UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 23, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Registration Statement (Form S-4) Number 333-70143
AGRILINK FOODS, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-0845824
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number)
90 Linden Oaks, PO Box 20670, Rochester, NY 14602-6070
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (716) 383-1850
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 28, 2000.
Common Stock: 10,000
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
Agrilink Foods, Inc.
Consolidated Statements of Operations, Accumulated Earnings/(Loss) and Comprehensive Income
(Dollars in Thousands)
(Unaudited)
Quarter Ended
------------------------------------
September 23, September 25,
2000 1999
---------------- -------------
<S> <C> <C>
Net sales $ 285,018 $ 278,186
Cost of sales (202,569) (196,557)
---------- ----------
Gross profit 82,449 81,629
Selling, administrative, and general expenses (63,436) (61,348)
Income from Joint Venture 275 491
---------- ----------
Operating income before dividing with Pro-Fac 19,288 20,772
Interest expense (19,218) (19,323)
---------- ----------
Pretax income before dividing with Pro-Fac 70 1,449
Pro-Fac share of income (34) (724)
---------- ----------
Income before taxes 36 725
Tax provision (14) (309)
---------- ----------
Net Income 22 416
Accumulated earnings/(loss) at beginning of period 4,000 (2,424)
---------- ----------
Accumulated earnings/(loss) at end of period $ 4,022 $ (2,008)
========== ==========
Net income $ 22 $ 416
Other comprehensive income
Unrealized gain on hedging activity 2,304 0
---------- ----------
Comprehensive income $ 2,326 $ 416
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Agrilink Foods, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
September 23, June 24, September 25,
2000 2000 1999
------------- ---------- --------------
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 6,268 $ 4,994 $ 10,831
Accounts receivable trade, net 120,493 95,499 106,871
Accounts receivable, other 17,422 9,855 14,396
Income taxes refundable 0 7,331 2,880
Current deferred tax asset 11,552 11,552 15,565
Inventories 388,377 295,297 419,954
Current investment in CoBank 1,951 2,927 1,602
Prepaid manufacturing expense 0 20,296 114
Prepaid expenses and other current assets 23,959 18,706 21,327
---------- ---------- ----------
Total current assets 570,022 466,457 593,540
Investment in CoBank 15,893 15,893 19,693
Investment in joint venture 7,049 6,775 7,170
Property, plant and equipment, net 311,802 317,994 337,278
Assets held for sale at net realizable value 339 339 1,172
Goodwill and other intangible assets, net 256,135 258,545 262,059
Other assets 25,526 23,484 21,556
Note receivable due from Pro-Fac Cooperative, Inc. 9,400 9,400 9,400
---------- ---------- ----------
Total assets $1,196,166 $1,098,887 $1,251,868
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable $ 99,000 $ 5,700 $ 126,800
Current portion of obligations under capital leases 218 218 208
Current portion of long-term debt 16,595 16,583 16,580
Accounts payable 89,554 80,687 104,594
Income taxes payable 1,945 0 0
Accrued interest 15,771 11,398 11,059
Accrued employee compensation 11,533 10,114 13,555
Other accrued expenses 60,958 64,138 76,230
Due to AgriFrozen Foods, Inc. 1,819 14,384 3,413
Due to Pro-Fac Cooperative, Inc. 15,449 9,141 22,861
---------- ---------- ----------
Total current liabilities 312,842 212,363 375,300
Obligations under capital leases 520 520 568
Long-term debt 639,280 644,712 660,640
Deferred income tax liabilities 32,262 32,262 23,174
Other non-current liabilities 29,758 29,852 27,886
---------- ---------- ----------
Total liabilities 1,014,662 919,709 1,087,568
---------- ---------- ----------
Commitments and contingencies
Shareholder's Equity:
Common stock, par value $.01;
10,000 shares outstanding, owned by Pro-Fac 0 0 0
Additional paid-in capital 175,703 175,703 167,071
Accumulated earnings/(deficit) 4,022 4,000 (2,008)
Accumulated other comprehensive income/(loss):
Unrealized gain on hedging activity 2,304 0 0
Minimum pension liability adjustment (525) (525) (763)
---------- ---------- ----------
Total shareholder's equity 181,504 179,178 164,300
---------- ---------- ----------
Total liabilities and shareholder's equity $1,196,166 $1,098,887 $1,251,868
========== ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Agrilink Foods, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited) Quarter Ended
----------------------------------
September 23, September 25,
2000 1999
-------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 22 $ 416
Adjustments to reconcile net income to net cash used in operating activities -
Interest-in-kind on subordinated promissory note 402 384
Depreciation 7,727 7,446
Amortization of goodwill and other intangibles 2,514 2,105
Amortization of debt issue costs and discount on subordinated promissory note 1,159 1,025
Equity in undistributed earnings of joint venture (275) (491)
Change in assets and liabilities:
Accounts receivable (32,561) (33,653)
Inventories and prepaid manufacturing expense (72,784) (108,281)
Income taxes refundable/(payable) 7,565 6,480
Accounts payable and other accrued expenses 11,479 28,856
Due to AgriFrozen Foods (12,565) (3,402)
Due to Pro-Fac 6,308 7,799
Other assets and liabilities, net (3,272) (4,603)
---------- ----------
Net cash used in operating activities (84,281) (95,919)
---------- ----------
Cash Flows From Investing Activities:
Purchase of property, plant and equipment (7,590) (8,314)
Proceeds from disposals 5,053 273
Proceeds from investment in CoBank 976 801
---------- ----------
Net cash used in investing activities (1,561) (7,240)
---------- ----------
Cash Flows From Financing Activities:
Net proceeds from issuance of short-term debt 93,300 107,900
Payments on long-term debt (6,184) (450)
---------- ----------
Net cash provided by financing activities 87,116 107,450
---------- ----------
Net change in cash and cash equivalents 1,274 4,291
Cash and cash equivalents at beginning of period 4,994 6,540
---------- ----------
Cash and cash equivalents at end of period $ 6,268 $ 10,831
========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
AGRILINK FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The Company: Agrilink Foods, Inc. (the "Company" or "Agrilink Foods"),
incorporated in New York in 1961, is a producer and marketer of processed food
products. The Company has four primary product lines including: vegetables,
fruits, snacks, and canned meals. The majority of each of the product lines' net
sales is within the United States. In addition, all of the Company's operating
facilities, excluding one in Mexico, are within the United States. The Company
is a wholly-owned subsidiary of Pro-Fac Cooperative, Inc. ("Pro-Fac" or the
"Cooperative").
