SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 1994
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-1) Number 2-66772
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
New York
16-6036816
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification Number)
90 Linden Place, P.O. Box 682, Rochester, NY 14603
(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 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 April 15, 1994.
Common Stock - 2,066,585
Page 1 of 16<PAGE>
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<TABLE>
Part I. FINANCIAL INFORMATION
Item I - FINANCIAL STATEMENTS
The interim financial statements contained herein are unaudited, but in the opinion of the
management of the Cooperative include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations for these
periods. The results of operations for the interim periods are not necessarily indicative
of the results of operations for the full year.
Pro-Fac Cooperative, Inc.
Statement of Net Proceeds
(Dollars in Thousands)
<C>
Three Months Ended Nine Months Ended
3/26/94 3/26/93 3/26/94 3/26/93
<S> <C> <C> <C> <C>
Revenues:
Proceeds from sale of crops to Curtice
Burns Foods, Inc.
Estimated commercial market value
delivered during the period $ 2,670 $ 4,343 $58,423 $60,360
Additional proceeds under the
Integrated Agreement 2,517 854 14,990 6,067
Interest income 3,676 4,063 11,992 12,620
Patronage dividend from Springfield
Bank for Cooperatives 613 554 1,313 1,304
Total revenues 9,476 9,814 86,718 80,351
Costs and expenses:
Estimated commercial market value paid
to or accrued for the accounts of
members during the period 2,670 4,343 58,423 60,360
Interest expense 2,724 3,408 8,998 10,583
Administrative expenses 256 263 665 652
Total costs and expenses 5,650 8,014 68,086 71,595
Excess of revenues before taxes, dividends
and allocation of net proceeds 3,826 1,800 18,632 8,756
Benefit/(provision) for taxes on income 718 (412) (100) (1,235)
Net income (proceeds before dividends) 4,544 1,388 18,532 7,521
Dividends on common and preferred stock -- -- (4,390) (4,548)
Net proceeds 4,544 1,388 14,142 2,973
Allocation (to)/from earned surplus (1,480) 665 (2,147) 1,967
Net proceeds available to members $ 3,064 $ 2,053 $11,995 $ 4,940
Allocation of net proceeds available to members:
Estimated to be payable currently $ 583 $ 396 $ 2,308 $ 943
Allocated to members but retained by the
Cooperative:
Qualified retains 2,328 1,582 9,229 3,772
Non-qualified retains 153 75 458 225
$ 3,064 $ 2,053 $11,995 $ 4,940
<FN>
The accompanying notes are an integral part of these financial statements.
/TABLE
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<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc.
Balance Sheet
(Dollars in Thousands)
<CAPTION>
<S>
Assets 3/26/94 6/26/93 3/26/93
Current assets: <C> <C> <C>
Cash $ 63 $ 19 $ 18
Accounts receivable 24 25 445
Receivable from Curtice Burns Foods, Inc. 15,469 9,113 40,062
Current portion of long-term loans receivable
from Curtice Burns Foods, Inc. 14,000 16,000 14,000
Current portion of investment in direct
financing leases 21,184 21,184 21,940
Current portion of investment in
Springfield Bank for Cooperatives 1,340 1,172 972
Income taxes refundable -- 70 --
Prepaid expenses 1,722 693 14
Total current assets 53,802 48,276 77,451
Long-term portion of investment in direct
financing leases 118,677 152,329 153,284
Long-term loans receivable from Curtice
Burns Foods, Inc. 86,262 78,648 69,948
Long-term portion of investment in Springfield
Bank for Cooperatives 19,356 16,814 16,453
Deferred tax benefit 2,170 2,010 1,880
Finance receivable related to intangibles 25,331 26,545 49,514
Other assets 248 262 271
Total assets $305,846 $324,884 $368,801
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Shareholders' and Members Capitalization
<S>
Current liabilities: <C> <C> <C>
Notes payable $ 19,500 $ 12,000 $ 43,000
Accounts payable 396 1,019 424
Accrued expenses 3,226 3,019 3,836
Federal and state income taxes payable 190 -- 798
Current portion of long-term debt 14,000 16,000 14,003
Amounts due members 16,425 14,525 15,296
Total current liabilities 53,737 46,563 77,357
Long-term debt 133,014 168,000 156,000
Other non-current liabilities 484 417 406
Total liabilities 187,235 214,980 233,763
Commitments
Shareholders' and members' capitalization:
Retained earnings allocated to members 33,719 29,446 29,010
Non-qualified allocation to members 6,162 5,704 5,317
Capital Stock -
Preferred, par value $25, authorized -
5,000,000 shares; issued and
outstanding - 2,576,720, 2,378,807 and
2,378,807, respectively 64,418 59,470 59,470
Common, par value $5, authorized -
5,000,000 shares
3/26/94 6/26/93 3/26/93
Shares issued 2,066,585 2,690,430 2,692,106
Shares subscribed 9,679 24,788 20,064
Total subscribed
and issued 2,076,264 2,715,218 2,712,170
Less subscriptions
receivable in
installments (9,679) (24,788) (20,064)
2,066,585 2,690,430 2,692,106 10,335 13,455 13,461
Earned surplus 3,977 1,829 27,780
Total shareholders' and
members' capitalization 118,611 109,904 135,038
Total liabilities and capitalization $305,846 $324,884 $368,801
<FN>
The accompanying notes are an integral part of these financial statements.
