Assets held for sale at net realizable value 339 890 920
Goodwill and other intangible assets, net 257,613 260,733 291,361
Other assets 24,166 21,655 22,356
Note receivable due from Pro-Fac 9,400 9,400 9,400
---------- ---------- ----------
Total assets $1,136,514 $1,110,061 $1,172,518
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable $ 79,600 $ 18,900 $ 73,900
Current portion of obligations under capital leases 208 208 256
Current portion of long-term debt 16,580 8,670 8,731
Accounts payable 45,478 103,615 59,967
Income taxes payable 1,603 0 1,924
Accrued interest 13,294 5,476 10,456
Accrued employee compensation 10,466 13,717 13,083
Other accrued expenses 81,002 60,242 86,597
Due to Pro-Fac 17,369 15,067 16,587
---------- ---------- ----------
Total current liabilities 265,600 225,895 271,501
Obligations under capital leases 568 568 503
Long-term debt 650,747 668,316 668,923
Deferred income tax liabilities 23,174 23,174 35,341
Other non-current liabilities 26,071 28,224 25,696
---------- ---------- ----------
Total liabilities 966,160 946,177 1,001,964
---------- ---------- ----------
Commitments and contingencies
Shareholder's Equity:
Common stock, par value $.01;
10,000 shares outstanding, owned by Pro-Fac 0 0 0
Additional paid-in capital 167,071 167,071 167,071
Accumulated retained earnings/(deficit) 4,046 (2,424) 4,091
Accumulated other comprehensive income:
Minimum pension liability adjustment (763) (763) (608)
---------- ---------- -----------
Total shareholder's equity 170,354 163,884 170,554
---------- ---------- ----------
Total liabilities and shareholder's equity $1,136,514 $1,110,061 $1,172,518
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Agrilink Foods, Inc.
Consolidated Statement of Cash Flows
(Dollars in Thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
--------------------------
March 25, March 27,
2000 1999
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 6,470 $ 23,469
Adjustments to reconcile net income to net cash used in operating activities -
Extraordinary item relating to the early extinguishment of debt (net of income taxes and
after dividing with Pro-Fac) 0 16,366
Gains on sales of assets (2,293) (64,734)
Loss on disposal of assets 0 353
Depreciation 22,035 19,974
Amortization of goodwill and other intangibles 6,551 6,632
Interest in-kind on Subordinated Promissory Note 1,174 0
Amortization of debt issue costs and discount on Subordinated Promissory Note 3,221 6,969
Equity in undistributed earnings of Great Lakes Kraut Company (2,238) (2,417)
Equity in undistributed earnings of CoBank (102) (520)
Change in assets and liabilities:
Accounts receivable (19,396) (22,766)
Inventories and prepaid manufacturing expense (75,637) (276)
Income taxes refundable/(payable) 10,963 8,444
Accounts payable and other accrued expenses (33,030) (66,768)
Due to Pro-Fac 2,302 2,203
Other assets and liabilities (2,285) (1,985)
---------- ----------
Net cash used in operating activities (82,265) (75,056)
---------- ----------
Cash Flows From Investing Activities:
Purchase of property, plant and equipment (20,691) (13,411)
Proceeds from disposals 53,538 94,913
Proceeds from investment in CoBank 2,403 1,994
Cash paid for acquisitions 0 (443,531)
---------- ----------
Net cash provided by/(used in) investing activities 35,250 (360,035)
---------- ----------
Cash Flows From Financing Activities:
Net proceeds from issuance of short-term debt 60,700 73,900
Proceeds from issuance of long-term debt 0 677,507
Payments on long-term debt (11,773) (287,313)
Cash paid for debt issuance costs 0 (19,085)
Dividends paid to Pro-Fac 0 (7,500)
---------- -----------
Net cash provided by financing activities 48,927 437,509
---------- ----------
Net change in cash and cash equivalents 1,912 2,418
Cash and cash equivalents at beginning of period 6,540 5,046
---------- ----------
Cash and cash equivalents at end of period $ 8,452 $ 7,464
========== ==========
<FN>
(Table continued on next page)
</FN>
</TABLE>
<PAGE>
<TABLE>
Agrilink Foods, Inc.
Consolidated Statement of Cash Flows
(Dollars in Thousands)
(Unaudited)
(Table continued from previous page)
<CAPTION>
Nine Months Ended
-------------------------------
March 25, March 27,
2000* 1999
----------- ----------
<S> <C>
Supplemental disclosure of cash flow information:
Acquisition of Erin's Gourmet Popcorn -
Inventories $ 33
Property, plant and equipment 26
Goodwill and other intangible assets 554
--------
$ 613
========
Acquisition of Dean Foods Vegetable Company -
Accounts receivable $ 24,201
Current deferred tax asset 30,645
Inventories 195,674
Prepaid expenses and other current assets 6,374
Property, plant and equipment 154,527
Assets held for sale at net realizable value 49
Goodwill and other intangible assets 182,010
Accounts payable (40,865)
Accrued employee compensation (8,437)
Other accrued expenses (75,778)
Long-term debt (2,752)
Subordinated promissory note (22,590)
Other assets and liabilities, net (2,453)
--------
$440,605
========
Acquisition of J.A. Hopay Distributing Co., Inc. -
Accounts receivable $ 420
Inventories 153
Property, plant and equipment 51
Goodwill and other intangible assets 3,303
Other accrued expenses (251)
Obligation for covenant not to compete (1,363)
--------
$ 2,313
========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
*There have been no acquisitions completed for the period ending March 25, 2000.
</FN>
</TABLE>
<PAGE>
AGRILINK FOODS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Agrilink Foods, Inc. (the "Company" or "Agrilink Foods"), incorporated in New
York in 1961, is a producer and marketer of processed food products. The Company
has four primary product lines including: vegetables, fruits, snacks, and canned
meals. The majority of the net sales of each product line are within the United
States. In addition, all of the Company's operating facilities, excluding one in
Mexico, are within the United States. The Company is a wholly-owned subsidiary
of Pro-Fac Cooperative, Inc. ("Pro-Fac" or the "Cooperative"). On March 1, the
Cooperative announced it will being doing business as Agrilink. In addition, the
board of directors of Agrilink and Pro-Fac have agreed to conduct joint
meetings, coordinate their activities, and to act on a consolidated basis.
Although Pro-Fac Cooperative will continue to be the legal name of the
Cooperative, with the same structure and regulations required by bank credit
agreements and bond indentures, and with the same stock symbol, "PFACP," it will
be presented as Agrilink for all other communications. PF Acquisition II, Inc.
conducts business under the name AgriFrozen Foods ("AgriFrozen").
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. These financial statements should be read in conjunction with the
financial statements and accompanying notes contained in the Company's Form 10-K
for the fiscal year ended June 26, 1999.
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 1999 have been reclassified to
conform with the current presentation.
NOTE 2. ACQUISITIONS
On September 24, 1998, Agrilink Foods acquired the Dean Foods Vegetable Company
("DFVC"), the frozen and canned vegetable business of Dean Foods Company ("Dean
Foods"), by acquiring all the outstanding capital stock of Dean Foods Vegetable
Company and Birds Eye de Mexico SA de CV (the "DFVC Acquisition"). In connection
with the DFVC Acquisition, Agrilink Foods sold its aseptic business to Dean
Foods. Agrilink Foods 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 DFVC Acquisition. On April 15, 1999, the Company paid
$13.2 million to Dean Foods and exercised its right to require Dean Foods,
jointly with the Company, to treat the DFVC Acquisition as an asset sale for tax
purposes under Section 338(h)(10) of the Internal Revenue Code.
After the DFVC Acquisition, DFVC was merged into the Company. DFVC has been one
of the leading processors of vegetables in the United States, selling its
products under well-known brand names, such as Birds Eye, Freshlike and Veg-All,
and various private labels. The Company believes that the DFVC Acquisition has
strengthened its competitive position by: (i) enhancing its brand recognition
and market position, (ii) providing opportunities for cost savings and operating
efficiencies and (iii) increasing its product and geographic diversification.
The DFVC Acquisition was accounted for under the purchase method of accounting.
Under purchase accounting, tangible and identifiable intangible assets acquired
and liabilities assumed were recorded at their respective fair values. Goodwill
associated with the DFVC Acquisition is being amortized over 30 years. Final
allocations of purchase price were made in the third and fourth quarters of
fiscal 1999.
The following unaudited pro forma financial information presents a summary of
consolidated results of operations of the Company and the acquired Dean Foods
Vegetable Company as if the acquisition had occurred at the beginning of the
1999 fiscal year.
<PAGE>
(Dollars in Millions)
Nine Months Ended
March 27, 1999
Net sales $ 1,008.5
Income before extraordinary item $ 29.6
Net income $ 13.2
These unaudited pro forma results have been prepared for comparative purposes
only and include adjustments for additional depreciation expense and
amortization and interest expense on acquisition debt. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination been in effect at the beginning of the 1999 fiscal year, or of
the future operations of the consolidated entities.