Basis of Presentation: The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by GAAP
for complete financial statement presentation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations have been included. Operating
results for the quarter ended September 23, 2000 are not necessarily the results
to be expected for other interim periods or the full year. These financial
statements should be read in conjunction with the financial statements and
accompanying notes contained in the Company's Form 10-K for the fiscal year
ended June 24, 2000.
Consolidation: The consolidated financial statements include the Company and its
wholly owned subsidiaries after elimination of intercompany transactions and
balances. Investments in affiliates owned more than 20 percent but not in excess
of 50 percent are recorded under the equity method of accounting.
Reclassification: Certain items for fiscal 2000 have been reclassified to
conform with the current period presentation.
NOTE 2. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On June 25, 2000, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires the recognition of all derivative financial instruments as either
assets or liabilities in the balance sheet and measurement of those instruments
at fair value. Changes in the fair values of those derivatives will be reported
in earnings or other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. The accounting for gains and
losses associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge designation
and whether the hedge is highly effective in achieving offsetting changes in the
fair value or cash flow of the asset or liability hedged. Under the provisions
of SFAS No. 133, the method that will be used for assessing the effectiveness of
a hedging derivative, as well as the measurement approach for determining the
ineffective aspects of the hedge, must be established at the inception of the
hedge.
The Company, as a result of its operating and financing activities, is exposed
to changes in foreign currency exchange rates, certain commodity prices, and
interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Company may enter into derivative contracts.
The adoption of SFAS No. 133 did not materially affect the Company's results of
operations or financial position.
Foreign Currency: The Company manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by the Company are denominated in Mexican pesos.
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. During fiscal 2000, the Company
entered into cash flow hedges for the Mexican peso with maturity dates ranging
from July 2000 to April 2001. At September 23, 2000, the fair value of the open
contracts was an after-tax gain of $0.2 million, recorded in accumulated other
comprehensive income in shareholder's equity. Amounts deferred to accumulated
other comprehensive income will be reclassified into cost of goods sold within
the next 12 months.
<PAGE>
During the first quarter of fiscal 2001, approximately $0.3 million was
reclassified from other comprehensive income to cost of goods sold. Hedge
ineffectiveness was insignificant.
Commodity Prices: The Company is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, the Company designates soybean
oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. At September 23, 2000, the Company had open soybean oil contracts
hedging approximately 70 percent of its planned soybean oil requirements during
fiscal 2001. The fair value of these open contracts was $64,800 at September 23,
2000. During the first quarter of fiscal 2001, an immaterial loss on these
contracts was recorded in cost of goods sold. All open contracts mature by
January 2001.
The Company is exposed to commodity price risk related to forecasted purchases
of corrugated (unbleached kraftliner) in its manufacturing process. To mitigate
this risk, the Company designates a swap agreement as a cash flow hedge of its
forecasted corrugated purchases. At September 23, 2000, the Company had an open
swap hedging approximately 80 percent of its planned corrugated requirements.
The fair value of this agreement was immaterial at September 23, 2000. The
termination date for the agreement is June 2001.
Interest Rates: The Company is exposed to interest rate risk primarily through
its borrowing activities. The majority of the Company's long-term borrowings are
variable rate instruments. The Company entered into two interest rate swap
contracts under which the Company agrees to pay an amount equal to a specified
fixed rate of interest times a notional principal amount, and to receive in
return an amount equal to a specified variable rate of interest times the same
notional principal amount. The notional amounts of the contract are not
exchanged and no other cash payments are made. Two interest rate swap contracts
were entered into with a major financial institution in order to minimize credit
risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month LIBOR of 6.77 percent as of September 23, 2000) on $150 million
notional amount of indebtedness. The Company had a second interest rate swap
contract to pay a fixed rate of interest (5.32 percent) and receive a variable
rate of interest (three-month LIBOR of 6.77 percent as of September 23, 2000) on
$100 million notional amount of indebtedness. Approximately 59 percent of the
underlying debt is being hedged with these interest rate swaps.
The Company designates these interest rate swap contacts as cash flow hedges. At
September 23, 2000, the fair value of the contracts was an after-tax gain of
$2.1 million, recorded in accumulated other comprehensive income in
shareholder's equity.
To the extent that any of these contracts are not considered effective in
offsetting the change in the value of the interest payments being hedged, any
changes in fair value relating to the ineffective portion of these contacts are
immediately recognized in income. However, the net gain or loss on the
ineffective portion of these interest rate swap contracts was not material
during the first quarter of fiscal 2001. Amounts deferred to other comprehensive
income will be reclassified into interest expense over the life of the swap
contracts.
