Exhibit 99
The following full financial statements of Pro-Fac Cooperative, Inc. (which has
fully and unconditionally, jointly and severally guaranteed, on an unsecured
senior subordinated basis, the Company's obligations under its 11-7/8% Senior
Subordinated Notes) are included with this Form 10-K as required by Rule 3-10 of
Regulation S-X.
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the financial
statements and related notes which begin on the page following the "Report of
Independent Accountants." These statements have been prepared in accordance with
accounting principles generally accepted in the United States.
The Cooperative's accounting systems include internal controls designed to
provide reasonable assurance of the reliability of its financial records and the
proper safeguarding and use of its assets. Such controls are monitored through
the internal and external audit programs.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants, who were responsible for conducting their examination
in accordance with generally accepted auditing standards. Their resulting report
is on the subsequent page.
The Board of Directors exercises its responsibility for these financial
statements. The independent accountants and internal auditors of the Cooperative
have full and free access to the Board. The Board periodically meets with the
independent accountants and the internal auditors, without management present,
to discuss accounting, auditing and financial reporting matters.
/s/ Dennis M. Mullen /s/ Earl L. Powers
-------------------- ------------------
Dennis M. Mullen Earl L. Powers
President and Executive Vice President Finance and
Chief Executive Officer Chief Financial Officer
Agrilink Foods, Inc. Agrilink Foods, Inc.
Treasurer
Pro-Fac Cooperative, Inc.
August 1, 2000
<PAGE>
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Pro-Fac Cooperative, Inc.
In our opinion, the consolidated financial statements listed under Item 8 of
this Form 10-K present fairly, in all material respects, the financial position
of Pro-Fac Cooperative, Inc. and its subsidiaries at June 24, 2000 and June 26,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended June 24, 2000, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Cooperative's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Our audits of the consolidated financial statements also included an audit of
the financial statement schedule listed in the accompanying index and appearing
under Item 14 of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein for the fiscal years ended June 24, 2000, June 26, 1999, and June 27,
1998 when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS LLP
/s/ PricewaterhouseCoopers LLP
Rochester, New York
August 1, 2000
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statements of Operations, Net Proceeds, and Comprehensive Income
(Dollars in Thousands)
<CAPTION>
Fiscal Years Ended
------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 1,268,542 $1,238,946 $ 719,665
Cost of sales (882,861) (877,438) (524,082)
----------- ---------- ----------
Gross profit 385,681 361,508 195,583
Selling, administrative, and general expenses (286,562) (291,395) (141,739)
Gains on sales of assets 6,635 64,734 0
Restructuring 0 (5,000) 0
Income from joint venture 2,418 2,787 1,893
----------- ---------- ----------
Operating income 108,172 132,634 55,737
Interest expense (83,511) (67,420) (30,767)
Amortization of debt issue costs associated with the Bridge Facility 0 (5,500) 0
----------- ---------- ----------
Pretax income before extraordinary item, dividends, and
allocation of net proceeds 24,661 59,714 24,970
Tax provision (8,497) (24,746) (7,840)
----------- ---------- ----------
Income before extraordinary item, dividends, and allocation of net proceeds 16,164 34,968 17,130
Extraordinary item relating to the early extinguishment of debt (net of
income taxes) 0 (18,024) 0
----------- ---------- ----------
Net income $ 16,164 $ 16,944 $ 17,130
=========== ========== ==========
Allocation of Net Proceeds:
Net income $ 16,164 $ 16,944 $ 17,130
Dividends on common and preferred stock (7,410) (6,734) (6,328)
----------- ---------- ----------
Net proceeds 8,754 10,210 10,802
Allocation to earned surplus (3,832) (10,210) (4,662)
----------- ----------- ----------
Net proceeds available to members $ 4,922 $ 0 $ 6,140
=========== ========== ==========
Allocation of net proceeds available to members:
Payable to members currently (30% of qualified proceeds
available to members in fiscal 2000 and 25% in fiscal 1998) $ 1,477 $ 0 $ 1,535
Allocated to members but retained by the Cooperative:
Qualified retains 3,445 0 4,605
----------- ---------- ----------
Net proceeds available to members $ 4,922 $ 0 $ 6,140
=========== ========== ==========
Net income $ 16,164 $ 16,944 $ 17,130
Other comprehensive income:
Minimum pension liability 238 (155) (608)
----------- ---------- ----------
Comprehensive income $ 16,402 $ 16,789 $ 16,522
=========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
<CAPTION>
ASSETS
June 24, 2000 June 26, 1999
------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,994 $ 6,540
Accounts receivable, trade (net of allowances for doubtful accounts of $998 and $1,607, respectively) 101,065 88,249
Accounts receivable, other 10,488 9,848
Income taxes refundable 9,869 11,295
Current deferred tax assets 12,176 16,160
Inventories -
Finished goods 290,195 281,005
Raw materials and supplies 51,736 50,057
---------- ----------
Total inventories 341,931 331,062
---------- ----------
Current investment in CoBank 2,927 2,403
Prepaid manufacturing expense 26,364 22,075
Prepaid expenses and other current assets 19,688 27,883
---------- ----------
Total current assets 529,502 515,515
Investment in CoBank 16,203 19,693
Investment in Great Lakes Kraut Company, LLC 6,775 6,679
Property, plant, and equipment, net 348,359 367,255
Assets held for sale at net realizable value 339 890
Goodwill and other intangible assets (net of accumulated amortization of $28,248 and $22,031,
respectively) 258,545 260,733
Other assets 27,543 25,714
---------- ----------
Total assets $1,187,266 $1,196,479
========== ==========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Notes payable $ 49,800 $ 54,900
Current portion of obligations under capital leases 218 208
Current portion of long-term debt 16,583 8,670
Accounts payable 89,612 107,159
Accrued interest 11,398 5,974
Accrued employee compensation 11,216 15,127
Other accrued expenses 66,397 64,603
Dividends payable 41 45
Amounts due AgriFrozen growers 2,060 1,453
Amounts due Class A members 21,696 20,045
---------- ----------
Total current liabilities 269,021 278,184
Obligations under capital leases 520 568
Long-term debt 679,205 702,322
Deferred income tax liabilities 36,825 23,072
Other non-current liabilities 33,852 32,222
Non-controlling interest in AgriFrozen 8,000 8,000
---------- ----------
Total liabilities 1,027,423 1,044,368
---------- ----------
Commitments and contingencies
Class B cumulative redeemable preferred stock, liquidation preference $10 per
share, authorized 500,000 shares; issued and outstanding 23,664
and 26,061, respectively 237 261
Class A common stock, par value $5, authorized 5,000,000 shares
June 24, 2000 June 26, 1999
------------- -------------
Shares issued 2,132,981 1,995,740
Shares subscribed 233,977 384,649
--------- ---------
Total subscribed and issued 2,366,958 2,380,389
Less subscriptions receivable in installments (233,977) (384,649)
--------- ---------
Total issued and outstanding 2,132,981 1,995,740 10,665 9,979
========= =========
Class B common stock, par value $5, authorized 2,000,000 shares;
issued and outstanding 723,229 and 0, respectively 0 0
Shareholders' and members' capitalization:
Retained earnings allocated to members 16,591 25,573
Non-qualified allocation to members 300 2,050
Non-cumulative Preferred Stock, par value $25, authorized 5,000,000
shares; issued and outstanding 34,400 and 39,635, respectively 860 991
Class A Cumulative Preferred Stock, liquidation preference $25 per share;
authorized 10,000,000 shares; issued and outstanding 4,249,007 and
3,694,495, respectively 106,225 92,362
Special membership interests 0 0
Earned surplus 25,490 21,658
Accumulated other comprehensive income:
Minimum pension liability adjustment (525) (763)
---------- ----------
Total shareholders' and members' capitalization 148,941 141,871
---------- ----------
Total liabilities and capitalization $1,187,266 $1,196,479
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Fiscal Years Ended
June 24, 2000 June 26, 1999 June 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 16,164 $ 16,944 $ 17,130
Amount payable to members currently (1,477) 0 (1,535)
Adjustments to reconcile net income to net cash (used in)/provided by
operating activities:
Extraordinary item relating to the early extinguishment of debt
(net of income taxes) 0 18,024 0
Interest-in-kind on Subordinated Promissory Note 1,571 782 0
Gains on sales of assets (6,635) (64,734) 0
Loss on disposal of assets 0 353 0
Amortization of goodwill and other intangible assets 8,768 9,396 3,581
Amortization of debt issue costs 4,805 7,678 800
Depreciation 32,605 24,752 18,009
Provision for deferred taxes 13,636 9,949 752
Provision for losses on accounts receivable 201 208 17
Equity in undistributed earnings of CoBank (412) (520) (715)
Change in assets and liabilities:
Accounts receivable (10,992) 32 (9,311)
Inventories and prepaid manufacturing expenses (66,754) 34,388 (25,654)
Income taxes payable/refundable 1,426 (5,231) (1,626)
Accounts payable and accrued expenses (16,353) (52,639) 18,145
Amounts due to members 1,651 (591) 4,845
Other assets and liabilities 13,371 (16,078) (11,360)
--------- ---------- ---------
Net cash (used in)/provided by operating activities (8,425) (17,287) 13,078
--------- ---------- ---------
Cash Flows from Investing Activities:
Purchase of property, plant, and equipment (26,983) (23,787) (14,056)
Proceeds from disposals of property, plant, and equipment 63,955 93,486 12,794
Proceeds from sales of idle facilities 405 1,427 0
Proceeds from investment in CoBank 3,378 2,795 1,611
Cash paid for acquisitions (250) (516,052) (7,423)
--------- ---------- ---------
Net cash provided by/(used in) investing activities 40,505 (442,131) (7,074)
--------- ---------- ---------
Cash Flows from Financing Activities:
Net (payments on)/proceeds from note payable (5,100) 54,900 0
Proceeds from issuance of long-term debt 0 719,263 11,180
Payments on long-term debt (18,470) (287,574) (8,076)
Payments on capital leases (239) (283) (616)
Cash paid for debt issuance costs and amendments (2,624) (19,354) 0
Issuance of stock, net of repurchases 662 844 140
Cash paid in lieu of fractional shares 0 0 (9)
Cash portion of non-qualified conversion (445) (153) (84)
Cash dividends paid (7,410) (6,734) (6,328)
--------- ---------- ---------
Net cash (used in)/provided by financing activities (33,626) 460,909 (3,793)
--------- ---------- ---------
Net change in cash and cash equivalents (1,546) 1,491 2,211
Cash and cash equivalents at beginning of period 6,540 5,049 2,838
--------- ---------- ---------
Cash and cash equivalents at end of period $ 4,994 $ 6,540 $ 5,049
========= ========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 78,087 $ 70,005 $ 30,319
========= ========== =========
Income taxes, net $ 6,622 $ 14,742 $ 8,714
========= ========== =========
Acquisition of Flavor Destinations trademark:
Goodwill and other intangible assets $ 250 $ 0 $ 0
========= ========== =========
Acquisition of Agripac, Inc.:
Accounts receivable $ 0 $ 12,563 $ 0
Inventories 0 39,055 0
Property, plant, and equipment 0 30,327 0
Prepaid expenses and other current assets 0 1,063 0
Discount on subordinated note 0 8,157 0
Other non-current assets 0 4,000 0
Other accrued expenses 0 (10,644) 0
Other non-current liabilities 0 (4,000) 0
Non-controlling interest 0 (8,000) 0
--------- ---------- ---------
0 72,521 0
Escrow 0 6,413 0
--------- ---------- ---------
0 78,934 0
Discount on subordinated note 0 (8,157) 0
--------- ---------- ---------
$ 0 $ 70,777 $ 0
========= ========== =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries - Agrilink Foods, Inc. and AgriFrozen Foods, Inc.