Concurrently with the DFVC Acquisition, Agrilink Foods refinanced its existing
indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink Foods 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 Foods for aggregate consideration of approximately $184 million,
including accrued interest of $2.9 million. Agrilink Foods also terminated its
then existing bank facility (including seasonal borrowings) and repaid the
$176.5 million, excluding interest owed and breakage fees outstanding
thereunder. The Company recognized an extraordinary item of $16.4 million (net
of income taxes and after dividing with Pro-Fac) in the first quarter of fiscal
1999 relating to this refinancing.
In order to consummate the DFVC Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink Foods: (i) entered into a new credit
facility (the "New Credit Facility") providing for $455 million of term loan
borrowings (the "Term Loan Facility") and up to $200 million of revolving credit
borrowings (the "Revolving Credit Facility"), (ii) entered into and drew upon a
$200 million bridge loan facility (the "Subordinated Bridge Facility") and (iii)
issued the $30 million Subordinated Promissory Note to Dean Foods. The
Subordinated Bridge Facility was repaid during November of 1998 principally with
the proceeds from the issuance of Senior Subordinated Notes ("the New Notes")
for $200 million aggregate principal amount due November 1, 2008. Interest on
the New Notes accrues at the rate of 11-7/8 percent per annum. Debt issue costs
of $5.5 million associated with the Bridge Facility were expensed during the
quarter ended December 26, 1998.
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 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 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 Foods 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 Foods, 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
Foods.
Amounts received by Pro-Fac from Agrilink Foods for the nine months ended March
25, 2000 and March 27, 1999 include: commercial market value of crops delivered,
$69.4 million and $61.5 million, respectively; and additional proceeds from
profit sharing provisions, $11.3 million and $5.8 million, respectively.
<PAGE>
NOTE 4. DEBT
Summary of Long-Term Debt:
(Dollars in Thousands)
March 25, June 26, March 27,
2000 1999 1999
---------- --------- ----------
Term Loan Facility $435,000 $446,600 $ 446,800
Senior Subordinated Notes 200,015 200,015 200,015
Subordinated Promissory Note (net of discount) 25,447 23,372 23,372
Other 6,865 6,999 7,467
-------- -------- ---------
Total Debt 667,327 676,986 677,654
Less Current Portion (16,580) (8,670) (8,731)
-------- --------- ---------
Total Long-Term Debt $650,747 $668,316 $ 668,923
========= ======== =========
NOTE 5. OTHER MATTERS
Sale of Midwest Private Label Canned Vegetable Business: On November 8, 1999,
the Company completed the sale of Agrilink's Midwest private label canned
vegetable business to Seneca Foods. Included in this transaction was the
Arlington, Minnesota facility. The Company received proceeds of approximately
$42.4 million which were applied to the borrowings outstanding under the
Company's Revolving Credit Facility. 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 Company's retail branded
canned vegetables, Veg-All and Freshlike. No significant gain or loss was
recognized on this transaction.
On December 17, 1999, Agrilink Foods completed the sale of the Company's
Cambria, Wisconsin processing facility to Del Monte. The sale includes an
agreement for Del Monte to produce a portion of Agrilink Foods' product needs
during the 2000 packing season. The Company received proceeds of approximately
$10.5 million which were applied to bank loans ($6.0 million of which was
applied to the Term Loan Facility and $4.5 million of which was applied to the
Company's Revolving Credit Facility). A gain of approximately $2.3 million was
recognized on this transaction.
Restructuring: During the third quarter of fiscal 1999, the Company completed a
corporate-wide restructuring program. The overall objectives of the plan were to
reduce expenses, improve productivity, and streamline operations. The total
restructuring charge amounted to $5.0 million and was primarily comprised of
employee termination benefits. Efforts have focused on the consolidation of
operating functions and the elimination of approximately five percent of the
work force. Reductions in personnel include operational and administrative
positions. Of this charge, $2.6 million has been liquidated to date, and the
remaining termination benefits are anticipated to be liquidated within the next
12 months.
NOTE 6. OPERATING SEGMENTS
The Company is organized by product line for management reporting with operating
income being the primary measure of segment profitability. Accordingly, no items
below operating earnings are allocated to segments. The Company's four primary
operating segments are as follows: vegetables, fruits, snacks, and canned meals.
The vegetable product line consists of canned and frozen vegetables, chili
beans, pickles, and various other products. Branded products within the
vegetable category include Birds Eye, Birds Eye Voila!, Veg-All, Freshlike,
McKenzies, Brooks Chili Beans, Farman's and Nalley. The fruit product line
consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snack category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, and Super
Pop. The canned meal product line includes canned meat products such as chilies,
stew, soups, and various other ready-to-eat prepared meals. Branded products
within the canned meal category include Nalley. The Company's 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 Company's operating segment information:
(Dollars in Millions)
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
------------ ----------- --------- ----------
<S> <C> <C> <C> <C>
Net Sales:
Vegetables $ 210.4 $ 240.5 $ 638.9 $ 572.8
Fruits 19.8 22.0 88.7 90.4
Snacks 20.8 23.2 64.2 67.6
Canned Meals 14.9 18.6 49.9 51.3
Other 13.1 25.9 41.0 52.5
-------- --------- -------- ---------
Continuing segments 279.0 330.2 882.7 834.6
Businesses sold1 0.0 22.0 30.0 76.9
-------- --------- -------- ---------
Total $ 279.0 $ 352.2 $ 912.7 $ 911.5
======== ========= ======== =========
Operating income:
Vegetables2 $ 16.4 $ 15.8 $ 56.6 $ 38.2
Fruits 1.8 1.6 11.4 10.5
Snacks 1.2 1.1 4.1 4.7
Canned Meals 1.6 2.4 6.1 5.5
Other 0.9 1.3 2.4 2.4
-------- --------- -------- ---------
Continuing segments 21.9 22.2 80.6 61.3
Businesses sold1 0.0 0.2 (1.4) 4.7
-------- --------- -------- ---------
Subtotal 21.9 22.4 79.2 66.0
Gains on sales of assets 0.0 0.5 2.3 64.7
Restructuring 0.0 (5.0) 0.0 (5.0)
-------- --------- -------- ---------
Operating income before dividing with Pro-Fac 21.9 17.9 81.5 125.7
Interest expense (19.9) (19.3) (58.9) (46.3)
Amortization of debt issue costs associated with a Bridge Facility 0.0 0.0 0.0 (5.5)
-------- --------- -------- ---------
Pretax income/(loss) before dividing with Pro-Fac and
before extraordinary item $ 2.0 $ (1.4) $ 22.6 $ 73.9
======== ========= ======== =========
<FN>
1 Includes the Midwest private label canned vegetable business sold in fiscal 2000 and the aseptic and peanut butter businesses
sold in fiscal 1999.
2 The vegetable product line includes earnings derived from the Company's investment in Great Lakes Kraut Company of $0.5
million and $0.7 million for the three months ended March 25, 2000 and March 27, 1999, respectively and $2.2 million and $2.4
million for the nine months ended March 25, 2000 and March 27, 1999, respectively.
</FN>
</TABLE>
NOTE 7. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation, wholly-owned
subsidiaries of the Company ("Subsidiary Guarantors"), and the Cooperative have
jointly and severally, fully and unconditionally guaranteed, on a senior
subordinated basis, the obligations of the Company with respect to the Company's
11-7/8 percent Senior Subordinated Notes due 2008 ("New Notes") and the New
Credit Facility. The covenants in the New Notes and the New Credit Facility do
not restrict the ability of the Subsidiary Guarantors to make cash distributions
to the Company.
Full financial statements of the Cooperative are included as an Exhibit to this
Form 10-Q. Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented as management has determined that such
financial statements and other disclosures are not material. Accordingly, set
forth below is certain summarized financial information derived from unaudited
historical financial information for the Subsidiary Guarantors, on a combined
basis.
<PAGE>
<TABLE>
(Dollars in Millions)
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Summarized Statement of Operations:
Net sales $ 17.3 $ 8.2 $ 56.5 $14.6
Gross profit 13.7 6.1 45.5 9.2
Income from continuing operations 14.2 5.5 45.9 6.6
Net income 9.2 3.6 29.8 4.2
Summarized Balance Sheet:
Current assets $ 2.9 $ 2.0
Noncurrent assets 212.7 219.5
Current liabilities 6.3 2.6
</TABLE>
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 first nine months
of fiscal 2000 versus fiscal 1999.
Agrilink Foods, Inc. ("Agrilink Foods" or the "Company") has four primary
product lines: vegetables, fruits, snacks and canned meals. The majority of the
net sales of each product line are within the United States. In addition, the
Company's operating facilities, excluding one in Mexico, are within the United
States.
The vegetable product line consists of canned and frozen vegetables, chili
beans, pickles, and various other products. Branded products within the
vegetable product line include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All,
McKenzies, Brooks Chili Beans, Farman's and Nalley. The fruit product line
consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snack category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, and Super
Pop. The canned meal product line includes canned meat products such as chilies,
stews, soups, and various other ready-to-eat prepared meals. Branded products
within the canned meal category include Nalley. The Company's other product line
primarily represents salad dressings. Brand products within the "other" category
include Bernstein's and Nalley.
The following tables illustrate the results of operations by product line for
the three- and nine-month periods ended March 25, 2000 and March 27, 1999.