/TABLE
<PAGE>
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<TABLE>
Pro-Fac Cooperative, Inc.
Statement of Cash Flows (Dollars in Thousands)
<CAPITON>
Nine Months Ended
<S> 3/26/94 3/26/93
Cash flows from operating activities: <C> <C>
Net income $ 18,532 $ 7,521
Amount payable to members currently (2,308) (1,253)
Equity in undistributed earnings of Springfield Bank (1,541) (1,115)
Change in assets and liabilities:
Accounts receivable 1 198
Accounts payable and accrued expenses (416) 531
Amounts due to members 1,900 1,506
Income taxes payable/refundable 260 (544)
Other assets and liabilities (1,115) 223
Net cash provided by operating activities 15,313 7,067
Cash flows from investing activities:
Due from Curtice Burns, net (11,970) (21,943)
Return from investment in direct financing leases 33,652 12,074
Investment in Springfield Bank (1,169) (1,747)
Cash received from the finance receivable
related to intangibles 1,214 1,938
Net cash provided by/(used in) investing activities 21,727 (9,678)
Cash flows from financing activities:
Proceeds from short-term debt 7,500 15,000
Payments on long-term debt (36,986) (8,022)
Issuance of common stock, net of cancellations (3,120) 174
Cash dividends paid (4,390) (4,548)
Net cash (used in)/provided by financing activities (36,996) 2,604
Net change in cash 44 (7)
Cash at beginning of period 19 25
Cash at end of period $ 63 $ 18
Supplemental Disclosure of Cash Flow Information
Cash paid/(received) during the year for:
Interest $ 8,998 $ 10,514
Income taxes, net $ (180) $ 866
Supplemental schedule of non cash investing and financing
activities:
Conversion of retains to preferred stock $ 4,948 $ 5,959
<FN>
The accompanying notes are an integral part of these financial statements.
/TABLE
<PAGE>
<PAGE>
PRO-FAC COOPERATIVE, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. AGREEMENT WITH CURTICE-BURNS FOODS, INC. ("Curtice Burns")
Pro-Fac has a contractual relationship with Curtice Burns under the
Integrated Agreement ("the Agreement") consisting of four sections:
Operations Financing, Marketing, Facilities Financing, and Management,
which extends to 1997 and provides for two successive five-year renewals
at the option of Curtice Burns.
The provisions of the Agreement include the financing of certain assets
utilized in the business of Curtice Burns and provide a sharing of income
and losses between Curtice Burns and Pro-Fac. Under the Agreement, title
to substantially all of Curtice Burns' fixed assets is held by Pro-Fac,
and Pro-Fac provides the major portion of the financing of Curtice Burns'
operations. As described below under "Potential Sale of Curtice Burns
and Possible Effects on Pro-Fac," Curtice Burns is exploring several
options, some of which could lead to a termination by Curtice Burns of
the Agreement. Such a termination would have a material adverse effect
on Pro-Fac's ability to provide a market for crops and would eliminate
Pro-Fac's right to share in earnings with Curtice Burns.
Revenues received from Curtice Burns under the Agreement for the nine
months ended March 26, 1994, and March 26, 1993, include: commercial
market value of crops delivered, $58,423,000 and $60,360,000,
respectively; interest income, $11,991,000 and $12,620,000, respectively;
and additional proceeds from profit sharing provisions, $14,990,000 and
$6,067,000, respectively. In addition, Pro-Fac received financing
amortization payments of $34,867,000 and $18,601,000 for the periods
ended March 26, 1994 and March 26, 1993, respectively.
Potential Sale of Curtice Burns and Possible Effects on Pro-Fac
On March 23, 1993, Curtice Burns announced that Agway Inc., which owns 99
percent of Curtice Burns' Class B shares and approximately 14 percent of
Curtice Burns' Class A shares, was considering the potential sale of its
interest in Curtice Burns. At its meeting held on August 9 and 10, 1993,
the Curtice Burns Board of Directors authorized Curtice Burns' management
with the advice of its investment bankers to pursue strategic
alternatives for Curtice Burns. These options include negotiations with
Pro-Fac and its investment banker relating to Pro-Fac gaining control of
the business; the possible sale of the entire equity of Curtice Burns to
a third party; and a possible expanded restructuring plan and a
refinancing plan which would involve Curtice Burns exercising its option
to purchase from Pro-Fac the property and equipment and certain other
assets used by Curtice Burns in its business.
Curtice Burns has the right to terminate the Agreement on 60-days notice.
In the event of a termination, Curtice Burns must repay all debt owed to
Pro-Fac and has the option to purchase all of the assets owned by Pro-Fac
at book value. Curtice Burns has advised Pro-Fac that it believes it
would be required to pay Pro-Fac $280,923,000 at March 26, 1994 to
satisfy such obligation. Pro-Fac has advised Curtice Burns that it
believes the amount would be significantly higher and has reserved all
rights to dispute Curtice Burns' position in the event of a termination
of the Agreement.
A substantial part of the dispute over the amounts that would be due to
Pro-Fac in the event of a termination of the Agreement involves
writedowns recorded as of June 26, 1993 by Curtice Burns of the book
value of Hiland Potato Chip Company and Curtice Burns Meat Snacks. Pro-
Fac believes that the asset writedown should not affect amounts to be
paid for assets should Curtice Burns terminate the Agreement. Pro-Fac
and Curtice Burns have agreed to defer any resolution of their
disagreement over this issue until such time as Curtice Burns may decide
to terminate the Agreement.
