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I
TEM 2.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
MANAGEMENTS 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-Facs 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.
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 Cooperatives 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. Managements Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources in Pro-Facs Annual Report on Form 10-K for the fiscal year
ended June 27, 2009, one of the challenges Pro-Fac faces, is the Cooperatives
source of available cash to fund its operations and pay its dividends. In
recent years, Pro-Facs 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-Facs 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.
RESULTS OF OPERATIONS - FIRST QUARTER 2010
COMPARED TO FIRST QUARTER 2009
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.
11
Income Taxes
:
See Note 1. Description of Business and Summary of Significant Accounting
Policies in Notes to Condensed Financial Statements for a discussion of the Cooperatives
tax exempt status and the tax basis of the Cooperatives investment in Holdings
LLC.
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.
CRITICAL ACCOUNTING POLICIES
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-Facs 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-Facs 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-Facs 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-Facs 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.
LIQUIDITY AND
CAPITAL RESOURCES
As discussed in further detail in Pro-Facs 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 Cooperatives 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-Facs 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.
12
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I
TEM 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.
|
|
I
TEM 4.
|
CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
:
Pro-Facs Principal Executive Officer and
Principal Financial Officer evaluated the effectiveness of the design and
operation of Pro-Facs disclosure controls and procedures (as defined in Rule
13a-15(e) or 15d-15(e) of the Exchange Act). Based on that evaluation,
Pro-Facs Principal Executive and Principal Financial Officer concluded that
Pro-Facs disclosure controls and procedures as of September 26, 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 SECs rules and forms, and that such information is
accumulated and communicated to Pro-Facs 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-Facs internal control over financial reporting identified
during the quarter ended September 26, 2009, that materially affected, or are reasonably likely to materially affect,
Pro-Facs internal control over financial reporting.
13
P
ART II
|
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I
TEM 1.
|
LEGAL PROCEEDINGS
|
|
|
|
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.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
|
|
|
|
None
|
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|
I
TEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
|
|
|
None
|
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|
I
TEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
|
|
|
None
|
|
|
I
TEM 5.
|
OTHER INFORMATION
|
|
|
|
None
|
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|
I
TEM 6.
|
EXHIBITS
|
|
|
|
|
|
Exhibit Number
|
|
Description
|
|
|
|
|
|
|
|
|
|
31.
|
|
Certification of the Principal Executive
Officer and the Principal Financial Officer as required by Rule 13a-14 (a) of
the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
Sarbanes Oxley Act of 2002 (filed herewith).
|
|
|
|
|
|
32.
|
|
Certification of the Principal Executive Officer and the Principal
Financial Officer as 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 (filed herewith).
|
14
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.
|
|
|
|
|
|
Date:
|
November 6,
2009
|
BY:
|
/s/
|
Stephen R. Wright
|
|
|
|
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|
|
|
|
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|
General Manager, Chief
Executive
|
|
|
|
|
Officer, Chief Financial
Officer
|
|
|
|
|
and Secretary
|
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|
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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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Principal Accounting Officer)
|
15
EXHIBIT INDEX
|
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|
ITEM 6.
|
EXHIBITS
|
|
|
|
|
|
Exhibit Number
|
|
Description
|
|
|
|
|
|
|
|
|
|
31.
|
|
Certification of the Principal Executive
Officer and the Principal Financial Officer as required by Rule 13a-14 (a) of
the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
Sarbanes Oxley Act of 2002 (filed herewith).
|
|
|
|
|
|
32.
|
|
Certification of the Principal Executive Officer and the Principal
Financial Officer as 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 (filed herewith).
|
16
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