|
|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 third quarter and first
nine months of fiscal 2009 as compared to the third quarter and first nine
months of fiscal 2008. This section
should be read in conjunction with Part I, Item 1. Financial Statements, of
this Report.
OVERVIEW
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 below under “Liquidity and Capital
Resources”, 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 described above, 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.
In July 2007,
Pro-Fac received a distribution of approximately $120.1 million from Holdings
LLC. During the first quarter of fiscal
year 2008, Pro-Fac used this distribution: to redeem all retained earnings
allocated to its members at a cost of approximately $6.8 million; to pay
dividends on its non-cumulative preferred stock and its Class A cumulative
preferred stock at a cost of approximately $5.4 million; and to repay principal
and interest owed under its Credit Agreement with Birds Eye Foods in an amount
equal to approximately $1.1 million. During
the second quarter of fiscal year 2008, Pro-Fac used this distribution: to
redeem all of Pro-Fac’s non-cumulative preferred stock at a price of $25.00 per
share for an aggregate redemption cost of approximately $0.7 million; to redeem
3,155,433 shares of its Class A cumulative preferred stock at a price of $25.00
per share for an aggregate redemption cost of approximately $78.9 million; and
to pay dividends on its preferred stock to the date of redemption at a cost of
approximately $2.1 million. On October
31, 2008, Pro-Fac used this distribution to redeem 390,887 shares of Class A
preferred stock at a price of $25.00 per share for an aggregate redemption cost
of approximately $9.8 million.
The Board of
Directors periodically evaluates Pro-Fac’s business plan in consideration of
Pro-Fac’s receipt of the distribution from Holdings LLC in the first quarter of
fiscal year 2008 and possible future events.
RESULTS OF OPERATIONS - THIRD QUARTER 2009
COMPARED TO THIRD QUARTER 2008
Net sales, cost of
sales and gross profit
:
Net
sales increased from $11,000 in the quarter ended March 29, 2008 to $0.7
million in the quarter ended March 28, 2009, and cost of sales increased from
$42,000 in the quarter ended March 29, 2008 to $0.7 million in the quarter ended
March 28, 2009, as the Cooperative entered into more sales transactions as a
principal. Volume and pricing
differences resulted in a $68,000 increase in gross profit for the quarter
ended March 28, 2009 compared to the quarter ended March 29, 2008.
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 $17,000 in margin
during the quarter ended March 28, 2009 and $0.1 million in margin during the
quarter ended March 29, 2008. The
decrease resulted from volume differences.
Selling,
administrative, and general expense
:
Selling,
administrative, and general expenses totaled $0.6 million and $0.5 million for
the quarters ended March 28, 2009 and March 29, 2008, respectively. The increase relates to an increase of $0.1
million in the reserve for uncollectable accounts receivable recorded during
the quarter ended March 28, 2009.
Investment income
:
Investment income decreased from $0.3
million for the quarter ended March 29, 2008, to $31,000 for the quarter ended
March 28, 2009, due to use of the proceeds from the $120.1 million distribution
from Holdings LLC in July 2007 to redeem equity interests in July and October
2007 and October 2008 and pay dividends.
Investment income for the quarters ended March 28, 2009 and March 29,
2008, included unrealized gains/(losses) of approximately ($1,000) and $46,000,
respectively.
11
Income Taxes
:
The Cooperative qualifies 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 for
dividends paid on its common and preferred stock and distributions of patronage
income. The Cooperative intends to
surrender its tax exempt status effective for fiscal year 2009. This action is not expected to have a
material impact on Pro-Fac’s operations or income tax liabilities.
During the
first quarter of fiscal year 2008, Pro-Fac received a $120.1 million
distribution from Holdings LLC pursuant to the terms of the Limited Liability
Company Agreement. Approximately $10.1
million of the amount received was a taxable dividend, subject to the qualified
dividends received deduction, with the remaining amount representing a return
of capital.
The
Cooperative’s tax basis of its investment in Holdings LLC at June 28, 2008 was
$76.4 million. A deferred income tax
asset has not been recognized on the estimated excess of the tax basis over the
recorded financial statement value of Pro-Fac’s investment in Holdings LLC at
March 28, 2009. This asset would only
be realized upon the sale of Pro-Fac’s investment based on the proceeds
received or receipt of a distribution representing a return of capital, neither
of which is expected to occur in the foreseeable future.