Management of Pro-Fac is actively evaluating the effects of a sale of
Curtice Burns or other potential changes in its relationship with Curtice
Burns. In this regard, it is exploring alternatives for Pro-Fac,
including: (1) acquiring all or part of Curtice Burns; (2) continuing
its relationship with Curtice Burns or any third-party purchaser of
Curtice Burns under the Agreement, on the same or modified terms; and (3)
protecting Pro-Fac's interest, including amounts that would be due to
Pro-Fac by Curtice Burns in the event of a proposed termination under the
Agreement.
On March 25, 1994, Pro-Fac received notice from Curtice Burns that
Curtice Burns intends to discontinue in 1995 a substantial portion of its
historical business with Pro-Fac. <PAGE>
<PAGE>
The notice principally affects Pro-Fac's New York fruit and vegetable
growers, Illinois and Nebraska popcorn growers and Northwest potato
growers. As a result of the Curtice Burns action, Pro-Fac has given
notice to its affected members terminating Pro-Fac's obligation to
purchase these crops beginning next year. The Pro-Fac growers who have
been terminated represent more than half of Pro-Fac's membership and have
accounted for over half of the crops delivered by Pro-Fac to Curtice
Burns in the past year. Pro-Fac is protesting this action by Curtice
Burns and Agway, and intends to contest the attempt by Curtice Burns to
terminate the affected businesses.
As of March 26, 1994, Pro-Fac has spent $1.7 million relative to Curtice
Burns change of control issue. It is anticipated another $.8 million
will be incurred prior to fiscal year end. Due to the uncertainty
surrounding the ultimate outcome of the review relating to the change of
control, these costs have been recorded as a prepaid expense.
Note 2. RECEIVABLES FROM CURTICE BURNS FOODS, INC.
Current and long-term receivables from Curtice Burns under the Agreement
consist of the following:
3/26/94 3/26/93
Current receivable $ 15,469,000 $40,062,000
Long-term receivable $100,262,000 $83,948,000
Less current portion 14,000,000 14,000,000
$ 86,262,000 $69,948,000
The long-term receivable shown above is loaned to Curtice Burns under the
same conditions and at the same rates as the Cooperative obtained from
its lenders. Provisions of the Agreement between the two companies do,
however, allow Pro-Fac, with sufficient notice to Curtice Burns, to
accelerate the repayment of outstanding debt should Pro-Fac require such
funds for its legitimate business purposes. In addition to the
receivables shown above, the finance receivable related to intangibles
amounted to $25,331,000 and $49,514,000 at March 26, 1994 and March 26,
1993, respectively.
Note 3. DEBT
Short-Term Debt
Short-term borrowings are made by the Cooperative under a seasonal line
of credit with Springfield which currently provides for borrowings up to
$46,000,000. Outstanding borrowings at March 26, 1994 amounted to
$19,500,000 at 4.5 percent. The maximum amount of short-term borrowings
outstanding during the nine months ended March 26, 1994 was $46,000,000.
The Cooperative's short-term borrowings are loaned to Curtice Burns under
the same conditions and at the same rates as the Cooperative obtained
from its lenders. Provisions of the Agreement between the two companies
do, however, allow Pro-Fac, with sufficient notice to Curtice Burns, to
accelerate the repayment of outstanding debt should Pro-Fac require such
funds for its legitimate business purposes.
In addition the Cooperative guarantees Curtice Burns' short-term notes
payable to commercial banks and certain other debt. The total lines of
credit available to the companies expire annually unless extended or
renewed. Curtice Burns had short-term notes payable to commercial banks
at March 26, 1994 and March 26, 1993 of $15,500,000 and $20,000,000,
respectively.
Long-Term Debt
The Cooperative's long-term debt consists of the following:
3/26/94 3/26/93
Term loans due Springfield:
Interest rate of 6.3% and 7.1% at
3/26/94 and 3/26/93 respectively $147,014,000 $170,000,000
Less current portion 14,000,000 14,000,000
$133,014,000 $156,000,000
<PAGE>
<PAGE>
The term loans are collateralized by liens on substantially all assets of
Curtice Burns and Pro-Fac. Certain borrowing agreements require that the
companies maintain specified levels with regard to working capital, net
income, tangible net worth, coverage of interest and fixed charges and
the incurrence of additional debt. The Cooperative is in compliance with
restrictions and requirements under the terms of the borrowing
agreements. The revolving lines of credit under such agreements have
been renewed through November 1994. Such renewals provide for
adjustments in interest rates and covenants and grant to both short-term
and long-term lenders liens on substantially all assets of Curtice Burns
and Pro-Fac as collateral for borrowings under such agreements.
Additional Information With respect to Borrowing Arrangements
Because Pro-Fac's income is largely determined by the income of Curtice
Burns and because Pro-Fac guarantees the debt of Curtice Burns and
Curtice Burns guarantees the debt of Pro-Fac (substantially all of which
is advanced to Curtice Burns), management and lenders use combined pro
forma financial statements to assess the financial strength of the two
companies. Specifically, the combined statement of operations, balance
sheet and statement of cash flows portray the financial results, cash
flows and equity of Curtice Burns and Pro-Fac. Management believes that
combined financial statements are useful because they provide information
concerning Pro-Fac's ability to continue present credit arrangements
and/or obtain additional borrowings in the future.