NOTE 3: DISPOSITIONS
Sale of Pickle Business: On June 23, 2000, Agrilink Foods sold its pickle
business based in Tacoma Washington to Dean Pickle and Specialty Products
Company. This business included pickle, pepper, and relish products sold
primarily under the Nalley and Farman's brand names. Agrilink Foods will
continue to contract pack Nalley and Farman's pickle products for a period of
two years at the existing Tacoma processing plant which Agrilink Foods will
operate.
In a related transaction, on July 21, 2000, Agrilink sold the machinery and
equipment utilized in the production of pickles and other related products to
Dean Pickle and Specialty Products Company. No significant gain or loss was
recognized on this transaction. The Company received proceeds of $5.0 million
which were applied to bank loans ($3.2 million of which was applied to the term
loan facility and $1.8 million of which was applied to the Company's revolving
credit facility).
Sale of Midwest Private Label Canned Vegetable Business: On November 8, 1999,
the Company completed the sale of Agrilink Foods' Midwest private label canned
vegetable business to Seneca Foods. Included in this transaction was the
Arlington, Minnesota facility. The Company received proceeds of approximately
$42.4 million which were applied to borrowings outstanding under the Company's
revolving credit facility. In addition, Seneca Foods issued to Agrilink Foods a
$5.0 million unsecured subordinated
<PAGE>
promissory note due February 8, 2009. This transaction did not include the
Company's retail branded canned vegetables, Veg-All and Freshlike. No
significant gain or loss was recognized on this transaction.
NOTE 4. AGREEMENTS WITH PRO-FAC
The Company's contractual relationship with Pro-Fac is defined in the Pro-Fac
Marketing and Facilitation Agreement ("Agreement"). Under the Agreement, the
Company pays Pro-Fac the commercial market value ("CMV") for all crops supplied
by Pro-Fac. CMV is defined as the weighted average price paid by other
commercial processors for similar crops sold under preseason contracts and in
the open market in the same or competing market area. Although CMV is intended
to be no more than the fair market value of the crops purchased by Agrilink
Foods, it may be more or less than the price Agrilink Foods would pay in the
open market in the absence of the Agreement.
Under the Agreement, the Company is required to have on its board of directors
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. The volume and type of
crops to be purchased by Agrilink Foods under the Agreement are determined
pursuant to its annual profit plan, which requires the approval of a majority of
the Disinterested Directors. In addition, under the Agreement, in any year in
which the Company has earnings on products which were processed from crops
supplied by Pro-Fac ("Pro-Fac Products"), the Company pays to Pro-Fac, as
additional patronage income, 90 percent of such earnings, but in no case more
than 50 percent of all pretax earnings of the Company (before dividing with
Pro-Fac). In years which the Company has losses on Pro-Fac Products, the Company
reduces the CMV it would otherwise pay to Pro-Fac by up to 90 percent of such
losses, but in no case by more than 50 percent of all pretax losses of the
Company (before dividing with Pro-Fac). Additional patronage income is paid to
Pro-Fac for services provided to Agrilink Foods, including the provision of a
long term, stable crop supply, favorable payment terms for crops, and the
sharing of risks of losses of certain operations of the business. Earnings and
losses are determined at the end of the fiscal year, but are accrued on an
estimated basis during the year. Under the Agreement, Pro-Fac is required to
reinvest at least 70 percent of the additional patronage income in Agrilink
Foods.
Amounts received by Pro-Fac from Agrilink Foods for the three months ended
September 23, 2000 and September 25, 1999 include: commercial market value of
crops delivered, $48.4 million and $53.3 million, respectively; and additional
proceeds from profit sharing provisions of, $34,000 and $0.7 million,
respectively.
NOTE 5. INVENTORIES
The major classes of inventories are as follows:
September 23, June 24, September 25,
2000 2000 1999
------------- ---------- -------------
Finished goods $ 346,808 $ 250,112 $ 375,877
Raw materials and supplies 41,569 45,185 44,077
---------- ---------- ---------
$ 388,377 $ 295,297 $ 419,954
========== ========== =========
NOTE 6. DEBT
Summary of Long-Term Debt:
(Dollars in Thousands)
September 23, June 24, September 25,
2000 2000 1999
------------- --------- ------------
Term Loan Facility $ 422,400 $ 428,300 $ 446,400
Senior Subordinated Notes 200,015 200,015 200,015
Subordinated Promissory Note 26,909 26,144 24,056
Other 6,551 6,836 6,749
---------- ---------- ---------
Total Debt 655,875 661,295 677,220
Less Current Portion (16,595) (16,583) (16,580)
---------- ------- ---------
Total Long-Term Debt $ 639,280 $ 644,712 $ 660,640
========== ========== =========
<PAGE>
Amendments to Term Loan Facility: The term loan facility contains customary
covenants and restrictions on the Company's ability to engage in certain
activities, including, but not limited to: (i) limitations on the incurrence of
indebtedness and liens, (ii) limitations on sale-leaseback transactions,
consolidations, mergers, sale of assets, transactions with affiliates and
investments and (iii) covenants require Pro-Fac to maintain a minimum level of
consolidated EBITDA, a minimum consolidated interest coverage ratio, a minimum
consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio,
and a minimum level of consolidated net worth. Under the Credit Agreement, the
assets, liabilities, and results of operations of AgriFrozen Inc., also a
subsidiary of Pro-Fac, are not consolidated with Pro-Fac for purposes of
determining debt covenant compliance.
