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 December 25, 1993
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 January 14, 1994.
Common Stock - 2,097,309
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
<CAPTION>
(Dollars in Thousands except per share amounts)
Three Months Ended Six Months Ended
12/25/93 12/25/92 12/25/93 12/25/92
<S> <C> <C> <C> <C>
Revenues:
Proceeds from sale of crops to Curtice
Burns Foods, Inc.
Estimated commercial market value
delivered during the period $17,245 $16,489 $59,572 $56,017
Additional proceeds under the
Integrated Agreement 9,700 3,381 12,473 5,213
Interest income 4,192 4,419 8,316 8,557
Patronage dividend from Springfield
Bank for Cooperatives 350 375 700 750
Total revenues 31,487 24,664 81,061 70,537
Costs and expenses:
Estimated commercial market value paid
to or accrued for the accounts of
members during the period 17,245 16,489 59,572 56,017
Interest expense 3,106 3,677 6,274 7,175
Administrative expenses 206 133 409 389
Total costs and expenses 20,557 20,299 66,255 63,581
Excess of revenues before taxes, dividends
and allocation of net proceeds 10,930 4,365 14,806 6,956
Provision for taxes on income (409) (411) (818) (823)
Net income (proceeds before dividends) 10,521 3,954 13,988 6,133
Dividends on common and preferred stock -- -- (4,390) (4,548)
Net proceeds 10,521 3,954 9,598 1,585
Allocation from/(to) earned surplus (1,590) (1,067) (667) 1,302
Net proceeds available to members $ 8,931 $ 2,887 $ 8,931 $ 2,887
Allocation of net proceeds available to members:
Estimated to be payable currently $ 1,725 $ 547 $ 1,725 $ 547
Allocated to members but retained by the
Cooperative:
Qualified retains 6,901 2,190 6,901 2,190
Non-qualified retains 305 150 305 150
$ 8,931 $ 2,887 $ 8,931 $ 2,887
<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 12/25/93 6/26/93 12/25/92
Current assets: <C> <C> <C>
Cash $ 54 $ 19 $ 30
Accounts receivable 374 25 864
Receivable from Curtice Burns Foods, Inc. 39,241 9,113 43,002
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 1,356 1,172 773
Income taxes refundable -- 70 --
Prepaid expenses 1,604 693 27
Total current assets 77,813 48,276 80,636
Long-term portion of investment in direct
financing leases 126,325 152,329 154,240
Long-term loans receivable from Curtice
Burns Foods, Inc. 76,262 78,648 68,877
Long-term portion of investment in Springfield
Bank for Cooperatives 17,543 16,814 14,709
Deferred tax benefit 2,117 2,010 2,500
Finance receivable related to intangibles 25,725 26,545 50,116
Other assets 253 262 275
Total assets $326,038 $324,884 $371,353
</TABLE>
<TABLE>
Liabilities and Shareholders' and Members Capitalization
<S>
Current liabilities: <C> <C> <C>
Notes payable $ 31,100 $ 12,000 $ 37,000
Accounts payable 3,272 1,019 100
Accrued expenses 2,994 3,019 3,503
Federal and state income taxes payable 854 -- 1,255
Current portion of long-term debt 14,000 16,000 14,010
Amounts due members 25,549 14,525 24,670
Total current liabilities 77,769 46,563 80,538
Long-term debt 133,014 168,000 156,000
Other non-current liabilities 468 417 388
Total liabilities 211,251 214,980 236,926
Commitments
Shareholders' and members' capitalization:
Retained earnings allocated to members 36,377 29,446 32,130
Non-qualified allocation to members 5,959 5,704 6,795
Capital Stock -
Preferred, par value $25, authorized -
5,000,000 shares; issued and
outstanding - 2,378,807, 2,378,807 and
2,148,050, respectively 59,470 59,470 53,701
Common, par value $5, authorized -
5,000,000 shares
12/25/93 6/26/93 12/25/92
Shares issued 2,096,860 2,690,430 2,671,193
Shares subscribed 17,063 24,788 50,521
Total subscribed
and issued 2,113,923 2,715,218 2,721,714
Less subscriptions
receivable in installments (17,063) (24,788) (50,521)
2,096,860 2,690,430 2,671,193 10,484 13,455 13,356
Earned surplus 2,497 1,829 28,445
Total shareholders' and
members' capitalization 114,787 109,904 134,427
Total liabilities and capitalization $326,038 $324,884 $371,353
<FN>
The accompanying notes are an integral part of these financial statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc.