<PAGE>
<TABLE>
EBITDA1, 2
(Dollars in Millions)
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- -------------------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
--------------- ------------------ ----------------- ----------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- ------ ------ ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vegetables $ 23.6 74.9% $ 21.0 69.1% $ 78.1 72.4% $ 55.8 60.2%
Fruits 2.3 7.3 2.2 7.2 12.7 11.8 12.1 13.0
Snacks 2.1 6.7 1.7 5.6 6.5 6.1 6.5 7.0
Canned Meals 2.1 6.7 2.9 9.6 7.5 6.9 7.1 7.7
Other 1.4 4.4 1.8 5.9 3.8 3.5 3.7 4.0
------ ----- ------ ------ ------- ----- ------- ------
Continuing segments 31.5 100.0 29.6 97.4 108.6 100.7 85.2 91.9
Businesses sold3 0.0 0.0 0.8 2.6 (0.8) (0.7) 7.5 8.1
------ ----- ------ ------ ------- ------ ------- ------
Total $ 31.5 100.0% $ 30.4 100.0% $ 107.8 100.0% $ 92.7 100.0%
====== ===== ====== ====== ======= ====== ======= ======
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 issues costs
associated with a Bridge Facility, depreciation and amortization of goodwill
and other intangibles.
EBITDA should not be considered as an alternative to net income or cash flows
from operations or any other generally accepted accounting principles measure
of performance or as a measure of liquidity.
EBITDA is included herein because the Company believes EBITDA is a financial
indicator of a company's ability to service debt. EBITDA as calculated by
Agrilink Foods may not be comparable to calculations as presented by other
companies.
2 Excludes gains on sales of assets and the restructuring charge. See NOTES 2
and 5 to the "Notes to Consolidated Financial Statements."
3 Represents the operating results of the Midwest private label canned
vegetable business sold in fiscal 2000 and the operating results of the
aseptic and peanut butter operations sold in fiscal 1999. See NOTES 2 and 5
to the "Notes to Consolidated Financial Statements."
</TABLE>
<TABLE>
Net Sales
(Dollars in Millions)
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- -------------------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
--------------- ------------------ ----------------- -----------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- ------ ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vegetables $ 210.4 75.4% $ 240.5 68.3% $ 638.9 70.0% $ 572.8 62.8%
Fruits 19.8 7.1 22.0 6.3 88.7 9.7 90.4 9.9
Snacks 20.8 7.5 23.2 6.6 64.2 7.0 67.6 7.4
Canned Meals 14.9 5.3 18.6 5.3 49.9 5.5 51.3 5.7
Other 13.1 4.7 25.9 7.3 41.0 4.5 52.5 5.8
------- ----- ------- ------ ------- ------- ------- -----
Continuing segments 279.0 100.0 330.2 93.8 882.7 96.7 834.6 91.6
Businesses sold1 0.0 0.0 22.0 6.2 30.0 3.3 76.9 8.4
------- ----- ------- ------ ------- ------- ------- -----
Total $ 279.0 100.0% $ 352.2 100.0% $ 912.7 100.0% $ 911.5 100.0%
======= ===== ======= ====== ======= ======= ======= =====
<FN>
1 Includes net sales of the Midwest private label canned vegetable business
sold in fiscal 2000 and net sales of the aseptic and peanut butter
operations sold in fiscal 1999. See NOTES 2 and 5 to the "Notes to
Consolidated Financial Statements."
</FN>
</TABLE>
<PAGE>
<TABLE>
Operating Income1
(Dollars in Millions)
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- -------------------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
--------------- ------------------ ----------------- -----------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- ------ ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vegetables $ 16.4 74.9% $ 15.8 70.5% $ 56.6 71.5% $ 38.2 57.9%
Fruits 1.8 8.3 1.6 7.2 11.4 14.4 10.5 15.9
Snacks 1.2 5.4 1.1 4.9 4.1 5.2 4.7 7.1
Canned Meals 1.6 7.3 2.4 10.7 6.1 7.6 5.5 8.3
Other 0.9 4.1 1.3 5.8 2.4 3.0 2.4 3.7
------- ----- ------ ------ ------ ----- ------- -----
Continuing segments 21.9 100.0 22.2 99.1 80.6 101.7 61.3 92.9
Businesses sold2 0.0 0.0 0.2 0.9 (1.4) (1.7) 4.7 7.1
------ ----- ------ ------ ------ ----- ------- -----
Total $ 21.9 100.0% $ 22.4 100.0% $ 79.2 100.0% $ 66.0 100.0%
======= ===== ====== ====== ====== ===== ======= =====
<FN>
1 Excludes the gains on sales of assets and the restructuring charge. See
NOTES 2 and 5 to the "Notes to Consolidated Financial Statements."
2 Represents the operating results of the private label canned vegetable
business sold in fiscal 2000 and operating results of the aseptic and
peanut butter operations sold in fiscal 1999. See NOTES 2 and 5 to the
"Notes to Consolidated Financial Statements."
</FN>
</TABLE>
CHANGES FROM THIRD QUARTER FISCAL 2000 TO THIRD QUARTER FISCAL 1999
The net income for the third quarter of fiscal 2000 of $0.6 million represents a
$0.7 million increase as compared to the third quarter of fiscal 1999 net loss
of $0.1 million. Comparing net income/loss is, however, difficult because of the
impact of non-recurring events such as restructuring charges and gains on sales
of assets. Accordingly, management believes, to summarize results, an evaluation
of EBITDA from continuing segments, as presented on page 11, is more appropriate
as it allows the operations of the business to be reviewed in a more comparable
manner.
EBITDA from continuing segments increased $1.9 million, or 6.4 percent, to $31.5
million in the third quarter of the current fiscal year from $29.6 million in
the third quarter of the prior fiscal year.
The vegetable product line accounts for $2.6 million of the increase in EBITDA
from continuing segments and is primarily attributable to changes in product mix
with a greater percentage of sales coming from the Company's branded products.
The Company's branded products yield a higher margin than its private label and
food service categories. In addition, during fiscal 2000, the Company has
benefited from a reduction in product costs resulting from the synergistic
savings achieved from the DFVC Acquisition. The vegetable product line has,
however, been negatively impacted by market conditions within the frozen
vegetable segment as a result of lower consumer demand. The decrease in consumer
demand has impacted both the Company's brand and private label product lines,
however, the impact has been felt to a greater extent within the private label
category. According to industry data, for the last 52-week period, there has
been an overall decrease in the frozen vegetable category of 5.9 percent. For
the same 52-week period, the decrease in the frozen vegetable private label
category was 7.1 percent. In addition, the third quarter fiscal 2000 net sales
were negatively impacted by the timing of spring holidays and the associated
retail customer promotional events. In calendar 1999 the Easter and Passover
holidays occurred in March, while in calendar 2000 these holidays occur in April
and therefore the Company's fourth quarter.
The Company's fruit product line showed an increase of $0.1 million due
primarily to the timing of various promotional programs.
The snack product line EBITDA increased $0.4 million due to changes in product
mix. Snack net sales for the quarter consisted of a greater percentage of potato
chip sales which carry a higher margin than the Company's popcorn product line.
Canned meals decreased $0.8 million primarily due to a decline in private label
chili net sales during the quarter. Management believes this decline is
associated with greater sales in the second quarter tied to various calendar
year-end programs.
The other product line showed a decrease of $0.4 million due to changes in
product mix.
<PAGE>
Net Sales: Total net sales for the third quarter decreased $73.2 million, or
20.8 percent, to $279.0 million in the third quarter of fiscal 2000 from $352.2
million in the third quarter of fiscal 1999. Excluding businesses sold, net
sales decreased by $51.2 million to $279.0 million in the third quarter of
fiscal 2000 from $330.2 million in the third quarter of fiscal 1999.
The vegetable product line accounts for $30.1 million of the decrease and, as
described above, is primarily attributable to a decline resulting from lower
consumer demand and the timing of spring holidays. While management believes the
net sales associated with the spring holidays will be reflected in the results
of the fourth quarter, it does not anticipate an improvement in the current
market conditions in the immediate future. Management is therefore focusing its
efforts on cost savings initiatives, the establishment of strategic alliances,
and other innovative market strategies to improve performance.
Net sales for the fruit product line decreased $2.2 million in the third quarter
of fiscal 2000 to $19.8 million from $22.0 million in the third quarter of
fiscal 1999. This decrease is also attributable to the timing of spring
holidays.
Net sales for the snack product line decreased $2.4 million in the third quarter
of fiscal 2000 to $20.8 million from $23.2 million in the third quarter of
fiscal 1999. While improvements were highlighted in the potato chip category,
these amounts were offset by declines in the popcorn category.
Canned meals decreased $3.7 million primarily attributable to a decline in
private label chili. This product line had showed improved sales in the second
quarter associated with various year 2000 programs.
The other category, while it primarily consists of dressings, also includes
sales from the production of canned products primarily for use by the military
and other governmental operations. The other category decreased $12.8 million in
the third quarter of fiscal 2000 due primarily to a reduction in contracts
received from the government.