Consolidated Statements of Cash Flows (Continued)
(Dollars in Thousands)
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Acquisition of Erin's Gourmet Popcorn:
Inventories $ 0 $ 33 $ 0
Property, plant, and equipment 0 26 0
Goodwill and other intangible assets 0 554 0
--------- --------- ---------
$ 0 $ 613 $ 0
========= ========= =========
Acquisition of Dean Foods Vegetable Company:
Accounts receivable $ 0 $ 24,201 $ 0
Current deferred tax asset 0 30,645 0
Inventories 0 195,674 0
Prepaid expenses and other current assets 0 6,374 0
Property, plant, and equipment 0 157,227 0
Assets held for sale 0 49 0
Goodwill and other intangible assets 0 178,377 0
Accounts payable 0 (40,865) 0
Accrued employee compensation 0 (8,437) 0
Other accrued expenses 0 (74,845) 0
Long-term debt 0 (2,752) 0
Subordinated promissory note 0 (22,590) 0
Other assets and liabilities, net 0 (2,453) 0
--------- --------- ---------
$ 0 $ 440,605 $ 0
========= ========= =========
Acquisition of J.A. Hopay Distributing Co., Inc.:
Accounts receivable $ 0 $ 420 $ 0
Inventories 0 153 0
Property, plant, and equipment 0 51 0
Goodwill and other intangible assets 0 3,303 0
Other accrued expenses 0 (251) 0
Obligation for covenant not to compete 0 (1,363) 0
--------- ---------- ---------
$ 0 $ 2,313 $ 0
========= ========= =========
Acquisition of DelAgra:
Accounts receivable $ 0 $ 0 $ 403
Inventories 0 0 3,212
Prepaid expenses and other current assets 0 0 81
Property, plant, and equipment 0 0 1,842
Goodwill and other intangible assets 0 0 1,508
Other accrued expenses 0 0 (433)
--------- --------- ---------
$ 0 $ 0 $ 6,613
========= ========= =========
Acquisition of C&O Distributing Company:
Property, plant, and equipment $ 0 $ 0 $ 54
Goodwill and other intangible assets 0 0 756
--------- --------- ---------
$ 0 $ 0 $ 810
========= ========= =========
Investment in Great Lakes Kraut Company, LLC:
Inventories $ 0 $ 0 $ 2,175
Prepaid expenses and other current assets 0 0 409
Property, plant, and equipment 0 0 6,966
Other accrued expenses 0 0 (62)
--------- --------- ---------
$ 0 $ 0 $ 9,488
========= ========= =========
Supplemental schedule of non-cash investing and financing activities:
Conversion of retains to preferred stock $ 13,732 $ 4,648 $ 6,967
========= ========= =========
Net proceeds allocated to members but retained by the Cooperative $ 3,445 $ 0 $ 4,605
========= ========= =========
Capital lease obligations incurred $ 171 $ 320 $ 222
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc. and Consolidated Subsidiaries
Consolidated Statements of Changes in Shareholders' and Members' Capitalization and Redeemable Stock
(Dollars in Thousands)
<CAPTION>
Fiscal Years Ended
---------------------------------------------
June 24, June 26, June 27,
2000 1999 1998
---------- ----------- -----------
<S> <C> <C> <C>
Retained earnings allocated to members:
Qualified retains:
Balance at beginning of period $ 25,573 $ 29,765 $ 31,920
Net proceeds allocated to members 3,445 0 4,605
Converted to preferred stock (12,427) (4,191) (6,751)
Cash paid in lieu of fractional shares 0 (1) (9)
---------- ---------- ----------
Balance at end of period 16,591 25,573 29,765
---------- ---------- ----------
Non-qualified retains:
Balance at beginning of period $ 2,050 $ 2,660 $ 2,960
Distribution of non-qualified retains -
Cash paid (445) (153) (84)
Converted to preferred stock (1,305) (457) (216)
---------- ----------- ----------
Balance at end of period 300 2,050 2,660
---------- ---------- ----------
Total retains allocated to members at end of period $ 16,891 $ 27,623 $ 32,425
---------- ---------- ----------
Non-cumulative preferred stock:
Balance at beginning of period $ 991 $ 1,125 $ 1,345
Conversion to cumulative preferred stock (131) (134) (220)
---------- ---------- ----------
Balance at end of period $ 860 $ 991 $ 1,125
---------- ---------- ----------
Cumulative preferred stock:
Balance at beginning of period $ 92,362 $ 87,580 $ 80,393
Converted from non-cumulative preferred stock 131 134 220
Converted from non-qualified retains 1,305 457 216
Converted from qualified retains 12,427 4,191 6,751
---------- ---------- ----------
Balance at end of period $ 106,225 $ 92,362 $ 87,580
---------- ---------- ----------
Earned surplus:
Balance at beginning of period $ 21,658 $ 11,448 $ 6,786
Allocation to earned surplus 3,832 10,210 4,662
---------- ---------- ----------
Balance at end of period $ 25,490 $ 21,658 $ 11,448
---------- ---------- ----------
Accumulated other comprehensive income:
Balance at beginning of period $ (763) $ (608) $ 0
Minimum pension liability adjustment 238 (155) (608)
---------- ---------- ----------
Balance at end of period (525) (763) (608)
---------- ----------- ----------
Total shareholders' and members' capitalization $ 148,941 $ 141,871 $ 131,970
========== ========== ==========
Redeemable stock:
Class B cumulative preferred stock:
Balance at beginning of period $ 261 $ 270 $ 315
(Repurchased)/issued, net (24) (9) (45)
---------- ---------- ----------
Balance at end of period $ 237 $ 261 $ 270
========== ========== ==========
Common stock:
Balance at beginning of period $ 9,979 $ 9,129 $ 8,944
Issued/(repurchased), net 686 850 185
---------- ---------- ----------
Balance at end of period $ 10,665 $ 9,979 $ 9,129
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
PRO-FAC COOPERATIVE, INC. AND CONSOLIDATED SUBSIDIARIES
AGRILINK FOODS, INC. AND AGRIFROZEN FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
Pro-Fac 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 AgriFrozen Foods, Inc.
("AgriFrozen") in which it has a controlling interest. Unless the context
otherwise requires, the terms "Cooperative" and "Pro-Fac" refer to Pro-Fac
Cooperative, Inc. and its subsidiaries.
Agrilink Foods has four primary product lines including: vegetables, fruits,
snacks, and canned meals. The majority of each of the product lines' net sales
is within the United States. AgriFrozen has vegetables as its one primary
product line. The majority of each of the product lines' net sales are within
the United States. In addition, all of the Cooperative's operating facilities,
excluding one in Mexico, are within the United States.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles, generally accepted in the United States,
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
Fiscal Year: The fiscal year of Pro-Fac ends on the last Saturday in June.
Fiscal 2000, 1999, and 1998 each comprised 52 weeks.
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 and 1998 have been reclassified
to conform with the current presentation.
Restructuring: During the third quarter of fiscal 1999, Agrilink Foods began
implementation of a corporate-wide restructuring program. The overall objectives
of the plan were to reduce expenses, improve productivity, and streamline
operations. The total restructuring charge amounted to $5.0 million and was
primarily comprised of employee termination benefits (which have improved annual
earnings by $8.0 million). Efforts have focused on the consolidation of
operating functions and the elimination of approximately 5 percent of the work
force. Reductions in personnel include operational and administrative positions.
Of this charge, $3.3 million has been liquidated to date, and the remaining
termination benefits will be liquidated within the next 12 months.
Extraordinary Item Relating to the Early Extinguishment of Debt: During fiscal
1999, Agrilink Foods refinanced its existing indebtedness, including its 12 1/4
percent Senior Subordinated Notes due 2005 and its then existing bank debt.
Premiums and breakage fees associated with early redemptions and other fees
incurred amounted to $18.0 million (net of applicable income taxes of $10.4
million). See NOTE 3 to the "Notes to Consolidated Financial Statements."
Cash and Cash Equivalents: Cash and cash equivalents include short-term
investments with original maturities of three months or less. There were no such
short-term investments at June 24, 2000 or June 26, 1999.
Inventories: Inventories are stated at the lower of cost or market on the
first-in, first-out ("FIFO") method. Reserves recorded at June 24, 2000 and June
26, 1999 were $3,385,000, and $8,401,000, respectively. Reductions to the
reserve were recorded in fiscal 2000 as related inventory was disposed,
primarily associated with AgriFrozen.
Investment in CoBank: The Cooperative's investment in CoBank is required as a
condition of borrowings. These securities are not physically issued by CoBank,
but rather the Cooperative is notified as to their monetary value. The
investment is carried at cost plus the Cooperative's share of the undistributed
earnings of CoBank (that portion of patronage refunds not distributed currently
in cash).
Earnings on the Cooperative's investment in CoBank in fiscal year 2000, 1999,
and 1998 amounted to $590,000, $743,000, and $1,023,000, respectively.
Prepaid Manufacturing Expense: Allocation of manufacturing overhead to finished
goods produced is on the basis of a production period; thus at the end of each
period, manufacturing costs incurred by seasonal plants, subsequent to the end
of previous pack operations, are deferred and included in the accompanying
balance sheet. Such costs are applied to finished goods during the next
production period and recognized as an element of cost of goods sold.