Such financial statements are neither necessary for a fair presentation
of the financial position of Pro-Fac nor appropriate as primary
statements for Curtice Burns' shareholders or for Pro-Fac shareholders
and members because they combine earnings, assets and liabilities and
cash flows which are legally attributable to either Curtice Burns'
shareholders or to Pro-Fac shareholders and members, but not to both.
Accordingly, the condensed pro forma financial statements presented
herein are special purpose in nature and should be used only within the
context described.
<TABLE>
Combined Pro Forma Condensed Statement of Operations
(Millions)
<CAPTION> Nine Months Ended
March 26, 1994 March 26, 1993
Curtice
Burns Pro-Fac Eliminations Combined Combined
<S> <C> <C> <C> <C> <C>
Sales and revenues $642.8 $ 86.7 $(86.7) $642.8 $666.6
Cost of sales 456.6 58.4 (58.4) 456.6 477.2
Restructuring (gain)/loss (8.1) -- -- (8.1) 2.2
Selling, administrative
and general expenses 148.7 .7 (1.3) 148.1 157.9
Interest expense 14.3 9.0 (12.0) 11.3 13.2
Pro-Fac share of earnings 15.0 -- (15.0) -- --
Total cost and expenses 626.5 68.1 (86.7) 607.9 650.5
Income before taxes 16.3 18.6 -- 34.9 16.1
Provision for taxes (6.7) (.1) -- (6.8) (4.4)
Net income $ 9.6 $ 18.5 $ -- $ 28.1 $ 11.7
<FN>
Transactions between Curtice Burns and Pro-Fac have been eliminated for purposes of this
combined statement of operations.
/TABLE
<PAGE>
<PAGE>
<TABLE>
Combined Pro Forma Condensed Balance Sheet
<CAPTION>
(Millions)
March 26, 1994 March 26, 1993
Curtice
Burns Pro-Fac Eliminations Combined Combined
<S> <C> <C> <C> <C> <C>
Assets
Current assets (A)(C) $261.9 $ 53.8 $ (50.7) $265.0 $282.1
Property, plant and
equipment, net (B) 168.3 -- -- 168.3 196.0
Investment in direct
financing leases (C) -- 118.7 (118.7) -- --
Due from Curtice Burns (D) -- 86.3 (86.3) -- --
Goodwill and other intangibles 25.3 25.3 -- 50.6 99.0
Other assets 8.1 21.7 -- 29.8 25.3
Total assets $463.6 $305.8 $(255.7) $513.7 $602.4
Liabilities and Net Worth
Current liabilities (A)(C) $151.7 $ 53.7 $ (50.7) $154.7 $174.7
Lease obligations (C) 120.4 -- (118.7) 1.7 1.9
Long-term debt--
Due Pro-Fac (D) 86.3 -- (86.3) -- --
Due others 1.1 133.0 -- 134.1 162.8
Other liabilities 22.8 .5 -- 23.3 23.1
Total liabilities 382.3 187.2 (255.7) 313.8 362.5
Shareholders' equity and
members' capitalization (E) 81.3 118.6 -- 199.9 239.9
Total Liabilities and
Net Worth $463.6 $305.8 $(255.7) $513.7 $602.4
<FN>
Notes to combined balance sheet:
(A) Current assets of Pro-Fac consist principally of amounts due from Curtice Burns
with respect to the Agreement described in Note 1. Such amounts are eliminated for
purposes of this balance sheet.
(B) Property, plant and equipment to which Pro-Fac holds title (with net book value of
$139.9 million at March 26, 1994) is leased to Curtice Burns on a financing basis.
Such leased assets are reclassified as property, plant and equipment for purposes
of this balance sheet.
(C) The majority of Curtice Burns' lease obligations are payable to Pro-Fac and amount
to $139.9 million at March 26, 1994, of which $21.2 million is payable currently.
The related Curtice Burns liability and Pro-Fac receivable are eliminated for
purposes of this balance sheet.
(D) Long-term borrowings by Curtice Burns from Pro-Fac under the Agreement are
eliminated for purposes of this balance sheet.
(E) Shareholders' equity of Curtice Burns consists of Class A common stock at par, $6.5
million; Class B common stock at par, $2.0 million; additional paid-in capital,
$13.8 million, and retained earnings, $59.0 million.
/TABLE
<PAGE>
<PAGE>
<TABLE>
Combined Pro Forma Condensed Statement of Cash Flows
(Millions)
<CAPTION> Nine Months Ended
March 26, 1994 March 26, 1993
Curtice
Burns Pro-Fac Eliminations Combined Combined
<S> <C> <C> <C> <C>
Net cash provided by/(used in)
operating activities $ 5.1 $ 15.3 $ 2.4 $ 22.8 $(8.7)
Net cash provided by/(used in)
investing activities 8.0 21.7 (22.9) 6.8 (8.2)
Net cash (used in)/provided by
financing activities (15.8) (37.0) 20.5 (32.3) 16.6
Net change in cash (2.7) -- -- (2.7) (.3)
Cash at beginning of period 6.5 -- -- 6.5 6.1
Cash at end of period $ 3.8 -- -- $ 3.8 $ 5.8
Supplemental disclosure of
cash flow information
Cash paid during the period for:
Interest (net of amount
capitalized) $ 14.4 $ 9.0 $(12.0) $ 11.4 $13.0
Income taxes, net $ 12.4 $ (.2) $ -- $ 12.2 $ 3.5
Supplemental Schedule of
Non-Cash Investing and
Financing Activities:
Capital lease obligations
incurred $ 3.6 $ -- $ (3.6) $ -- $ --
Conversion of retains into
preferred stock $ -- $ 4.9 $ -- $ 4.9 $ 6.0
<FN>
Transactions between Curtice Burns and Pro-Fac have been eliminated for purposes of this
combined statement of cash flows.
