<PAGE>
PROSPECTUS
PRO-FAC COOPERATIVE, INC.
1,100,000 Shares of Common Stock
$10,000,000 Retains
Pro-Fac Cooperative, Inc. ('Pro-Fac') is a New York cooperative corporation with
capital stock which markets the agricultural products grown by its members, all
of whom are its common shareholders, through Curtice-Burns Foods, Inc.
('Curtice-Burns'), a food processing corporation which is a wholly-owned
subsidiary of Pro-Fac. This Prospectus pertains to common stock, the allocation
by Pro-Fac to its members of certain credits representing payments by Pro-Fac
for crops purchased, denominated 'retains', and to the issuance by Pro-Fac of
its preferred stock to members and other persons holding such retains.
SEE THE SECTION OF THIS PROSPECTUS ENTITLED 'RISK FACTORS,'
WHICH BEGINS ON PAGE 9, FOR CERTAIN SPECIAL FACTORS RELATING TO THIS OFFERING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Issuer (2)
---------------------- --------------- ------------
<S> <C> <C> <C>
Common Stock Per Share $ 5.00 -- $ 5,500,000
Total: $ 5,500,000
Retains Per Unit: 100% -- 100%
Total: $10,000,000 -- $10,000,000
</TABLE>
======================================
(1) The securities described in this Prospectus are to be offered and
distributed directly by the issuer through officers of Pro-Fac, without
the use of any underwriter or dealer, and no discounts, commissions or
other compensation are to be allowed or paid therefor.
(2) Before deducting expenses estimated at $47,500.
(3) The issuance of preferred stock does not result in any additional
cash proceeds. See 'Use of Proceeds.'
The date of this Prospectus is October 24, 1995.
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AVAILABLE INFORMATION
Pro-Fac is subject to the informational requirements of the Securities Exchange
Act of 1934 and in accordance therewith files reports and other information with
the Securities and Exchange Commission (the 'Commission'). Reports and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. and at its regional offices located at
7 World Trade Center (Suite 1300), New York, New York 10048 and at 500 West
Madison Street (Suite 1400), Chicago, Illinois 60661. Copies of such material
can be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth St., N.W., Washington, D.C. 20549, at prescribed rates.
REPORTS TO SHAREHOLDERS
Pro-Fac furnishes annual reports to its members on Form 10-K which contain
audited financial statements.
3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary of Prospectus.............................................................................. 5
Risk Factors....................................................................................... 9
Use of Proceeds.................................................................................... 11
Ratio of Earnings to Fixed Charges and
Preferred Dividends............................................................................. 11
Business of Pro-Fac................................................................................ 12
Relationship with Curtice-Burns.................................................................... 18
Description of Pro-Fac Securities.................................................................. 21
Selected Historical Financial Data of Pro-Fac...................................................... 28
Pro Forma Financial Data of Pro-Fac and Curtice Burns.............................................. 29
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................. 31
Business of Curtice Burns.......................................................................... 42
Description of Properties.......................................................................... 52
Management and Directors........................................................................... 53
Executive Compensation............................................................................. 59
Security Ownership of Certain Beneficial Owners and
Management...................................................................................... 60
Certain Relationships and Related Transactions..................................................... 62
Legal Opinion...................................................................................... 64
Experts ....................................................................................... 64
Index to Financial Statements...................................................................... F-1
</TABLE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations, other than those contained in this Prospectus,
in connection with the transactions described herein, and if given or made, such
information or representations must not be relied upon as having been authorized
by Pro-Fac. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, the securities covered by this Prospectus in
any state to any person to whom it is unlawful to make such offer or
solicitation in such state. Neither the delivery of this Prospectus nor the
distribution of any security covered by this Prospectus shall, under any
circumstances, create an implication that there has been no change in the facts
herein set forth or in the affairs of Pro-Fac since the date hereof.
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SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and financial statements
appearing elsewhere in this Prospectus.
Pro-Fac:
Pro-Fac is an agricultural cooperative corporation formed in 1960 under New York
law to process and market crops grown by its members. Only growers of crops
marketed through Pro-Fac (or associations of such growers) can become members of
Pro-Fac.
A grower becomes a member of Pro-Fac through the purchase of common stock, which
obligates the grower to supply, and Pro-Fac to purchase, crops for delivery to
and processing by Curtice-Burns Foods, Inc. ('Curtice-Burns' or the 'Company').
The principal office of Pro-Fac is at 90 Linden Place, Rochester, New York
14625; its telephone number is (716) 383-1850.
Recent Changes in Relationship with Curtice-Burns:
Curtice-Burns is a producer and marketer of processed food products, including
canned and frozen fruits and vegetables, canned desserts and condiments, fruit
fillings and toppings, canned chilies and stews, salad dressings, pickles,
peanut butter and snack foods. In addition, Curtice-Burns manufactures cans,
which are both utilized by the Company and sold to third parties. Pro-Fac and
Curtice-Burns were established together in the early 1960s and have had a
long-standing contractual relationship under an Integrated Agreement pursuant to
which Pro-Fac provided crops and financing to Curtice-Burns, Curtice-Burns
provided a market and management to Pro-Fac, and Pro-Fac shared in the profits
of Curtice-Burns.
On November 3, 1994, Pro-Fac acquired Curtice-Burns (the 'Acquisition'), and
Curtice-Burns became a wholly-owned subsidiary of Pro-Fac. In connection with
the Acquisition, Agway Inc. and the other shareholders of Curtice-Burns received
$19.00 per share in cash for their shares of common stock of Curtice-Burns. The
purchase price and fees and expenses related to the Acquisition were financed
with borrowings under a new credit agreement (the 'New Credit Agreement') with
Springfield Bank for Cooperatives, predecessor to CoBank ACB (the 'Bank'), and
the proceeds of the Company's 12-1/4 percent Senior Subordinated Notes due 2005
(the 'Notes'). Pro-Fac has guaranteed the obligations of the Company under the
New Credit Agreement and the Notes.
As a result of the indebtedness incurred in connection with the Acquisition,
Curtice-Burns is a much more highly leveraged company, with higher interest
expenses, than prior to the Acquisition. The New Credit Agreement and the Notes
restrict the ability of Pro-Fac to amend the Pro-Fac Marketing Agreement. The
New Credit Agreement and the Notes also restrict the amount of dividends and
other payments that may be made by the Company to Pro-Fac. Such restrictions on
the flow of cash to Pro-Fac may affect the ability of Pro-Fac to pay dividends
on its common and preferred stock or to repurchase common or preferred stock.
Pro-Fac Securities:
Common Stock. Common stock, par value $5, is sold for cash at its par value to
all growers or associations of growers who become members of Pro-Fac, and
ownership of common stock is thus synonymous with membership in Pro-Fac. The
common stock investment required of each new member is based upon the nature,
location, and quantity of particular crops in particular locations. In
determining the level of common stock investment required for a member who
desires to market a specified quantity or acreage of a crop through Pro-
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Fac, the Board of Directors takes into account the expected Commercial Market
Value ('CMV') of the crop, the level of interest in marketing that crop through
Pro-Fac and other factors. Common stock may only be held by members of Pro-Fac
who are growers of crops marketed through Pro-Fac (or by associations of such
growers), and may only be transferred with the written consent of Pro-Fac. Any
proposed purchaser of outstanding common stock must be a grower willing to
assume all of the seller's obligations as a member of Pro-Fac and must be
acceptable to the Board of Directors.
Upon the purchase of common stock, a new member of Pro-Fac executes the General
Marketing Agreement, which provides for (1) delivery of crops; (2) the
availability of facilities for receiving and processing the crops; (3) the
operation of a single marketing pool for all crops delivered based upon the
establishment of the CMV, as defined, of each crop each year; and (4) the manner
of payment by Pro-Fac to its members of the purchase price for delivered crops.
Annual crop agreements supplement the General Marketing Agreement by setting
forth quality specifications, terms and conditions for the production and
delivery of the member's specific crop, and the relative value weighting to be
given to raw product by grade category. See 'Business of Pro-Fac.'
Retains. Retains are issued to reflect the retention by Pro-Fac of a portion of
its proceeds, as described below. Patronage proceeds are its gross receipts
derived from sources that under federal tax law qualify as patronage income,
which is primarily proceeds from the sale of crops supplied by members of
Pro-Fac, as well as transactions that facilitate or are directly related to such
marketing activities.