<PAGE>
Property, Plant, and Equipment and Related Lease Arrangements: Property, plant,
and equipment are depreciated over the estimated useful lives of the assets
using the straight-line method, half-year convention, over 4 to 40 years.
Lease arrangements are capitalized when such leases convey substantially all of
the risks and benefits incidental to ownership. Capital leases are amortized
over either the lease term or the life of the related assets, depending upon
available purchase options and lease renewal features.
Assets held for sale are separately classified on the balance sheet. The
recorded value represents an estimate of net realizable value.
Goodwill and Other Intangibles: Goodwill and other intangible assets include the
cost in excess of the fair value of net tangible assets acquired in purchase
transactions and acquired non-competition agreements and trademarks. Goodwill
and other intangible assets, stated net of accumulated amortization, are
amortized on a straight-line basis over 3 to 35 years. The Cooperative
periodically assesses whether there has been a permanent impairment in the value
of goodwill. This is accomplished by determining whether the estimated,
undiscounted future cash flows from operating activities exceed the carrying
value of goodwill as of the assessment date. Should aggregate future cash flows
be less than the carrying value, a writedown would be required, measured by the
difference between the discounted future cash flows and the carrying value of
goodwill.
Other Assets: Other assets are primarily comprised of debt issuance costs. The
debt issuance costs are amortized over the term of the debt. Amortization
expense incurred, including $5,500,000 of fees associated with the Bridge
Facility in fiscal 1999, were $2,758,000, $7,678,000, and $800,000 in fiscal
2000, 1999, and 1998, respectively.
Income Taxes: Income taxes are provided on non-patronage income for financial
reporting purposes. Deferred income taxes resulting from temporary differences
between financial reporting and tax reporting as well as from the issuance of
non-qualified retains are appropriately classified in the balance sheet.
Pension: The Cooperative and its subsidiaries have several pension plans and
participate in various union pension plans which on a combined basis cover
substantially all employees. Charges to income with respect to plans sponsored
by the Cooperative and its subsidiaries are based upon actuarially determined
costs. Pension liabilities are funded by periodic payments to the various
pension plan trusts.
Derivative Financial Instruments: The Cooperative does not engage in interest
rate speculation. Derivative financial instruments are utilized to hedge
interest rate risks and are not held for trading purposes.
Agrilink Foods has entered into interest rate swap agreements to limit exposure
to interest rate movements. Net payments or receipts are accrued into prepaid
expenses and other current assets and/or other accrued expenses and are recorded
as adjustments to interest expense. Interest rate instruments are entered into
for periods no greater than the life of the underlying transaction being hedged.
Management anticipates that all interest rate derivatives will be held to
maturity. Any gains or losses on prematurely terminated interest rate
derivatives will be recognized over the remaining life, if any, of the
underlying transaction as an adjustment to interest expense.
Commodities Options Contracts: In connection with the purchase of certain
commodities for anticipated manufacturing requirements, the Cooperative
occasionally enters into options contracts as deemed appropriate to reduce the
effect of price fluctuations. These options contracts are accounted for as
hedges and, accordingly, gains and losses are deferred and recognized in cost of
sales as part of the product cost. These activities are not significant to the
Cooperative's operations as a whole.
Foreign Currency: The Cooperative hedges certain foreign currency transactions
by entering into forward exchange contracts. Gains and losses associated with
currency rate changes on forward exchange contracts hedging foreign currency
transactions are recorded in earnings upon settlement. In fiscal 2000, the
Cooperative entered into forward exchange contracts to hedge aggregate foreign
currency exposures of approximately $11.5 million. The forward exchange
contracts have varying maturities ranging from July 2000 to April 2001 with cash
settlements made at maturity based upon rates agreed to at contract inception.
Recently Issued Accounting Statements: In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. In June 1999,
the FASB issues SFAS 137, which deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000, and requires all derivatives be
measured at fair value and recorded on a company's balance sheet as an asset or
liability, depending upon the company's underlying rights or obligations
associated with the derivative instrument. Agrilink Foods and AgriFrozen are
currently investigating the impact of this pronouncement.
<PAGE>
Casualty Insurance: The Cooperative is insured for workers compensation and
automobile liability through a primarily self-insured program. The Cooperative
accrues for the estimated losses from both asserted and unasserted claims. The
estimate of the liability for unasserted claims arising from unreported
incidents is based on an analysis of historical claims data. The accrual for
casualty insurance at June 24, 2000 and June 26, 1999 was $5.2 million and $6.3
million, respectively.
Environmental Expenditures: Environmental expenditures that pertain to current
operations are expensed or capitalized consistent with the Cooperative's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations that do not contribute to current
or future revenues are expensed. Liabilities are recorded when remedial
activities are probable, and the cost can be reasonably estimated.
Advertising: Production costs of commercials and programming are charged to
operations in the year first aired. The cost of other advertising promotion and
marketing programs are charged in the year incurred. Advertising expense
incurred in fiscal 2000, 1999, and 1998 amounted to $43,597,000, $38,192,000,
and $9,878,000, respectively.
Earnings Per Share Data Omitted: Earnings per share amounts are not presented as
earnings are not distributed to members in proportion to their common stock
holdings. Earnings (representing those earnings derived from patronage-sourced
business) are distributed to members in proportion to the dollar value of
deliveries under Pro-Fac contracts rather than based on the number of shares of
common stock held.
Disclosures About Fair Value of Financial Instruments: The following methods and
assumptions were used by the Cooperative in estimating the fair value
disclosures for financial instruments:
Cash and Cash Equivalents and Notes Payable: The carrying amount
approximates fair value because of the short maturity of these
instruments.
Long-Term Investments: The carrying value of the investment in CoBank
was $19.1 million at June 24, 2000. As there is no market price for
this investment, a reasonable estimate of fair value is not possible.
Long-Term Debt: The fair value of the long-term debt is estimated based
on the quoted market prices for the same or similar issues or on the
current rates offered for debt of the same remaining maturities. See
NOTE 5 to the "Notes to Consolidated Financial Statements."
NOTE 2. 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 paid Pro-Fac $69.6
million, $62.2 million, and $58.5 million as CMV for crops purchased from
Pro-Fac in fiscal years 2000, 1999, and 1998, respectively. The crops purchased
by Agrilink Foods from Pro-Fac Class A members represented approximately 55
percent, 71 percent, and 76 percent of the raw agricultural crops purchased by
Agrilink Foods from Pro-Fac in fiscal 2000, 1999, and 1998, respectively.
Under the Pro-Fac Marketing Agreement, Agrilink Foods is required to have on its
board of directors individuals who are neither members of nor affiliated with
Pro-Fac ("Disinterested Directors"), the number of Disinterested Directors must
at least equal the number of directors who are members of Pro-Fac's board of
directors. The volume and type of crops to be purchased by Agrilink Foods from
Pro-Fac under the Pro-Fac Marketing Agreement are determined pursuant to its
annual profit plan, which requires the approval of a majority of the
Disinterested Directors of Agrilink Foods. In addition, in any year in which
Agrilink Foods has earnings on products which were processed from crops supplied
by Pro-Fac ("Pro-Fac Products"), Agrilink Foods pays to Pro-Fac up to 90 percent
of such earnings, but in no case more than 50 percent of all pretax earnings
(before dividing with Pro-Fac) of Agrilink Foods. In years in which Agrilink
Foods has losses on Pro-Fac Products, Agrilink Foods reduces the CMV it would
otherwise pay to Pro-Fac by up to 90 percent of such losses, but in no case by
more than 50 percent of all pretax losses (before dividing with Pro-Fac) of
Agrilink Foods. Additional patronage income is paid to Pro-Fac for services
provided to Agrilink Foods, including the provision of a long-term, stable crop
supply, favorable payment terms for crops and the sharing of risks in losses of
certain operations of the business. For fiscal years ended 2000 and 1998, such
additional patronage income amounted to $12.3 million and $12.5 million,
<PAGE>
respectively. During fiscal 1999, there was no additional patronage income.
Under the Pro-Fac Marketing Agreement, Pro-Fac is required to reinvest at least
70 percent of the additional patronage income in Agrilink Foods. Subsequent to
the acquisition date, Pro-Fac has invested an additional $29.9 million 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
(the "AgriFrozen Marketing Agreement"). Under this agreement, AgriFrozen
purchases raw products from Pro-Fac and processes and markets the finished
products. AgriFrozen will pay Pro-Fac CMV for the crops supplied by Pro-Fac. In
addition, in any year in which AgriFrozen has earnings, AgriFrozen will
distribute such earnings to members of Pro-Fac. However, in the event AgriFrozen
experiences any losses, AgriFrozen will deduct the losses from the total CMV
payable. The agreement permits AgriFrozen to pay 20 percent in cash and retain
80 percent of its earnings on Pro-Fac products as working capital.
Under the AgriFrozen Marketing Agreement, AgriFrozen paid Pro-Fac $14.0 million
in CMV for crops purchased in fiscal 2000.
Under the AgriFrozen Marketing Agreement, the board of directors of AgriFrozen
is required to consist of: (i) at least three and as many as five directors who
are individuals who currently serve as directors of Pro-Fac and who are chosen
by Pro-Fac's board of directors; (ii) one director who is nominated by the
president of Agrilink Foods from among Agrilink Foods' management employees; and
(iii) any number of disinterested directors who are to be elected from
individuals suggested by the president of Agrilink Foods. Disinterested
directors are persons who are neither employees, shareholders, nor otherwise
affiliated with Pro-Fac or AgriFrozen, but may include a disinterested director
of Agrilink Foods.
NOTE 3. ACQUISITIONS AND DISPOSALS
Fiscal 2000 -
Sale of Pickle Business: On June 23, 2000, Agrilink Foods sold its pickle
business based in Tacoma, Washington to Dean Pickle and Specialty Products
Company. This business included pickle, pepper, and relish products sold
primarily under the Nalley and Farman's brand names. Agrilink Foods received
proceeds of approximately $10.3 million which were applied to bank loans ($4.0
million of which was applied to the Term Loan Facility and $6.3 million of which
was applied to Agrilink Foods' Revolving Credit Facility). A gain of
approximately $4.3 million was recognized on this transaction.
On July 21, 2000, Agrilink Foods sold the machinery and equipment utilized in
the production of pickles and other related products to Dean Pickle and
Specialty Products Company. No significant gain or loss was recognized on this
transaction. Net proceeds of approximately $3.2 million were applied to the Term
Loan Facility.
This transaction did not include any other products carrying the Nalley brand
name, including prepared canned meal products. Agrilink Foods will continue to
contract pack Nalley and Farman's pickle products for a period of two years at
the existing Tacoma processing plant which Agrilink Foods will operate.