Statement of Cash Flows (Dollars in Thousands)
<CAPTION>
Six Months Ended
<S> 12/25/93 12/25/92
Cash flows from operating activities: <C> <C>
Net income $ 13,988 $ 6,133
Amount payable to members currently (1,725) (547)
Change in deferred tax benefit (107) (51)
Change in assets and liabilities:
Accounts receivable (349) (221)
Accounts payable and accrued expenses 2,228 (126)
Amounts due to members 11,024 7,868
Federal and state taxes payable/refundable 924 (87)
Other assets and liabilities (870) 626
Net cash provided by operating
activities 25,113 13,595
Cash flows from investing activities:
Due from Curtice Burns, net (25,742) (23,812)
Return from investment in direct financing leases 26,004 11,118
Investment in Springfield Bank (913) (919)
Cash received from the finance receivable
related to intangibles 820 3,327
Net cash from/(used in) investing activities 169 (10,286)
Cash flows from financing activities:
Proceeds from short-term debt 19,100 9,000
Payments on long-term debt (36,986) (8,015)
Issuance of common stock, net of cancellations (2,971) 259
Cash dividends paid (4,390) (4,548)
Net cash provided by financing activities (25,247) (3,304)
Net change in cash 35 5
Cash at beginning of period 19 25
Cash at end of period $ 54 $ 30
Supplemental Disclosure of Cash Flow Information
Cash paid/(received) during the year for:
Interest $ 6,274 $ 10,580
Income taxes, net $ (106) $ 910
<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 six months
ended December 25, 1993, and December 25, 1992, include: commercial market
value of crops delivered, $59,572,000 and $56,017,000, respectively; interest
income, $8,314,000 and $8,557,000, respectively; and additional proceeds from
profit sharing provisions, $12,473,000 and $5,213,000, respectively. In
addition, Pro-Fac received financing amortization payments of $26,824,000 and
$12,518,000 for the periods ended December 25, 1993 and December 25, 1992,
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 $302,737,000 based on the December 25, 1993 book
value. 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 involve 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.
<PAGE>
<PAGE>
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
Note 2. RECEIVABLES FROM CURTICE BURNS FOODS, INC.
Current and long-term receivables from Curtice Burns under the Agreement
consist of the following:
12/25/93 12/25/92
Current receivable $39,241,000 $43,002,000
Long-term receivable $90,262,000 $82,877,000
Less current portion 14,000,000 14,000,000
$76,262,000 $68,877,000
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 $25,725,000 and $50,116,000 at December 25,
1993 and December 25, 1992, respectively. The amount of the finance
receivable relative to intangibles is related to the dispute disclosed in Note
1.
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 December 25, 1993 amounted to
$31,100,000 at 4.5 percent. The maximum amount of short-term borrowings
outstanding during the six months ended December 25, 1993 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.
Long-Term Debt -
The Cooperative's long-term debt consists of the following:
12/25/93 12/25/92
Term loans due Springfield:
Interest rate of 6.3% and
7.1% at 12/25/93
and 12/25/93 respectively $147,014,000 $170,000,000
Other debt -- 10,000
147,014,000 170,010,000
Less current portion 14,000,000 14,010,000
$133,014,000 $156,000,000
The term loans are collateralized by the Cooperative's investment in
Springfield Bank for Cooperatives. In addition, Curtice Burns guarantees all
of the Cooperative's bank debt and 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 for seasonal borrowings
<PAGE>
expire annually unless extended or renewed. Curtice Burns had short-term
notes payable to commercial banks at December 25, 1993 and December 25, 1992
of $17,000,000 and $40,000,000, respectively.