Under the bylaws of Pro-Fac, net proceeds from patronage income must be paid or
allocated each year to each member on the basis of the business done by that
member with Pro-Fac during the preceding crop year. Distribution may be made in
cash or by allocating to the account of each member his interest in that portion
of the proceeds retained by Pro-Fac for use as working capital or for such other
purposes as may be determined by the Board of Directors ('retains'). Such
retains are made up of allocations for which qualified notices have been
distributed ('qualified retains') and non-qualified notices of allocations
('non-qualified retains'). Qualified retains are freely transferable and
normally mature into preferred stock at its par value, $25 per share, in
December of the fifth year after allocation. Although there were, for several
years preceding the Acquisition, two broker-dealers making a market in Pro-Fac
qualified retains, no such market currently exists, and there can be no
assurance that any such market will be reestablished. Non-qualified retains may
not be sold or purchased and may, in the discretion of the Board of Directors,
be redeemed after five years for cash and/or preferred stock. In the past,
qualified retains have been converted into Non-Cumulative Preferred Stock upon
maturity, and Non-Cumulative Preferred Stock has been used to redeem
non-qualified retains. It is the intention of the Board of Directors that
retains maturing or redeemed in the future, commencing with the retains expected
to mature or be redeemed in fiscal 1996, will be converted into, or redeemed
using, Class A Cumulative Preferred Stock. With respect to retains issued prior
to September 1995, however, it is expected that the Board will permit holders of
such retains to elect to receive Non-Cumulative Preferred Stock rather than
Class A Cumulative Preferred Stock. See 'Description of Pro-Fac Securities.'
Preferred Stock. Until October 1995, all preferred stock issued by Pro-Fac has
been Non-Cumulative Preferred Stock. On October 10, 1995, Pro-Fac consummated an
exchange offer in which shares of Class A Cumulative Preferred Stock
('Cumulative Preferred Stock') were exchanged for outstanding shares of
Non-Cumulative Preferred Stock (the 'Exchange Offer'). The purpose of the
Exchange Offer was to provide stockholders with the
6
<PAGE>
opportunity to exchange, on a share-for-share basis, shares of Non-Cumulative
Preferred Stock (which are highly illiquid) for shares of Cumulative Preferred
Stock (which have been accepted for inclusion in the NASDAQ National Market
System). It is the intention of the Board of Directors that retains maturing or
redeemed in the future, commencing with the retains expected to mature or be
redeemed in fiscal 1996, will be converted into, or redeemed using, Cumulative
Preferred Stock. With respect to retains issued prior to September 1995,
however, it is expected that the Board will permit holders of such retains to
elect to receive Non-Cumulative Preferred Stock rather than Cumulative Preferred
Stock.
Holders of shares of Cumulative Preferred Stock will be entitled to receive,
when, as and if declared by the Board, out of assets of Pro-Fac legally
available therefor, cumulative cash dividends at a quarterly rate equal to $0.43
per share (or an annual rate of approximately 6.88% of the liquidation
preference of $25.00 per share). Although the Cumulative Preferred Stock has
been accepted for inclusion in the NASDAQ National Market system, there can be
no assurance that an established and liquid market for the Cumulative Preferred
Stock will develop or that it will continue if one develops. Holders of
Non-Cumulative Preferred Stock are entitled to receive, in preference to
dividends on Pro-Fac's shares of Common Stock, dividends at a rate of not less
that 6% per annum, when, as and if declared by the Board of Directors out of
legally available funds. The Board does not anticipate paying a dividend in
excess of 6% per annum on shares of Non-Cumulative Preferred Stock. Currently,
there is no active trading market for the Non-Cumulative Preferred Stock. The
reduction in the number of outstanding shares of Non-Cumulative Preferred Stock
as a result of the Exchange Offer and the Board's intention to issue primarily
Cumulative Preferred Stock in the future as retains mature or are redeemed may
result in a further reduction in the liquidity of Non-Cumulative Preferred
Stock. See 'Description of Pro-Fac Securities.'
Use of Proceeds: The cash retained as a result of distributing net proceeds in
the form of retains rather than in cash will be used for general corporate
purposes as determined by the Board of Directors at the time of receipt. No
separate cash proceeds are realized from the issuance of preferred stock that
results from the conversion of retains.
Tax Treatment of Amounts Paid or Allocated to Members: Under the federal income
tax laws, members of Pro-Fac must include currently in their taxable income
calculation the purchase price for their crops, including all cash payments and
allocations of qualified retains. Non-qualified retains are not subject to
current taxation to the members and are taxable to the members only if and when
redeemed by Pro-Fac. See 'Business of Pro-Fac.'
Benefits of Membership: From the point of view of a member of Pro-Fac there are
several advantages that he receives from his membership in Pro-Fac, which
include the following:
1. The primary advantage is that the member has an established market for
a portion of his crop in advance of the crop season.
2. A member of Pro-Fac can specialize in the production of one or a few
crops, which normally tends to increase the efficiency of his
operations, yet have the opportunity to participate in the potential
benefits of crop and geographical diversity, since he shares in the
proceeds of all crops marketed through Pro-Fac in proportion to the
value of his own crops marketed through Pro-Fac.
3. Members of Pro-Fac have the satisfaction of knowing that their views
will be heard in the Cooperative because at least 80
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<PAGE>
percent of the directors of Pro-Fac and all of the members of the
commodity committees are also grower-members. The members of the
commodity committees and all of the directors (except for directors,
who may not constitute more than 20 percent of the entire board,
appointed by the Board of Directors to represent the public interest)
are also elected by the members of Pro-Fac on a regional basis.
4. Should Pro-Fac or Curtice-Burns need additional crops for an existing
division of Curtice-Burns, qualified members are given the first
opportunity to provide those crops.
5. The member obtains the benefit of the expertise of Curtice-Burns in the
processing and marketing of food products.
6. Over a period of years, depending on the results of operations, the
member has the opportunity to build a substantial equity investment in
Pro-Fac retains and preferred stock.
7. The investment of the member in Pro-Fac common stock and the market for
his products derived from that investment are transferable, subject to
the approval of the Pro-Fac Board of Directors, so that should he want
to reduce or terminate his production of crops, he can liquidate his
common stock investment through the sale of his shares to an eligible
grower or to Pro-Fac itself.
To obtain these advantages the member must:
1. Purchase shares of common stock of Pro-Fac based upon the type,
location, and volume of crops he agrees to market through Pro-Fac.
2. Agree to the retention by Pro-Fac of a portion of its proceeds from
patronage business above the CMV of crops marketed. For example, in the
1995, 1994, and 1993 fiscal years, 80 percent of such proceeds,
excluding non-qualified retains, was so retained by Pro-Fac each year.
For the first five years, such amounts are retained without payment of
interest or dividends. In addition, in such fiscal years, 100 percent
of such proceeds allocated as non-qualified retains was so retained by
Pro-Fac. A member's investment in the retains and preferred stock of
Pro-Fac is relatively illiquid. Recent sales of qualified retains and
preferred stock have been at prices substantially below the face
amounts thereof.
3. Agree to the delayed payment of a portion of the purchase price for his
crops. Such delay will exceed the industry average in many instances.
4. Include in his income for tax purposes not only the cash payments
received for his crops but also the amount of qualified retains
allocated to his account in that year and any non-qualified retains
redeemed in that year.
5. Assume the risk that he may be paid less than CMV for his crops. See
'Risk Factors - Member's Share of Proceeds Could be Less Than CMV' and
'Business of Pro-Fac.'
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RISK FACTORS
Member's Share of Proceeds Could be Less Than CMV: Payment for crops is based
upon the CMV of such crops, which is the weighted average of the prices paid by
other commercial processors for similar crops used for similar or related
purposes sold under preseason contracts or in the open market in the same or
similar market areas.
While Curtice-Burns has agreed to pay to Pro-Fac at least the CMV of Pro-Fac
crops, the total proceeds of Pro-Fac depend in large part on the overall
profitability of Curtice-Burns. There can be no assurance that payment by
Pro-Fac to a member for his crops from the proceeds of Pro-Fac will be equal to
or greater than the CMV of those crops. Although the members of Pro-Fac have
been paid more than the CMV of their crops in every year of Pro-Fac operations
except 1963, 1969, and 1970, the increased indebtedness incurred by
Curtice-Burns in connection with the Acquisition has increased the leverage and
interest expense of Curtice-Burns, thus increasing the risk that Pro-Fac may, in
one or more coming years, pay members less than the CMV of their crops. There is
no relationship between the CMV of crops and the cost of producing such crops
since CMV is determined by supply and demand in the marketplace.
While each year Pro-Fac must, under its bylaws, pay or allocate to each member
his pro rata share of the net proceeds of Pro-Fac from patronage business,
Pro-Fac may retain whatever portion of such proceeds the Board of Directors may
determine to be necessary for the operations of Pro-Fac, allocating the retained
portion to the accounts of members. There is thus no assurance that a member of
Pro-Fac will receive cash payments for his crops equal to the CMV thereof or
that he will receive any cash payments in addition to CMV even if his share of
the proceeds of Pro-Fac from patronage business is equal to or greater than CMV.
Delayed Payments for Crops: Pro-Fac members receive delayed payment of a portion
of the purchase price for their crops. The delay exceeds the industry average in
many instances. See 'Business of Pro-Fac - Marketing of Members' Crops - Timing
of Payments for Crops' and '- Harvest-Time Advances.'