Under a related agreement, the Cooperative will supply raw cucumbers grown in
the Northwestern United States to Dean Pickle and Specialty Products Company for
a minimum 10-year period at market pricing.
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 the Arlington,
Minnesota facility. Agrilink Foods received proceeds of approximately $42.4
million which were applied to 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 Foods' 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 Cambria,
Wisconsin processing facility to Del Monte. Agrilink 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's Revolving Credit Facility). A gain of approximately $2.3
million was recognized on this transaction. The sale also includes an agreement
for Del Monte to produce a portion of Agrilink Foods' product needs during the
2000 packing season.
Fiscal 1999 -
Acquisition of Agripac Frozen Vegetable Business: On February 23, 1999, PF
Acquisition II, Inc., which does business under the name AgriFrozen Foods
("AgriFrozen"), acquired the frozen vegetable business of Agripac, Inc.
("Agripac"), an Oregon cooperative.
<PAGE>
AgriFrozen was formed in January 1999 under the corporation laws of New York
State. AgriFrozen was formed to acquire substantially all of the assets of
Agripac related to its frozen vegetable processing business. On January 4, 1999
Agripac filed a voluntary petition under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court for the District of Oregon. On January 22,
1999 Agripac, as debtor-in-possession, filed a motion with the Bankruptcy Court
for authority to sell substantially all of the assets comprising its frozen food
processing business. The bankruptcy court confirmed the sale of Agripac's frozen
food processing assets to AgriFrozen by an order entered on February 18, 1999.
The purchase price for the assets was $80.5 million. AgriFrozen paid an
additional $7.8 million in related expenses, including $6.4 million to prior
member-growers of Agripac to obtain crop delivery agreements with AgriFrozen,
and transaction expenses and miscellaneous costs totaling $1.4 million.
AgriFrozen incurred an additional $1.2 million in severance costs associated
with the acquisition and the implementation of AgriFrozen's business plan. In
connection with, and as a condition to the consummation of the acquisition,
AgriFrozen entered into a sufficient number of crop delivery contracts with
prior member growers of Agripac acceptable to AgriFrozen.
The acquisition was accounted for under the purchase method of accounting. Under
purchase accounting tangible and identifiable intangible assets acquired are
recorded at their respective fair values. 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, ACB ("CoBank) (the "CoBank Credit Facility") providing for
$30 million of term loan borrowings and a revolving credit facility (the "CoBank
Revolving Credit Facility") of $55 million in fiscal 2000 and $50 million in
each year thereafter and (ii) issued a $12 million Subordinated Promissory Note
to CoBank. Neither Pro-Fac nor Agrilink Foods guaranteed the debts of AgriFrozen
or otherwise pledged any of their respective properties as security for the
CoBank financing. All of AgriFrozen's indebtedness is expressly without recourse
to Pro-Fac and Agrilink Foods.
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 $4.0 million 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. The operations
from Agripac have been included in the Company's Statement of Operations since
the acquisition date.
Sale of Adams Brand Peanut Butter Operations: On January 29, 1999, Agrilink
Foods sold the Adams brand peanut butter operations to the J.M. Smucker Company.
Agrilink Foods received proceeds of approximately $13.5 million which were
applied to outstanding bank loans. A gain of approximately $3.5 million was
recognized on this transaction.
Acquisition of Erin's Gourmet Popcorn: On January 5, 1999, Agrilink Foods
acquired the assets of Erin's Gourmet Popcorn ("Erin's"), a Seattle-based,
ready-to-eat popcorn manufacturer. The acquisition was accounted for as a
purchase. The purchase price was approximately $0.6 million. Intangibles of
approximately $0.6 million were recorded in conjunction with this transaction
and are being amortized over 3 to 30 years.
The effects of the Erin's acquisition are not material, and accordingly, have
been excluded from the pro forma information presented below. The operations
from Erin's have been included in the Company's Statement of Operations since
the acquisition date.
Acquisition of 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. Agrilink Foods had the right,
exercisable until July 15, 1999, 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. On April 15, 1999, Agrilink
Foods paid $13.2 million to Dean Foods and exercised the election.
<PAGE>
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.
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.
(Dollars in Millions)
Fiscal Year Ended
June 26, 1999
Net sales $1,336.0
Income before extraordinary items $ 25.1
Net income $ 7.1
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 then
existing indebtedness (the "Refinancing"), including its 12 1/4 percent Senior
Subordinated Notes due 2005 (the "Old Notes") and its then existing bank debt.
On August 24, 1998, Agrilink 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 $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 "Bridge Facility") and (iii) issued the
$30 million Subordinated Promissory Note to Dean Foods. The Bridge Facility was
repaid during November of 1998 principally with the proceeds from a new Senior
Subordinated Note Offering (the "New Notes"). See NOTE 5 - "Debt - Senior
Subordinated Notes 11 -7/8 Percent (due 2008)." Debt issue costs of $5.5 million
associated with the Bridge Facility were expensed during the quarter ended
December 26, 1998.
Acquisition of J.A. Hopay Distributing Co, Inc.: Effective July 21, 1998,
Agrilink Foods acquired J.A. Hopay Distributing Co., Inc. ("Hopay") of
Pittsburgh, Pennsylvania. Hopay distributed snack products for Snyder of Berlin,
one of the Company's businesses included within its snack foods unit. The
acquisition was accounted for as a purchase. The purchase price (net of
liabilities assumed) was approximately $2.3 million. Intangibles of
approximately $3.3 million were recorded in conjunction with this transaction
and are being amortized over 5 to 30 years.
The effects of the Hopay acquisition are not material and, accordingly, have
been excluded from the above pro forma presentation. The operations from Hopay
have been included in the Company's Statement of Operations since the
acquisition date.
Fiscal 1998 -
Sale of Michigan Distribution Center: Effective March 31, 1998, Agrilink Foods
entered into a multiyear logistics agreement under which GATX Logistics will
provide freight management, packaging and labeling services, and distribution
support to and from production facilities owned by Agrilink Foods in and around
Coloma, Michigan. The agreement included the sale of Agrilink Foods'
<PAGE>
labeling equipment and distribution center. Agrilink Foods received proceeds of
$12.6 million for the equipment and facility which were applied to outstanding
bank loans. No significant gain or loss occurred as a result of this
transaction.
Acquisition of DelAgra Corp.: Effective March 30, 1998, Agrilink Foods acquired
the majority of assets and the business of DelAgra Corp. of Bridgeville,
Delaware. DelAgra Corp. is a producer of private label frozen vegetables. The
acquisition was accounted for as a purchase. The purchase price was
approximately $6.6 million. Goodwill of approximately $0.6 million and $0.9
million for a covenant not to compete were received in conjunction with this
transaction. These amounts are being amortized over 30 and 5 years,
respectively. The operations of DelAgra Corp. have been included in the
Company's Statement of Operations since the acquisition date.
Acquisition of C&O Distributing Company: Effective March 9, 1998, Agrilink Foods
acquired the majority of assets and the business of C&O Distributing Company of
Canton, Ohio. C&O distributed snack products for Snyder of Berlin, one of
Agrilink Foods' businesses included within its snack foods unit. The acquisition
was accounted for as a purchase. The purchase price was approximately $0.8
million. Intangibles of approximately $0.8 million were recorded in conjunction
with this transaction and are being amortized over 30 years. The operations of
C&O have been included in the Company's Statement of Operations since the
acquisition date.
Formation of New Sauerkraut Company: Effective July 1, 1997, Agrilink Foods and
Flanagan Brothers, Inc. of Bear Creek, Wisconsin contributed all their assets
involved in sauerkraut production to form a new sauerkraut company. This new
company, Great Lakes Kraut Company, LLC, operates as a New York limited
liability company with ownership and earnings divided equally between the two
companies. The joint venture is accounted for using the equity method of
accounting. Summarized financial information of Great Lakes Kraut Company, LLC
is as follows:
Condensed Statement of Earnings
(Dollars in Thousands)
Fiscal Years Ended
June 24, 2000 June 26, 1999 June 27, 1998
Net sales $ 32,200 $ 30,174 $ 27,620
Gross profit $ 9,150 $ 9,392 $ 7,439
Operating income $ 5,488 $ 6,267 $ 4,411
Net income $ 4,836 $ 5,575 $ 3,786
Condensed Balance Sheet
(Dollars in Thousands)
June 24, 2000 June 26, 1999
Current assets $ 12,464 $ 14,112
Noncurrent assets $ 22,081 $ 21,669
Current liabilities $ 13,158 $ 13,237
Noncurrent liabilities $ 4,579 $ 5,736
<PAGE>
NOTE 4. PROPERTY, PLANT AND EQUIPMENT AND RELATED OBLIGATIONS
The following is a summary of property, plant and equipment and related
obligations at June 24, 2000 and June 26, 1999:
<TABLE>
(Dollars in Thousands)
<CAPTION>
June 24, 2000 June 26, 1999
Owned Leased Owned Leased
Assets Assets Total Assets Assets Total
---------- ---------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Land $ 18,943 $ 0 $ 18,943 $ 19,864 $ 0 $ 19,864
Land improvements 7,828 0 7,828 7,907 0 7,907
Buildings 114,428 395 114,823 112,229 395 112,624
Machinery and equipment 307,890 936 308,826 296,658 827 297,485
Construction in progress 14,499 0 14,499 19,507 0 19,507
--------- ------- -------- --------- -------- ---------
463,588 1,331 464,919 456,165 1,222 457,387
Less accumulated depreciation (115,856) (704) (116,560) (89,568) (564) (90,132)
--------- ------- -------- --------- -------- ---------
Net $ 347,732 $ 627 $348,359 $ 366,597 $ 658 $ 367,255
========= ======= ======== ========= ======== =========
Obligations under capital leases1 $ 738 $ 776
Less current portion (218) (208)
------- --------
Long-term portion $ 520 $ 568
======= ========
<FN>
1 Represents the present value of net minimum lease payments calculated at the
Cooperative's incremental borrowing rate at the inception of the leases,
which ranged from 6.3 to 9.8 percent.
</FN>
</TABLE>
Interest capitalized in conjunction with construction amounted to approximately
$691,000, $259,000, and $248,000 in fiscal 2000, 1999, and 1998, respectively.