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.
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, or entitle such lenders to obtain, liens on substantially
all assets of Curtice Burns and Pro-Fac as collateral for borrowings under
such agreements.
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
<CAPTION>
(Millions)
Six Months Ended
December 25, 1993 December 25, 1992
Curtice
Burns Pro-Fac Eliminations Combined Combined
<S> <C> <C> <C> <C> <C>
Sales and revenues $453.3 $ 81.1 $(81.1) $453.3 $455.5
Cost of sales 322.4 59.6 (59.6) 322.4 322.1
Restructuring (gain)/loss (8.1) -- -- (8.1) 2.2
Selling, administrative
and general expenses 103.4 .4 (.8) 103.0 109.4
Interest expense 10.0 6.3 (8.3) 8.0 8.9
Pro-Fac share of earnings 12.4 -- (12.4) -- --
Total cost and expenses 440.1 66.3 (81.1) 425.3 442.6
Income before taxes 13.2 14.8 28.0 12.9
Provision for taxes (5.3) (.8) (6.1) (3.3)
Net income $ 7.9 $ 14.0 $ 21.9 $ 9.6
<FN>
Transactions between Pro-Fac and Curtice Burns have been eliminated for purposes of this
combined statement of operations.
/TABLE
<PAGE>
<PAGE>
<TABLE>
Combined Pro Forma Condensed Balance Sheet
<CAPTION>
(Millions)
December 25, 1993 December 25, 1992
Curtice
Burns Pro-Fac Eliminations Combined Combined
<S> <C> <C> <C> <C> <C>
Assets
Current assets (A)(C) $303.3 $ 77.8 $ (74.4) $306.7 $316.0
Property, plant and
equipment, net (B) 169.5 -- -- 169.5 197.2
Investment in direct
financing leases (C) 126.3 (126.3) -- --
Due from Curtice Burns (D) 76.3 (76.3) -- --
Goodwill and other intangibles 25.7 25.7 -- 51.4 100.2
Other assets 8.0 19.9 -- 27.9 24.2
Total assets $506.5 $326.0 $(277.0) $555.5 $637.6
Liabilities and Net Worth
Current liabilities (A)(C) $202.8 $ 77.8 $ (74.4) $206.2 $207.8
Lease obligations (C) 128.1 -- (126.3) 1.8 2.0
Long-term debt--
Due Pro-Fac (D) 76.3 -- (76.3) -- --
Due others 4.8 133.0 -- 137.8 164.6
Other liabilities 13.5 .5 -- 14.0 23.3
Total liabilities 425.5 211.3 (277.0) 359.8 397.7
Shareholders' equity and
members' capitalization (E) 81.0 114.7 -- 195.7 239.9
Total Liabilities and
Net Worth $506.5 $326.0 $(277.0) $555.5 $637.6
<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
$147.5 million at December 25, 1993) 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
$147.5 million at December 25, 1993, 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, $13.7
million, and retained earnings, $58.7 million.
/TABLE
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<PAGE>
<TABLE>
Combined Pro Forma Condensed Statement of Cash Flows
<CAPTION>
(Millions)
Six Months Ended
December 25, 1993 December 25, 1992
Curtice
Burns Pro-Fac Eliminations Combined Combined
<S> <C> <C> <C> <C> <C>
Net cash (used in)/provided by
operating activities $(10.1) $ 25.1 $(10.2) $ 4.8 $(31.3)
Net cash provided by/(used in)
investing activities 11.8 .2 (1.1) 10.9 (1.O)
Net cash provided by/(used in)
financing activities 1.7 (25.3) 11.3 (12.3) 33.7
Net change in cash 3.4 -- -- 3.4 1.4
Cash at beginning of period 6.5 -- -- 6.5 6.1
Cash at end of period $ 9.9 -- -- $ 9.9 $ 7.5
Supplemental disclosure of
cash flow information
Cash paid during the period for:
Interest (net of amount
capitalized) $ 10.0 $ 6.3 $( 8.3) $ 8.0 $ 8.4
Income taxes, net $ 11.0 $ (.1) $ -- $ 10.9 $ 1.9
Supplemental Schedule of
Non-Cash Investing and
Financing Activities:
Capital lease obligations
incurred $ 4.6 $ -- $ (4.6) $ -- $ --
<FN>
Transactions between Pro-Fac and Curtice Burns 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 $2.8 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 have agreed upon a restructuring program of the
business.