The income tax
benefit for the quarters ended March 28, 2009 and March 29, 2008 were based on
the Cooperative’s estimated effective tax rates for the respective fiscal years
applied to the respective quarters.
For fiscal
year 2009, 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 2008, all of which was carried back
to generate refunds of taxes previously paid resulting in the income tax
benefit recorded in the quarter ended March 29, 2008.
RESULTS OF OPERATIONS – FIRST NINE MONTHS
2009 COMPARED TO FIRST NINE MONTHS 2008
Net sales, cost of
sales and gross profit:
Net sales increased from $0.9 million in the
nine months ended March 29, 2008 to $1.9 million in the nine months ended March
28, 2009, and cost of sales increased from $1.0 million in the nine months
ended March 29, 2008 to $1.8 million in the nine months ended March 28, 2009,
as the Cooperative entered into more sales transactions as a principal. Volume and pricing differences accounted for
the majority of the $0.2 million improvement in gross profit for the nine
months ended March 28, 2009 compared to the nine months ended March 29, 2008.
Gain from
transaction with Birds Eye Foods and related agreements:
In the first nine months of fiscal year
2008, Pro-Fac recognized, approximately $1.2 million, as additional gain from
the receipt of the final termination payment under the Termination Agreement in
July 2007.
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 $0.3 million in
margin during the first nine months of fiscal 2009 and $0.2 million in margin
during the first nine months of fiscal 2008.
Volume and pricing differences accounted for the majority of the
improvement in margin for the nine months ended March 28, 2009.
Selling,
administrative, and general expense:
Selling, administrative, and general
expenses totaled $1.6 million and $1.4 million for the nine months ended March
28, 2009 and March 29, 2008, respectively.
The increase relates to an increase of $0.1 million in the reserve for
uncollectable accounts receivable recorded during the quarter ended March 28,
2009
Investment income:
Investment income decreased from $2.4
million for the nine months ended March 29, 2008 to $0.3 million for the nine
months ended March 28, 2009 due to use of the proceeds from the $120.1 million
distributions from Holdings, LLC in July 2007 to redeem equity interests in
July and October 2007 and October 2008 and pay dividends. Investment income for the nine months ended
March 28, 2009 and March 29, 2008, included unrealized gains/(losses) of
approximately ($1,000) and $46,000, respectively.
Distribution from
Holdings LLC:
During the first quarter of 2008, Pro-Fac received a distribution of
approximately $120.1 million from Holdings LLC under the Limited Liability
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.
Income taxes:
The income tax benefit for the nine months
ended March 28, 2009 is based on the Cooperative’s estimated effective tax rate
for fiscal year 2009. The Cooperative
does not expect to record a net deferred tax asset for any expected fiscal year
2009 net operating loss carry forward as realization is not reasonably
assured. A valuation allowance has been
recorded to offset the deferred tax asset.
The Cooperative recorded a tax benefit of $1.0 million for the nine
month period ended March 29, 2008 because the Cooperative expected to have a
loss for tax purposes which would be carried back to recover taxes paid in
prior periods.
12
CRITICAL ACCOUNTING POLICIES
“NOTE 1. Description of Business and Summary of
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
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. On an ongoing basis,
Pro-Fac 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 March 28, 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 March 28, 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.
LIQUIDITY AND CAPITAL RESOURCES
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.
Pro-Fac
receives cash payments equal to the CMV of crops sold to Birds Eye Foods,
Allens, Inc. 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 2008 and 2007. 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 increased through fiscal year 2007, subsequent increases have not been
significant and future increases are not expected to be significant. Net cash available to Pro-Fac, after payment
of CMV to Pro-Fac’s member-growers, has historically been used to pay Pro-Fac’s
operating expenses as well as its quarterly dividends on its preferred stock
and to fund repurchases of its common stock.
The final
installment payment to Pro-Fac under the Termination Agreement was received in
July 2007.