Operating Income: Excluding the impact of businesses sold and the gains on sales
of assets, operating income decreased from $22.2 million in the third quarter of
fiscal 1999 to $21.9 million in the third quarter of fiscal 2000. This
represents a decline of $0.3 million or 1.4 percent. Significant variances are
highlighted above in the discussion of EBITDA for continuing segments and net
sales.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $21.6 million as compared with the third quarter
of the prior fiscal year. The declines in this category were primarily
attributable to reductions in brokerage of $1.2 million and decreases in
promotional spending of $19.2 million, both associated with the decline in net
sales. In addition, the Company experienced benefits from the reduction in
selling expenses of $2.1 million due to personnel reductions and other
consolidation efforts completed as a result of the DFVC Acquisition.
Gains on Sales of Assets: In conjunction with the DFVC Acquisition, the Company
sold its aseptic business to Dean Foods. The final purchase price of $80 million
was determined in the third quarter of fiscal 1999 based upon a final appraisal
performed by an independent appraiser. The gain on the sale was appropriately
adjusted to reflect the final purchase price during the third quarter of fiscal
1999.
On January 29, 1999, the Company sold the Adams brand peanut butter operation to
the J.M. Smucker Company. The Company received proceeds of approximately $13.5
million which were applied to the New Credit Facility. A gain of approximately
$3.5 million was recognized on this transaction in the third quarter of fiscal
1999.
Restructuring: Implementation of a corporate-wide restructuring program resulted
in a charge of $5.0 million in the third quarter of fiscal 1999. See NOTE 5 to
the "Notes to Consolidated Financial Statements."
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture formed between Agrilink
Foods and Flanagan Brothers, Inc. on July 1, 1997. There has been no significant
change in the operations of the joint venture for the third quarter of fiscal
2000 compared with the prior year.
Interest Expense: Interest expense increased $0.5 million to $19.9 million in
the third quarter of fiscal 2000 from $19.4 million in the third quarter of
fiscal 1999. This increase is primarily associated with an overall increase in
prevailing interest rates.
Pro-Fac Share of (Income)/Loss Before Extraordinary Item: The Company's
contractual relationship with Pro-Fac is defined in the Pro-Fac Marketing and
Facilitation Agreement (the "Agreement"). 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 of the Company.
<PAGE>
In years in which the Company has losses on Pro-Fac Products, the Company
reduces the commercial market value it would otherwise pay to Pro-Fac by 90
percent of such losses, but in no case by more than 50 percent of all pretax
losses of the Company. Earnings and losses are determined at the end of the
fiscal year, but are accrued on an estimated basis during the year.
In fiscal 2000, it is currently estimated that 90 percent of earnings on
patronage products will exceed 50 percent of all pretax earnings of the Company;
accordingly, the Pro-Fac share of income has been recognized at a maximum of 50
percent of pretax earnings of the Company.
Due to the recognition of the gain on the sale of the aseptic operations, the
Pro-Fac share of earnings was recorded at 90 percent of the earnings on
patronage products in the third quarter of fiscal 1999.
Tax Provision: The provision for taxes decreased $0.5 million to $0.4 million in
the third quarter of fiscal 2000 from $0.9 million in the third quarter of
fiscal 1999. The variance is primarily attributable to changes in estimates
recognized in the third quarter of fiscal 1999. Agrilink's effective tax rate is
negatively impacted by the non-deductibility of certain amounts of goodwill.
CHANGES FROM FIRST NINE MONTHS FISCAL 2000 TO FIRST NINE MONTHS FISCAL 1999
The net income for the first nine months of fiscal 2000 of $6.5 million
represents a $17.0 million decrease as compared to the first nine months of
fiscal 1999 net income of $23.5 million. Comparing net income is, however,
difficult because the results of the first nine months of fiscal 1999 were
significantly impacted by gains on the sales of assets, a restructuring charge,
an extraordinary item relating to the early extinguishment of debt and the
amortization of debt issue costs associated with the Subordinated Bridge
Facility. In addition, fiscal 2000 results reflect nine months of interest
expense in the current year versus six months in the prior year for the
additional debt associated with the acquisition of DFVC which occurred on
September 24, 1998 and gains on sales of assets. Accordingly, management
believes, to summarize results, an evaluation of EBITDA from continuing
segments, as presented on page 11, is more appropriate as it allows the
operations of the business to be reviewed in a more comparable manner.
EBITDA from continuing segments increased $23.4 million, or 27.5 percent, to
$108.6 million in the first nine months of the current fiscal year from $85.2
million in the first nine months of the prior fiscal year.
The vegetable product line accounts for $22.3 million of the increase in EBITDA
from continuing segments in the current year and is attributable to several
factors including: (1) the date of the DFVC Acquisition; (2) current market
conditions; (3) the timing of spring holidays; and (4) the reduction in product
costs resulting from the synergistics savings achieved from the DFVC
Acquisition. As a result of the date of the DFVC Acquisition, the operating
results for the acquisition have been included for nine months in fiscal 2000
and for six months in fiscal 1999. Also, as outlined earlier, the frozen
vegetable category has been negatively impacted by market conditions within this
segment as a result of lower consumer demand. The decrease in consumer demand
has impacted both the Company's brand and private label product lines, however,
the impact has been felt to a greater extent within the private label category.
In addition, the third quarter fiscal 2000 net sales were negatively impacted by
the timing of spring holidays. In calendar 1999 the Easter and Passover holidays
occurred in March, while in calendar 2000 these holidays occur in April and
therefore the Company's fourth quarter. As an offset to the variances
experienced in net sales, the Company has benefited from a reduction in product
cost during fiscal 2000. The benefits are primarily associated with the
synergistic savings achieved from the DFVC Acquisition. Specifically, the
Company has benefited from the insourcing of product previously purchased from
outside suppliers, staffing reductions, and shipping consolidations.
The Company's fruit product line showed an improvement of $0.6 million due to
the inclusion in the first nine months of fiscal 1999 of $0.9 million of
expenses associated with a new product launch. No such costs were incurred in
fiscal 2000. In addition, the fruit product line has been impacted by the timing
of various promotional programs and the difference in the timing of spring
holidays between the two years.
Overall, EBITDA for the snack product line has remained consistent with that
reported for the first nine months of fiscal 1999.
Canned meals increased $0.4 million primarily due to production efficiencies
within the chili category.
EBITDA for the other product line has remained consistent with the prior year.
<PAGE>
Net Sales: Total net sales increased $1.2 million, or 0.1 percent, to $912.7
million in the first nine months of fiscal 2000 from $911.5 million in the first
nine months of fiscal 1999. Excluding businesses sold, net sales increased by
$48.1 million to $882.7 million in the first nine months of fiscal 2000 from
$834.6 million in the first nine months of fiscal 1999.
The vegetable product line accounts for $66.1 million of the increase. The
inclusion of the Birds Eye, Freshlike, and Veg-All brands for nine months during
fiscal 2000 versus six months of results in fiscal 1999 resulted in incremental
sales of approximately $86.2 million. Excluding this impact, vegetable net sales
have declined $20.1 million and, as highlighted above, this decline is primarily
attributable to lower consumer demand experienced throughout the year and the
timing of spring holidays.
Net sales for the fruit product line decreased $1.7 million in the first nine
months of fiscal 2000 to $88.7 million from $90.4 million in the first nine
months of fiscal 1999. This decline was primarily experienced during the third
quarter and, as described above, is also associated with the timing of the
spring holidays.
Net sales for the snack product line decreased $3.4 million in the first nine
months of fiscal 2000 to $64.2 million from $67.6 million in the first nine
months of fiscal 1999. Sales declines within the popcorn category of $4.3
million were attributable to competitive pressures. The potato chip and other
snack categories showed increases of $.9 million due to improvements in volume.
Canned meals decreased $1.4 million primarily attributable to a modest decline
in volume predominantly within the private label category.
The other category, while it primarily consists of dressings, also includes
sales from the production of canned meat products primarily for use by the
military and other government operations. The other category decreased $11.5
million in the first nine months of fiscal 2000 to $41.0 million from $52.5
million in the first nine months of fiscal 1999. The majority of this decline is
associated with the decline in government demand.
Operating Income: Excluding the impact of businesses sold and the gains on sales
of assets, operating income increased from $61.3 million in the first nine
months of fiscal 1999 to $80.6 million in the first nine months of fiscal 2000.
This represents an improvement of $19.3 million or 31.5 percent. As highlighted
in the discussion of EBITDA from continuing segments, the increase is
attributable to: (1) the date of the DFVC Acquisition; (2) current market
conditions; (3) the timing of spring holidays; and (4) the reductions in
production costs achieved as a result of synergistic savings achieved from the
DFVC Acquisition.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $.9 million as compared with the first nine
months of the prior fiscal year. The change is primarily attributable to the
inclusion of the DFVC operation for nine months in fiscal 2000 versus six months
in fiscal 1999 offset by the decline in brokerage ($1.2 million) and promotional
spending ($19.2 million) associated with the third quarter reduction in net
sales. In addition, the Company has experienced benefits from a reduction in
selling expenses due to restructuring and consolidation efforts.
Gains on Sales of Assets: On December 17, 1999, the Company sold the Cambria,
Wisconsin facility to Del Monte. The Company received proceeds of approximately
$10.5 million which were applied to bank loans. A gain of approximately $2.3
million was recognized on this transaction.
On January 29, 1999, the Company sold the Adams brand peanut butter operation to
the J.M. Smucker Company. The Company received proceeds of approximately $13.5
million which were applied to the New Credit Facility. A gain of approximately
$3.5 million was recognized on this transaction in the third quarter of fiscal
1999.
