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| PFACP > SEC Filings for PFACP > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The purpose of this discussion is to outline the reasons for material changes in Pro-Fac's financial condition and results of operations in the first quarter of fiscal 2010 as compared to the first quarter of fiscal 2009. This section should be read in conjunction with Part I, Item 1. Financial Statements, 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.
As discussed in greater detail in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in Pro-Fac's Annual Report on Form 10-K for the fiscal year ended June 27, 2009, one of the challenges Pro-Fac faces, is the Cooperative's source of available cash to fund its operations and pay its dividends. In recent years, Pro-Fac's primary source of cash to fund its operations and pay dividends was the $10.0 million in payments it received annually under the Termination Agreement with the final installment of $2.0 million received in July 2007. Currently, Pro-Fac's primary sources of cash are cash on hand, gross profit and margin on certain sales, interest income and possible distributions, if any, made by Holdings LLC to Pro-Fac under the Limited Liability Company Agreement. As previously reported, Pro-Fac received such a distribution in the amount of $120.1 million in July 2007. However, because Pro-Fac has no control over the determination of whether any such distributions will be made, Pro-Fac operates under a business plan that assumes that no further distributions will be made under the Limited Liability Company Agreement.
Net sales, cost of sales and gross profit: Net sales decreased from $0.3 million in the quarter ended September 27, 2008 to $0.1 million in the quarter ended September 26, 2009, and cost of sales decreased from $0.3 million in the quarter ended September 27, 2008 to $0.1 million in the quarter ended September 26, 2009, as the Cooperative entered into fewer sales transactions as a principal.
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 $29,000 in margin during the quarter ended September 26, 2009 and $86,000 in margin during the quarter ended September 27, 2008. The decrease resulted from volume differences.
Selling, administrative, and general expense: Selling, administrative, and general expenses totaled $0.5 million for each of the quarters ended September 26, 2009 and September 27, 2008.
Investment income:Investment income decreased from $0.2 million for the quarter ended September 27, 2008, to $8,000 for the quarter ended September 26, 2009, due to lower invested balances and interest rates. Investment income for the quarters ended September 26, 2009 and September 27, 2008, included unrealized gains of approximately $1,000 and $4,000, respectively.
For fiscal year 2010, the Cooperative expects to generate a net operating loss carry forward for income tax purposes. Realization of the related deferred tax asset is not assured. Accordingly, a valuation allowance has been recorded to offset the deferred tax asset, resulting in a reduction in the effective rate. The Cooperative also generated a loss for income tax purposes in 2009.
"NOTE 1. Description of Business and Summary of Significant Accounting Policies" under "Notes to Condensed Financial Statements" included in Part I, Item 1 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 condensed financial statements, which have been prepared in accordance with GAAP. 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, distributions of earnings are reported as income and distributions that represent a return of capital reduce the carrying value of the investment, but not below zero. 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 to zero. However, Pro-Fac continues to own an approximate 40% interest in Holdings LLC through its ownership of Class B common units.
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 September 26, 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 September 26, 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.
As discussed in further detail in Pro-Fac's Annual Report on Form 10-K for the
fiscal year ended June 27, 2009, Pro-Fac historically 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, (iii) cash distributions related to its investment in Holdings LLC, and
(iv) borrowings.
As described in Note 3 to the Cooperative's unaudited condensed financial statements included in Part I, Item 1. Financial Statements, of this report, Pro-Fac may borrow up to $2.0 million from M&T Bank and approximately $0.1 million (limited by collateral) from another cooperative. At September 26, 2009, Pro-Fac had no outstanding borrowings under either borrowing facility.
A discussion of "Statement of Cash Flows" for the three months ended September 26, 2009, follows:
Net cash used in operating activities was $1.3 million for the first three months of fiscal year 2010 compared to cash used in operating activities of approximately $10.5 million in the first three months of fiscal year 2009. The change primarily represents a reduction in cash transferred to investments, reduced investment in inventory and changes in the timing of cash receipts from customers and related cash payments to member-growers between the first three months of fiscal year 2010 and the first three months of fiscal year 2009.
Net cash used in financing activities during the first three months of fiscal year 2010 consisted of payment of dividends of $0.3 million. During the first three months of fiscal year 2009, net cash used in financing activities consisted of $0.8 million in dividends paid.
Based on the assumptions contained in Pro-Fac's current business plan, the Board believes that Pro-Fac has sufficient sources of cash to fund its operations at least through the end of fiscal 2013.
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