The Limited
Liability Company Agreement provides that, subject to restrictions contained in
any financing arrangements of Holdings LLC or its subsidiaries (including Birds
Eye Foods), Holdings LLC will use commercially reasonable efforts to cause
Birds Eye Foods to distribute annually to Holdings LLC up to $24.8 million of
cash flow from operations of Birds Eye Foods, which Holdings LLC will then
distribute to the holders of its common units, including Pro-Fac. In July 2007, Pro-Fac received a $120.1
million cash distribution from Holdings LLC.
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 and, as a minority owner of Holdings LLC, Pro-Fac has no control over
the determination of whether such distributions will be made. Pro-Fac is operating under a business plan
that assumes no further distributions will be made under the Limited Liability
Agreement.
13
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 $0.6 million
(limited by collateral) from a cooperative.
At March 28, 2009, Pro-Fac had no outstanding borrowings under either
borrowing facility.
The Board of
Directors periodically evaluates Pro-Fac’s business plan. There can be no assurances that Pro-Fac will
continue to pay dividends and the declaration of any future dividends is
subject to Board action in advance of any such declaration based upon all of
the facts and circumstances at such time.
On April 3, 2009, the Cooperative announced that future quarterly
dividends, beginning with the July 31, 2009 dividend, if declared by its Board
of Directors, are expected to be at the rate of $.20 per share. Any future difference between a 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.
A discussion
of “Statement of Cash Flows” for the nine months ended March 28, 2009, follows:
Net cash used
in operating activities was $2.4 million for the first nine months of fiscal
year 2009 compared to cash provided by operating activities of approximately
$111.0 million in the first nine months of fiscal year 2008. The change primarily represents income from
the receipt of the $120.1 million distribution from Holdings LLC in the first
nine months of fiscal year 2008, changes in investments classified as trading
securities and changes in the timing of cash receipts from customers other than
Birds Eye Foods and related cash payments to member-growers between the first
nine months of fiscal year 2009 and the first nine months of fiscal year 2008.
In the first
nine months of fiscal year 2009, no cash was provided by investing
activities. Cash provided by investing
activities for the first nine months of 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 portion of the distribution
from Holdings LLC classified as a return of capital, approximately $3.5
million.
Net cash used
in financing activities during the first nine months of fiscal year 2009
included payment of dividends of $2.1 million and the redemption of preferred
shares of $9.8 million. During the
first nine months of fiscal year 2008, net cash used in financing activities
included $1.0 million to repay amounts previously borrowed, $6.8 million to
redeem all retained earnings allocated to members, $8.3 million in dividends
paid and $79.6 million for the redemption of preferred shares.
In January
2003, the Pro-Fac Board of Directors suspended the payment of dividends on the
Cooperative’s common stock for an indefinite period of time and, in January
2006, the Board placed a moratorium on Pro-Fac’s repurchase of shares of its
common stock from its member-growers. Any
repurchase by Pro-Fac of its common stock is subject to pre-approval by the
Board.
Based on 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.
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ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
As a “smaller
reporting company” as defined by Item 10 of Regulation S-K, Pro-Fac is not
required to provide information required by this item.
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ITEM 4T.
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CONTROLS AND PROCEDURES
|
Disclosure Controls
and Procedures
:
Pro-Fac’s Principal Executive
Officer and Principal Financial Officer evaluated the effectiveness of the
design and operation of Pro-Fac’s disclosure controls and procedures (as
defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”)). Based
on that evaluation, Pro-Fac’s Principal Executive and Principal Financial
Officer concluded that Pro-Fac’s disclosure controls and procedures as of March
28, 2009 (the end of the period covered by this Report), have been designed and
are functioning effectively to provide reasonable assurance that the
information required to be disclosed by Pro-Fac in reports filed or submitted
by it under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
Pro-Fac’s management, including its Principal Executive and Principal Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal
Control over Financial Reporting:
There
were no changes in Pro-Fac’s internal control over financial reporting
identified during the quarter ended March 28, 2009, that materially affected,
or are reasonably likely to materially affect, Pro-Fac’s internal control over
financial reporting.
14
P
ART II
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I
TEM 1.