In conjunction with the DFVC Acquisition, the Company sold its aseptic operation
to Dean Foods in fiscal 1999. The final purchase price of $80 million was
determined in the third quarter of fiscal 1999 based upon an appraisal performed
by an independent appraiser.
Restructuring: Implementation of a corporate-wide restructuring program resulted
in a charge of $5.0 million in the third quarter of fiscal 1999. See NOTE 5 to
the "Notes to Consolidated Financial Statements."
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture formed between Agrilink and
Flanagan Brothers, Inc. on July 1, 1997. There has been no significant change in
the operations of the joint venture for the first nine months of fiscal 2000
compared with the first nine months of fiscal 1999.
Interest Expense: Interest expense increased $12.6 million to $58.9 million in
the first nine months of fiscal 2000 from $46.3 million in the first nine months
of fiscal 1999. This increase is associated with additional debt utilized to
finance the DFVC Acquisition and higher levels of seasonal borrowings to fund
additional working capital requirements associated with the increase in the
Company's size. In addition, an increase in interest expense is associated with
an overall increase in interest rates experienced throughout fiscal 2000 as a
result of prevailing market conditions.
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 "Subordinated Bridge Facility"). The Subordinated
Bridge Facility was repaid with the proceeds from the new senior subordinated
note offering (see NOTE 2 - "Acquisitions"). Debt issuance costs associated with
the Subordinated Bridge Facility were $5.5 million and were fully amortized
during the second quarter of fiscal 1999.
Pro-Fac Share of Income Before Extraordinary Item: The Company's contractual
relationship with Pro-Fac is defined in the Pro-Fac Marketing and Facilitation
Agreement (the "Agreement"). 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 of the Company. In years in which the Company has
losses on Pro-Fac products, the Company reduces the commercial market value it
would otherwise pay to Pro-Fac by 90 percent of such losses, but in no case by
more than 50 percent of all pretax losses of the Company. Earnings and losses
are determined at the end of the fiscal year, but are accrued on an estimated
basis during the year.
In fiscal 2000, it is currently estimated that 90 percent of earnings on
patronage products will exceed 50 percent of all pretax earnings of the Company.
Accordingly, the Pro-Fac share of income has been recognized at a maximum of 50
percent of pretax earnings of the Company.
Due to the recognition of the gain on the sale of the aseptic operations in
fiscal 1999, the Pro-Fac share of earnings was recorded at 90 percent of the
earnings on patronage products in the prior year.
Tax Provision: The provision for taxes decreased $21.8 million to $4.8 million
in the first nine months of fiscal 2000 from $26.6 million in the first nine
months of fiscal 1999. Of this decrease, $25.2 million is attributable to the
provision associated with the fiscal 1999 gain on sale of the aseptic
operations. 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 was impacted by the improvement 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 DFVC Acquisition, the Company refinanced its existing indebtedness,
including its 12 1/4 percent Senior Subordinated Notes due 2005 (see NOTE 2 -
"Acquisitions") and its then existing bank debt. Premiums and breakage fees
associated with early redemptions and other fees incurred amounted to $16.4
million (net of income taxes of $10.4 million and after allocation to Pro-Fac of
$1.7 million) were recognized in the first quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the "Unaudited
Consolidated Statement of Cash Flows" for the first nine months of fiscal 2000
compared to the first nine months of fiscal 1999.
Net cash used in operating activities increased $7.2 million over the first nine
months of the prior fiscal year. This increase primarily results from an
increase in inventories due to the decline in net sales resulting from lower
consumer demand. This variance is 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 nine months of fiscal 1999
was impacted by the DFVC Acquisition and the difference in asset sales. The
purchase of property, plant and equipment increased $7.3 million to $20.7
million for the first nine months of fiscal 2000 from $13.4 million for the
first nine months of fiscal 1999. The increase was primarily utilized to support
additional operating facilities acquired in conjunction with the DFVC
Acquisition and was for general operating purposes.
Net cash provided by financing activities in the first nine months of fiscal
1999 was significantly impacted by the DFVC Acquisition and the activities
completed concurrent with the acquisition to refinance existing indebtedness.
Borrowings: Under the Company's New Credit Facility, Agrilink is able to borrow
up to $200 million for seasonal working capital purposes under the Revolving
Credit Facility. The Revolving Credit Facility may also be utilized in the form
of letters of credit.
As of March 25, 2000, (i) cash borrowings outstanding under the Revolving Credit
Facility were $79.6 million, (ii) there were $14.5 million in letters of credit
outstanding, and (iii) additional availability under the Revolving Credit
Facility, after taking into account
<PAGE>
the amount of borrowings and letters of credit outstanding, was $105.9 million.
The Company believes that the cash flow generated by operations and the amounts
available under the Revolving Credit Facility provide adequate liquidity to fund
working capital needs and capital expenditures.
Certain financing arrangements require that Pro-Fac and Agrilink meet certain
financial tests and ratios and comply with certain restrictions and limitations.
As of March 25, 2000, Pro-Fac and the Company are in compliance with all such
covenants, restrictions, and limitations.
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.
The following is a summary of the Company's interest rate swap agreements:
March 25, 2000
Interest Rate Swap:
Variable to Fixed - notional amount $250,000,000
Average pay rate 4.96 - 5.32%
Average receive rate 6.00%
Maturities through 2001
The Company had a two-year option to extend the maturity date on one of the
interest rate swap agreements with a notional amount of $100,000,000. On June 8,
1999, the Company sold this option to Bank of Montreal for approximately
$2,050,000. The gain resulting from the sale is being recognized over the
remaining life of the interest rate swap.
While there is potential that interest rates will fall, and hence minimize the
benefits of 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
Restructuring: During the third quarter of fiscal 1999, the Company completed a
corporate-wide restructuring program. The overall objectives of the plan were to
reduce expenses, improve productivity, and streamline operations. The total
restructuring charge amounted to $5.0 million and was primarily comprised of
employee termination benefits (which are estimated to improve annual earnings by
approximately $8.0 million). Efforts have focused on the consolidation of
operating functions and the elimination of approximately five percent of the
work force. Reductions in personnel include operational and administrative
positions. Of this charge, $2.6 million has been liquidated to date, and the
remaining termination benefits are anticipated to be liquidated within the next
12 months.
Short- and Long-Term Trends: The vegetable and fruit portions of the business
can be positively or negatively affected by weather conditions nationally and
the resulting impact on crop yields. Favorable weather conditions can produce
high crop yields and an oversupply situation. This results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
Management believes that the decrease in consumer demand will result in an
increased supply throughout the industry. Accordingly, management anticipates
sales and pricing, consistent with prior years, may be negatively impacted
during the fourth quarter.
Year 2000 Readiness Disclosure: Agrilink Foods has not experienced any
significant Year 2000 related system failures nor, to management's knowledge,
have any of the Company's suppliers. Agrilink Foods intends to continue to
monitor and test systems for ongoing Year 2000 compliance; however, management
cannot guarantee that the systems of other companies upon which operations rely
could not be affected by issues associated with the Year 2000 conversion.
All material costs associated with the Company's Year 2000 compliance project
were covered under its service agreement with Systems and Computer Technology
Corporation ("SCT"). The Company's ten-year agreement with SCT is currently
valued at $50
<PAGE>
million and is for SCT's OnSite outsourcing services, which includes assistance
in solving the Year 2000 issue. These amounts have been funded through operating
cash flows.
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 17) 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:
|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 Company's progress in integrating operations
(including whether the anticipated cost savings in connection with
acquisitions will be realized and the timing of any such realization), and
the availability of acquisition and alliance opportunities;
|X| the Company's ability to achieve gains in productivity and improvements in
capacity utilization; and
|X| the Company's ability to service debt.
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.
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Agrilink Foods' and Pro-Fac board of directors meeting was held on March 30,
2000. At that meeting, Pro-Fac, the sole shareholder of Agrilink Foods, elected
the following individuals who will serve as directors of Agrilink Foods: Bruce
R. Fox, Cornelius D. Harrington, Steven D. Koinzan, Dennis M. Mullen, Walter F.
Payne, Paul E. Roe, and Frank M. Stotz. Such individuals to serve as directors
until Agrilink's next annual meeting and until his or her successor is duly
elected and qualified.
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
99.1 Pro-Fac Cooperative, Inc. Financial Statements for the Quarterly
Period Ended March 25, 2000.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed in the third quarter of fiscal 2000.
<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.
AGRILINK FOODS, INC.