/TABLE
<PAGE>
<PAGE>
Note 4. OTHER MATTERS
Favorable Tax Ruling
In August of 1993, the Internal Revenue Service issued a determination
letter which concluded that the Cooperative is exempt from federal income
tax to the extent provided by Section 521 of the Internal Revenue Code,
"Exemption of Farmers' Cooperatives from Tax." Unlike a non-exempt
cooperative, a tax-exempt cooperative is entitled to deduct cash
dividends it pays on its capital stock in computing its taxable income.
This exempt status is retroactive to fiscal year 1986 and is anticipated
to apply to future years as long as there is no significant change in the
way in which the Cooperative operates. In conjunction with this ruling,
the Cooperative has filed for tax refunds for fiscal years 1986 to 1990
in the amount of approximately $5.7 million and interest payments of
approximately $3.1 million. In addition, it is anticipated that the
Cooperative will file for tax refunds for fiscal years 1991 and 1992.
Restructuring Program
Curtice Burns and Pro-Fac agreed upon a restructuring program of the
business which was completed in the quarter ended March 26, 1994. To
reflect both the completed and contemplated effect of the restructuring
program, Curtice Burns incurred a restructuring charge in fiscal 1993 of
$61 million (before dividing with Pro-Fac and before taxes), which
included the loss incurred on the sale of the Lucca frozen entree
business, anticipated losses on the sale of the Meat Snacks Division and
the Hiland operation of the Snack Foods Division, and other costs
anticipated in conjunction with the restructuring program. A $1.9
million charge was incurred in the second quarter of fiscal 1994 to
adjust previous estimates recorded to complete the Lucca sale transaction
and to reserve against additional operating losses on the meat snacks
business prior to the sale.
A principal element of the restructuring program was the divestiture of
unprofitable or declining businesses. Lucca Frozen Foods was sold during
fiscal 1993 at a loss of approximately $2.7 million before dividing with
Pro-Fac and before taxes. On November 19, 1993, the oats portion of the
business of the National Oats Division of Curtice Burns was sold to
Ralston Purina at a gain of $10 million before taxes and dividing with
Pro-Fac. The popcorn portion of the National Oats division was
transferred to the Comstock Michigan Fruit division. On November 22,
1993, certain assets of Hiland were sold to Weaver Potato Chip Company.
On February 22, 1994, Curtice Burns sold the Meat Snacks business located
in Denver, Colorado and Albany, Oregon to Oberto Sausage Company of Kent,
Washington. Under the agreement, Oberto has purchased certain assets and
assumed certain liabilities of the Meat Snacks operation, excluding
plant, equipment and trademarks. Curtice Burns will lease its Albany,
Oregon manufacturing facility and equipment and license its trademarks,
trade names, etc. to Oberto for up to a one-year period, at the end of
which Oberto is contractually obligated to purchase these assets. No
significant gain or loss was incurred on the sale of the Meat Snacks and
Hiland businesses due to writedowns recorded in fiscal 1993. See Note 1
"Potential Sale of Curtice Burns and Possible Effects on Pro-Fac." In
fiscal year 1993, Curtice Burns incurred losses of $13.2 million from
Meat Snacks and Hiland before dividing with Pro-Fac and before taxes.
The oats business earnings were approximately $1.4 million in fiscal 1993
before dividing with Pro-Fac and before taxes.
Repurchase of Common Stock
As a result of the sale of the oats business of National Oats on November
19, 1993, Pro-Fac no longer had any facilities to process or otherwise
market oats, so that effective as of that date, Pro-Fac discontinued oats
as a crop to be marketed through the Cooperative. Harvest States
Cooperative, Inc. ("Harvest States") was the only member of Pro-Fac which
marketed oats through the Cooperative. As required by the Pro-Fac bylaws
upon discontinuance of a crop, Pro-Fac has repurchased and canceled its
600,000 shares of common stock of Pro-Fac for $3,000,000, which is the
par value of such stock and the amount for which it was purchased by
Harvest States from Pro-Fac. Since substantially all cash not
distributed by Pro-Fac to its members or security holders is either
invested in assets leased to Curtice Burns or loaned to Curtice Burns to
finance its operations, the repurchase of Harvest States' stock was
financed by reducing the loans receivable from Curtice Burns. Other
conditions of the termination of the membership of Harvest States in Pro-
Fac are being negotiated.<PAGE>
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
Most of the proceeds of Pro-Fac are derived from the sale to Curtice-
Burns Foods, Inc. ("Curtice Burns") of the crops of its members and hence
depend primarily upon the volume and commercial market value of these
crops (which accrues to Pro-Fac at the time of delivery). In addition,
proceeds depend upon the profitability of the finished products made from
Pro-Fac crops and raw materials from other sources which are then
processed and sold by Curtice Burns during the course of the fiscal year.