Inclusion of Certain Payments in Taxable Income: A member of Pro-Fac must
include in his taxable income for federal income tax purposes his share of the
net proceeds of Pro-Fac realized from patronage business which are paid to him
in cash or allocated to his account as qualified retains. Non- qualified retains
are included in the member's taxable income only upon redemption. See 'Business
of Pro-Fac.'
Increase in Leverage of Curtice-Burns: As a result of the Acquisition,
Curtice-Burns is highly leveraged, and such leverage may increase as a result of
further borrowings to fund capital expenditures, working capital needs or for
other general corporate purposes. The degree to which the Company is leveraged
is important to members of Pro-Fac because the amount paid by Curtice-Burns for
crops supplied by Pro-Fac, and the amount of dividends that Curtice-Burns may
pay to Pro-Fac, varies depending upon the profitability of Curtice-Burns. Such
payments, in turn, affect what Pro-Fac may pay to its members for their crops
and the ability of Pro-Fac to pay dividends on, or repurchase, its common and
preferred stock. A high degree of leverage may make Curtice-Burns more
vulnerable to economic downturns, may limit its ability to withstand competitive
pressures, and may impair the Company's ability to obtain financing in the
future for working capital, capital expenditures, and general corporate
purposes.
9
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Non-Transferability of Non-Qualified Retains: Non-qualified retains are
non-transferable and do not bear interest. See 'Description of Pro-Fac
Securities.'
Absence of Market for Preferred Stock and Qualified Retains: The preferred stock
and qualified retains of Pro-Fac may be transferred without the consent of
Pro-Fac. There were, for several years preceding the Acquisition, broker-dealers
making a market in Pro-Fac Non-Cumulative Preferred Stock and qualified retains,
but no such market currently exists. There is no assurance that these
arrangements, or any other organized market for Pro-Fac preferred stock and
qualified retains, will be re-established. The purpose of the Exchange Offer was
to provide stockholders with the opportunity to exchange, on a share-for-share
basis, shares of Non-Cumulative Preferred Stock (which are highly illiquid) for
shares of Cumulative Preferred Stock (which have been accepted for inclusion in
the NASDAQ National Market System). There can be no assurance, however, that an
established and liquid market for the Cumulative Preferred Stock will develop or
that it will continue if one develops. The reduction in the number of
outstanding shares of Non-Cumulative Preferred Stock as a result of the Exchange
Offer and the Board's intention to issue primarily Cumulative Preferred Stock in
the future as retains mature or are redeemed may result in a further reduction
in the liquidity of Non-Cumulative Preferred Stock. Qualified retains do not
bear interest. See 'Description of Pro-Fac Securities.'
Effect of Exchange Offer on Patronage Income in Fiscal 1996: Because dividends
on the Non-Cumulative Preferred Stock are payable annually (with the most recent
dividend having been paid in July 1995) and dividends on the Cumulative
Preferred Stock are paid quarterly (with dividends expected to be paid on
October 31, 1995, January 31, 1996 and April 30, 1996), the exchange of
Non-Cumulative Preferred Stock for Cumulative Preferred Stock on October 10,
1995 is likely to result in the payment of 1-3/4 years of dividends to the
holders of exchanged shares in fiscal 1996. Such dividends will reduce the
amount of patronage income allocated to members in fiscal 1996.
Possible Changes of Treatment of Retains: The current policy of Pro-Fac with
regard to the maturing of qualified retains into preferred stock and the
redemption of non-qualified retains for preferred stock and/or cash is described
in this Prospectus under 'Description of Securities Offered.' This policy is,
however, subject to change, in the discretion of the Board of Directors.
Each Member Receives One Vote: Each member of Pro-Fac has one vote, regardless
of the number of shares of common stock held. Further, if two or more members
are joined in a single farming enterprise, the participating members receive
only a single vote. Accordingly, even a member with substantial holdings of
common stock will have relatively little control over the election of directors
or other matters on which members may vote. See 'Description of Pro-Fac
Securities.'
Possible Discontinuance of Crop: Pro-Fac continuously reviews the ability of its
members to produce high-quality crops, and Curtice Burns continuously reviews
its ability to process and market profitably the crops it buys from Pro-Fac. As
a result of such reassessment, Pro-Fac may determine to cease marketing a
particular crop and terminate the marketing agreements of the members producing
that crop for sale through the Cooperative. The members affected would be
required to sell all of their common stock supporting that crop to Pro-Fac for
cash at its par value, plus any accrued dividends. Pro-Fac may also adjust the
quantity of a crop to be marketed for members, either permanently or
temporarily, in several ways described herein under 'Business of Pro-Fac -
Marketing of Members' Crops - Quantity of Crops
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Marketed.' Permanent increases or decreases in the quantity of a crop to be
marketed would involve, respectively, the purchase of additional common stock by
members or other growers, or the sale of common stock by members to Pro-Fac at
par value, plus any accrued dividends.
Agricultural Risks: Curtice-Burns and Pro-Fac and its members are subject to all
the risks generally associated with production and marketing of agricultural
commodities. For example, unfavorable growing conditions in the Northeast in
1989, coupled with increased crop levels in competing areas, resulted in
increased costs for Curtice-Burns' canned and frozen vegetable businesses in
fiscal 1990, while increased national supplies reduced selling prices.
Curtice-Burns' reduced earnings on these Pro-Fac products in turn reduced the
amount paid by Curtice-Burns to Pro-Fac under the marketing provisions of the
Integrated Agreement between them. See 'Relationship with Curtice-Burns.'
Competition in Food Processing Industry: The products of Curtice-Burns,
including those processed from crops supplied by Pro-Fac, compete with those of
national and major regional food processors under highly competitive conditions.
Many national manufacturers have substantially greater resources than
Curtice-Burns and Pro-Fac.
USE OF PROCEEDS
The securities offered hereunder are issued on a continuing basis as part of the
normal operations of Pro-Fac and are not offered to raise funds for any specific
purpose. As described more fully elsewhere herein, common stock is sold from
time to time to new members of Pro-Fac or to members who increase the quantity
of crops marketed through Pro-Fac. Retains are issued annually to represent net
proceeds from patronage business retained by Pro-Fac. The cash retained as a
result of distributing net proceeds in the form of retains rather than in cash
is transferred to Curtice-Burns and is used for general corporate purposes, such
as the financing of fixed assets and the reduction of short or long-term
borrowings, as determined by the Board of Directors at the time of receipt. No
separate cash proceeds are realized from the issuance of preferred stock, which
is issued only upon the maturing of outstanding retains and replaces those
retains on the books of the Cooperative.
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------
June 28, June 26, June 26, June 25, June 24,
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
and preferred dividends 1.2 1.4 (A) 2.2 1.5
Pro forma ratio of earnings to fixed
charges and preferred dividends (B) 1.2 (B) 1.7 1.3
</TABLE>
(A) In fiscal year ended June 26, 1993, the earnings were inadequate by
$22,877,000 to cover the amount of pretax fixed charges and preferred
dividends.
(B) In fiscal years ended June 26, 1993 and June 28, 1991, the earnings were
inadequate by $27,268,000 and $797,000, respectively, to cover the amount
of pretax basis fixed charges and preferred dividends which would have
been declared and paid if all retained earnings allocated to members'
'retains' at the end of each fiscal period had been converted to preferred
stock at the beginning of the period at the maximum dividend permitted by
law.
For purposes of computing the ratio of earnings to fixed charges and preferred
dividends, earnings consist of net proceeds before (1) equity in the
undistributed earnings of the Bank, (2) fixed charges, (3) income taxes,
11
<PAGE>
and (4) dividends on common and preferred stock. Fixed charges represent total
interest expense and the interest factor included in rent. For purposes of this
computation, preferred dividends are adjusted to a pretax basis (the amount of
earnings before taxes necessary to meet preferred stock dividend requirements).
Dividends represent those amounts deducted for purposes of determining net
proceeds in each fiscal year.
The pro forma ratios of earnings to fixed charges and preferred dividends were
computed by further increasing combined fixed charges and such dividends,
adjusted to a pretax basis, by the amount of pretax basis preferred dividends
which would have been declared and paid if all retained earnings allocated to
members' 'retains' at the end of each fiscal period had been converted to
preferred stock at the beginning of the respective periods and the maximum
dividend permitted by law of 12 percent of par value was declared and paid
thereon.
BUSINESS OF PRO-FAC
Pro-Fac is an agricultural marketing cooperative. Membership in Pro-Fac is
limited to persons actively engaged in the growing of agricultural products (or
associations of such producers) which are marketed through Pro-Fac. Its
approximately 700 members are growers located principally in New York,
Pennsylvania, Illinois, Indiana, Michigan, Minnesota, Washington, Oregon, Iowa,
Nebraska, Florida, California and Georgia. A grower becomes a member of Pro-Fac
through the purchase of common stock, which obligates the grower to supply, and
Pro-Fac to purchase, crops. Crops grown by Pro-Fac members and purchased by
Pro-Fac include fruits (cherries, apples, blueberries, peaches and plums),
vegetables (snap beans, beets, cucumbers, peas, sweet corn, carrots, cabbage,
squash, asparagus, potatoes, dry beans, southern peas, turnip roots and leafy
greens) and popcorn. All of the crops supplied to Pro-Fac by its members are
sold to Curtice-Burns for processing.