Date: May 8, 2000 By: /s/ Earl L. Powers
-------------------- ---------------------------------
EARL L. POWERS
EXECUTIVE VICE PRESIDENT FINANCE AND
CHIEF FINANCIAL OFFICER
(Principal Financial Officer
and Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Agrilink Foods, Inc., Form 10-Q, March 25, 2000 and is qualified in it
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000026285
<NAME> Agrilink Foods, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-24-2000
<PERIOD-START> JUN-27-2000
<PERIOD-END> MAR-25-2000
<CASH> 8,452
<SECURITIES> 0
<RECEIVABLES> 106,639
<ALLOWANCES> 0
<INVENTORY> 336,385
<CURRENT-ASSETS> 499,103
<PP&E> 426,476
<DEPRECIATION> 105,036
<TOTAL-ASSETS> 1,136,514
<CURRENT-LIABILITIES> 265,600
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 170,354
<TOTAL-LIABILITY-AND-EQUITY> 1,136,514
<SALES> 912,703
<TOTAL-REVENUES> 912,703
<CGS> 621,108
<TOTAL-COSTS> 621,108
<OTHER-EXPENSES> 221,385
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,936
<INCOME-PRETAX> 11,274
<INCOME-TAX> 4,804
<INCOME-CONTINUING> 6,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,470
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statement of Operations and Net Proceeds
(Unaudited)
(Dollars in Thousands)
<CAPTION>
Three Months Ended Nine Months Ended
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 300,880 $ 361,235 $ 977,613 $ 920,517
Cost of sales (210,463) (250,847) (674,161) (641,292)
---------- ----------- ---------- ----------
Gross profit 90,417 110,388 303,452 279,225
Selling, administrative, and general expense (66,855) (88,005) (220,833) (215,006)
Income from joint venture 543 728 2,238 2,417
Gains on sales of assets 0 532 2,293 64,734
Restructuring 0 (5,000) 0 (5,000)
---------- ----------- ---------- ----------
Operating income 24,105 18,643 87,150 126,370
Interest expense (22,114) (20,048) (64,598) (46,997)
Amortization of debt issues costs associated with a
Bridge Facility 0 0 0 (5,500)
---------- ----------- ---------- ----------
Income/(loss) before taxes, dividends, allocation of net proceeds,
and extraordinary item 1,991 (1,405) 22,552 73,873
Tax provision (1,066) (1,436) (6,744) (28,336)
---------- ----------- ---------- ----------
Income/(loss) before dividends, allocation of net proceeds, and
extraordinary item 925 (2,841) 15,808 45,537
Extraordinary item relating to the early extinguishment of debt
(net of income taxes) 0 0 0 (18,024)
---------- ----------- ---------- ----------
Net income/(loss) $ 925 $ (2,841) $ 15,808 $ 27,513
========== =========== ========== ==========
Allocation of net proceeds:
Net income/(loss) $ 925 $ (2,841) $ 15,808 $ 27,513
Dividends on common and preferred stock (1,838) (1,602) (5,544) (5,104)
---------- ----------- ----------- ----------
Net (deficit)/proceeds (913) (4,443) 10,264 22,409
Allocation from/(to) earned surplus 913 4,443 (4,531) (21,734)
---------- ----------- ---------- ----------
Net proceeds available to members $ 0 $ 0 $ 5,733 $ 675
========== =========== ========== ==========
Net proceeds available to members:
Estimated cash payment $ 0 $ 0 $ 1,433 $ 169
Qualified retains 0 0 4,300 506
---------- ----------- ---------- ----------
Net proceeds available to members $ 0 $ 0 $ 5,733 $ 675
========== =========== ========== ==========
<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 Sheet (Unaudited)
<CAPTION>
(Dollars in Thousands) ASSETS March 25, June 26, March 27,
2000 1999 1999
--------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 8,452 $ 6,540 $ 9,421
Accounts receivable, trade, net 107,601 88,249 109,254
Accounts receivable, other 7,555 9,848 5,992
Income taxes refundable 0 11,295 0
Current deferred tax asset 16,160 16,160 13,336
Inventories -
Finished goods 335,874 284,863 313,748
Raw materials and supplies 51,771 50,057 48,539
---------- ---------- ----------
Total inventories 387,645 334,920 362,288
---------- ---------- ----------
Current investment in CoBank 4,355 2,403 3,198
Prepaid manufacturing expense 12,933 18,217 13,607
Prepaid expenses and other current assets 19,885 27,883 28,427
---------- ---------- ----------
Total current assets 564,586 515,515 545,523
Investment in CoBank 15,750 19,693 19,699
Investment in Great Lakes Kraut Company 9,013 6,679 9,001
Property, plant, and equipment, net 352,491 367,255 353,418
Assets held for sale, at net realizable value 339 890 920
Goodwill and other intangible assets, net 257,613 260,733 294,048
Other assets 28,225 25,714 26,415
---------- ---------- ---------
Total assets $1,228,017 $1,196,479 $1,249,024
========== ========== ==========
Liabilities and Shareholders' and Members' Capitalization
Current liabilities:
Notes payable $ 125,600 $ 54,900 $ 110,870
Current portion of obligations under capital leases 208 208 256
Current portion of long-term debt 16,580 8,670 8,731
Accounts payable 48,345 107,159 59,495
Income taxes payable 1,608 0 1,978
Accrued interest 13,959 5,974 10,935
Accrued employee compensation 11,372 15,127 13,399
Other accrued expenses 84,004 64,603 88,825
Dividends payable 27 45 31
Amounts due Class B members 493 1,453 0
Amounts due Class A members 17,797 20,045 14,805
---------- ---------- ----------
Total current liabilities 319,993 278,184 309,325
Obligations under capital leases 568 568 503
Long-term debt 685,111 702,322 702,946
Deferred income tax liabilities 23,072 23,072 34,644
Other non-current liabilities 30,071 32,222 29,696
Minority interest in AgriFrozen 8,000 8,000 8,000
---------- ---------- ----------
Total liabilities 1,066,815 1,044,368 1,085,114
---------- ---------- ----------
Commitments and contingencies
Class B cumulative redeemable preferred stock liquidation preference $10 per
share, authorized - 500,000 shares; issued and
outstanding 26,061, 26,061, and 28,634 shares, respectively 261 261 286
Class A common stock, par value $5, authorized - 5,000,000 shares
March 25, June 26, March 27,
2000 1999 1999
--------- --------- -------
Shares issued 2,136,820 1,995,740 1,913,892
Shares subscribed 233,977 384,649 212,794
--------- --------- ---------
Total subscribed and issued 2,370,797 2,380,389 2,126,686
Less subscriptions receivable in installments (233,977) (384,649) (212,794)
--------- --------- ---------
Total issued and outstanding 2,136,820 1,995,740 1,913,892 10,684 9,979 9,569
========= ========= =========
Class B common stock, par value $5, authorized
1,600,000 shares; issued and outstanding - 755,259 0 0 0
Shareholders' and members' capitalization:
Retained earnings allocated to members 17,446 25,573 26,078
Non-qualified allocation to members 300 2,050 2,050
Non-cumulative preferred stock, par value $25; authorized -
5,000,000 shares; issued and outstanding - 37,529,
39,635, and 41,471, respectively 938 991 1,037
Class A cumulative preferred stock, liquidation preference
$25 per share; authorized - 10,000,000 shares; issued and
outstanding 4,245,878, 3,694,495 and 3,692,659 shares, respectively 106,147 92,362 92,316
Special membership interests 0 0 0
Earned surplus 26,189 21,658 33,182
Accumulated other comprehensive income:
Minimum pension liability adjustment (763) (763) (608)
---------- ---------- ----------
Total shareholders' and members' capitalization 150,257 141,871 154,055
---------- ---------- ---------
Total liabilities and capitalization $1,228,017 $1,196,479 $1,249,024
========== ========== ==========
<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 Statement of Cash Flows
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
---------------------------------
March 25, March 27,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,808 $ 27,513
Amounts payable to members (1,433) (169)
Adjustments to reconcile net income to net cash used in operating activities:
Extraordinary item relating to the early extinguishment of debt (net of income taxes) 0 18,024
Gains on sales of assets (2,293) (64,734)
Loss on disposal of assets 0 353
Depreciation 24,364 20,211
Amortization of goodwill and other intangibles 6,551 6,739
Interest in-kind on Subordinated Promissory Note 1,174 0
Amortization of debt issue costs and discount on subordinated promissory notes 3,579 6,969
Equity in undistributed earnings of Great Lakes Kraut Company (2,238) (2,417)
Equity in undistributed earnings of CoBank (412) (520)
Change in assets and liabilities:
Accounts receivable (17,430) (18,865)
Inventories and prepaid manufacturing expense (93,041) 5,830
Income taxes refundable/(payable) 12,903 8,395
Accounts payable and other accrued expenses (35,421) (71,714)
Amounts due to members (2,248) (5,831)
Other assets and liabilities 4,617 (4,057)
----------- -----------
Net cash used in operating activities (85,520) (74,273)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (22,152) (13,411)
Proceeds from disposals 53,538 94,913
Proceeds from investment in CoBank 2,403 1,994
Cash paid for acquisitions 0 (516,052)
----------- -----------
Net cash provided by/(used in) investing activities 33,789 (432,556)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 70,700 110,870
Proceeds from issuance of long-term debt 0 711,530
Payments on long-term debt (11,773) (287,313)
Cash paid for debt issuance costs 0 (19,085)
Cash portion of non-qualified conversion (445) (153)
Issuances of common stock 705 456
Cash dividends paid (5,544) (5,104)
----------- -----------
Net cash provided by financing activities 53,643 511,201
----------- -----------
Net change in cash and cash equivalents 1,912 4,372
Cash and cash equivalents at beginning of period 6,540 5,049
----------- -----------
Cash and cash equivalents at end of period $ 8,452 $ 9,421
=========== ===========
<FN>
(Table continued on next page)
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statement of Cash Flows
(Dollars in Thousands)
(Unaudited)
<CAPTION>
(Table continued from previous page)
Nine Months Ended
-----------------------------
March 25, March 27,
2000* 1999
---------- ---------
<S> <C>
Supplemental disclosure of cash flow information:
Acquisition of Agripac, Inc.:
Accounts receivable $ 12,563
Inventories 39,055
Prepaid expenses and other current assets 1,063
Property, plant, and equipment 30,327
Discount on subordinated note 8,157
Other non-current assets 4,000
Other accrued expenses (10,644)
Other non-current liabilities (4,000)
Minority interest (8,000)
----------
$ 72,521
Escrow to be refunded 6,413
----------
78,934
Discount on subordinated note (8,157)
----------
$ 70,777
==========
Acquisition of Erin's Gourmet Popcorn:
Inventories $ 33
Property, plant, and equipment 26
Goodwill and other intangible assets 554
----------
$ 613
==========
Acquisition of Dean Foods Vegetable Company:
Accounts receivable $ 24,201
Current deferred tax asset 30,645
Inventories 195,674
Prepaid expenses and other current assets 6,374
Property, plant and equipment 154,527
Assets held for sale at net realizable value 49
Goodwill and other intangible assets 182,010
Accounts payable (40,865)
Accrued employee compensation (8,437)
Other accrued expenses (75,778)
Long-term debt (2,752)
Subordinated promissory note (22,590)
Other assets and liabilities, net (2,453)
----------
$ 440,605
==========
Acquisition of J.A. Hopay Distributing Co., Inc. -
Accounts receivable $ 420
Inventories 153
Property, plant and equipment 51
Goodwill and other intangible assets 3,303
Other accrued expenses (251)
Obligation for covenant not to compete (1,363)
----------
$ 2,313
==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
*There have been no acquisitions completed for the period ending March 25, 2000.