The following is a schedule of future minimum lease payments together with the
present value of the minimum lease payments related to capitalized leases, both
as of June 24, 2000:
(Dollars in Thousands)
Fiscal Year Ending Last Capital Operating Total Future
Saturday In June Leases Leases Commitment
---------------------------- ------- ----------- ------------
2001 $ 294 $ 8,621 $ 8,915
2002 222 6,265 6,487
2003 147 5,036 5,183
2004 121 2,559 2,680
2005 89 1,925 2,014
Later years 35 10,954 10,989
------- -------- --------
Net minimum lease payments 908 $ 35,360 $ 36,268
======== ========
Less amount representing interest (170)
-------
Present value of minimum lease payments $ 738
=======
Total rent expense related to operating leases (including lease arrangements of
less than one year which are not included in the previous table) amounted to
$18,671,000, $15,352,000, and $12,250,000 for fiscal years 2000, 1999, and 1998,
respectively.
<PAGE>
NOTE 5. DEBT
The following is a summary of long-term debt outstanding:
<TABLE>
(Dollars in Thousands)
<CAPTION>
June 24, 2000 Total
-------------------------------------------- June 26,
Agrilink AgriFrozen Total 1999
------------ ---------- --------- -----------
<S> <C> <C> <C> <C>
Bank Debt $ 428,300 $ 30,000 $ 458,300 $ 476,600
Senior Subordinated Notes 200,015 0 200,015 200,015
Subordinated Promissory Notes (net of discount) 26,144 4,493 30,637 27,378
Other 6,836 0 6,836 6,999
----------- -------- ---------- -----------
Total Debt 661,295 34,493 695,788 710,992
Less Current Portion (16,583) 0 (16,583) (8,670)
----------- -------- ---------- -----------
Total Long-Term Debt $ 644,712 $ 34,493 $ 679,205 $ 702,322
=========== ======== ========== ===========
</TABLE>
AGRILINK FOODS DEBT
New Credit Facility (Bank Debt): In connection with the DFVC Acquisition,
Agrilink Foods entered into the New Credit Facility with Harris Bank as
Administrative Agent and Bank of Montreal as Syndication Agent, and the lenders
thereunder. The New Credit Facility consists of a $200 million Revolving Credit
Facility and a $455 million Term Loan Facility. The Term Loan Facility is
comprised of the Term A Facility, which has a maturity of five years, the Term B
Facility, which has a maturity of six years, and the Term C Facility, which has
a maturity of seven years. The Revolving Credit Facility has a maturity of five
years. All previous bank debt was repaid in conjunction with the execution of
the New Credit Facility.
The New Credit Facility bears interest, at Agrilink Foods' option, at the
Administrative Agent's alternate base rate or the London Interbank Offered Rate
("LIBOR") plus, in each case, applicable margins of: (i) in the case of
alternate base rate loans, (x) 1.00 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 2.75 percent for loans under the Term B
Facility and (z) 3.00 percent for loans under the Term C Facility and (ii) in
the case of LIBOR loans, (x) 2.75 percent for loans under the Revolving Credit
Facility and the Term A Facility, (y) 3.75 percent for loans under the Term B
Facility and (z) 4.00 percent for loans under the Term C Facility. The
Administrative Agent's "alternate base rate" is defined as the greater of: (i)
the prime commercial rate as announced by the Administrative Agent or (ii) the
Federal Funds rate plus 0.50 percent. The fiscal 2000 weighted-average rate of
interest applicable to the Term Loan Facility was 9.51 percent. In addition,
Agrilink Foods pays a commitment fee calculated at a rate of 0.50 percent per
annum on the daily average unused commitment under the Revolving Credit
Facility.
Utilizing outstanding balances at June 24, 2000, the Term Loan Facility is
subject to the following amortization schedule:
(Dollars in Millions)
Fiscal Year Term Loan A Term Loan B Term Loan C Total
----------- ----------- ----------- ----------- -----
2001 $ 10.0 $ 0.4 $ 0.4 $ 10.8
2002 10.0 0.4 0.4 10.8
2003 10.0 0.4 0.4 10.8
2004 9.2 0.4 0.4 10.0
2005 0.0 190.5 0.4 190.9
2006 0.0 0.0 195.0 195.0
------- ------ ------- -------
$ 39.2 $192.1 $ 197.0 $ 428.3
======= ====== ======= =======
The Term Loan Facility is subject to mandatory prepayment under various
scenarios as defined in the New Credit Facility. During fiscal 2000, Agrilink
Foods made mandatory prepayments of $10.0 million from proceeds of the sale of
the Cambria facility and the pickle operations. In addition, during fiscal 2000
principal payments of $8.3 million were made on the Term Loan facilities.
Agrilink Foods' obligations under the New Credit Facility are collateralized by
a first-priority lien on: (i) substantially all existing or after-acquired
assets, tangible or intangible, (ii) the capital stock of certain of Pro-Fac's
(excluding AgriFrozen), current and future subsidiaries and (iii) all of
Agrilink Foods' rights under the agreement to acquire DFVC (principally
indemnification rights) and the Marketing and Facilitation Agreement between
Agrilink Foods and Pro-Fac. Agrilink Foods' obligations under the New Credit
Facility are guaranteed by Pro-Fac (excluding AgriFrozen) and certain of
Agrilink Foods' subsidiaries.
<PAGE>
The New Credit Facility contains customary covenants and restrictions on
Agrilink Foods' ability to engage in certain activities, including, but not
limited to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on sale-leaseback transactions, consolidations, mergers, sale of
assets, transactions with affiliates and investments and (iii) limitations on
dividend and other distributions. The New Credit Facility also contains
financial covenants requiring Pro-Fac to maintain a minimum level of
consolidated EBITDA, a minimum consolidated interest coverage ratio, a minimum
consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio
and a minimum level of consolidated net worth. Under the Credit Agreement, the
assets, liabilities, and results of operations of AgriFrozen are not
consolidated with Pro-Fac for purposes of determining compliance with the
covenants. In August of 1999, Pro-Fac negotiated an amendment to the original
covenants. In conjunction with this amendment, Pro-Fac incurred a fee of
approximately $2.6 million. This fee is being amortized over the remaining life
of the New Credit Facility. Pro-Fac and Agrilink Foods are in compliance with
all covenants, restrictions and requirements under the terms of the New Credit
Facility as amended.
Interest Rate Protection Agreements: Agrilink Foods has entered into a
three-year interest rate swap agreement with the Bank of Montreal in the
notional amount of $150 million. The swap agreement provides for an interest
rate of 4.96 percent over the term of the swap payable by Agrilink Foods in
exchange for payments at the published three-month LIBOR. In addition, Agrilink
Foods entered into a separate interest rate swap agreement with the Bank of
Montreal in the notional amount of $100 million for an initial period of three
years. This swap agreement provides for an interest rate of 5.32 percent over
the term of the swap, payable by Agrilink Foods in exchange for payments at the
published three-month LIBOR. Agrilink Foods entered into these agreements in
order to manage its interest rate risk by exchanging its floating rate interest
payments for fixed rate interest payments.
Agrilink Foods had a two-year option to extend the maturity date on one of the
interest rate swap agreements with a notional amount of $100,000,000. On June 8,
1999, Agrilink Foods sold this option to Bank of Montreal for approximately
$2,050,000. The gain resulting from the sale is being recognized over the
remaining interest rate swap life.
Senior Subordinated Notes - 11-7/8 Percent (due 2008): To extinguish the
Subordinated Bridge Facility, Agrilink Foods issued Senior Subordinated Notes
("New Notes") for $200 million aggregate principal amount due November 1, 2008.
Interest on the New Notes accrues at the rate of 11-7/8 percent per annum and is
payable semiannually in arrears on May 1 and November 1.
The New Notes represent general unsecured obligations of Agrilink Foods,
subordinated in right of payment to certain other debt obligations of Agrilink
Foods (including Agrilink Foods' obligations under the New Credit Facility). The
New Notes are guaranteed by Pro-Fac and certain of Agrilink Foods' subsidiaries.
The New Notes contain customary covenants and restrictions on Agrilink Foods'
ability to engage in certain activities, including, but not limited to: (i)
limitations on the incurrence of indebtedness and liens; (ii) limitations on
consolidations, mergers, sales of assets, transactions with affiliates; and
(iii) limitations on dividends and other distributions. Agrilink Foods is in
compliance with all covenants, restrictions, and requirements under the New
Notes.
Subordinated Bridge Facility: To complete the DFVC Acquisition, Agrilink Foods
entered into a Subordinated Bridge Facility (the "Bridge Facility"). During
November 1998, the net proceeds from the sale of the New Notes, together with
borrowings under the Revolving Credit Facility, were used to repay all the
indebtedness outstanding ($200 million plus accrued interest) under the Bridge
Facility. The outstanding indebtedness under the Bridge Facility accrued
interest at an approximate rate per annum of 10 1/2 percent. Debt issuance costs
associated with the Bridge Facility of $5.5 million were fully amortized during
the second quarter of fiscal 1999.
Dean Foods Subordinated Promissory Note: As partial consideration for the DFVC
Acquisition, Agrilink Foods issued to Dean Foods the Dean Foods Subordinated
Promissory Note for $30 million aggregate principal amount due November 22,
2008. Interest on the note is accrued quarterly in arrears commencing December
31, 1998, at a rate per annum of 5 percent until November 22, 2003, and at a
rate of 10 percent thereafter. As the stated rates on the note are below market
value, Agrilink Foods has imputed the appropriate discount utilizing an
effective interest rate of 11-7/8 percent. Interest accruing through November
22, 2003 is required to be paid in kind through the issuance by Agrilink Foods
of additional subordinated promissory notes identical to the note. Agrilink
Foods satisfied this requirement through the issuance of six additional
promissory notes each for approximately $0.4 million. Interest accruing after
November 22, 2003 is payable in cash. The notes may be prepaid at Agrilink
Foods' option without premium or penalty.
The note is expressly subordinate to the New Credit Facility and the New Notes
and contains no financial covenants. The note is guaranteed by Pro-Fac.
<PAGE>
Senior Subordinated Notes - 12 1/4 Percent Due 2005 ("Old Notes"): In
conjunction with the DFVC Acquisition, Agrilink Foods repurchased $159,985,000
principal amount of its Old Notes, of which $160 million aggregate principal
amount was previously outstanding. Agrilink Foods paid a total of approximately
$184 million to repurchase the Old Notes, including interest accrued thereon of
$2.9 million. Holders who tendered consented to certain amendments to the
indenture relating to the Old Notes, which eliminated or amended substantially
all the restrictive covenants and certain events of default contained in such
indenture. Agrilink Foods may repurchase the remaining Old Notes in the future
in open market transactions, privately negotiated purchases or otherwise.