Membership: Membership in Pro-Fac is evidenced by the ownership of Pro-Fac
common stock. Hence the terms 'member' and 'common stockholder' are synonymous.
Only producers (or associations of producers) of agricultural products marketed
through Pro-Fac are eligible to become members and to own common stock of
Pro-Fac.
Under the Pro-Fac bylaws and the policies adopted by the Board of Directors of
Pro-Fac, growers who wish to become members of the Cooperative are required to
buy Pro-Fac common stock in order to provide a capital base for its marketing
activities. The stock purchase required of each grower is based upon the type
and quantity of product to be delivered by the grower to Pro-Fac as established
by the Board of Directors for particular commodities in particular locations. In
determining the level of common stock purchase required for a member who desires
to market a specified quantity or acreage of a crop through Pro-Fac, the Board
of Directors takes into account the expected CMV of the crop, the level of
interest in marketing that crop through Pro-Fac and other factors.
Common Stock: Common stock is issued only at its par value, $5.00 per share.
Payment for common stock required to be purchased must be made in the manner
approved by the Board of Directors. In many cases, the board has permitted the
purchase price to be paid in four installments. Under this system, a cash
deposit of at least 25 percent of the total price must be paid upon joining
Pro-Fac; at that time 25 percent of the shares to be purchased are issued to the
grower. The balance due may be paid in three equal annual installments; upon
receipt of each payment, 25 percent of the shares to be purchased are issued by
Pro-Fac to the grower. A member making his purchase in installments is permitted
to market through Pro-Fac the total quantities of product covered by his General
Marketing Agreement even before he has purchased the total required number of
shares of common
12
<PAGE>
stock. Since each Pro-Fac member is entitled to only one membership vote
regardless of the number of shares of common stock held, the voting rights of a
member are not affected by the purchase of common stock in installments. See
'Description of Pro-Fac Securities - Common Stock - Voting Rights.' A member is
entitled to receive dividends only on shares actually issued to him.
A grower may pay the three annual installments from the proceeds of his crop
sales to Pro-Fac or from other funds, as he chooses. He may pay the full amount
due at any time prior to the end of the third crop season, except that members
are not permitted to make voluntary advance payments for common stock between
April 1 and the dividend qualifying date for common stock during any calendar
year.
A grower who wishes to become a member of Pro-Fac is required to execute an
'Application for Membership', on which his required common stock purchase is
calculated and the method of payment is indicated, and in which he agrees to
include in his gross income in the year of receipt, for federal income tax
purposes, the stated amount of all patronage dividends allocated to him by
Pro-Fac by means of written notices of allocation of qualified retains. Such
member also agrees to include in gross income for federal income tax purposes,
in the year of redemption, the stated amount of non-qualified retains redeemed
by Pro-Fac. Each grower's application must be reviewed and approved by the Board
of Directors before it is accepted by Pro-Fac.
A grower must execute the General Marketing Agreement, and thereafter he will
also be required annually to execute a crop agreement setting forth quality
specifications for his crop and terms of production and delivery.
Pro-Fac is not aware of any government program which would materially restrict a
grower's ability to deliver crops which he has agreed to produce and deliver in
accordance with his crop agreement with Pro-Fac.
Regional Representation: The business of Pro-Fac is conducted pursuant to
policies established by its Board of Directors. The territorial area in which
Pro-Fac operates has been divided into geographical regions based on natural
divisions of product and location. In addition, some regions have been further
divided into districts. The members within each region or district are
represented on the Board by at least one director. The board designates the
number of directors to be elected from each region or district, based on the
value of raw product delivered, so as to attain reasonably balanced
representation on the Board. At present, there are five regions of Pro-Fac
covering the following areas and represented by the number of directors
indicated:
<TABLE>
<CAPTION>
Present Number
Region Area of Directors
------ ---- --------------
<S> <C> <C>
I (Dist. 1) Western Upstate New York 2
(Dist. 2) Eastern Upstate New York 2
(Dist. 3) Pennsylvania and Maryland 1
II (Dist. 1) Michigan 3
(Dist. 2) Illinois 1
III Iowa and Nebraska 1
IV Washington, Oregon and California 1
V Georgia and Florida 1
</TABLE>
In addition to the 12 directors elected by the members of Pro-Fac within these
five membership regions, the Board of Directors of Pro-Fac is
13
<PAGE>
permitted to appoint up to one-fifth of the total number of directors to
represent primarily the interest of the general public in Pro-Fac.
Commodity Committees: A commodity committee has been established for each of the
major crops marketed through Pro-Fac. Each committee member is a member of
Pro-Fac who grows and markets through Pro-Fac the crop with which his committee
is concerned. Under current policies, where a crop is produced in different
geographical areas, commodity committees are established either for separate
geographical areas or for a combination of areas. Members of each commodity
committee are elected by the members of Pro-Fac in the region(s) for which the
committee serves.
The commodity committees have been active in advising the Board of Directors of
Pro-Fac as to numerous matters affecting Pro-Fac crops, particularly with regard
to the determination of CMV as hereinafter described and the content of the
annual crop agreements, which specify the terms under which crops will be grown,
harvested and delivered.
MARKETING OF MEMBERS' CROPS
General Marketing Agreement: Each member of Pro-Fac enters into a marketing
agreement with Pro-Fac (the 'General Marketing Agreement'), in which he appoints
Pro-Fac as his exclusive agent for processing and marketing the portion of his
crop committed under the General Marketing Agreement and under annual crop
agreements. In the General Marketing Agreement, Pro-Fac agrees to make
available, through its agreement with Curtice-Burns, facilities for receiving
and processing the crops delivered by its members and the management personnel
to operate such facilities and to market the crops of its members as processed
food products.
Passage of Title to Crops: Upon delivery of a member's crops to Pro-Fac, Pro-Fac
takes title to such crops and has the right to transfer, process, or encumber
them as it sees fit, subject to the provisions of the General Marketing
Agreement. A member delivering crops to Pro-Fac has no control over such crops
following delivery. Prior to delivery to Pro-Fac, each member bears all risk of
loss or damage to his crops.
Quantity of Crops Marketed: Ordinarily, the quantity of a crop to be delivered
by a member of Pro-Fac in any year is the quantity previously established in the
General Marketing Agreement and the Application for Membership or Additional
Stock Subscription, this being the quantity of raw product supported by the
member's common stock ownership. For annual crops, the quantity delivered is the
quantity established in the General Marketing Agreement and the Application for
Membership or Additional Stock Subscription. For perennial crops, the quantity
is based on the quantity in the General Marketing Agreement and the four-year
history of an individual member. For crops subscribed on a tonnage basis,
members deliver 111 percent of the stock commitment. There are several ways,
however, in which this quantity may be changed.
If Pro-Fac determines that a permanent change is required in the total quantity
of a particular crop marketed through it, a corresponding change in the common
stock of the members producing that crop will be required. If additional
quantities of the crop are required, additional common stock will be offered to
growers of the crop, with qualified current members of Pro-Fac in the area where
the crop is needed given the first opportunity to purchase the stock. If a
reduction in the quantity of a crop is required, the common stock holdings of
all Pro-Fac members delivering that crop will be proportionately reduced; see
'RISK FACTORS - Possible Discontinuance of Crop.'
14
<PAGE>
If a change in total crop requirement is determined to be only temporary,
adjustment of common stock holdings will not be required. If additional
quantities are temporarily required, Pro-Fac offers the opportunity to deliver
them to qualified current members growing the crop, on a pro rata basis. If a
temporary reduction in a crop is required, Pro-Fac may temporarily pro-rate
downward the quantity of the crop delivered by all members supplying it.
If the deliveries of a crop are temporarily pro-rated downward, the members
affected may, with the approval of the Board of Directors, be offered the
opportunity to sell their excess common stock to Pro-Fac. A member choosing to
do so would incur a permanent reduction in the amount of crop he is entitled to
deliver to Pro-Fac.
Pro-Fac crops under stock tonnage are subscribed for 90 percent of Curtice-
Burns normal required raw product needs. The difference between the normal stock
tonnage and the normal required raw product need of Curtice-Burns becomes part
of the member's delivery obligation. The tonnage will be paid for by Pro-Fac and
qualify for net proceeds distribution. No additional investment is required from
the member. This results in an increase of 11 percent to a member's agreed to
seasonal tonnage.
Agent Growers: If a member is temporarily unable to fulfill his production
obligation to Pro-Fac, either in whole or in part, he may secure another grower
or growers to act as his agent in growing and delivering the crop to Pro-Fac. An
agent grower arrangement should be consummated prior to the planting season for
the crop concerned. An agent grower may, but need not, be a member of Pro-Fac.