During the first quarter of fiscal 2001, the Company negotiated an amendment to
the covenants outlined under the credit facility. In consideration for this
amendment, the Company incurred a fee of approximately $1.7 million. This fee is
being amortized over the life of the credit facility. Pursuant to the amendment,
the interest rates were modified and the credit facility currently bears
interest, at the Company's option, at the Administrative Agent's alternate base
rate or the London Interbank Offered Rate ("LIBOR") plus, in each case,
applicable margins of: (i) in the case of alternate base rate loans, (x) 1.25
percent for loans under the Revolving Credit Facility and the Term A Facility,
(y) 3.00 percent for loans under the Term B Facility and (z) 3.25 percent for
loans under the Term C Facility and (ii) in the case of LIBOR loans, (x) 3.00
percent for loans under the Revolving Credit Facility and the Term A Facility,
(y) 4.00 percent for loans under the Term B Facility and (z) 4.25 percent for
loans under the Term C Facility. The Administrative Agent's "alternate base
rate" is defined as the greater of: (i) the prime commercial rate as announced
by the Administrative Agent or (ii) the Federal Funds rate plus 0.50 percent.
Pro-Fac and the Company are in compliance with all covenants, restrictions, and
requirements under the terms of the credit facility as amended.
NOTE 7. OTHER MATTERS
Restructuring: During the third quarter of fiscal 1999, the Company began
implementation of a corporate-wide restructuring program. The overall objectives
of the plan were to reduce expenses, improve productivity, and streamline
operations. The total restructuring charge amounted to $5.0 million and was
primarily comprised of employee termination benefits. Efforts have focused on
the consolidation of operating functions and the elimination of approximately
five percent of the work force. Reductions in personnel include operational and
administrative positions and have improved annual earnings by approximately $8.0
million. Of this charge, $4.3 million has been liquidated, and the remaining
termination benefits will be liquidated during fiscal 2001.
NOTE 8. OPERATING SEGMENTS
The Company is organized by product line for management reporting with operating
income being the primary measure of segment profitability. Accordingly, no items
below operating income are allocated to segments. The Company's four primary
operating segments are as follows: vegetables, fruits, snacks, and canned meals.
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable
category include Birds Eye, Birds Eye Voila!, Veg-All, Freshlike, McKenzies, and
Brooks Chili Beans. The fruit product line consists of canned and frozen fruits
including fruit fillings and toppings. Branded products within the fruit
category include Comstock and Wilderness. The snack product line consists of
potato chips, popcorn and other corn-based snack items. Branded products within
the snack category include Tim's Cascade Chips, Snyder of Berlin, Husman, La
Restaurante, Erin's, Beehive, Pops-Rite, and Super Pop. The canned meal product
line includes canned meat products such as chilies, stew, and soups, and various
other ready-to-eat prepared meals. Branded products within the canned meal
category include Nalley. The Company's other product lines primarily represent
salad dressings. Branded products within the "other category" include
Bernstein's and Nalley.
<PAGE>
The following table illustrates the Company's operating segment information:
<TABLE>
(Dollars in Millions) Quarter Ended
---------------------------------------
September 23, 2000 September 25, 1999
------------------ ------------------
<S> <C> <C>
Net Sales:
Vegetables $ 207.7 $ 172.3
Fruits 25.5 23.3
Snacks 23.4 21.4
Canned Meals 15.7 16.6
Other 12.7 14.7
---------- ----------
Continuing segments 285.0 248.3
Businesses sold1 0.0 29.9
---------- ----------
Total $ 285.0 $ 278.2
========== ==========
Operating income:
Vegetables2 $ 10.5 $ 13.4
Fruits 3.8 3.3
Snacks 1.7 1.5
Canned Meals 2.5 1.9
Other 0.8 0.9
---------- ----------
Continuing segments 19.3 21.0
Businesses sold1 0.0 (0.2)
---------- ----------
Operating income before dividing with Pro-Fac 19.3 20.8
Interest expense (19.2) (19.3)
---------- ----------
Pretax income before dividing with Pro-Fac $ 0.1 $ 1.5
========== ==========
<FN>
1 Includes the private label canned vegetable business and the pickle
business sold in fiscal 2000.
2 The vegetable product line includes earnings derived from the Company's
investment in a joint venture of $0.3 million and $0.5 million in fiscal
2001 and fiscal 2000, respectively.
</FN>
</TABLE>
NOTE 9. SUBSIDIARY GUARANTORS
Kennedy Endeavors, Incorporated and Linden Oaks Corporation, wholly-owned
subsidiaries of the Company ("Subsidiary Guarantors"), and Pro-Fac have jointly
and severally, fully and unconditionally guaranteed, on a senior subordinated
basis, the obligations of the Company with respect to the Company's 11-7/8
percent Senior Subordinated Notes due 2008 (the "Notes") and the Company's
Credit Facility. The covenants in the Notes and the Credit Facility do not
restrict the ability of the Subsidiary Guarantors to make cash distributions to
the Company.
Full financial statements of Pro-Fac are included as an Exhibit to this Form
10-Q. Separate financial statements and other disclosures concerning the
Subsidiary Guarantors are not presented because management has determined that
such financial statements and other disclosures are not material. Accordingly,
set forth below is certain summarized financial information derived from
unaudited historical financial information for the Subsidiary Guarantors, on a
combined basis.