Revolving Credit Facility ("Notes Payable"): Borrowings under Agrilink Foods'
Revolving Credit Facility (excluding AgriFrozen) were as follows:
<TABLE>
(Dollars in Thousands)
<CAPTION>
Fiscal Years
Ended June 24, 2000 June 26,
1999 June 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Balance at end of period $ 5,700 $ 18,900 $ 0
Rate at fiscal year end 9.375% 8.2% 0.0%
Maximum outstanding during the period $ 156,100 $ 116,200 $66,000
Average amount outstanding during the period $ 90,800 $ 76,700 $51,300
Weighted average interest rate during the period 8.5% 7.8% 7.0%
</TABLE>
Agrilink Foods also maintains a Letter of Credit Facility which provides for the
issuance of letters of credit through September 2000. As of June 24, 2000, there
were $14.2 million of letters of credit outstanding. Management anticipates
timely renewals of the Letter of Credit facilities.
Other Debt: Other debt of $6.8 million carries rates up to 10 percent at June
24, 2000.
Maturities: Total long-term debt maturities during each of the next five fiscal
years for debt associated with Agrilink Foods are as follows: 2001, $16.6
million; 2002, $11.2 million; 2003, $11.1 million; 2004, $10.3 million; and
2005, $190.6 million. Provisions of the Term Loan require annual payments on the
last day of each September of each year (commencing September 30, 1999) in an
amount equal to the "annual cash sweep" (equivalent to approximately 75 percent
of net income adjusted for certain cash and non-cash items) for the preceding
fiscal year. As of June 24, 2000, there were no obligations under this
provision. Provisions of the Term Loan Facility also require that net cash
proceeds from the sale of businesses be applied to the Term Loan Facility.
Fair Value: The estimated fair value of Agrilink Foods' long-term debt
outstanding was approximately $615.5 million and $673.7 million at June 24, 2000
and June 26, 1999, respectively. The fair value for long-term debt was estimated
using either quoted market prices for the same or similar issues or the current
rates offered to Agrilink Foods for debt with similar maturities.
AGRIFROZEN DEBT
CoBank Credit Facility (Bank Debt): In connection with the acquisition of
Agripac's frozen vegetable processing business, AgriFrozen entered into a CoBank
credit facility with CoBank, ACB ("CoBank"). The CoBank Credit Facility consists
of a $30 million Term Loan Facility and a Revolving Credit Facility both of
which mature on June 29, 2002. The Revolving Credit Facility commitment is $55
million for fiscal 2000 and in each year thereafter it is $50 million.
The CoBank term loan facility bears interest, at the option of AgriFrozen, at a
fixed or variable rate. The fixed rate represents the CoBank cost of funds plus
4.19 percent. The variable rate is CoBank's "National Variable Rate," which is a
reference rate established by CoBank. In addition, AgriFrozen is obligated to
pay a commitment fee calculated at a rate of 0.50 percent per annum on the
amount by which the CoBank revolving credit facility commitment exceeds the
greater of (i) $50 million or (ii) the average daily aggregate of the revolving
credit facility advances. There is an interest cap, which includes the fees on
the CoBank Revolving Credit Facility. The interest rate cap was $1.9 million for
the initial period ending June 26, 1999 and is $5.5 million for each subsequent
fiscal year.
AgriFrozen's obligations under the CoBank Credit Facility are collateralized by
a first-priority lien on substantially all existing or after acquired assets,
tangible or intangible, of AgriFrozen.
<PAGE>
AgriFrozen's obligations under the CoBank Credit Facility are not guaranteed by
Pro-Fac or Agrilink Foods and are expressly nonrecourse as to Pro-Fac and
Agrilink Foods.
The CoBank Credit Facility contains customary covenants and restrictions on
AgriFrozen's ability to engage in certain activities, including, but not limited
to: (i) limitations on the incurrence of indebtedness and liens, (ii)
limitations on consolidations, mergers, sale of assets, acquisitions and
transactions with affiliates and third parties (iii) limitations on dividends
and other distributions and (iv) limitations on capital expenditures and
administrative expenses. The CoBank Credit Facility also contains financial
covenants that are effective beginning in fiscal 2000. The covenants require
AgriFrozen to maintain a minimum level of EBITDA and a maximum leverage ratio.
AgriFrozen is in compliance with or has obtained waivers or amendments for its
covenants, restrictions, and requirements under the terms of the CoBank Credit
Facility.
CoBank Subordinated Promissory Note: As partial consideration for the
acquisition of Agripac's frozen vegetable processing business, AgriFrozen issued
to CoBank the CoBank Subordinated Promissory Note for $12 million aggregate
principal amount. Interest on the note is payable quarterly in arrears
commencing February 22, 2004 until February 22, 2009 at a rate per annum of 5
percent, and at a rate of 7 percent thereafter. As the stated rates on the note
are below market value, AgriFrozen has imputed the appropriate discount
utilizing an effective interest rate of 13 percent. Interest accruing for the
period from February 22, 2004 until February 22, 2009 is payable in kind through
the issuance by AgriFrozen of additional subordinated promissory notes identical
to the note. Quarterly principal payments are due commencing March 31, 2009 each
equal to 1/40 of the principal balance on March 31, 2009 with a final lump-sum
payment due February 22, 2014. The note may be prepaid at AgriFrozen's option
without premium or penalty.
The note is expressly subordinate to the CoBank Credit Facility. The note is
collateralized by the assets of AgriFrozen, but it is not guaranteed by Pro-Fac
or Agrilink Foods and is expressly non-recourse as to Pro-Fac and Agrilink
Foods.
Revolving Credit Facility ("Notes Payable"): Borrowings under AgriFrozen's
Revolving Credit Facility were as follows:
(Dollars in Thousands)
Fiscal Years Ended
June 24, 2000 June 26, 1999
Balance at end of period $ 44,100 $ 36,000
Rate at fiscal year end 11.00% 9.25%
Maximum outstanding during the period $ 51,000 $ 36,970
Average amount outstanding during the period $ 42,482 $ 11,548
Weighted average interest rate during the period 10.01% 9.25%
Fair Value: The estimated fair value of AgriFrozen's long-term debt outstanding
was approximately $34.5 and $34.0 million at June 24, 2000 and June 26, 1999,
respectively. The fair value for long-term debt was estimated using the current
rates offered to AgriFrozen for debt with similar maturities.
<PAGE>
NOTE 6. TAXES ON INCOME
Taxes on income before extraordinary item include the following:
(Dollars in Thousands)
Fiscal Years Ended
June 24, 2000 June 26, 1999 June 27, 1998
Federal -
Current $ (4,929) $12,781 $ 6,214
Deferred 12,734 8,972 1,201
-------- ------- --------
7,805 21,753 7,415
State and foreign -
Current (210) 2,016 874
Deferred 902 977 (449)
-------- ------- --------
692 2,993 425
-------- ------- --------
$ 8,497 $24,746 $ 7,840
======== ======= ========
A reconciliation of the consolidated effective tax rate to the amount computed
by applying the federal income tax rate to income before taxes and extraordinary
item is as follows:
<TABLE>
Fiscal Years Ended
--------------------------------
June 24, June 26, June 27,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Statutory federal rate 35.0% 35.0% 35.0%
State and foreign income taxes, net of federal income tax effect 2.9 3.5 2.3
Allocation to members (7.0) 0.0 (8.6)
Goodwill amortization 5.1 5.9 3.9
Dividend received deduction (0.2) (0.4) (1.2)
Other, net (1.4) (1.4) 0.0
---- ---- ----
Effective Tax Rate 34.4% 42.6% 31.4%
==== ==== ====
</TABLE>
<PAGE>
The consolidated deferred tax (liabilities)/assets consist of the following:
(Dollars in Thousands)
June 24, 2000 June 26, 1999
Liabilities:
Depreciation $ (41,033) $ (28,468)
Goodwill and other intangible assets (5,796) (1,379)
Prepaid manufacturing expense (10,152) (7,086)
Prepaid expenses and other current assets 0 (1,672)
Investment in Great Lakes Kraut Company, LLC (1,727) (1,892)
Discount on Subordinated Promissory Notes (5,208) (2,882)
---------- ----------
(63,916) (43,379)
---------- ----------
Assets:
Non-qualified retains 105 697
Inventories 12,922 9,182
Credits and operating loss carryforwards 7,820 1,538
Accrued employee compensation 1,795 5,316
Insurance accruals 3,259 4,422
Pension/OPEB accruals 10,752 7,353
Restructuring reserve 661 1,556
Promotional reserves 371 867
Other 7,334 6,945
---------- ----------
45,019 37,876
---------- ----------
Net deferred liabilities (18,897) (5,503)
Valuation allowance (5,752) (1,409)
---------- ----------
$ (24,649) $ (6,912)
========== ==========
During fiscal 2000, the Cooperative increased the valuation allowance in the
amount of $4.3 million. This valuation allowance was primarily established for
state net operating losses and credits generated during the year. As the
Cooperative cannot assure that realization is more likely than not to occur, a
valuation allowance has been recorded.
During fiscal 1999, Agrilink Foods utilized the $5.5 million of net operating
loss carryforwards ($1.9 million of tax). The benefits for these net operating
losses had been recorded in previous years.
In January 1995, the Boards of Directors of Agrilink Foods and Pro-Fac approved
appropriate amendments to the Bylaws of Agrilink Foods to allow Agrilink Foods
to qualify as a cooperative under Subchapter T of the Internal Revenue Code. In
August 1995, Agrilink Foods and Pro-Fac received a favorable ruling from the
Internal Revenue Service approving the change in tax treatment effective for
fiscal 1996. This ruling also confirmed that the change in Agrilink Foods tax
status would have no effect on Pro-Fac's ongoing treatment as a cooperative
under Subchapter T of the Internal Revenue Code of 1986.
NOTE 7. PENSIONS, PROFIT SHARING, AND OTHER EMPLOYEE BENEFITS
Pensions: The Cooperative has primarily noncontributory defined benefit plans
covering most employees. The benefits for these plans are based primarily on
years of service and employees' pay near retirement. The Cooperative's funding
policy is consistent with the funding requirements of Federal law and
regulations. Plan assets consist principally of common stocks, corporate bonds
and US government obligations.
The Cooperative also participates in several union sponsored pension plans. It
is not possible to determine the Cooperative's relative share of the accumulated
benefit obligations or net assets for these plans.