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 non-recurring charge was incurred in
the second quarter of fiscal 1994 to adjust previous estimates was recorded to
complete the Lucca sale transaction and to reserve against additional
operating losses on the meat snacks business prior to the sale.
The first step of the restructuring program is 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. No gain or loss was incurred on the sale of Hiland due
to writedowns taken in fiscal 1993. See Note 1 "Potential Sale of Curtice
Burns and Possible Effects on Pro-Fac." Negotiations for the sale of Meat
Snacks are continuing with a potential buyer. 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.
Additional charges to earnings in connection with the restructuring program
may be required in fiscal 1994 as a result of decisions yet to be made.
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 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. 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, with lingering effects
for 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 realized increased earnings from Comstock Michigan Fruit and
Southern Frozen Foods from improved pricing on commodity frozen and canned
vegetables achieved as a result 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 six months of fiscal 1994, Curtice Burns' net earnings were
$7,908,000 or $.92 per share compared to $3,490,000 or $.41 per share for the
first six 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 as required under
Financial Accounting Standards Board regulation number 109. Included in the
fiscal 1994 six-month results, however, was a non-recurring net gain on sale
of the businesses and other restructuring (see Note 4) of $8,114,000,
equivalent to $.38 per share. Included in the corresponding prior year was a
loss on the disposition of the Lucca business of approximately $2,152,000, the
equivalent of $.07 per share. Net earnings, excluding these non-recurring
items for the current fiscal year to date, were approximately $5,144,000,
equivalent to $.60 per share, compared to the prior year of approximately
$4,082,000, equivalent to $.48 per share.
Pro-Fac's Results of Operations
Changes From the Corresponding Prior Year Quarter
The commercial market value of crops delivered during the quarter increased to
$17,245,000 from $16,489,000 in the comparable fiscal 1993 period.
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For the quarter ended December 25, 1993, the change in net proceeds compared
to the prior year period is summarized below:
Increased proceeds from Curtice Burns $6,319,000
Increased net interest income 344,000
Change in bank patronage dividend (25,000)
All other (73,000)
Change in excess of revenues before taxes,
dividends and allocation of net proceeds 6,565,000
Change in tax provision 2,000
Change in net proceeds $6,567,000
Of the $6,319,000 increased proceeds from Curtice Burns, $5,133,000 was
attributable to net restructuring gains and the remainder is primarily due to
increased profits generated by the vegetable business.
Six Month Changes From the Corresponding Prior Year Period
The commercial market value of crops delivered during the six-month period
increased to $59,572,000 from $56,017,000 in comparable fiscal 1993 period.
For the six months ended December 25, 1993, the change in net proceeds
compared to the prior year period is summarized below:
Increased proceeds from Curtice Burns $7,260,000
Increased net interest income 660,000
Change in bank patronage dividend (50,000)
All other (20,000)
Change in excess of revenues before taxes,
dividends and allocation of net proceeds 7,850,000
Change in tax provision 5,000
Decrease in dividends 158,000
Change in net proceeds $8,013,000
Of the $7,260,000 increased proceeds from Curtice Burns, $5,133,000 was
attributable to non-recurring items, and the remainder is primarily due to
increased profits generated by the vegetable business.