<PAGE>
(Dollars in Thousands)
Quarter Ended
------------------------------------
September 23, September 25,
2000 1999
------------ -------------
Summarized Statement of Operations:
Net sales $ 18,943 $ 18,262
Gross profit 14,842 14,384
Income from continuing operations 15,669 14,132
Net income 10,185 9,186
Summarized Balance Sheet:
Current assets $ 3,266 $ 2,511
Noncurrent assets 209,901 215,813
Current liabilities 7,041 5,583
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, the Company makes oral and written statements that may
constitute "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange
Commission ("SEC") in its rules, regulations, and releases. The Company desires
to take advantage of the "safe harbor" provisions in the Act for forward-looking
statements made from time to time, including, but not limited to, the
forward-looking information contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations (pages 10 to 14) and other
statements made in this Form 10-Q and in other filings with the SEC.
The Company cautions readers that any such forward-looking statements made by or
on behalf of the Company are based on management's current expectations and
beliefs but are not guarantees of future performance. Actual results could
differ materially from those expressed or implied in the forward-looking
statements. Among the factors that could impact the Company's ability to achieve
its goals are:
|X| the impact of strong competition in the food industry;
|X| the impact of changes in consumer demand,
|X| the impact of weather on the volume and quality of raw product;
|X| the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer acceptance;
|X| the continuation of the Company's success in integrating operations
(including the realization of anticipated synergies in operations and the
timing of any such synergies), and the availability of acquisition and
alliance opportunities;
|X| the Company's ability to achieve gains in productivity and improvements in
capacity utilization; and
|X| the Company's ability to service debt.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to outline the significant reasons for
material changes in the Unaudited Consolidated Statement of Operations and
Accumulated Earnings/(Loss) in the first quarter of fiscal 2001 versus fiscal
2000.
Agrilink Foods, Inc. ("Agrilink Foods" or the "Company") has four primary
product lines: vegetables, fruits, snacks and canned meals. The majority of each
of the product lines' net sales are within the United States. In addition, the
Company's operating facilities, excluding one in Mexico, are within the United
States.
<PAGE>
The vegetable product line consists of canned and frozen vegetables, chili
beans, and various other products. Branded products within the vegetable product
line include Birds Eye, Birds Eye Voila!, Freshlike, Veg-All, McKenzies, and
Brooks Chili Beans. The fruit product line consists of canned and frozen fruits
including fruit fillings and toppings. Branded products within the fruit
category include Comstock and Wilderness. The snack product line consists of
potato chips, popcorn and other corn-based snack items. Branded products within
the snack category include Tim's Cascade Chips, Snyder of Berlin, Husman, La
Restaurante, Erin's, Beehive, Pops-Rite, and Super Pop. The canned meal product
line includes canned meat products such as chilies, stews, soups, and various
other ready-to-eat prepared meals. Branded products within the canned meal
category include Nalley. The Company's other product line primarily represents
salad dressings. Brand products within the "other" category include Bernstein's
and Nalley.
The following tables illustrate the results of operations by product line for
the three-month period ended September 23, 2000 and September 25, 1999.
EBITDA1
(Dollars in Millions)
Quarter Ended
------------------------------------------
September 23, September 25,
2000 1999
------------------- ------------------
% of % of
$ Total $ Total
---------- -------- ---------- ------
Vegetables $ 18.0 61.2% $ 20.0 66.0%
Fruits 4.4 15.0 3.7 12.2
Snacks 2.8 9.5 2.4 7.9
Canned Meals 2.8 9.5 2.3 7.6
Other 1.4 4.8 1.4 4.6
------ ----- ------- ------
Continuing segments 29.4 100.0 29.8 98.3
Businesses sold2 0.0 0.0 0.5 1.7
------ ----- ------- ------
Total $ 29.4 100.0% $ 30.3 100.0%
====== ===== ======= ======
1 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") is
defined as the sum of pretax income before dividing with Pro-Fac, interest
expense, depreciation and amortization of goodwill and other intangibles.
EBITDA should not be considered as an alternative to net income or cash flows
from operations or any other generally accepted accounting principles measure
of performance or as a measure of liquidity.
EBITDA is included herein because the Company believes EBITDA is a financial
indicator of a company's ability to service debt. EBITDA as calculated by
Agrilink Foods may not be comparable to calculations as presented by other
companies.
2 Represents the operating results of the private label canned vegetable
business and pickle business sold in fiscal 2000. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
<PAGE>
Net Sales
(Dollars in Millions)
Quarter Ended
------------------------------------------
September 23, September 25,
2000 1999
------------------- ------------------
% of % of
$ Total $ Total
---------- -------- ---------- -------
Vegetables $207.7 72.9% $ 172.3 61.9%
Fruits 25.5 8.9 23.3 8.4
Snacks 23.4 8.2 21.4 7.7
Canned Meals 15.7 5.5 16.6 6.0
Other 12.7 4.5 14.7 5.3
------ ----- ------- ------
Continuing segments 285.0 100.0 248.3 89.3
Businesses sold1 0.0 0.0 29.9 10.7
------ ----- ------- ------
Total $285.0 100.0% $ 278.2 100.0%
====== ===== ======= ======
1 Represents net sales of the private label canned vegetable business and
pickle business sold in fiscal 2000. See NOTE 3 to the "Notes to
Consolidated Financial Statements."