<PAGE>
Pension cost for fiscal years ended 2000 and 1999 includes the following
components:
<TABLE>
(Dollars in Thousands)
<CAPTION>
Pension Benefits
Fiscal Years Ended
June 24, 2000 June 26, 1999
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 110,833 $ 101,504
Service cost 6,520 4,727
Interest cost 7,592 6,953
Plan participants' contributions 160 242
Amendments 2,296 0
Actuarial (gain)/loss (16,122) 4,976
Benefits paid (9,584) (7,569)
---------- ----------
Benefit obligation at end of period 101,695 110,833
---------- ----------
Change in plan assets:
Fair value of assets at beginning of period 108,183 107,253
Actual return on plan assets 12,941 8,000
Employer contribution 256 257
Plan participants' contributions 160 242
Benefits paid (9,584) (7,569)
---------- ----------
Fair value of assets at end of period 111,956 108,183
---------- ----------
Plan funded status: 10,261 (2,650)
Unrecognized prior service cost 2,181 (131)
Unrecognized actuarial gain (29,217) (10,810)
Union plans 0 (31)
---------- ----------
Accrued benefit liability prior to additional minimum liability (16,775) (13,622)
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability (17,300) (14,385)
Accumulated other comprehensive income 525 763
---------- ----------
Net amount recognized $ (16,775) $ (13,622)
========== ==========
Weighted-average assumptions:
Discount rate 8.0% 7.0%
Expected return on plan assets 9.5% 10.0%
Rate of compensation increase 4.5% 4.5%
</TABLE>
<TABLE>
Pension Benefits
--------------------------------------------------
Fiscal Years Ended
--------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
------------- ------------- -------------
Components of net periodic benefit cost:
<CAPTION>
<S> <C> <C> <C>
Service cost $ 6,520 $ 4,727 $ 2,796
Interest cost 7,592 6,953 6,776
Expected return on plan assets (10,604) (10,528) (8,708)
Amortization of prior service cost (16) (15) (22)
Amortization of gain (51) (741) (593)
Union costs 37 81 88
-------- --------- -------
Net periodic cost $ 3,478 $ 477 $ 337
======== ========= =======
</TABLE>
The Cooperative maintains a non-tax qualified Supplemental Executive Retirement
Plan which provides additional retirement benefits to two prior executives who
retired prior to November 4, 1994.
On January 28, 1992, the Cooperative adopted a Non-Qualified Excess Benefit
Retirement Plan which serves to provide employees with the same retirement
benefit they would have received from Agrilink Foods' retirement plan under the
career average base pay formula, but for changes required under the 1986 Tax
Reform Act and the compensation limitation under Section 401(a)(17) of the
Internal Revenue Code having been revised in the 1992 Omnibus Budget Reform Act.
<PAGE>
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the two non-qualified retirement plans with accumulated
benefit obligations in excess of plan assets were:
<TABLE>
(Dollars in Thousands)
<CAPTION>
Supplemental Executive Retirement Plan Excess Benefit Retirement Plan
--------------------------------------- -----------------------------------
Fiscal Years Ended Fiscal Years Ended
--------------------------------------- -----------------------------------
June 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Projected benefit obligation $ 1,729 $ 1,895 $ 1,159 $ 1,128
Accumulated benefit obligation 1,729 1,895 834 855
Plan assets 0 0 0 0
</TABLE>
Postretirement Benefits Other Than Pensions: Generally, other than pensions, the
Cooperative does not pay retirees' benefit costs. Various exceptions exist,
which have evolved from union negotiations, early retirement incentives and
existing retiree commitments from acquired companies.
The Cooperative has not prefunded any of its retiree medical or life insurance
liabilities. Consequently there are no plan assets held in a trust, and there is
no expected long-term rate of return assumption for purposes of determining the
annual expense.
The plan's funded status was as follows:
<TABLE>
(Dollars in Thousands)
<CAPTION>
Other Benefits
Fiscal Years Ended
June 24, 2000 June 26, 1999
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 6,507 $ 2,758
Service cost 184 90
Interest cost 433 250
(Decrease due to sale)/increase due to acquisition (295) 2,065
Actuarial (gain)/loss (715) 1,932
Benefits paid (456) (588)
---------- ----------
Benefit obligation at end of period 5,658 6,507
---------- ----------
Change in plan assets:
Fair value of assets at beginning of period 0 0
Employer contribution 456 588
Benefits paid (456) (588)
----------- ----------
Fair value of assets at end of period 0 0
---------- ----------
Plan funded status: (5,658) (6,507)
Unrecognized actuarial loss 717 1,886
---------- ----------
Accrued benefit liability (4,941) (4,621)
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability (4,941) (4,621)
---------- ----------
Net amount recognized $ (4,941) $ (4,621)
========== ==========
Weighted-average assumptions:
Discount rate 8.0% 7.0%
Expected return on plan assets N/A N/A
Rate of compensation increase 4.5% 4.5%
</TABLE>
<PAGE>
<TABLE>
Other Benefits
--------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 184 $ 90 $ 6
Interest cost 433 250 198
Amortization of loss/(gain) 159 0 (10)
--------- -------- ----------
Net periodic cost $ 776 $ 340 $ 194
========= ======== =========
</TABLE>
For measurement purposes, an 8.5 percent rate of increase in the per capita cost
of covered health care benefits was assumed for fiscal 2000. The rate was
assumed to decrease gradually to 5.0 percent for 2007 and remain at that level
thereafter.
The Cooperative sponsors benefit plans that provide postretirement medical and
life insurance benefits for certain current and former employees. For the most
part, current employees are not eligible for the postretirement medical
coverage. As such, the assumed health care trend rates have an insignificant
effect on the amounts reported for the postretirement benefits plan.
One-percentage point change in the assumed health care trend rates would have
the following effect:
<TABLE>
1-Percentage 1-Percentage
Point Increase Point Decrease
<S> <C> <C>
Effect on total of service and interest cost components $ 47,913 $ (43,868)
Effect on postretirement benefit obligation $ 283,765 $ (260,670)
</TABLE>
Retirement Savings and Incentive Plan: Under the Retirement Savings and
Incentive Plan ("RSIP"), the Cooperative makes an incentive contribution to the
RSIP if certain pre-established earnings goals are achieved. In addition, the
Cooperative contributes 401(k) matching contributions to the plan for the
benefit of employees who elect to defer a portion of their salary into the plan.
During fiscal 2000, 1999, and 1998, the Cooperative allocated $1,076,000,
$888,000, and $475,000, respectively, in the form of matching contributions and
$0, $0, and $400,000, respectively, in the form of incentive contributions for
the benefit of its employees.
In addition, Agrilink Foods also maintains a Non-qualified Retirement Savings
Plan in which the Cooperative allocates matching contributions for the benefit
of "highly compensated employees" as defined under Section 414(q) of the
Internal Revenue Code. During fiscal 2000, 1999, and 1998, the Cooperative
allocated $243,000, $208,000, and $131,000 respectively in the form of matching
contributions to this plan.
Long-Term Incentive Plan: On June 24, 1996, the Cooperative introduced a
long-term incentive program, the Agrilink Foods Equity Value Plan, which it has
amended from time to time. The Equity Value Plan provides performance units to a
select group of management. The future value of the performance units is
determined by the Company's performance on earnings and debt repayment.
Units issued in 1996 through 1999 vest 25 percent each year after the first
anniversary of the grant, becoming 100 percent vested on the fourth anniversary
of grant. For units granted in 1996, the appreciated value of units in excess of
the initial grant price is paid as cash compensation on the tenth anniversary of
grant. The total units granted in 1996 were 248,511 at $13.38. For units granted
in 1997, 1998 and 1999, the final value of the performance units is determined
on the fourth anniversary of grant. One-third of the appreciated value of units
in excess of the initial grant price is paid as cash compensation over each of
the subsequent three years. The total units granted from 1997 through 1999 were
402,715 at $26.00 per unit in 1999, 308,628 at $21.88 per unit in 1998, and
176,278 at $25.04 per unit in 1997.
For units granted in 2000, the final value of the performance units is
discretionary. Units granted in 2000 vest 100 percent on the fourth anniversary
of grant. The total units granted in 2000 were 371,806.
Units forfeited since the inception of the plan include 8,731 at $26.00, 9,418
at $21.88, 18,362 at $25.04, and 27,165 at $13.38.
The value of the grants from the Agrilink Foods Equity Value Plan will be based
on Agrilink's future earnings and debt repayment.
Employee Stock Purchase Plan: During fiscal 1996 the Cooperative introduced an
Employee Stock Purchase Plan which affords employees the opportunity to purchase
semi-annually, in cash or via payroll deduction, shares of Class B Cumulative
Pro-Fac Preferred Stock to a maximum value of 5 percent of salary. The purchase
price of such shares is par value, $10 per share. During fiscal 2000, 1999, and
1998, 23,664, 26,061, and 27,043 shares, respectively, were held by employees,
and there were no shares subscribed to as of June 24, 2000.
<PAGE>
NOTE 8. OPERATING SEGMENTS
During fiscal 1999, the Cooperative adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise" (SFAS 131).
SFAS No. 131 establishes requirements for reporting information about operating
segments and establishes standards for related disclosures about products and
services, and geographic areas. SFAS No. 131 also replaces the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of reportable
segments. As management makes the majority of its operating decisions based upon
the Cooperative's significant product lines, The Cooperative has elected to
utilize significant product lines in determining its operating segments. The
Cooperative's four primary operating segments are as follows: vegetables, fruit,
snacks, and canned meals.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, and
Brooks Chili Beans. The fruit product line consists of canned and frozen fruits
including fruit fillings and toppings. Branded products within the fruit
category include Comstock and Wilderness. The snack product line consists of
potato chips, popcorn and other corn-based snack items. Branded products within
the snacks category include Tim's Cascade Chips, Snyder of Berlin, Husman, La
Restaurante, Erin's, Beehive, Pops-Rite, Super Pop, and Flavor Destinations. The
canned meal product line includes canned meat products such as chilies, stew,
and soups, and various other ready-to-eat prepared meals. Branded products
within the canned meals category include Nalley. Other product lines primarily
represent salad dressings. Branded products within the "other category" include
Bernstein's and Nalley.
