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| PFACP > SEC Filings for PFACP > Form 10-K on 18-Sep-2009 | All Recent SEC Filings |
18-Sep-2009
Annual Report
The following section should be read in conjunction with Part I, Item 1:
Business; and Part II, Item 8: Financial Statements and Supplementary Data of
this Report.
The purpose of this discussion is to outline the significant reasons for changes in the Statement of Operations from fiscal 2008 through fiscal 2009.
Net Sales, Cost of Sales and Gross Profit: Net sales and cost of sales increased in fiscal year 2009 as the Cooperative entered into more sales transactions as a principal than in fiscal year 2008 and commodity prices increased.
Gain from Transaction with Birds Eye Foods, Inc. and Related Agreements:In accordance with the Termination Agreement, Pro-Fac was entitled to the payment of a termination fee of $10.0 million per year for five years payable in quarterly installments, as follows: $4.0 million on each July 1, and $2.0 million on each October 1, January 1, and April 1 with the final payment received in July 2007.
Payments under the Termination Agreement were considered additional consideration related to the Transaction. Accordingly, the portion of the payments received under the Termination Agreement representing Pro-Fac's continuing ownership percentage was recorded as a reduction to Pro-Fac's investment in Holdings LLC. The remaining portion of the payments received was recognized as additional gain on the Transaction with Birds Eye Foods in the period received. Accordingly, in fiscal year 2008, Pro-Fac recognized approximately $1.2 million as additional gain from the receipt of termination payments. Because the final payment under the Termination Agreement was made in July 2007, Pro-Fac received no payments under that agreement during fiscal 2009 and accordingly recognized no additional gain in fiscal 2009.
Margin on Delivered Product: The Cooperative negotiates certain sales transactions on behalf of its members which result in margin being earned by the Cooperative. The Cooperative earned $0.4 million in margin during fiscal year 2009 and $0.3 million in fiscal year 2008. The increase in margin resulted primarily from the timing of sales transactions.
Selling, Administrative, and General Expense: Selling, administrative, and general expenses totaled $2.0 million and $1.8 million for fiscal years 2009 and 2008, respectively. The increase is due primarily to a bad debt of $0.1 million in fiscal year 2009.
Distribution from Holdings LLC: During the first quarter of fiscal year 2008, Pro-Fac received a distribution of approximately $120.1 million from Holdings LLC under the Limited Liability Company Agreement. In accordance with the cost method of accounting for the investment in Holdings LLC, Pro-Fac reduced its investment in Holdings LLC by $3.5 million to zero with the remaining $116.6 million of the distribution recorded as income. No distributions were received in fiscal year 2009.
Contract Termination Receipts and Payments: During fiscal year 2008, Pro-Fac received approximately $1.4 million under a settlement agreement and release with a customer in connection with the termination of a raw product supply agreement with that customer, and Pro-Fac made contract termination payments totaling approximately $1.0 million to member-growers who would no longer be supplying raw product for the customer. Also in fiscal year 2008, Pro-Fac redeemed approximately $348,000 of common stock of those member-growers, representing approximately 56% of the shares owned by those members. No further payments were made or received in connection with this termination during fiscal year 2009.
Shortfall Payments:Under the Amended and Restated Marketing and Facilitation Agreement, Birds Eye Foods may be required to make shortfall payments to Pro-Fac as discussed above under "Item I. Description of Business - Supply Agreements." During fiscal year 2008, Pro-Fac ascertained that Birds Eye Foods had not met purchasing targets for two crops. As a result, Pro-Fac received a total of $370,000 in shortfall payments; $215,000 in fiscal year 2009 and $155,000 in July 2009.
Income Taxes: Through fiscal year 2008, the Cooperative had qualified for tax exempt status as a farmers' cooperative under Section 521 of the Internal Revenue Code. Exempt cooperatives are permitted to reduce or eliminate taxable income through the use of special deductions such as dividends paid on their common and preferred stock and distributions of patronage income. The Cooperative has historically used these special deductions and distributions of patronage income to reduce the Cooperative's taxable income. The Pro-Fac Board of Directors determined that there would be no payment or allocation of patronage income for the fiscal years ended June 27, 2009 or June 28, 2008. For fiscal year 2008, after deductions for dividends paid, the Cooperative had a loss for tax purposes which was carried back to recover taxes paid in prior periods. Accordingly, a tax benefit of $1.0 million was recorded for the year ended June 28, 2008.
The Cooperative will surrender its tax exempt status effective for fiscal year 2009 and the Board of Directors adopted resolutions to this effect on August 19, 2009. This action is not expected to have a material impact on Pro-Fac's operations or income tax liabilities.
"NOTE 1. Description of Business and Summary of Significant Accounting Policies" under "Notes to Financial Statements" included in Part II, Item 8 of this Report discusses the significant accounting policies of Pro-Fac. Pro-Fac's discussion and analysis of its financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Pro-Fac's management to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Pro-Fac regularly evaluates its estimates.