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 six-month period ended December 25, 1993, 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 $2.2 million or .5 percent. The change is
comprised of a $12.2 million decrease due to the disposition of businesses, a
$15.4 million increase due to changes in volume other than the dispositions
and a decrease of $5.4 million due to variations in price and mix. The sales
volume increase was due primarily to increased demand as a result of decreased
supply in the vegetable industry due to the floods in the Midwest and the
droughts in the South during the 1993 growing season. The vegetable sales
volume increase offset sales volume decreases in the snack foods category.
Cost of sales increased $.3 million. As a percent of sales, costs increased
to 71.1 percent from 70.7 percent. Gross profit decreased $2.5 million or 1.8
percent. These changes resulted primarily from variations in price and
product mix.
Selling, administrative and general expenses decreased $6.4 million or 5.9
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percent. Cost changes include a $.1 million decrease in trade promotions, a
$3.8 million reduction in advertising and selling costs, and a $2.5 million
reduction of other administrative costs.
Interest expense decreased $.9 million or 10.1 percent; representing a $1.0
million decrease due to lower rates partially offset by a $.1 million increase
due to an increase in debt.
Income before taxes increased $15.1 million or 117.1 percent, primarily due to
the non-recurring gain (see Note 4).
Restructuring gains and losses before taxes improved by $10.3 million from the
prior year. A non-recurring 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 combined net income for these non-recurring 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 $302.7 million based on the December 25, 1993 book
value. 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 $302.7
million, $129.5 million represents short- and long-term debt, $25.7 million is
relative to intangible assets, and $147.5 million relates to leased fixed
assets. This $302.7 million at December 25, 1993 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 $25.7 million is a result of increased borrowings of $61.4
million for seasonal financing for the production of raw product deliveries
during the period less $35.7 million relating to sale proceeds of business
units sold (see Note 4). The decrease in the leased asset values of $26.0
million is the net of assets sold as a result of business units sold and
depreciation for the six 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, so that the exact amount cannot now be calculated.
Should Curtice Burns terminate the Agreement then, even with the total
payments asserted by Curtice Burns, Pro-Fac should have cash and other assets
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of not less than its equity, which as of December 25, 1993 was $114,787,000.
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 a 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 any required financing from the Springfield Bank for
Cooperatives.
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 a purchase of 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 $4.8
million in the six-month period reflect net income of $7.9 million and $14.0
million for Curtice Burns and Pro-Fac, respectively. Amortization of assets
amounted to $12.8 million. Inventories increased $29.0 million and accounts
receivable increased $8.5 million. Changes in other assets and liabilities
amounted to $4.2 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 $10.9
million in the periods was comprised of cash paid for purchases of property,
plant and equipment of $10.0 million, cash received for disposals of fixed
assets of $21.8 million and an increase in the investment in Springfield Bank
for Cooperatives of $.9 million. During the six-month period, $40.8 million
was received in proceeds from the disposition of the oats portion of the
National Oats business and the Hiland Potato Chip business. Approximately $2
million is expected to be received in additional proceeds by February 22, 1994
in connection with such disposition. Proceeds from such dispositions have
been and will be applied to debt.
Net cash used in financing activities of $12.3 million in the period was
comprised of proceeds from short-term debt of $36.1 million, payments on long-
term debt of $38.4 million, issuance of capital stock of $.2 million less
repurchases of $3.0 million and dividends paid of $7.2 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, such as that experienced in the last three years.
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 six months ended December 25, 1993, and the maximum borrowing
on those lines was $81.0 million. The balance outstanding at December 25,
1993 was $48.1 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
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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 December 1991, the national office of the Internal Revenue Service issued a
technical advice memorandum ("TAM") concluding that virtually all of Pro-Fac's
income arises from patronage sources. As a result of the TAM, in January 1992
an additional distribution of patronage proceeds for fiscal 1991 was made to
members in the amount of $3,727,000. Patronage proceeds available for
distribution are determined by the Board of Directors each year, as stipulated
in the Bylaws.
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 $2.8 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.
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)