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LEGAL PROCEEDINGS
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The
information called for by this Item is disclosed in NOTE 5. “Other Matters –
Legal Matters” under “Notes to Condensed Financial Statements” in Part I,
Item 1 of this Form 10-Q, and is incorporated herein by reference in answer
to this Item.
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I
TEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
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None
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I
TEM 3.
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DEFAULTS UPON SENIOR SECURITIES
|
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None
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I
TEM 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
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(a)
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The regional
annual membership meetings for the members of Pro-Fac were held as follows:
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Date
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Region/District
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City/State
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|
|
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|
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February 13,
2009
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I/1 and I/2
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Pittsford,
New York
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February 24,
2009
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III
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Columbus,
Nebraska
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February 25,
2009
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II/2
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Havana,
Illinois
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March 3,
2009
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I/3
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Johnstown,
Pennsylvania
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March 4,
2009
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II/1
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Holland,
Michigan
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(b)
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Peter Call,
Robert DeBadts, Allan Overhiser, Darell Sarf, and Steven Koinzan were
re-elected to three-year terms on the Pro-Fac Board of Directors as a result
of the elections at the regional meetings held in February and March, 2009.
The following is a list of the remaining directors whose terms of office
continued after the regional annual meetings.
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Name
|
Term
Expires
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|
Charles
Altemus
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2010
|
|
Kenneth
Dahlstedt
|
2010
|
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Bruce Fox
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2011
|
|
Joseph
Herman
|
2010
|
|
Kenneth
Mattingly
|
2011
|
|
Paul Roe
|
2011
|
|
James
Vincent
|
2010
|
|
|
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(c)
|
The only
matters submitted to the Cooperative’s members for action at the regional
annual meetings were the election of directors and ratification of amendments
to Pro-Fac’s Bylaws. Following are the voting results for members of the
Board of Directors from the regional meetings:
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Name
|
|
Votes Cast For
|
|
Votes Cast Against
|
|
Not Voting
|
|
|
|
|
|
|
|
|
|
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|
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Peter Call
|
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66
|
|
0
|
|
1
|
|
Robert
DeBadts
|
|
46
|
|
0
|
|
2
|
|
Allan
Overhiser
|
|
69
|
|
0
|
|
7
|
|
Darell Sarf
|
|
13
|
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0
|
|
0
|
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Steven
Koinzan
|
|
14
|
|
0
|
|
0
|
|
|
|
|
|
The
amendment to Pro-Fac’s Bylaws, which was approved by the Cooperative’s Board
of Directors on January 31, 2008 and previously reported in its current
report on Form 8-K filed March 10, 2009, further defines the events which
trigger a capital gains distribution and was ratified by a vote of 192 in
favor, 7 opposed and 35 not voting.
|
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Consistent
with the Cooperative’s Bylaws, the Pro-Fac Board of Directors re-appointed
directors Cornelius D. Harrington, Frank M. Stotz and William J. Lipinski to
continue to serve as directors of the Cooperative for a one year term and
until their successors are duly elected and qualified. Messrs, Harrington,
Stotz, and Lipinski will continue to serve as members of the Cooperative’s
Audit Committee, and Mr. Lipinski also continues to serve on the Executive
and Compensation Committee.
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15
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I
TEM 5.
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OTHER INFORMATION
|
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None
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I
TEM 6.
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EXHIBITS
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Exhibit Number
|
|
Description
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31.
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|
Certification required by Rule 13a-14 (a) of the Securities Exchange
Act of 1934 of the Principal Executive Officer and the Principal Financial
Officer (filed herewith).
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32.
|
|
Certification
required by Rule 13a-14 (b) of the Securities Exchange Act of 1934 and
pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of
the Sarbanes Oxley Act of 2002, of the Principal Executive Officer and the
Principal Financial Officer (filed herewith).
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16
SIGNATURES
In accordance
with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
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|
PRO-FAC COOPERATIVE, INC.
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Date:
|
May 8, 2009
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BY:
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/s/ Stephen
R. Wright
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General Manager, Chief Executive
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Officer, Chief Financial Officer
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and Secretary
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(On Behalf of the Registrant and as
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Principal Executive Officer
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Principal Financial Officer, and
|
|
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|
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Principal Accounting Officer)
|
17
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