Certain accounting policies deemed critical to Pro-Fac's results of operations or financial position are discussed below.
The Cooperative accounts for its investment in Holdings LLC under the cost method of accounting. Under the cost method, the Cooperative's share of Holdings LLC's earnings or losses is not included in the Cooperative's balance sheet or statement of operations and the Cooperative does not record its proportionate share of other comprehensive income and loss items of Holdings LLC. As a result of the $120.1 million distribution received from Holdings LLC during the first quarter of fiscal year 2008, Pro-Fac's investment in Holdings LLC was reduced on Pro-Fac's balance sheet to zero. However, Pro-Fac continues to own an approximate 40% interest in Holdings LLC through its ownership of Class B common units.
For fiscal year 2008, $10.1 million of the distribution received was reported as a taxable dividend, subject to the qualified dividends received deduction, with the remaining amount representing a return of capital. This amount is $106.5 million less than the amount reported as income for financial statement purposes, resulting in a reduction of the excess of tax basis over the recorded financial statement basis in Pro-Fac's investment in Holdings LLC. A deferred income tax asset has not been recognized on the estimated excess of the tax basis over the recorded financial statement value of the investment in Holdings LLC at June 27, 2009, of approximately $76.4 million. This potential asset would only be recognized upon the sale of the investment based on the proceeds received or receipt of a distribution representing a return of capital, which was not considered probable at June 27, 2009.
Pro-Fac markets and sells its members' crops to food processors. Under the provisions of Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross Versus Net as an Agent", the Cooperative records activity among its customers, itself and its members on a net basis. For transactions in which Pro-Fac acts a principal rather than an agent, sales and cost of sales are reported.
Historically, Pro-Fac has had four sources or potential sources of available
cash to fund its operating expenses and the payment of its quarterly dividends:
(i) cash from its sale of raw products to its customers, (ii) payments received
under the Termination Agreement with Birds Eye Foods, (iii) cash distributions
related to its investment in Holdings LLC, and (iv) borrowings. The final
installment payment of $2.0 million to Pro-Fac under the Termination Agreement
was received in July 2007; therefore, that agreement no longer serves as a
potential source of available cash to Pro-Fac.
Pro-Fac receives cash payments equal to the CMV of crops sold to Birds Eye Foods, Allens and other customers pursuant to the Amended and Restated Marketing and Facilitation Agreement, the Allens Supply Agreement and other supply agreements. Although CMV payments are considered a potential source of cash to Pro-Fac, Pro-Fac has typically paid 100 percent of CMV to its member-growers for crops delivered and did so in fiscal years 2009 and 2008. Since CMV payments are approximately equal to the cash Pro-Fac receives from its customers for its raw products, CMV payments are not a significant source of available cash from which Pro-Fac can pay operating expenses and quarterly dividends.
While Pro-Fac principally acts as agent for its member-growers in the marketing and sale of crops, Pro-Fac does occasionally engage in crop sales transactions as a principal, resulting in gross profit or margin being earned by the Cooperative. Although the amounts earned have been increasing through fiscal year 2009, future increases are not expected to be significant.
In July 2007, Pro-Fac received a $120.1 million distribution from Holdings LLC. However, as discussed above in "Item 1. Business - Limited Liability Company Agreement with Vestar", there can be no assurance that Pro-Fac will receive any such distribution in the future, and accordingly, Pro-Fac is operating under a business plan that assumes no further distributions under the Limited Liability Company Agreement.
The Board of Directors continues to periodically evaluate Pro-Fac's business plan. There can be no assurances that Pro-Fac will pay dividends in the future. The declaration of any future dividends is subject to Board action in advance of any such declaration based upon the facts and circumstances at such time. On April 3, 2009, the Cooperative announced that future quarterly dividends on shares of the Cooperative's Class A cumulative preferred stock, beginning with the July 31, 2009 dividend, if declared by its Board of Directors, are expected to be at the rate of $0.20 per share. Any difference between a future quarterly dividend payment and the full quarterly preferred dividend of $0.43 per share must be paid in full before the payment of dividends on any other Pro-Fac equity and before the redemption of any Pro-Fac equity.
The Cooperative may borrow up to $2.0 million under the M&T Line of Credit. Principal amounts borrowed under the M&T Line of Credit bear interest at 75 basis points above the prime rate in effect on the day proceeds are disbursed, as announced by M&T Bank as its prime rate of interest (3.25 percent at June 27, 2009). Interest is payable monthly. Amounts extended under the M&T Line of Credit are required to be repaid in full during each year by July 15, with further borrowings prohibited for a minimum of 60 consecutive days after such repayment. Pro-Fac's obligations under the M&T Line of Credit are secured by a security interest granted to M&T Bank in substantially all of Pro-Fac's assets, excluding Pro-Fac's Class B common units in Holdings LLC. The collateral does include any distributions made to Pro-Fac by Holdings LLC in respect of Pro-Fac's Class B common units and cash payments made by Birds Eye Foods to the Cooperative. At June 27, 2009 and June 28, 2008, there was no balance outstanding under the M&T Line of Credit.