All payments, including the allocation of retains, made by Pro-Fac for crops
delivered by an agent grower will be made directly to the agent grower. A member
may not utilize an agent grower to fulfill his production obligation to Pro-Fac
more frequently than one out of any two consecutive years without subjecting
himself to the mandatory transfer of his excess common stock.
Payments Received from Curtice-Burns; CMV: Payment for crops is initially made
by Curtice-Burns to Pro-Fac (and by Pro-Fac to its members) on the basis of CMV.
CMV is determined by a committee established jointly by the Board of Directors
of Pro-Fac and Curtice-Burns ('Joint Board CMV Committee') consisting of two
members appointed by the president of Pro-Fac, two members appointed by the
chairman of Curtice-Burns, and the president of Curtice-Burns. In making that
determination, the Joint Board CMV Committee acts on the basis of data supplied
primarily by Curtice-Burns concerning preseason contracts and open market
purchases for various crops; however, it also relies significantly upon the
advice of the commodity committee for each of the various crops marketed through
Pro-Fac. Because the members of the commodity committees are growers of the
crops with which they are concerned, and because those growers, like other
growers who are members of Pro-Fac, frequently sell crops to processors outside
of Pro-Fac, members of the commodity committees are familiar with prices paid by
other commercial processors for crops similar to those sold and marketed through
Pro-Fac.
Payment of Purchase Price to Members: As a cooperative corporation subject to
the provisions of the Internal Revenue Code of 1986, as amended, Pro-Fac may
retain for working capital a portion of the proceeds received in payment for
crops while currently deducting for tax purposes the amount of such retained
earnings that is annually allocated to its members as qualified retains. In
order to retain and deduct such amounts, Pro-Fac must give a qualified written
notice of allocation of such amount to each member; the bylaws of Pro-Fac
provide that such notices may contain such terms and conditions as the Board of
Directors deems appropriate, but the allocation must be made within 8-1/2 months
following the end of the fiscal year. Each
15
<PAGE>
member must also consent to take his entire allocation of qualified retains into
income for tax purposes at its stated dollar amount, and Pro-Fac must pay in
cash at least 20 percent of each member's share of such proceeds. Retains as to
which Pro-Fac issues a non-qualified written notice of allocation are excluded
from these provisions. The earnings retained by Pro-Fac in this fashion are
discussed more fully under 'Description of Pro- Fac Securities.'
The bylaws of Pro-Fac, which are incorporated into the General Marketing
Agreement, require Pro-Fac annually to pay or account to its members for their
crops, on a cooperative basis, in cash and through such allocations of retains
as the Board of Directors may determine. It has been the practice of Pro-Fac
over the past five years to pay to its members each year in cash the full CMV of
all of their products marketed through Pro-Fac. The patronage proceeds of
Pro-Fac above CMV in those years have, after payment of dividends on capital
stock, partly been paid in cash to members and partly retained by Pro-Fac and
credited to an account allocated to each member by Pro-Fac. The percentages of
CMV paid in cash or allocated to members as retains over the last five fiscal
years are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June
-------------------------------------------------
1991 1992 1993 1994 1995
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Paid in cash 100.1% 103.5% 101.8% 105.3% 102.6%
Allocated as qualified retains 0.4 10.5 7.0 21.0 10.6
Allocated as non-qualified retains 0.5 0.5 1.0 2.9 0.5
----- ----- ----- ----- -----
Total 101.0% 114.5% 109.8% 129.2% 113.7%
===== ===== ===== ===== =====
</TABLE>
Since the Acquisition, Pro-Fac has agreed with Curtice-Burns to retain and
invest in the equity of Curtice-Burns 70 percent of Pro-Fac earnings over CMV
each year, so that cash payments with respect to qualified notices of allocation
cannot exceed 30 percent of such earnings.
For fiscal 1991, in addition to the percentages shown above, based on the
resolution of a matter with the Internal Revenue Service, Pro-Fac made an
additional distribution to members upon re-allocation of its 1991 income in
relation to the members' CMV for fiscal 1991. See '-Certain Tax Matters.' The
following table illustrates the original allocation and the subsequent
additional distribution (which were reflected in the fiscal 1992 statements) and
the total distribution relating to members' crops in fiscal 1991.
<TABLE>
<CAPTION>
Allocated as Allocated as
Paid in Qualified Non-Qualified
Cash Retains Retains Total
---- ------- ------- -----
<S> <C> <C> <C> <C>
Original 1991 distribution 100.1% 0.4% 0.5% 101.0%
Additional 1991 distribution made during
fiscal 1992 1.6% 4.6% -- 6.2%
----- --- --- -----
Total payment of purchase price to members
as a percent of CMV for 1991 crops 101.7% 5.0% 0.5% 107.2%
===== === === =====
</TABLE>
Timing of Payments for Crops: Curtice-Burns is obligated to pay Pro-Fac the
purchase price for crops sold under the Marketing Agreement at such time or
times as may be necessary to permit Pro-Fac to make required payments to its
members. The actual CMV of a crop cannot ordinarily be determined until well
after the harvest, so initial payments are based upon estimated CMV, which is
the final CMV established for the crop in the prior year, unless the Board of
Directors determines that average industry prices have changed significantly
since that time.
As soon as payments for particular crops are received from Curtice-Burns,
Pro-Fac pays the funds received over to the members who delivered those crops.
Thus, with minor variations, the purchase price is then paid by Pro-Fac to the
members in accordance with a long-established schedule, as
16
<PAGE>
follows: 50 percent of estimated CMV is paid not later than 30 days after
completion of delivery of a particular crop, and another 25 percent of estimated
or established CMV is paid not later than 120 days after the average date of
final delivery for each crop. The balance of CMV is paid not later than July 15
of the following calendar year. Any payments in addition to CMV are made as soon
as possible, but in any event within 8-1/2 months following the end of the
fiscal year.
For example, a member of Pro-Fac who delivered crops with a CMV of $10,000 to
Pro-Fac for marketing on August 1, 1993 was paid or allocated a total of $12,920
for those crops. Of this amount, he was paid $10,000 (CMV) in cash in three
installments based on the following schedule of payments from Curtice-Burns:
$5,000 by August 30, 1993, $2,500 by November 30, 1993 (assuming this member's
date of final delivery coincides with the average date of final delivery for the
same crop), and $2,500 by July 15, 1994. In addition, as soon as the necessary
computations could be made, but before March 15, 1995 (8-1/2 months after fiscal
year end) and final payment was received from Curtice-Burns, he was paid an
additional $530 (20 percent of the $2,630 earned over CMV, excluding
non-qualified retains) in cash, while $2,100 (the remaining 80 percent of the
earnings over CMV, excluding non-qualified retains) was retained by Pro-Fac and
allocated to his account as qualified retains. Finally, he was notified of an
allocation of an additional $290 in the form of non-qualified retains which, at
the discretion of the Board of Directors, may be redeemed for cash and/or
preferred stock. See 'Description of Pro-Fac Securities.'
Harvest Time Advance: Recognizing the costs involved in harvesting and
delivering a crop, Pro-Fac has adopted a policy of offering harvest time cash
advances to members. The terms and conditions governing such advances are
specified in the annual crop agreements. Payment of the harvest time advance is
usually made approximately one week after delivery of a crop, and the total
amount of the advance may not exceed 50 percent of estimated CMV. The harvest
time advance is repaid by deducting the amount of the advance from the first
payment due the member for the crop.
Single Pool: Under the General Marketing Agreement, Pro-Fac is required to
account for its earnings under what is generally referred to as the single pool
concept, in part because that portion of the purchase price for crops received
from Curtice-Burns which is in excess of CMV is not allocated to individual
Pro-Fac crops, but rather is a single payment based on the profitability of a
variety of products. Under the single pool system, a determination is made as to
the earnings of all crops in the aggregate. In the above example, the total
purchase price for crops paid or allocated to the hypothetical member was 29.2
percent over the CMV of the crops which he delivered to Pro-Fac. The payment to
him of $10,000 in cash was based upon the CMV of the particular crops he
delivered, but the 29.2 percent earned above that was based upon the aggregate
earnings of all Pro-Fac crops delivered in fiscal 1994 (1993 Production Year),
computed in a single pool. The prices paid to members of Pro-Fac for their crops
are therefore related both to the CMV of those crops and to the aggregate
profitability of all Pro-Fac crops determined under the single pool concept.
Certain Tax Matters: 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.
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
17
<PAGE>
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. In conjunction with this ruling, the
Cooperative has filed for tax refunds for fiscal years 1986 to 1991 in the
amount of approximately $7.2 million and interest payments of approximately $4.9
million. In addition, it is anticipated that the Cooperative will file for tax
refunds for fiscal 1992 in the amount of approximately $1.6 million and interest
payments of approximately $.3 million. Based upon the status of the government's
review of the refunds for fiscal years 1986 to 1990 the legal counsel to the
Cooperative has issued an opinion that such refunds constitute a legally
enforceable account receivable from the government. Accordingly, refund amounts
of $10.1 million for tax and interest have been reflected in the financial
statements of Pro-Fac as of June 24, 1995. It is anticipated that such amounts
will be received in the first half of fiscal 1996. The Board of Directors of the
Cooperative has committed that substantially all of such refunds and interest
payments, when received, will be invested in its subsidiary, Curtice-Burns
Foods, Inc.