Under the Integrated Agreement ("the Agreement") between the two
companies presently in effect, the total purchase price for crops and the
financing charge are both based in part on the results of operations of
Curtice Burns.
Because of the profit split provisions within the Agreement between
Curtice Burns and Pro-Fac, business conditions and trends affecting
Curtice Burns' profitability will also affect the profitability of Pro-
Fac.
Curtice Burns' Results of Operations - General
There were two significant developments in fiscal 1993 that affected
fiscal 1994: initiation of a major restructuring program at Curtice
Burns; and Agway's announcement of the possible sale of its interest in
Curtice Burns. See Notes 1 and 4 to the Financial Statements.
Curtice Burns has realized increased earnings in fiscal 1994 from
Comstock Michigan Fruit and Southern Frozen Foods related to improved
pricing on commodity frozen and canned vegetables because of the weather-
related short national crop. The crop size for Northeastern vegetables
was generally at normal levels. The Snack Group continued to have weak
earnings performances, primarily due to significant sales volume and
margin declines resulting from severe competitive pressures in the salty
snack foods industry. Contributing factors were the decline in
consumption of potato chips in the Company's marketing area, and an
inability to increase prices to offset raw material price increases.
These factors reduced available marketing and promotional funds required
to increase volume in the grocery food store channel of distribution.
For the first nine months of fiscal 1994, Curtice Burns' net earnings
were $9,559,000 or $1.11 per share compared to $4,197,000 or $.49 per
share for the first nine months of fiscal 1993. Included in the first
quarter results was a charge against earnings of $480,000, equivalent to
$.06 per share, to adjust deferred taxes to the higher rates legislated
by Congress and as required under Financial Accounting Standards No. 109.
Included in the fiscal 1994 nine-month results, also, was a net gain on
sale of the businesses and other restructuring (see Note 4) of
$8,114,000, equivalent to $3,244,000 ($.38 per share) after dividing with
Pro-Fac and after taxes. Included in the corresponding prior year was a
loss on the disposition of the Lucca business of approximately
$2,152,000, equivalent to $635,000 or $.07 per share after dividing with
Pro-Fac and after taxes. Net earnings, excluding these non-recurring
items for the current fiscal year to date, were approximately $6,795,000,
equivalent to $.79 per share, compared to the prior year of approximately
$4,826,000, equivalent to $.56 per share.
Pro-Fac's Results of Operations
Changes From the Corresponding Prior Year Quarter
For the quarter ended March 26, 1994, the change in net proceeds compared
to the prior year period is summarized below:
Increased proceeds from Curtice Burns $1,663,000
Increased net interest income 297,000
Change in bank patronage dividend 59,000
All other 7,000
Change in excess of revenues before taxes,
dividends
and allocation of net proceeds 2,026,000
Change in tax provision 1,130,000
Change in net proceeds $3,156,000
Nine Month Changes From the Corresponding Prior Year Period
The commercial market value of crops delivered during the nine-month
period decreased to $58,423,000 from $60,360,000 in the comparable fiscal
1993 period. The decrease was <PAGE>
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primarily due to reduced oat deliveries caused by the sale of the oats
business, although all crops had variances in both volume and price.
For the nine months ended March 26, 1994, the change in net proceeds
compared to the prior year period is summarized below:
Increased proceeds from Curtice Burns $ 8,923,000
Increased net interest income 957,000
Change in bank patronage dividend 9,000
All other (13,000)
Change in excess of revenues before taxes,
dividends and allocation of net proceeds 9,876,000
Change in tax provision 1,135,000
Decrease in dividends 158,000
Change in net proceeds $11,169,000
Of the $8,923,000 increased proceeds from Curtice Burns, $5,133,000 was
attributable to the gains and losses relating to the restructuring
program, and the remainder is primarily due to increased profits
generated by the vegetable business.
In August of 1993, the Internal Revenue Service issued a determination
letter which concluded that the Cooperative is exempt from federal income
tax to the extent provided by Section 521 of the Internal Revenue Code.
In conjunction with the finalization of this order, the Cooperative has
determined that its federal tax liability will be minimized.
Accordingly, in the third quarter of fiscal 1994 the Cooperative has
adjusted the provision for income taxes to reflect only the anticipated
state income tax liability due.
Pro Forma Combined Results of Operations
The following analysis of the pro forma combined results of operations of
Pro-Fac and Curtice Burns for the nine-month period ended March 26, 1994,
as compared to the prior year period, is based on the combined pro forma
condensed statement of operations for that period set forth in Note 3 to
the accompanying financial statements of Pro-Fac and is subject to the
caveats and limitations set forth in Note 3.
Because most revenues and expenses of Pro-Fac result from, or are offset
by, transactions with Curtice Burns, the pro forma combined results of
operations of the two entities depend predominantly on the results of
operations of Curtice Burns. The results of operations of Curtice Burns
are discussed in general terms under "Curtice Burns' Results of
Operations" above.