Operating Income
(Dollars in Millions)
Quarter Ended
------------------------------------------
September 23, September 25,
2000 1999
------------------- ------------------
% of % of
$ Total $ Total
---------- -------- ---------- ------
Vegetables $ 10.5 54.4% $ 13.4 64.4%
Fruits 3.8 19.7 3.3 15.9
Snacks 1.7 8.8 1.5 7.2
Canned Meals 2.5 13.0 1.9 9.1
Other 0.8 4.1 0.9 4.3
------ ----- ------- ------
Continuing segments 19.3 100.0 21.0 100.9
Businesses sold1 0.0 0.0 (0.2) (0.9)
------ ----- ------- ------
Total $ 19.3 100.0% $ 20.8 100.0%
====== ===== ======= ======
1 Represents the operating results of the private label canned vegetable
business and pickle business sold in fiscal 2000. See NOTE 3 to the "Notes
to Consolidated Financial Statements."
CHANGES FROM FIRST QUARTER FISCAL 2001 TO FIRST QUARTER FISCAL 2000
Net income for the first quarter of fiscal 2001 showed a modest decline as
compared to the first quarter of fiscal 2000. However, net sales from continuing
segments showed an increase of $36.7 million, or 14.8 percent. Approximately
$11.2 million of the net sales improvement was attributable to an increase in
frozen vegetable sales, and an additional $21.5 million was associated with
various co-pack agreements into which the Company has recently entered. In the
first quarter of fiscal 2001, the Company also experienced an increase in its
manufacturing costs associated with lower than anticipated crop intake in the
eastern part of the country. In addition, the Company has experienced an
increase in administrative and general expenses primarily associated with an
investment in its infrastructure development and the timing of various
promotional and marketing efforts. Management continues to focus its efforts on
cost savings initiatives to reduce its overall spending.
<PAGE>
Management also utilizes an evaluation of EBITDA from continuing segments, as
presented on page 11 as a measure of performance. Excluding businesses sold,
EBITDA from continuing segments decreased $0.4 million, or 1.3 percent, to $29.4
million in the first quarter of the current fiscal year from $29.8 million in
the first quarter of the prior fiscal year. A detailed accounting of the
significant reasons for changes in net sales and EBITDA by product line follows.
Vegetable sales increased $35.4 million or 20.5 percent. This growth is
primarily attributable to a $7.7 million increase in sales in branded frozen
vegetables primarily within the Birds Eye brand. For the 12 weeks ended
September 17, 2000, the total frozen vegetable category unit sales percentage
change versus a year ago, as reported by Information Resources Inc., is down 2.1
percent. The Birds Eye brand unit volume in the same timeframe is up 5.0
percentage points wile the category leader is down 7.5 percentage points. The
Birds Eye brand unit share change in the same timeframe is up 1.0 percentage
points, the category leader is down 1.1 percentage points. In addition, volume
improvements in private label and food service frozen vegetables accounted for
$2.5 million of the increase. Further, various co-pack agreements for canned
vegetables in the Midwest and for pickles in the Northwest in total accounted
for $21.5 million of the increase. While these co-pack agreements typically
yield lower margins than the Company's other product lines, they do provide for
greater utilization of manufacturing facilities. Although vegetables experienced
an increase in net sales, EBITDA decreased $2.0 million, while the branded
businesses continued to show improvements, this reduction is attributable to
competitive pressures experienced within the non-branded segment of the
Company's businesses which has resulted in lower margins. In addition, as
highlighted above, the Company has experienced an increase in its manufacturing
costs and various selling, administrative, and general expenses which negatively
impacted the results of the vegetable product line in the first quarter of
fiscal 2001.
Net sales for the fruit product line increased $2.2 million, or 9.4 percent,
while EBITDA increased $0.7 million, or 18.9 percent. These improvements were
primarily the result of increased branded volume in this category which
typically yields higher margins.
Net sales for the snack product line increased $2.0 million, or 9.3 percent,
primarily due to increased volume within the potato chip category. Accordingly,
EBITDA also showed improvements of $0.4 million, or 16.7 percent. EBITDA further
benefited from lower packaging costs and the impact in fiscal 2000 of residual
strike related costs at the Company's Snyder of Berlin facility. This matter was
settled in July 2000, and management believes its current relationship with
these employees is good.
Net sales for canned meals decreased $0.9 million, or 5.4 percent. However,
EBITDA increased $0.5 million from $2.3 million to $2.8 million. The increase in
EBITDA primarily resulted from changes in product mix and the timing of various
promotional programs.
The other product line, which primarily represents dressings, experienced a
decrease in net sales of approximately $2.0 million, or 13.6 percent, due
primarily to a decline in unit volume associated with a private label customer.
EBITDA, however, remained consistent as the decrease in private label sales was
offset with branded sales at a higher margin. In addition, the Company benefited
from reductions in product costs, primarily due to oils.
Operating Income: Excluding the impact of businesses sold, operating income
decreased from $21.0 million in the first quarter of fiscal 2000 to $19.3
million in the first quarter of fiscal 2001. This represents a decrease of $1.7
million or 8.1 percent. Significant variances are highlighted above in the
discussion of EBITDA and net sales from continuing segments.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have increased $2.1 million, or 3.4 percent, as compared with
the first quarter of the prior fiscal year. As noted above, the increase is
primarily attributable to an investment in the Company's infrastructure
development and information system needs, along with the timing of certain
promotional and marketing efforts.
Income from Joint Venture: This amount represents earnings received from the
investment in Great Lakes Kraut LLC, a joint venture between Agrilink Foods and
Flanagan Brothers, Inc. Earnings from the joint venture decreased $0.2 million
as compared to the prior year and is the result of changes in sales mix to a
greater percentage of industrial sales versus branded product sales. Management
expects this trend to reverse during the second quarter.