Pro-Fac ceased to qualify as a tax-exempt cooperative upon consummation of the
acquisition and, accordingly, is no longer permitted to deduct the cash
dividends paid on its capital stock. Non-patronage income is subject to federal
income tax at the cooperative level. Patronage income paid or allocated in the
form of qualified retains to members is taxable to the members and not to
Pro-Fac. Patronage income allocated in the form of non-qualified retains is
taxable at the cooperative level when issued. In the year that non-qualified
retains are redeemed at Pro-Fac's option, Pro-Fac receives a tax deduction and
the members have taxable income equal to the face amount redeemed.
The results of operations for fiscal 1993 produced a net operating loss
carryforward which expires in fiscal 2008. No tax benefit was recognized at that
time because with Pro-Fac's tax exempt status and, due to the issues surrounding
the potential change in control of Curtice-Burns, there was no assurance of the
utilization of this net operating loss carryforward in future years. With the
cessation of the exempt status, Pro-Fac's cash dividends will no longer be tax
deductible, and because of the resolution of Curtice-Burns change in control
issue, it is more probable than not that Pro-Fac will be able to utilize the net
operating loss carryforward. A tax benefit relative to the net operating loss
carryforward in the amount of $8.0 million was recorded in the second quarter of
fiscal 1995.
From time to time various proposals have been made and bills introduced in
Congress which would have the effect of modifying or even eliminating the
present provisions of the Code pursuant to which cooperatives are taxed and
could subject cooperatives to greater federal income tax liability. It is not
possible to predict whether any such proposal may be adopted, or, if adopted,
what effect it might have on the federal income tax liability of Pro-Fac or its
members.
RELATIONSHIP WITH CURTICE-BURNS
Upon consummation of the Acquisition, certain disputed matters which were the
subject of pending arbitration were resolved. The Integrated Agreement was
terminated, and Pro-Fac and Curtice-Burns entered into the Pro-Fac Marketing and
Facilitation Agreement as of November 3, 1994 (the 'Pro-Fac Marketing
Agreement'). The Pro-Fac Marketing Agreement reflects that much of the financing
previously provided by Pro-Fac to Curtice-Burns has been restructured. Financing
previously provided by the Bank to Pro-Fac, then re-lent by Pro-Fac to
Curtice-Burns, is now provided directly by the Bank to Curtice-Burns under the
New Credit Agreement. Pro-Fac's interest in the facilities and equipment of
Curtice-Burns and Pro-Fac's investment in the
18
<PAGE>
Bank were transferred to Curtice-Burns at the time of the Acquisition. The
Pro-Fac equity that was previously lent to Curtice-Burns was also transferred to
Curtice-Burns.
The Pro-Fac Marketing Agreement resembles the Integrated Agreement in that it
continues to provide for Pro-Fac to supply crops and additional financing to
Curtice-Burns, for Curtice-Burns to provide a market and management services to
Pro-Fac, and for Pro-Fac to share in the profits of Curtice-Burns. To preserve
the independence of Curtice-Burns, the Pro-Fac Marketing Agreement also requires
that certain of the directors of Curtice-Burns be individuals who are not
employees or shareholders of, or otherwise affiliated with, Pro-Fac or the
Company ('Disinterested Directors') and requires that certain decisions be
approved by the Disinterested Directors. The New Credit Agreement and the Notes
restrict the ability of Pro-Fac to amend the Pro-Fac Marketing Agreement.
Purchase of Crops From Pro-Fac: Under the Pro-Fac Marketing Agreement,
Curtice-Burns purchases crops from Pro-Fac at the CMV of those crops. Under the
predecessor agreements to the Pro-Fac Marketing Agreement, Curtice-Burns paid
Pro-Fac $59.8 million, $59.2 million, and $55.9 million as CMV for crops
purchased from Pro-Fac in fiscal years 1993, 1994, and 1995, respectively. The
crops purchased by Curtice-Burns from Pro-Fac represented approximately 60
percent, 65 percent, and 73 percent of all raw agricultural crops purchased by
Curtice-Burns in fiscal 1993, 1994 and 1995, respectively.
CMV will be determined, similar to the process that existed prior to the
Acquisition, by a joint committee of the Boards of Directors of Pro-Fac and
Curtice-Burns, which is currently comprised of the Chief Executive Officer of
Curtice-Burns and an equal number of Pro-Fac directors and Disinterested
Directors. The Pro-Fac Marketing Agreement requires a majority of the
Disinterested Directors to approve the recommendation of the joint committee.
Although CMV is intended to be no more than the fair market value of the crops
purchased by Curtice-Burns, it may be more or less than the price Curtice-Burns
would pay in the open market in the absence of the Pro-Fac Marketing Agreement.
The volume and type of crops to be purchased by Curtice-Burns under the Pro-Fac
Marketing Agreement are determined pursuant to its annual profit plan, which
requires the approval of a majority of the Disinterested Directors.
Patronage Income of Pro-Fac: In addition to CMV, under the Pro-Fac Marketing
Agreement, Curtice-Burns will pay to Pro-Fac as additional patronage income (the
'Additional Patronage Income') up to 90 percent of Curtice-Burns' pre-tax income
on Pro-Fac related products (the 'Pro-Fac Products'), or reduce CMV by up to 90
percent of Curtice-Burns' losses on Pro-Fac Products. The Pro-Fac Marketing
Agreement provides that Additional Patronage Income may not exceed 50 percent of
Curtice-Burns' entire pre-tax income and that no more than 50 percent of
Curtice-Burns' entire pre-tax loss will be charged to Pro-Fac, through a
reduction of CMV, during the term of the Notes. Additional Patronage Income is
paid to Pro-Fac for services provided to Curtice-Burns, including the provision
of a long term, stable crop supply, favorable payment terms for crops and access
to cooperative bank financing and the sharing of risks in losses of operations
of the business.
Curtice-Burns has historically paid Pro-Fac Additional Patronage Income based on
a portion of Curtice-Burns' pre-tax income. Under the predecessor agreements to
the Pro-Fac Marketing Agreement, Additional Patronage Income has generally been
equal to 50 percent of the pre-tax income of Curtice- Burns, or in loss years
amounts due to Pro-Fac for interest on its loans to Curtice-Burns have been
reduced by 50 percent of Curtice-Burns' pre-tax losses. Curtice-Burns paid
Additional Patronage Income to Pro-Fac of $16.9
19
<PAGE>
million and $9.6 million in fiscal 1994 and 1995 on account of Curtice-Burns'
earnings for those years. In fiscal 1993, Curtice-Burns reduced the amount of
interest due to Pro-Fac by $21.8 million based on a 50 percent allocation of a
loss at Curtice-Burns.
Historically, Curtice-Burns has deducted Additional Patronage Income for income
tax purposes as an ordinary and necessary business expense for accommodations
provided to Curtice-Burns by Pro-Fac. Under the Pro-Fac Marketing Agreement,
Pro-Fac will continue to provide many of the same services as it has in the
past. Although Curtice-Burns is a wholly-owned subsidiary of Pro-Fac, the
payment of Additional Patronage Income will be subject to a similar methodology
to that established at arm's length in the past and will be approved by a
majority of the Disinterested Directors. In January of 1995, the Boards of
Directors of Curtice-Burns Foods, Inc. and Pro-Fac Cooperative, Inc. approved
appropriate amendments to the Bylaws to allow the Company to qualify as a
cooperative under Subchapter T of the Internal Revenue Code. A private letter
ruling agreeing to this change was received from the Internal Revenue Service in
August 1995. The effective date of the change is June 25, 1995. As a
cooperative, patronage income will be deductible to the extent distributed to
its members. Accordingly, taxation on patronage income is only imposed at the
patron level. The objective of the change is both to maximize the amount of
patronage income derived by Pro-Fac and to achieve a greater degree of certainty
concerning the federal income tax treatment of additional patronage income paid
by Curtice-Burns to Pro-Fac. See NOTE 7 - 'Taxes on Income.'
Additional Patronage Income received by Pro-Fac is deductible to Pro-Fac for
federal tax purposes only to the extent distributed to its members as retains.
Pro-Fac may make this distribution to its members through a combination of cash
and retains as long as a minimum of 20 percent of the amount is paid in cash as
required by federal tax law. Pro-Fac has historically paid its members between
20 percent and 30 percent of Additional Patronage Income in cash and the
remaining portion in retains. Funds made available by the distribution of
retains to members in lieu of cash have historically been reinvested by Pro-Fac
in Curtice-Burns. Pro-Fac will be required to reinvest at least 70 percent of
the Additional Patronage Income in Curtice-Burns. See 'Restrictions Under New
Financing Arrangements.'