Sales and revenues decreased $23.8 million or 3.6 percent. The change is
comprised of a $35.0 million decrease due to the disposition of
businesses, an $11.9 million increase due to changes in volume other than
the dispositions and a decrease of $.7 million due to variations in price
and mix. The sales volume increase was due primarily to higher demand in
canned and frozen vegetables created by the vegetable crop shortage
caused by the flooding in the Midwest and a drought in the South during
the 1993 growing season. The vegetable sales volume increase offset
significant sales volume decreases in the snack foods category.
Cost of sales decreased $20.6 million, primarily as a result of the
decline in sales volume resulting from dispositions. As a percent of
sales, costs decreased to 71.0 percent from 71.6. (The improvement in
margins resulted primarily from variations in price and product mix.)
Gross profit decreased $3.2 million or 1.7 percent.
Selling, administrative and general expenses decreased $9.8 million or
6.2 percent. Cost changes include a $1.1 million increase in trade
promotions, a $9.3 million reduction in advertising and selling costs,
and a $1.6 million reduction of other administrative costs. Of the
decrease in advertising and selling costs, $8.0 million relates to
businesses sold.
Interest expense decreased $1.9 million or 14.4 percent; representing a
$1.2 million decrease due to lower rates and a $.7 million decrease due
to a change in debt volume.
Income before taxes increased $18.8 million or 116.8 percent, primarily
due to the gains and losses associated with the restructuring program
(see Note 4).
Restructuring gains and losses before taxes increased earnings by $10.3
million from the prior year. A charge to earnings of $.5 million was
recorded in fiscal 1994 to adjust deferred taxes as a result of a tax
increase legislated by Congress. The effect on <PAGE>
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combined net income for these items improved earnings by $8.5 million.
Liquidity And Capital Resources
Substantially all cash not distributed by Pro-Fac to its members or
security holders is either invested in assets leased to Curtice Burns or
loaned to Curtice Burns to finance its operations. In order to gauge the
working capital and other resources available to the companies, the
combined pro forma condensed financial statements should be used. The
relationship with Curtice Burns and the combined financial statements are
shown in Notes 1, 2 and 3 to the financial statements. Note that such
financial statements should not be used as a basis for determining
shareholders' interest in the Cooperative, but only as a measure of the
total financial resources available to the companies.
Certain borrowing agreements require that the companies maintain
specified levels with regard to working capital, current ratio, ratio of
net worth to assets, ratio of long-term debt to net worth, tangible net
worth, net income, coverage of interest and fixed charges and the
incurrence of additional debt. The companies are in compliance with
restrictions and requirements under the terms of the borrowing
agreements. The borrowing agreements have been extended during the first
half of fiscal 1994, and the revised agreements include the grant by
Curtice Burns and Pro-Fac to their lenders of security interests in
substantially all assets as collateral for the outstanding indebtedness.
Curtice Burns has the right to terminate the Integrated Agreement on 60-
days notice. In the event of a termination, Curtice Burns must repay all
debt owed to Pro-Fac and has the option to purchase all of the assets
owned by Pro-Fac at book value. Curtice Burns has advised Pro-Fac that
it believes it would be required to pay Pro-Fac $280.9 million at March
26, 1994 to satisfy such obligations. Pro-Fac has advised Curtice Burns
that it believes the amount would be significantly higher and has
reserved all rights to dispute Curtice Burns' position in the event of a
termination of the Agreement. Of the $280.9 million, $115.7 million
represents short- and long-term debt, $25.3 million relates to intangible
assets, and $139.9 million relates to leased fixed assets. This $280.9
million at March 26, 1994 compares to $303.8 million at June 26, 1993,
which was comprised of $103.8 million of short- and long-term debt, $26.5
million relating to intangible assets and $173.5 million relates to
leased fixed assets. The increase in the debt due Pro-Fac during the
period of $11.9 million is a result of increased borrowings of $49.3
million for seasonal financing for the production of raw product
deliveries during the period less $37.4 million relating to the sale
proceeds of business units sold (see Note 4). The decrease in the leased
asset values of $33.6 million is the net of assets sold as a result of
business units sold and depreciation for the nine months having exceeded
additions. However, as discussed in Note 1 to the financial statements,
Pro-Fac believes that the total payments would be significantly in excess
of these amounts. In any event, the amount fluctuates from time to time,
depending upon the amount of indebtedness, including seasonal debt, at
the time of termination and other factors.
Should Curtice Burns terminate the Agreement, Pro-Fac should have cash
and other assets of not less than its equity, which as of March 26, 1994
was $118,611,000. Pro-Fac has disputed the amount claimed by Curtice
Burns to be due on termination of the Agreement and believes that the
total payments would be such that it would have cash and other assets of
a greater amount.
In any event, following such a transaction, determination would have to
be made as to whether Pro-Fac would be liquidated or continued in some
form.
Should the resolution of the potential sale of Curtice Burns result in
Pro-Fac acquiring control of Curtice Burns, it is presently anticipated
that Pro-Fac would obtain the majority of the required financing from the
Springfield Bank for Cooperatives. Financing not provided by the
Springfield Bank for Cooperatives would likely be available only on terms
significantly less favorable to Pro-Fac than those currently in place
with the Springfield Bank for Cooperatives. It is probable that any
financing obtained in connection with the acquisition of control of
Curtice Burns would require the sale of one or more of Curtice Burns'
current businesses.
Should the resolution of the potential sale of Curtice Burns result in
the sale to a third party, that third party might purchase the Curtice
Burns' shares outstanding as well as purchase the assets from Pro-Fac.