Pro-Fac is a member of another cooperative that markets cherries. As a member of the cooperative, Pro-Fac has entered into a loan agreement with the cooperative that allows Pro-Fac to borrow the collateral value of inventory owned by Pro-Fac and held by the cooperative, up to $5.0 million. Interest is charged at the cooperative's cost of funds to finance costs related to the cherry inventory. At June 27, 2009, Pro-Fac had borrowing capacity of approximately $120,000. No amounts were outstanding.
A discussion of Pro-Fac's "Statement of Cash Flows" for the year ended June 27, 2009 follows:
Net cash used in operating activities was $2.6 million in fiscal year 2009 compared to net cash provided by operating activities of $117.0 million in fiscal year 2008. The change primarily represents income from the receipt of the $120.1 million distribution from Holdings LLC in fiscal year 2008 and the investment in bonds of $2.6 million in fiscal year 2009.
No cash was provided by investing activities in fiscal year 2009. Cash provided by investing activities in fiscal year 2008 was $5.5 million related to the receipt of $2.0 million from Birds Eye Foods as the final payment under the Termination Agreement and the $3.5 million portion of the distribution from Holdings LLC classified as a return of capital.
During fiscal year 2009, net cash used in financing activities included the redemption of 390,887 Class A cumulative, preferred shares for $9.8 million and payment of dividends of $2.7 million on Pro-Fac's Class A Cumulative Preferred Stock. Net cash used in financing activities during fiscal year 2008 included $1.0 million to repay amounts previously borrowed under a prior credit facility with Birds Eye Foods, $6.8 million to redeem all retained earnings allocated to members, $79.6 million to redeem all non-cumulative preferred shares and 3,155,433 Class A cumulative preferred shares, $0.3 million to purchase and retire common shares, and $9.0 million in dividends paid on Pro-Fac's Class A Cumulative Preferred Stock.
Based on Pro-Fac's operations and anticipated cash flow needs, on an annual basis the Pro-Fac Board determines whether to retain a portion of CMV otherwise payable to its grower-members for working capital or other general corporate purposes. In consideration of its sources and cash flow needs, no CMV was retained in fiscal year 2009 or 2008.
The following is a summary of Pro-Fac's business outlook for fiscal 2010 and should be read in conjunction with the related completed fiscal year discussions in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Report.
Since 1960, Pro-Fac has operated as an agricultural cooperative, owned and controlled by its members, to purchase, market, and sell crops grown by its member-growers, for the mutual benefit of its members. The Cooperative's core business focus has not changed in 49 years and its current strategy is to continue its business of purchasing, marketing, and selling its member-grower crops to its customers.
One of the challenges Pro-Fac faces, which is discussed above under "Liquidity and Capital Resources", is the Cooperative's source of available cash to fund its operations and pay its dividends. From fiscal 2003 through fiscal 2008, Pro-Fac's primary sources of cash to fund its operations and pay dividends were the $10.0 million payments it received annually under the Termination Agreement, the last installment of $2.0 million having been received in July 2007, and the $120.1 million distribution received from Holdings LLC in July 2007. As a result, currently, Pro-Fac's primary sources of cash are gross profit and margin on certain sales, interest income and annual distributions, if any, made by Holdings LLC to Pro-Fac pursuant to the Limited Liability Company Agreement.
Holdings LLC has advised Pro-Fac that it will not speculate as to whether further distributions will be made under the Limited Liability Company Agreement. As a minority owner of Holdings LLC, Pro-Fac has no control over the determination of whether such distributions will be made. Accordingly, Pro-Fac has been operating under a business plan that assumes no distributions will be made under the Limited Liability Agreement.
The Board of Directors continues to periodically evaluate Pro-Fac's business plan. Based upon the assumptions contained in Pro-Fac's business plan, the Board currently believes that Pro-Fac has sufficient sources of cash to fund its operations at least through the end of fiscal 2013.
Indemnifications: Pro-Fac may in the future be required to perform under certain indemnification provisions set forth in contracts, policies and its by-laws. For further discussion of Pro-Fac's potential obligations under these provisions, see "Note 6. Other Matters" under "Notes to Financial Statements" in Part II, Item 8 of this Report.
Capital Expenditures: The Cooperative does not expect to have any material capital expenditures for the foreseeable future.
Supplemental Information on Inflation: The changes in costs and prices within the Cooperative's business due to inflation were not significantly different from inflation in the United States economy as a whole. Levels of capital investment, pricing and inventory investment were not materially affected by changes caused by inflation.
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