Under the Pro-Fac Marketing Agreement, Curtice-Burns will continue to manage the
business and affairs of Pro-Fac and provide all personnel and systems required
for its management, and Pro-Fac will pay Curtice-Burns a quarterly fee of
$25,000 for these services.
Restrictions Under New Financing Arrangements: The New Credit Agreement and the
Notes impose a variety of restrictions on the relationship, and flow of cash,
between Pro-Fac and Curtice-Burns. Under the New Credit Agreement, a reduction
in the number of Disinterested Directors on the Curtice-Burns Board of Directors
to less than two or the number of Pro-Fac directors on the board (whichever is
greater) would constitute a change of control and trigger an event of default.
Pro-Fac's guarantee of the Company's obligations under the New Credit Agreement
(the 'Pro-Fac Bank Guarantee') requires Pro-Fac to reinvest in Curtice-Burns at
least 70 percent of any Additional Patronage Income in excess of CMV paid by
Curtice-Burns for crops.
The Indenture, dated as of November 3, 1994, pursuant to which the Notes were
issued (the 'Indenture') also requires Pro-Fac to reinvest in Curtice-Burns at
least 70 percent of any Additional Patronage Income in excess of CMV paid by
Curtice-Burns for crops. The Indenture further restricts Curtice-Burns from
amending the calculation of amounts payable to Pro-Fac
20
<PAGE>
under the Pro-Fac Marketing Agreement in a manner that would increase the
payments made to Pro-Fac or amending the Pro-Fac Marketing Agreement to require
that certain transactions with Pro-Fac be approved by less than a majority of
the Disinterested Directors. If the number of Disinterested Directors on the
Curtice-Burns Board of Directors is reduced for more than 120 days to less than
two or to less than the number of Pro-Fac directors on the board (whichever is
greater), a change of control would be deemed to have occurred under the
Indenture. If a change of control is deemed to have occurred, the Company would
be required by the Indenture to make an offer to repurchase Notes for an amount
equal to 101 percent of the principal amount of the Notes plus accrued and
unpaid interest.
The Indenture also limits the amount and timing of dividends and other payments
('Restricted Payments') from the Company to Pro-Fac or other holders of payments
Curtice-Burns debt or equity. No dividends or other Restricted Payments may be
made if there is an existing event of default under the Notes or if
Curtice-Burns's Fixed Charge Coverage Ratio (as defined in the Indenture, a
ratio of cash flow to interest and tax-adjusted dividends) for the preceding
four quarters, after giving effect to the Restricted Payment, is not at least
1.75 to 1.00. The amount of all dividends and other Restricted Payments
subsequent to the date of the Indenture is subject to an overall limit that is
based on the Company's net income and the amount of additional equity invested
in the Company.
DESCRIPTION OF PRO-FAC SECURITIES
COMMON STOCK, PAR VALUE $5
Dividend Rights: After all required dividends have been declared and paid to the
holders of preferred stock, dividends may be declared and paid to the holders of
common stock. Under present law, dividends on common stock may not exceed 12
percent of par value per annum. Persons who purchase common stock in
installments are entitled to receive dividends only on those shares of common
stock which have been issued to them.
Voting Rights: The holders of common stock are members of Pro-Fac. Each member
has one vote, regardless of the number of shares held. The one-vote-per-member
rule is subject to certain limitations where, for estate planning, tax planning
or other reasons, more than one member is part of the same farm operation. The
certificate of incorporation of Pro-Fac provides that, when two or more holders
of common stock join in an agricultural venture, the Board of Directors in its
discretion shall determine whether the venture is a single enterprise for which
the participating holders shall have a single vote or a multiple enterprise
entitling the holders to more than one vote.
Liquidation Rights: Upon dissolution or other termination of Pro-Fac or its
business, after the payment of all debts, all outstanding retains (see
'Retains,' below) are to be retired in full, on a pro-rata basis without
priority, before any liquidating dividends are declared on or with respect to
capital stock.
After payment to holders of all outstanding retains, holders of preferred stock
are entitled to receive, out of the funds then remaining, the full par value of
their stock, together with the amount of any unpaid cumulative dividends and the
amount of such dividends as may have been declared but remain unpaid. After
payment to the holders of preferred stock, holders of common stock are entitled
to receive the par value thereof, together with the amount of such dividends as
may have been declared but remain unpaid.
21
<PAGE>
To summarize, the order of priority upon distribution of assets in dissolution
is as follows:
1. First to creditors;
2. Then to redeem outstanding retains at full face value.
3. Then to redeem preferred stock at par;
4. Then to redeem common stock at par;
5. With the remainder distributed proportionately to the members to whom
retains have been allocated during the preceding five fiscal years.
Preemptive Rights: Holders of common stock have no preemptive rights.
Conversion Rights: Common stock is not convertible into any other security
of Pro-Fac.
Redemption Provisions: If a member ceases to be a producer of agricultural
products marketed through Pro-Fac, however, he must dispose of his common stock.
If the member follows the proper termination procedure and gives the required
notice, Pro-Fac will ordinarily purchase his stock at par value. The same
procedure will ordinarily apply when a member is expelled from the Cooperative
or reduces his production of a particular crop, in which cases all or part of
his common stock must be disposed of. Should Pro-Fac discontinue a crop,
producers of that crop will be required to dispose of their related common stock
investments. Upon notice from the Cooperative, members must sell such stock to
Pro-Fac for cash equal to its par value.
Liability to Further Assessment: Shares of Pro-Fac common stock are subject to
no further call or assessment. Under the New York Cooperative Corporations Law,
however, each member of a cooperative corporation, as well as each director, may
be personally liable for certain amounts due to employees for services rendered
to the Cooperative.
Transfer Agent: Pro-Fac functions as its own transfer agent.
Transferability: Pro-Fac common stock is issued only to growers of agricultural
products marketed through Pro-Fac (or to associations of such growers) and may
be transferred only to another grower who meets Pro-Fac standards for
membership. A member who wishes to sell his common stock must notify Pro-Fac,
which then advises the member of the price another qualified grower acceptable
to Pro-Fac is willing to pay for the stock. Such prices vary widely by commodity
and the region in which the crop associated with the common stock is to be
grown. Such sales are often at a price exceeding the $5 par value at which the
stock was originally issued. Historically, there has usually been a demand for
common stock offered for sale by members. However, should there be no qualified
buyer for the common stock offered for sale, then Pro-Fac is obligated to
repurchase the common stock at its $5 par value.
PREFERRED STOCK
On January 28, 1995, the members of Pro-Fac approved an amendment to Pro Fac's
Certificate of Incorporation to authorize the issuance of an additional 50
million shares of preferred stock, divided into five classes (Classes A through
E) of 10 million shares each. As a result of the amendment, the Board continues
to be authorized to issue up to 5 million shares of Non-Cumulative Preferred
Stock and is authorized to issue up to 50 million shares of new preferred stock
at such times, for such purposes,
22
<PAGE>
on such terms and for such consideration as the Board may determine, without
further action of the members.
The Board is authorized to provide for the issuance, from time to time, of any
such new preferred stock in one or more designated series, and to fix the terms
of each such designated series of shares. In establishing the terms of the
series of new preferred stock, the Board is authorized to set, among other
things, the number of shares, the dividend rate and preferences, the form or
method of payment of dividends, the cumulative or non-cumulative nature of
dividends, redemption provisions (if any), including any mandatory scheduled
redemptions, the right (if any) to convert or exchange such preferred shares for
other securities, voting rights (if any), in addition to any required by
applicable law, and the amounts payable, and preferences, in the event of the
voluntary or involuntary liquidation of Pro-Fac. Each series of new preferred
stock will, in respect of dividends and liquidation, rank senior to Pro-Fac's
common stock, par value $5.00 per share (the 'Common Stock'), and on a parity
with or junior to the Non-Cumulative Preferred Stock, as determined by the Board
at the time of issuance of such series. Within any class of the new preferred
stock, each series will rank on a parity with each other series in that class as
to dividends and liquidation.
In June 1995, the Board approved the creation of a new series of preferred
stock, to be designated Class B, Series 1 10% Cumulative Preferred Stock
('Series 1 Preferred Stock'), for issuance to employees of the Company pursuant
to an employee stock purchase plan. Pursuant to the plan, shares of Series 1
Preferred Stock are being offered to employees of the Company for a purchase
price of $10.00 per share. Holders of Series 1 Preferred Stock will be entitled
to receive, when, as and if declared by the Board, cumulative cash dividends at
an annual rate of $1.00 per share.
In August 1995, in connection with the Exchange Offer, the Board approved the
creation of the Cumulative Preferred Stock as an additional new series of
preferred stock.