</FN>
</TABLE>
<PAGE>
PRO-FAC COOPERATIVE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Pro-Fac Cooperative, Inc. ("Pro-Fac" or the "Cooperative") is an agricultural
cooperative which processes and markets crops grown by its members through its
wholly-owned subsidiary Agrilink Foods, Inc. ("Agrilink Foods") and through its
subsidiary PF Acquisition II, Inc. in which it has a controlling interest. On
March 1, the Cooperative announced it will being doing business as Agrilink. In
addition, the board of directors of Agrilink and Pro-Fac have agreed to conduct
joint meetings, coordinate their activities, and to act on a consolidated basis.
Although Pro-Fac Cooperative will continue to be the legal name of the
Cooperative, with the same structure and regulations required by bank credit
agreements and bond indentures, and with the same stock symbol, "PFACP," it will
be presented as Agrilink for all other communications. PF Acquisition II, Inc.
conducts business under the name AgriFrozen Foods ("AgriFrozen").
Agrilink Foods has four primary product lines including: vegetables, fruits,
snacks, and canned meals. AgriFrozen has vegetables as its primary product line.
The majority of the net sales of each product line are within the United States.
In addition, all of the Cooperative's operating facilities, excluding one in
Mexico, are within the United States.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
these periods. The following summarizes the significant accounting policies
applied in the preparation of the accompanying financial statements. These
financial statements should be read in conjunction with the financial statements
and accompanying notes contained in the Pro-Fac Cooperative, Inc. Form 10-K/A-1
for the fiscal year ended June 26, 1999.
Consolidation: The consolidated financial statements include the Cooperative and
its subsidiaries, Agrilink 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 1999 have been reclassified to
conform with the current presentation.
NOTE 2. ACQUISITIONS
Agripac Frozen Vegetable Business: On February 23, 1999, AgriFrozen acquired the
frozen vegetable business of Agripac, Inc. ("Agripac"), an Oregon cooperative.
AgriFrozen was formed in January 1999 under the corporation laws of New York. On
January 4, 1999 Agripac filed a voluntary petition under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Oregon. On January 22, 1999 Agripac, as debtor-in-possession, filed a motion
with the Bankruptcy Court for authority to sell substantially all of the assets
comprising its frozen food processing business. The bankruptcy court confirmed
the sale of Agripac's frozen food processing assets to AgriFrozen by an order
entered on February 18, 1999.
The net purchase price for the assets was $80.5 million. AgriFrozen paid an
additional $7.8 million in related expenses, including $6.4 million to prior
member-growers of Agripac to obtain crop delivery agreements with AgriFrozen,
and transaction expenses and miscellaneous costs totaling $1.4 million. In
addition, AgriFrozen is paying $1.2 million in severance costs associated with
the acquisition and the implementation of AgriFrozen's business plan.
The acquisition was accounted for under the purchase method of accounting. Under
purchase accounting tangible and identifiable intangible assets acquired are
recorded at their respective fair values. Final allocations of purchase price
were made within one year of the acquisition date.
In order to consummate the acquisition, AgriFrozen (i) entered into a credit
facility with CoBank (the "CoBank Credit Facility") providing for $30 million of
term loan borrowings and currently up to $55 million of revolving credit
borrowings (the "CoBank Revolving Credit Facility") and (ii) issued a $12
million Subordinated Promissory Note to CoBank. Neither Pro-Fac nor Agrilink
Foods guaranteed the debts of AgriFrozen or otherwise pledged any of their
respective properties as security for the CoBank financing. In fact, all of
AgriFrozen's indebtedness is expressly without recourse to Pro-Fac and Agrilink
Foods.
<PAGE>
Phase I environmental audits were performed on the facilities acquired from
Agripac, including lease properties. A number of environmental conditions
requiring remedial action have been identified, but none of them individually,
or in the aggregate, are expected to exceed the $4.0 million of debt reduction
for environmental remediation to be provided by CoBank. As part of its business
strategy, AgriFrozen has also entered into an administrative services agreement
with Agrilink Foods to provide it with certain management consulting and
administrative services.
The effects of the Agripac acquisition are not material and, accordingly, have
been excluded from the pro forma information presented below.
Dean Foods Vegetable Company: On September 24, 1998, Agrilink Foods acquired the
Dean Foods Vegetable Company ("DFVC"), the frozen and canned vegetable business
of Dean Foods Company ("Dean Foods"), by acquiring all the outstanding capital
stock of Dean Foods Vegetable Company and Birds Eye de Mexico SA de CV (the
"DFVC Acquisition"). In connection with the DFVC Acquisition, Agrilink Foods
sold its aseptic business to Dean Foods. Agrilink Foods paid $360 million in
cash, net of the sale of the aseptic business, and issued to Dean Foods a $30
million unsecured subordinated promissory note due November 22, 2008 (the "Dean
Foods Subordinated Promissory Note"), as consideration for the DFVC Acquisition.
On April 15, 1999, Agrilink Foods paid $13.2 million to Dean Foods and exercised
its right to require Dean Foods, jointly with Agrilink Foods, to treat the DFVC
Acquisition as an asset sale for tax purposes under Section 338(h)(10) of the
Internal Revenue Code.
After the DFVC Acquisition, DFVC was merged into Agrilink Foods. DFVC has been
one of the leading processors of vegetables in the United States, selling its
products under well-known brand names, such as Birds Eye, Freshlike and Veg-All,
and various private labels. Agrilink Foods believes that the DFVC Acquisition
strengthens its competitive position by: (i) enhancing its brand recognition and
market position, (ii) providing opportunities for cost savings and operating
efficiencies and (iii) increasing its product and geographic diversification.
The DFVC Acquisition was accounted for under the purchase method of accounting.
Under purchase accounting, tangible and identifiable intangible assets acquired
and liabilities assumed were recorded at their respective fair values. Goodwill
associated with the DFVC Acquisition is being amortized over 30 years. Final
allocations of purchase price were made in the third and fourth quarters of
fiscal 1999.
The following unaudited pro forma financial information presents a summary of
consolidated results of operations of Pro-Fac and DFVC as if the acquisition had
occurred at the beginning of the 1999 fiscal year.
Nine Months Ended
(Dollars in Millions) March 27, 1999
-----------------
Net sales $1,017.5
Income before extraordinary item $ 35.3
Net income $ 17.3
These unaudited pro forma results have been prepared for comparative purposes
only and include adjustments for additional depreciation expense and
amortization and interest expense on acquisition debt. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination been in effect at the beginning of the 1999 fiscal year, or of
the future operations of the consolidated entities.
Concurrently with the DFVC Acquisition, Agrilink Foods refinanced its existing
indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink Foods 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 Foods for aggregate consideration of approximately $184 million,
including accrued interest of $2.9 million. Agrilink Foods also terminated its
then existing bank facility (including seasonal borrowings) and repaid the
$176.5 million, excluding interest owed and breakage fees outstanding
thereunder. Agrilink Foods recognized an extraordinary item of $18.0 million
(net of income taxes) in the first quarter of fiscal 1999 relating to this
refinancing.