Interest Expense: Interest expense decreased $0.1 million to $19.2 million in
the first quarter of fiscal 2001 from $19.3 million in the first quarter of
fiscal 2000. The decrease is the result of lower average outstanding balances
during the quarter of approximately $47.1 million due to timing of working
capital requirements, primarily within inventory. The Company has focused
efforts during the
<PAGE>
first quarter on inventory reduction to reduce its seasonal borrowings. The
reductions in outstanding balances were, however, offset by an increase in the
weighted average interest rate of 0.44 percent.
Pro-Fac Share of Income: The Company's contractual relationship with Pro-Fac is
defined in the Pro-Fac Marketing and Facilitation Agreement (the "Agreement").
Under the Agreement, in any year in which the Company has earnings on products
which were processed from crops supplied by Pro-Fac ("Pro-Fac Products"), the
Company pays to Pro-Fac, as additional patronage income, 90 percent of such
earnings, but in no case more than 50 percent of all pretax earnings of the
Company. In years in which the Company has losses on Pro-Fac Products, the
Company reduces the commercial market value it would otherwise pay to Pro-Fac by
90 percent of such losses, but in no case by more than 50 percent of all pretax
losses of the Company. Earnings and losses are determined at the end of the
fiscal year, but are accrued on an estimated basis during the year.
In fiscal 2001, it is currently estimated that 90 percent of earnings on
patronage products will exceed 50 percent of all pretax earnings of the Company;
accordingly, the Pro-Fac share of income has been recognized at a maximum of 50
percent of pretax earnings of the Company.
Tax Provision: The provision for income taxes decreased approximately $0.3
million from the prior year as a result of the change in earnings before tax.
Agrilink Foods' effective tax rate is negatively impacted by the
non-deductibility of certain amounts of goodwill.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the "Unaudited
Consolidated Statement of Cash Flows" for the first quarter of fiscal 2001
compared to the first quarter of fiscal 2000.
Net cash used in operating activities decreased $11.6 million over the first
quarter of the prior fiscal year. This decrease primarily results from a
decrease in inventories due to both management efforts to reduce outstanding
inventory levels and the late harvesting of crops in the eastern part of the
country.
Net cash used in investing activities in the first quarter of fiscal 2001
decreased $5.7 million from the first quarter of fiscal 2000. The change was
primarily a result of $5.0 million in proceeds received in fiscal 2001 in
conjunction with the sale of pickle machinery and equipment. See NOTE 3 to the
"Notes to Consolidated Financial Statements."
Net cash provided by financing activities decreased $20.3 million. This was due
to a decline in the net cash used in operating activities as described above
which resulted in a decrease in the short-term borrowing requirements. In
addition, the increase in payments on long-term debt was impacted by $3.2
million of mandatory prepayments in fiscal 2001 as a result of the sale of
pickle equipment and $2.5 million attributable to required repayments.
Borrowings: Under the Company's credit facility, Agrilink Foods is able to
borrow up to $200 million for seasonal working capital purposes under the
Revolving Credit Facility. The Revolving Credit Facility may also be utilized in
the form of letters of credit.
As of September 23, 2000, (i) cash borrowings outstanding under the Revolving
Credit Facility were $99.0 million, (ii) there were $15.9 million in letters of
credit outstanding, and (iii) additional availability under the Revolving Credit
Facility, after taking into account the amount of borrowings and letters of
credit outstanding, was $85.1 million. The Company believes that the cash flow
generated by operations and the amounts available under the Revolving Credit
Facility provide adequate liquidity to fund working capital needs and capital
expenditures.
Certain financing arrangements require that Pro-Fac and Agrilink Foods meet
certain financial tests and ratios and comply with certain restrictions and
limitations. As of September 23, 2000, Pro-Fac and the Company are in compliance
with all covenants, restrictions, and limitations under the terms of the credit
facility as amended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a result of its operating and financing activities, is exposed
to changes in foreign currency exchange rates, certain commodity prices, and
interest rates, which may adversely affect its results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, the Company may enter into derivative contracts.
<PAGE>
Foreign Currency: The Company manages its foreign currency related risk
primarily through the use of foreign currency forward contracts. The contracts
held by the Company are denominated in Mexican pesos.
The Company has entered into foreign currency forward contracts that are
designated as cash flow hedges of exchange rate risk related to forecasted
foreign currency-denominated intercompany sales. During fiscal 2000, the Company
entered into cash flow hedges for the Mexican peso with maturity dates ranging
from July 2000 to April 2001. At September 23, 2000, the fair value of the open
contracts was an after-tax gain of $0.2 million, recorded in accumulated other
comprehensive income in shareholder's equity. Amounts deferred to accumulated
other comprehensive income will be reclassified into cost of goods sold within
the next 12 months. During the first quarter of fiscal 2001, approximately $0.3
million was reclassified from other comprehensive income to cost of goods sold.
Hedge ineffectiveness was insignificant.
Foreign Currency
Forward
Contract amounts 101,000,000 Pesos
Weighted average settlement exchange rate 10.3579%
Commodity Prices: The Company is exposed to commodity price risk related to
forecasted purchases of soybean oil, an ingredient in the manufacture of salad
dressings and mayonnaise. To mitigate this risk, the Company designates soybean
oil forward contracts as cash flow hedges of its forecasted soybean oil
purchases. At September 23, 2000, the Company had open soybean oil contracts
hedging approximately 70 percent of its planned soybean oil requirements during
fiscal 2001. The fair value of these open contracts was $64,800 at September 23,
2000. During the first quarter of fiscal 2001, an immaterial loss on these
contracts was recorded in cost of goods sold. All open contracts mature by
January 2001.