Cash flows from operating activities are generally the cash effects of
transactions and other events that enter into the determination of net
income. Net cash provided by operating activities of the combined
companies of $22.8 million in the nine-month period <PAGE>
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reflect net income of $9.6 million and $18.5 million for Curtice Burns
and Pro-Fac, respectively. Amortization of assets amounted to $18.6
million. Inventories decreased $1.3 million and accounts receivable
increased $8.5 million. Changes in other assets and liabilities amounted
to $32.6 million.
Cash flows from investing activities include the acquisition and
disposition of property, plant and equipment and other assets held for or
used in the production of goods. Net cash provided by investing
activities of $6.9 million in the periods was comprised of cash paid for
purchases of property, plant and equipment of $13.8 million, cash
received for disposals of fixed assets of $21.8 million and an increase
in the investment in Springfield Bank for Cooperatives of $1.1 million.
During the nine-month period, $43.9 million was received in proceeds from
the disposition of the oats portion of the National Oats business and the
Hiland Potato Chip business. Proceeds from such dispositions have been
and will continue to be applied to debt.
Net cash used in financing activities of $32.3 million in the period was
comprised of proceeds from short-term debt of $23.0 million, payments on
long-term debt of $43.8 million, issuance of capital stock of $.1 million
less repurchases of $3.1 million and dividends paid of $8.5 million.
Short- and Long-Term Trends
The fruit and vegetable portion 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 vary regionally because of
variations in weather. The 1993 floods in the Midwest and the drought in
the South have increased prices even though the crops in the Company's
growing areas have been at normal levels.
Seasonal lines of credit of $100.0 million were available to the combined
companies in the nine months ended March 26, 1994, and the maximum
borrowing on those lines was $81.0 million. The balance outstanding at
March 26, 1994 was $35.0 million.
There are no current plans for the acquisition of further businesses.
Capital expenditures are expected to approximate $20.0 million in the
next year.
Scheduled payments on long-term debt will approximate $15 million in the
coming year. Net cash provided from operations should be sufficient to
cover the scheduled payments on long-term debt and planned capital
expenditures as well as anticipated dividends of approximately $10
million in the coming year. Proceeds from the sale of business units
will be applied to debt.
Favorable Tax Ruling and Developments
In August of 1993, the Internal Revenue Service issued a determination
letter which concluded that the Cooperative is exempt from federal income
tax to the extent provided by Section 521 of the Internal Revenue Code,
"Exemption of Farmers' Cooperatives from Tax." Unlike a non-exempt
cooperative, a tax-exempt cooperative is entitled to deduct cash
dividends it pays on its capital stock in computing its taxable income.
The exempt status is retroactive to fiscal year 1986 and is anticipated
to apply to future years as long as there is no significant change in the
way in which the Cooperative operates. In conjunction with this ruling,
the Cooperative has filed for tax refunds for fiscal years 1986 to 1990
in the amount of approximately $5.7 million and interest payments of
approximately $3.1 million. In addition, it is anticipated that the
Cooperative will file for tax refunds for fiscal years 1991 and 1992.
Impact of Inflation and Changing Prices
General inflation levels have not significantly affected Pro-Fac sales
and revenues. The sales prices of Pro-Fac crops sold to Curtice Burns
have been affected by agricultural crop size, prices and trends.
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Part II - OTHER INFORMATION
Item 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
a) The annual meeting was held on January 28, 1994, in Tampa,
Florida. No issues were voted on by shareholders.
b) The regional membership meetings for the members of Pro-Fac were
held as follows:
Date Region/District City/State
February 7, 1994 V Oglethorpe, Georgia
February 10, 1994 I/2 Rochester, New York
February 15, 1994 II/2 Harrisburg, Illinois
February 16, 1994 II/2 Havanna, Illinois
February 17, 1994 III Lincoln, Nebraska
February 21, 1994 I/3 Somerset, Pennsylvania
February 23, 1994 IV Portland, Oregon
February 24, 1994 IV LaConner, Washington
March 8, 1994 III Grand Forks, North Dakota
March 17, 1994 II/1 Holland, Michigan
c) Robert Call, Steven Koinzan, Alan Mitchell, Allan Overhiser, and
Edward Whitaker were elected directors for a three-year term as a
result of the elections at the regional meetings held in February
and March 1994. Christian Wolff was confirmed as the Agway
nominee to the Pro-Fac Board at a Board meeting on March 29, 1994.
The following is a list of the remaining directors whose terms of
office continued after the regional meetings.
Name Date
Dale Burmeister 1995
Albert Fazio 1995
Tom Croner 1995
Kenneth Mattingly 1996
Paul Roe 1996
Bruce Fox 1996
Glen Lee Chase 1996
Donald Pease 1996
Following are the voting results from the regional meetings:
Votes Cast For Votes Cast Against
Robert Call 73 0
Steven Koinzan 20 0
Alan Mitchell 42 0
Allan Overhiser 96 0
Edward Whitaker 48 0
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(b) No current report on Form 8-K was filed during the fiscal
period to which this report relates.
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SIGNATURES
Pursuant to the requirements 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.
PRO-FAC COOPERATIVE, INC.
Date: BY
ROY A. MYERS, GENERAL MANAGER
Date: BY
WILLIAM D. RICE, ASSISTANT TREASURER
(Principal Accounting Officer)