In order to consummate the DFVC Acquisition and the Refinancing and to pay the
related fees and expenses, Agrilink Foods: (i) entered into a new credit
facility (the "New Credit Facility") providing for $455 million of term loan
borrowings (the "Term Loan Facility") and up to $200 million of revolving credit
borrowings (the "Revolving Credit Facility"), (ii) entered into and drew upon a
$200 million bridge loan facility (the "Subordinated Bridge Facility") and (iii)
issued the $30 million Subordinated Promissory Note
<PAGE>
to Dean Foods. The Subordinated Bridge Facility was repaid during November of
1998 principally with the proceeds from the issuance of Senior Subordinated
Notes (the "New Notes") for $200 million aggregate principal amount due November
1, 2008. Interest on the New Notes accrues at the rate of 11-7/8 percent per
annum. Debt issue costs of $5.5 million associated with the Subordinated Bridge
Facility were expensed during the quarter ended December 26, 1998.
NOTE 3. AGREEMENTS WITH AGRILINK 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 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 Foods 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, under the Pro-Fac Marketing Agreement, in any year in which Agrilink
Foods has earnings on products, which were processed from crops supplied by
Class A Pro-Fac members ("Pro-Fac Products"), Agrilink Foods pays to Class A
members of Pro-Fac, as additional patronage income, up to 90 percent of such
earnings, but in no case more than 50 percent of all pretax earnings (before
dividing with Pro-Fac) of Agrilink Foods. In years in which Agrilink Foods has
losses on Class A 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, 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.
AgriFrozen: The contractual relationship between Pro-Fac and AgriFrozen is
defined in a Marketing and Facilitation Agreement between Pro-Fac and
AgriFrozen. Under this agreement, AgriFrozen will purchase raw products from
Pro-Fac and will process and market the finished products. AgriFrozen will pay
Pro-Fac CMV for the crops supplied by Pro-Fac. In addition, in any year in which
AgriFrozen has earnings on any products sold which were processed from crops
supplied by Pro-Fac, such earnings will be distributed to Class B members of
Pro-Fac. However, in the event AgriFrozen experiences any losses on Pro-Fac
products, AgriFrozen will deduct the losses from the total CMV payable to
Pro-Fac. The agreement also permits AgriFrozen to pay 20 percent of its earnings
on Pro-Fac products in cash and retain 80 percent of its earnings on Pro-Fac
products as working capital.
Under the Marketing and Facilitation Agreement between AgriFrozen and Pro-Fac,
the board of directors of AgriFrozen is required to consist of: (i) at least
three and as many as five directors who are individuals who currently serve as
directors of Pro-Fac and who are chosen by Pro-Fac's board of directors; (ii)
one director who is nominated by the president of Agrilink 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 4. DEBT
<TABLE>
Summary of Long-Term Debt:
(Dollars in Thousands)
<CAPTION>
March 25, 2000
--------------------------------------------------------------------------
Agrilink June 26, March 27,
Foods AgriFrozen Total 1999 1999
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Term Loan Facility $ 435,000 $ 30,000 $ 465,000 $ 476,600 $ 476,800
Senior Subordinated Notes 200,015 0 200,015 200,015 200,015
Subordinated Promissory Notes (net of discount) 25,447 4,364 29,811 27,378 27,802
Other 6,865 0 6,865 6,999 7,060
---------- -------- ---------- ---------- ----------
Total debt 667,327 34,364 701,691 710,992 711,677
Less current portion (16,580) 0 (16,580) (8,670) (8,731)
---------- -------- ---------- ---------- ----------
Total long-term debt $ 650,747 $ 34,364 $ 685,111 $ 702,322 $ 702,946
========== ======== ========== ========== ==========
</TABLE>
NOTE 5. OTHER MATTERS
Sale of Midwest Private Label Canned Vegetable Business: On November 8, 1999,
Agrilink Foods completed the sale of its Midwest private label canned vegetable
business to Seneca Foods. Included in this transaction was Agrilink Food's
Arlington, Minnesota facility. Agrilink Foods received proceeds of approximately
$42.4 million which were applied to the borrowings outstanding under Agrilink
Foods Revolving Credit Facility. 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 Agrilink Food's retail branded canned
vegetables, Veg-All and Freshlike. No significant gain or loss was recognized on
this transaction.
On December 17, 1999, Agrilink Foods completed the sale of its Cambria,
Wisconsin processing facility to Del Monte. The sale includes an agreement for
Del Monte to produce a portion of Agrilink Foods' product needs during the 2000
packing season. Agrilink Foods received proceeds of approximately $10.5 million
which were applied to bank loans ($6.0 million of which was applied to the Term
Loan Facility and $4.5 million of which was applied to Agrilink Foods' Revolving
Credit Facility). A gain of approximately $2.3 million was recognized on this
transaction.
Restructuring: During the third quarter of fiscal 1999, Agrilink Foods completed
a corporate-wide restructuring program. The overall objectives of the plan were
to reduce expenses, improve productivity, and streamline operations. The total
restructuring charge amounted to $5.0 million and was primarily comprised of
employee termination benefits. Efforts have focused on the consolidation of
operating functions and the elimination of approximately five percent of the
work force. Reductions in personnel include operational and administrative
positions. Of this charge, $2.6 million has been liquidated to date, and the
remaining termination benefits are anticipated to be liquidated within the next
12 months.
NOTE 6: OPERATING SEGMENTS
The Cooperative is organized by product line for management reporting with
operating income being the primary measure of segment profitability.
Accordingly, no items below operating earnings are allocated to segments. The
Cooperative's four primary operating segments are as follows: vegetables,
fruits, snacks, and canned meals.
The vegetable product line consists of canned and frozen vegetables, chili
beans, pickles, and various other products. Branded products within the
vegetable category include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All,
McKenzies, Brooks Chili Beans, Farman's and Nalley. The fruit product line
consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snacks category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, and Super
Pop. The canned meal product line includes canned meat products such as chilies,
stew, soups, and various other ready-to-eat prepared meals. Branded products
within the canned meal category include Nalley. The Cooperative's other product
line primarily represents 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)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net Sales:
Vegetables $ 232.3 $ 249.5 $ 703.8 $ 581.8
Fruits 19.8 22.0 88.7 90.4
Snacks 20.8 23.2 64.2 67.6
Canned Meals 14.9 18.6 49.9 51.3
Other 13.1 25.9 41.0 52.5
-------- --------- -------- ---------
Continuing segments 300.9 339.2 947.6 843.6
Businesses sold1 0.0 22.0 30.0 76.9
-------- --------- -------- ---------
Total $ 300.9 $ 361.2 $ 977.6 $ 920.5
======== ========= ======== =========
Operating income:
Vegetables2 $ 18.6 $ 16.4 $ 62.2 $ 38.8
Fruits 1.8 1.6 11.4 10.5
Snacks 1.2 1.1 4.1 4.7
Canned Meals 1.6 2.4 6.1 5.5
Other 0.9 1.3 2.4 2.4
-------- --------- -------- ---------
Continuing segments 24.1 22.8 86.2 61.9
Businesses sold1 0.0 0.2 (1.4) 4.7
-------- --------- -------- ---------
Total 24.1 23.0 84.8 66.6
Gains on sales of assets 0.0 .6 2.3 64.7
Restructuring 0.0 (5.0) 0.0 (5.0)
-------- --------- -------- ---------
Total consolidated operating income 24.1 18.6 87.1 126.3
Interest expense (22.1) (20.0) (64.6) (47.0)
Amortization of debt issue costs associated with a Bridge Facility 0.0 0.0 0.0 (5.5)
-------- --------- -------- ---------
Income/(loss) before taxes, dividends, allocation of net proceeds
and extraordinary item $ 2.0 $ (1.4) $ 22.5 $ 73.8
======== ========= ======== =========
<FN>
1 Includes the Midwest private label canned vegetable business sold in fiscal 2000 and the aseptic and peanut butter businesses
sold in fiscal 1999.
2 The vegetable product line includes earnings derived from Agrilink Foods' investment in Great Lakes Kraut Company of $.5
million and $.7 million for the three months ended March 25, 2000 and March 27, 1999, respectively, and $2.2 million and $2.4
million for the nine months ended March 25, 2000 and March 27, 1999, respectively.
</FN>
</TABLE>
NOTE 7. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation wholly-owned
subsidiaries of Agrilink Foods ("Subsidiary Guarantors"), and the Cooperative,
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 ("New Notes") and the
New Credit Facility. The covenants in the New Notes and the New Credit Facility
do not restrict the ability of the Subsidiary Guarantors to make cash
distributions to Agrilink Foods.
Separate financial statements of the Cooperative and other disclosures
concerning the Subsidiary Guarantors are not presented because management has
determined that such financial statements and other disclosures are not
material. Accordingly, set forth below is certain summarized financial
information derived from unaudited historical financial information for the
Subsidiary Guarantors, on a combined basis.
<PAGE>
<TABLE>
(Dollars in Millions)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Summarized Statement of Operations:
Net sales $ 17.3 $ 8.2 $ 56.5 $ 14.6
Gross profit 13.7 6.1 45.5 9.2
Income from continuing operations 14.2 5.5 45.9 6.6
Net income 9.2 3.6 29.8 4.2
Summarized Balance Sheet:
Current assets $ 2.9 $ 2.0
Noncurrent assets 212.7 219.5
Current liabilities 6.3 2.6
</TABLE>
NOTE 8. OTHER MATTERS
Dividends: Subsequent to its 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 April 28, 2000.