Options
Soybean Oil
Contract amounts 24 million pounds
Weighted average strike $.1825/pound
The Company is exposed to commodity price risk related to forecasted purchases
of corrugated (unbleached kraftliner) in its manufacturing process. To mitigate
this risk, the Company designates a swap agreement as a cash flow hedge of its
forecasted corrugated purchases. At September 23, 2000, the Company had an open
swap hedging approximately 80 percent of its planned corrugated requirements.
The fair value of this agreement was immaterial at September 23, 2000. The
termination date for the agreement is June 2001.
Swap
Corrugated
(Unbleached Kraftliner)
Notional amount 30,000 short tons
Average paid rate $475/short ton
Average receive rate Floating rate/short ton - $475
Maturities through June 2001
Interest Rates: The Company is exposed to interest rate risk primarily through
its borrowing activities. The majority of the Company's long-term borrowings are
variable rate instruments. The Company entered into two interest rate swap
contracts under which the Company agrees to pay an amount equal to a specified
fixed rate of interest times a notional principal amount, and to receive in
return an amount equal to a specified variable rate of interest times the same
notional principal amount. The notional amounts of the contract are not
exchanged and no other cash payments are made. Two interest rate swap contracts
were entered into with a major financial institution in order to minimize credit
risk.
The first interest rate swap contract required payment of a fixed rate of
interest (4.96 percent) and the receiving of a variable rate of interest
(three-month LIBOR of 6.77 percent as of September 23, 2000) on $150 million
notional amount of indebtedness. The Company had a second interest rate swap
contract to pay a fixed rate of interest (5.32 percent) and receive a variable
rate of interest
<PAGE>
(three-month LIBOR of 6.77 percent as of September 23, 2000) on $100 million
notional amount of indebtedness. Approximately 59 percent of the underlying debt
is being hedged with these interest rate swaps.
The Company designates these interest rate swap contacts as cash flow hedges. At
September 23, 2000, the fair value of the contracts was an after-tax gain of
$2.1 million, recorded in accumulated other comprehensive income in
shareholders' equity.
To the extent that any of these contracts are not considered effective in
offsetting the change in the value of the interest payments being hedged, any
changes in fair value relating to the ineffective portion of these contacts are
immediately recognized in income. However, the net gain or loss on the
ineffective portion of these interest rate swap contracts was not material
during the first quarter of fiscal 2001. Amounts deferred to other comprehensive
income will be reclassified into interest expense over the life of the swap
contracts.
The following is a summary of the Company's interest rate swap agreements:
September 23, 2000
Interest Rate Swap:
Variable to Fixed - notional amount $250,000,000
Average pay rate 4.96 - 5.32%
Average receive rate Floating rate - 6.77%
Maturities through 2001
Although it is possible that interest rates will decrease and thereby minimize
the benefits of the hedge position, Agrilink Foods believes that on a long-term
basis the possibility of interest rates exceeding the interest rate swap is not
likely. The Company will, however, monitor market conditions to adjust its
position as it considers necessary.
OTHER MATTERS
Restructuring: During the third quarter of fiscal 1999, the Company began
implementation of a corporate-wide restructuring program. The overall objectives
of the plan were to reduce expenses, improve productivity, and streamline
operations. The total restructuring charge amounted to $5.0 million and was
primarily comprised of employee termination benefits. Efforts have focused on
the consolidation of operating functions and the elimination of approximately
five percent of the work force. Reductions in personnel include operational and
administrative positions and have improved annual earnings by approximately $8.0
million. Of this charge, $4.3 million has been liquidated, and the remaining
termination benefits will be liquidated during fiscal 2001.
Short- and Long-Term Trends: The vegetable and fruit portions of the business
can be positively or negatively affected by weather conditions nationally and
the resulting impact on crop yields. Favorable weather conditions can produce
high crop yields and an oversupply situation. This results in depressed selling
prices and reduced profitability on the inventory produced from that year's
crops. Excessive rain or drought conditions can produce low crop yields and a
shortage situation. This typically results in higher selling prices and
increased profitability. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather.
The effect of the 2000 growing season on fiscal 2001 financial results cannot be
estimated until late 2000 or early calendar 2001 when harvesting is complete and
when local and national supplies can be determined.
MARKET AND INDUSTRY DATA
Unless otherwise stated herein, industry and market share data used throughout
this discussion was derived from industry sources believed by the Company to be
reliable. Such data was obtained or derived from consultants' reports and
industry publications. Consultants' reports and industry publications generally
state that the information contained therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. The Company has not independently verified such
data and makes no representation to its accuracy.
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 10-Q
(a) Exhibits
Exhibit Number Description
10.1 Sixth Amendment to Credit Agreement among Agrilink
Foods, Inc., Pro-Fac Cooperative, Inc., Harris Trust
and Savings Bank, Bank of Montreal, Chicago Branch,
and the Lenders from time to time party hereto,
dated September 23, 1998
27 Financial Data Schedule
99.1 Pro-Fac Cooperative, Inc. Financial Statements for
the Quarterly Period Ended September 23, 2000.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed in the first quarter of fiscal 2001.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AGRILINK FOODS, INC.
Date: November 6, 2000 By:/s/ Earl L. Powers
---------------- -----------------------------------
EARL L. POWERS
EXECUTIVE VICE PRESIDENT FINANCE AND
CHIEF FINANCIAL OFFICER
(On Behalf of the Registrant and as
Principal Financial Officer
and Principal Accounting Officer)