<PAGE>
<TABLE>
The following table illustrates the Cooperative's operating segment information:
(Dollars in Millions) Fiscal Years Ended
--------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales:
Vegetables $ 886.6 $ 763.1 $ 233.1
Fruits 110.4 111.5 119.7
Snacks 87.3 87.9 83.7
Canned Meals 60.3 64.2 64.0
Other 54.5 73.0 58.6
---------- ---------- ---------
Continuing segments 1,199.1 1,099.7 559.1
Businesses sold 69.4 139.2 160.6
---------- ---------- ---------
Total $ 1,268.5 $ 1,238.9 $ 719.7
========== ========== =========
Operating income:
Vegetables1 $ 70.8 $ 46.0 $ 11.5
Fruits 13.9 8.4 17.1
Snacks 6.7 3.3 6.1
Canned Meals 6.7 6.5 6.8
Other 4.6 3.7 (0.3)
---------- ---------- ---------
Continuing segments operating income 102.7 67.9 41.2
Businesses sold (1.2) 5.1 14.5
---------- ---------- ---------
Total 101.5 73.0 55.7
Gains on sales of assets 6.7 64.7 0.0
Restructuring expense 0.0 (5.0) 0.0
---------- ---------- ---------
Total consolidated operating income 108.2 132.7 55.7
Interest expense (83.5) (67.4) (30.7)
Amortization of debt issue costs associated with the Bridge Facility 0.0 (5.5) 0.0
---------- ---------- ---------
Pretax income before extraordinary item, dividends and allocation of
net proceeds $ 24.7 $ 59.8 $ 25.0
========== ========== =========
Total Assets:
Vegetables $ 966.2 $ 974.1 $ 300.8
Fruits 79.4 90.2 87.5
Snacks 43.5 40.9 43.1
Canned Meals 45.7 46.2 49.8
Other 52.2 43.1 47.4
---------- ---------- ---------
Continuing segments 1,187.0 1,194.5 528.6
Businesses sold 0.0 1.1 37.9
Assets held for sale 0.3 0.9 2.7
---------- ---------- ---------
Total $ 1,187.3 $ 1,196.5 $ 569.2
========== ========== =========
Depreciation expense:
Vegetables $ 24.6 $ 15.7 $ 8.2
Fruits 1.7 2.4 3.6
Snacks 2.4 1.7 1.6
Canned Meals 1.2 1.2 1.0
Other 1.2 1.0 1.4
---------- ---------- ---------
Continuing segments 31.1 22.0 15.8
Businesses sold 1.5 2.8 2.2
---------- ---------- ---------
Total $ 32.6 $ 24.8 $ 18.0
========== ========== =========
Amortization Expense:
Vegetables $ 6.1 $ 5.4 $ 0.6
Fruits 0.1 0.1 0.3
Snacks 0.8 0.9 0.6
Canned meals 0.7 0.7 0.8
Other 0.7 0.6 0.6
----------- ---------- ---------
Continuing segments 8.4 7.7 2.9
Businesses sold 0.4 1.7 0.7
----------- ---------- ---------
Total $ 8.8 $ 9.4 $ 3.6
=========== ========== =========
</TABLE>
<PAGE>
<TABLE>
(Dollars in Millions) Fiscal Years Ended
--------------------------------------------------
June 24, 2000 June 26, 1999 June 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Capital expenditures:
Vegetables $ 21.4 $ 19.5 $ 8.0
Fruits 1.6 1.3 1.5
Snacks 2.3 2.0 1.8
Canned Meals 1.1 0.6 0.5
Other 0.2 0.3 0.4
----------- ---------- ---------
Continuing Segments 26.6 23.7 12.2
Businesses sold 0.4 0.1 1.9
----------- ---------- ---------
Total $ 27.0 $ 23.8 $ 14.1
=========== ========== =========
<FN>
1 The vegetable product line includes earnings derived from Agrilink Foods'
investment in Great Lakes Kraut Company, LLC of $2.4 million, $2.8 million
and $1.9 million in fiscal 2000, fiscal 1999, and fiscal 1998, respectively.
See NOTE 3 to the "Notes to Consolidated Financial Statements" -
"Acquisitions and Disposals - Formation of New Sauerkraut Company."
</FN>
</TABLE>
NOTE 9. COMMON STOCK AND CAPITALIZATION
The following table illustrates the Cooperative's shares authorized, issued, and
outstanding at June 24, 2000 and June 26, 1999.
<TABLE>
Shares Issued and Outstanding
Fiscal Years Ended
Par Shares --------------------------------
Value Authorized June 24, 2000 June 26, 1999
----- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Class A Common Stock $ 5.00 5,000,000 2,132,981 1,995,740
Class B Common Stock $ 5.00 2,000,000 723,229 0
Non-Cumulative Preferred Stock $25.00 5,000,000 34,400 39,635
Class A Cumulative Preferred Stock $ 1.00 10,000,000 4,249,007 3,694,495
Class B Cumulative Preferred Stock $ 1.00 9,500,000 0 0
Class C Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class D Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class E Cumulative Preferred Stock $ 1.00 10,000,000 0 0
Class B, Series I 10% Cumulative Preferred Stock $ 1.00 500,000 23,664 26,061
</TABLE>
On March 4, 1999, the Cooperative authorized up to $15,000,000 of special
membership interests which shall have a stated value equal to such interests'
face amount.
Common Stock: The Common Stock purchased by members is related to the crop
delivery of each member. Regardless of the number of shares held, each member
has one vote. As of June 24, 2000, there were 626 holders of the Class A Common
Stock and 150 holders of Class B Common Stock. Common Stock may be transferred
to another grower only with approval of the Pro-Fac Board of Directors. If a
member ceases to be a producer of agricultural products which is marketed
through the Cooperative, then it must sell its Common Stock to another grower
within the members' pool that is acceptable to the Cooperative. If no such
grower is available to purchase the stock, then the member must sell its Common
Stock to the Cooperative at par value. There is no established public trading
market for the Common Stock of the Cooperative.
In fiscal 2000, 1999, and 1998 dividends on Class A Common Stock were paid at a
rate of 5.0 percent. There were no dividends paid on the Class B Common Stock.
Subsequent to June 24, 2000, the Cooperative declared a cash dividend at a rate
of 5.0 percent on the Class A Common Stock. These dividends amounted $0.5
million and were paid in July 2000.
At June 24, 2000 and June 26, 1999, there were outstanding subscriptions, at par
value, of 233,977 and 384,649 shares for Class A Common Stock, respectively.
These shares are issued as subscription payments are received. There were no
outstanding subscriptions for the Class B Common Stock.
Preferred Stock: Except for the Class B, Series I, 10 Percent Cumulative
Preferred Stock, all preferred stock outstanding originated from the conversion
at par value of retains at the discretion of Pro-Fac's board of directors.
Preferred Stock is non-voting, except that the holders of preferred and common
stock are entitled to vote as separate classes on certain matters which would
affect or subordinate the rights of the class.
On August 23, 1995, the Cooperative commenced an offer to exchange one share of
its Class A Cumulative Preferred Stock (liquidation preference $25 per share)
for each of its existing Non-cumulative Preferred Stock (liquidation preference
$25 per share). Pro-Fac's Class <PAGE> A Cumulative Preferred Stock is listed
under the symbol PFACP on the Nasdaq National Market System. As of June 24,
2000, the number of Class A Cumulative Preferred Stock record holders was 1,831.
The "Class B, Series I, 10 Percent Cumulative Preferred Stock (the "Class B
Stock") is issued to employees pursuant to an Employee Stock Purchase Plan. At
least once a year, Pro-Fac plans to offer to repurchase at least 5 percent of
the outstanding shares of Class B Stock.
<TABLE>
The dividend rates for the preferred stock outstanding are as follows:
<S> <C>
Non-Cumulative Preferred Stock $1.50 per share paid annually at the discretion of the Board.
Class A Cumulative Preferred Stock $1.72 per share annually, paid in four quarterly
installments of $.43 per share.
Class B, Series I, 10 Percent Cumulative Preferred Stock $1.00 per share paid annually.
</TABLE>
Subsequent to June 24, 2000, the Cooperative declared a cash dividend of $1.50
per share on the Non-cumulative Preferred Stock and $.43 per share on the Class
A Cumulative Preferred Stock. These dividends amounted to $1.9 million and were
paid in July 2000.
Retained Earnings Allocated to Members ("Retains"): Retains arise from patronage
income, and are allocated to the accounts of members within 8.5 months of the
end of each fiscal year.
Qualified Retains: Qualified retains are freely transferable. At the
discretion of the Board of Directors qualified retains may mature into
preferred stock in December of the fifth year after allocation.
Qualified retains are taxable income to the member in the year the
allocation is made.
Non-Qualified Retains: Non-qualified retains may not be sold or
purchased. At the discretion of the Board of Directors the
non-qualified retains allocation may be redeemed in five years through
partial payment in cash and issuance of preferred stock. The
non-qualified retains will not be taxable to the member until the year
of redemption.
Non-qualified retains may be subject to later adjustment if such is
deemed necessary by the Board of Directors because of events which may
occur after the retains were allocated.
Beginning with the retains issued in 1995, the maturity of all future retains,
if approved by the Board of Directors, will result in the issuance of Class A
Cumulative Preferred Stock.
Earned Surplus: Earned surplus consists of accumulated income after distribution
of earnings allocated to members, dividends and after state and federal income
taxes. Earned surplus is reinvested in the business in the same fashion as
retains.
NOTE 10. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation, wholly-owned
subsidiaries of Agrilink Foods ("Subsidiary Guarantors") and Pro-Fac, have
jointly and severally, fully and unconditionally guaranteed, on a senior
subordinated basis, the obligations of Agrilink Foods with respect to Agrilink
Foods' 11 7/8 percent Senior Subordinated Notes due 2008 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.
<PAGE>
Separate financial statements and other disclosures concerning the Subsidiary
Guarantors are not presented because management has determined that such
financial statements and other disclosures are not material. Accordingly, set
forth below is certain summarized financial information derived from unaudited
historical financial information for the Subsidiary Guarantors, on a combined
basis.
(Dollars in Thousands)
Fiscal Year Ended
-----------------------------------------
June 24, June 26, June 27,
2000 1999 1998
----------- --------- ---------
Summarized Statement of Operations:
Net sales/royalty income $ 74,163 $ 33,026 $ 12,086
Gross profit 59,072 23,641 5,123
Income from continuing operations 59,343 20,732 1,002
Net income 38,575 13,401 1,002
Summarized Balance Sheet:
Current assets $ 3,258 $ 1,759 $ 2,033
Noncurrent assets 211,107 217,684 7,129
Current liabilities 6,926 8,290 1,267
NOTE 11. OTHER MATTERS
Legal Matters: The Cooperative is party to various litigation and claims arising
in the ordinary course of business. Management and legal counsel for the
Cooperative are of the opinion that none of these legal actions will have a
material effect on the financial position of the Cooperative.
Commitments: Agrilink Foods has guaranteed an approximate $3.0 million loan for
Great Lakes Kraut Company, LLC in which Agrilink Foods has a 50 percent
interest.
Agrilink Foods has guaranteed an approximate $1.4 million loan for the City of
Montezuma to renovate a sewage treatment plant operated in Montezuma on behalf
of the City.