Ranking: The Cumulative Preferred Stock will rank as to dividends and upon
liquidation, dissolution and winding up on a parity with the Non-Cumulative
Preferred Stock, the Series 1 Preferred Stock, and any other series of Class A
Preferred Stock or Class B Preferred Stock ('Class A or B Series Preferred
Stock') of Pro-Fac, and will rank as to dividends or upon liquidation,
dissolution or winding up, or both, on a parity with any other class or series
of capital stock that expressly provides that it ranks on a parity with the
Cumulative Preferred Stock with respect to dividends or upon liquidation,
dissolution and winding up, as the case may be (collectively, 'Parity Dividend
Securities' or 'Parity Liquidation Securities'). The Cumulative Preferred Stock
will rank senior with respect to dividends and upon liquidation, dissolution and
winding up to the Common Stock and any other capital stock (other than the
Non-Cumulative Preferred Stock, Series 1 Preferred Stock and Class A or B Series
Preferred Stock) that does not, by its terms, expressly provide that it is
senior to or on a parity with the Cumulative Preferred Stock with respect to
dividends or upon liquidation, dissolution and winding up, as the case may be
(collectively, 'Junior Dividend Securities' or 'Junior Liquidation Securities').
Dividends: Holders of shares of Cumulative Preferred Stock will be entitled to
receive, when, as and if declared by the Board, out of assets of Pro-Fac legally
available therefor, cumulative cash dividends at a quarterly rate equal to $0.43
per share (or an annual rate of approximately 6.88% of the liquidation
preference of $25.00 per share). Dividends on the Cumulative Preferred Stock
will be payable quarterly in arrears on each April 30, July 31, October 31, and
January 31 of each year, commencing October 31, 1995. Each such dividend will be
payable to holders of record as they appear on
23
<PAGE>
the stock records of Pro-Fac at the close of business on each April 15, July 15,
October 15, and January 15 preceding such dividend payment date, or such other
record dates as selected by the Board, which will not be more than 50 days prior
to such payment date. Dividends will be cumulative from each dividend payment
date, whether or not in any dividend period or periods there are assets of
Pro-Fac legally available for the payment of such dividends.
Accumulations of dividends on shares of Cumulative Preferred Stock will not bear
interest. Dividends payable on the Cumulative Preferred Stock for any period
greater or less than a full dividend period will be computed on the basis of
360-day year consisting of twelve 30-day months.
Dividends on the Non-Cumulative Preferred Stock are not in a fixed amount, but
instead are at such rate (not less than 6% per annum) as the Board of Directors
may determine (as and when declared by the Board of Directors out of legally
available funds). Although the Board of directors has in the past declared
dividends based on Pro-Fac's cost of funds, the dividend for fiscal 1995 was at
an annual rate of 6%, and Pro-Fac expects that future dividends on the
Non-Cumulative Preferred Stock will not exceed the minimum rate of 6%. Dividends
on the Non-Cumulative Preferred Stock are not cumulative, which means that
holders of Non-Cumulative Preferred Stock do not have any dividend preference
with respect to undeclared dividends for prior periods. .
No full dividend and no distribution may be declared by the Board or paid or set
apart for payment by Pro-Fac on the Cumulative Preferred Stock for any period
unless a pro rata portion of the annual dividend anticipated to be paid on the
Non-Cumulative Preferred Stock for the applicable period (in any event, not less
than 6% per annum) has been or is contemporaneously declared. In addition, no
full dividend and no distribution may be declared by the Board or paid or set
apart for payment by Pro-Fac on the Non-Cumulative Preferred Stock, Series 1
Preferred Stock, Class A or B Series Preferred Stock or other Parity Dividend
Securities unless full cumulative dividends have been or contemporaneously are
declared and a sum set apart sufficient for such payment on the Cumulative
Preferred Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends on the Non-Cumulative Preferred Stock, Series 1
Preferred Stock, Class A or B Series Preferred Stock or other Parity Dividend
Securities. If any dividends are not paid in full upon the shares of the
Cumulative Preferred Stock, the Non-Cumulative Preferred Stock, the Series 1
Preferred Stock, the Class A or B Series Preferred Stock and other Parity
Dividend Securities, all dividends declared for any period upon shares of the
Cumulative Preferred Stock, the Non-Cumulative Preferred Stock, the Series 1
Preferred Stock, the Class A and B Series Preferred Stock, and other Parity
Dividend Securities shall be declared ratably in proportion to accrued dividends
on the Cumulative Preferred Stock, the Series 1 Preferred Stock, the Class A
Series Preferred Stock and other Parity Dividend Securities and the current
period dividend accrual on the Non-Cumulative Preferred Stock.
Pro-Fac may not declare, pay or set apart for payment any dividend (other than
certain stock dividends) on any of the Junior Dividend Securities or make any
distribution in respect thereof unless full cumulative dividends on the
Cumulative Preferred Stock, the Series 1 Preferred Stock, and Class A and B
Series Preferred Stock have been or are contemporaneously declared and the
corresponding portion of the current annual dividend on the Non-Cumulative
Preferred Stock is declared as described in the preceding paragraph.
24
<PAGE>
Dividends will be paid only to the extent earnings from Curtice Burns are
available for payment. Pro-Fac is also subject to certain limitations on payment
of dividends under the terms of its financing agreements.
Preemptive Rights: The holders of the Cumulative Preferred Stock and Non-
Cumulative Preferred Stock will not have any preemptive rights.
Redemption: Pro-Fac has the right, at any time and from time to time, to redeem
the Cumulative Preferred Stock, in whole or in part, at the redemption price of
$25.00 per share, plus, in each case, all dividends accrued and unpaid on the
Cumulative Preferred Stock up to the date fixed for redemption, upon giving
notice at least 30 but not more than 60 days before the date fixed for
redemption. If fewer than all of the outstanding shares of Cumulative Preferred
Stock are to be redeemed, the shares to be so redeemed will be selected pro rata
or by lot, except that Pro-Fac reserves the right to first redeem all of the
shares held by any holder of a number not to exceed 100.
From and after the redemption date (except to the extent Pro-Fac defaults in the
payment of the redemption price), all dividends on the shares of Cumulative
Preferred Stock designated for redemption will cease to accrue, and all rights
of the holders thereof as stockholders of Pro-Fac, except the right to receive
the redemption price thereof, will cease and terminate.
The Cumulative Preferred Stock will not be subject to any sinking fund or other
binding obligation of Pro-Fac to redeem or retire the Cumulative Preferred
Stock. Unless redeemed by Pro-Fac, the Cumulative Preferred Stock will have
perpetual maturity.
Pro-Fac has the right, at any time and from time to time, to redeem the
Non-Cumulative Preferred Stock, in whole or in part, upon payment to the holders
thereof of the par value of $25.00 per share, plus all dividends accrued and
unpaid at the date of retirement. Any such retirement may be made on such other
terms and conditions as are established by the Board of Directors, provided no
retirement of any Non-Cumulative Preferred Stock may be effected except upon 90
days written notice to the holders thereof.
During a limited period between 1984 and 1993, Pro-Fac repurchased small
portions of the Non-Cumulative Preferred Stock at its par value. Those
repurchases were at the sole discretion of Pro-Fac. Pro-Fac has not offered to
repurchase any Non-Cumulative Preferred Stock since its fiscal year ended 1993
and has no intention to do so in the near future. Pro-Fac also is restricted in
its ability to redeem shares of its capital stock under the various financing
obligations entered into to finance the Acquisition.
Restriction on Certain Stock Acquisitions: Pro-Fac may not purchase, redeem or
otherwise acquire for consideration (other than in a repurchase of Common Stock
of a departing member pursuant to Pro-Fac's Bylaws or in certain
recapitalizations, exchanges or refinancings) any Cumulative Preferred Stock,
Parity Dividend Securities (including the Non-Cumulative Preferred Stock, the
Series 1 Preferred Stock, and Class A and B Series Preferred Stock), Parity
Liquidation Securities, Junior Dividend Securities or Junior Liquidation
Securities unless full cumulative dividends on the Cumulative Preferred Stock,
the Series 1 Preferred Stock, and the Class A and B Series Preferred Stock have
been or are contemporaneously declared and the corresponding portion of the
current annual dividend on the Non-Cumulative Preferred Stock is declared as
described above.
Liquidation: After payment to holders of all outstanding retains, in the event
of any voluntary or involuntary liquidation, dissolution or winding up of
Pro-Fac: the holders of the Cumulative Preferred Stock will be entitled to
receive $25.00 per share plus an amount equal to all dividends
25
<PAGE>
(whether or not earned or declared) accrued and unpaid thereon to the date of
final distribution to such holders; and the holders of Non-Cumulative Preferred
Stock will be entitled to receive $25.00 per share plus an amount equal to such
dividends as may have been declared but remain unpaid. Until the holders of the
Cumulative Preferred Stock and Non-Cumulative Preferred Stock have been paid
such liquidation preference in full, no payment or other distribution will be
made on any Junior Liquidation Securities upon the liquidation, dissolution or
winding up of Pro-Fac. If amounts available after the payment to holders of all
outstanding retains are insufficient to pay, in full, the liquidation value of
the Cumulative Preferred Stock, the liquidation value of the Series 1 Preferred
Stock, the liquidation value of the Non-Cumulative Preferred Stock and the
liquidation value (including accumulated dividends) of any other shares of
Parity Liquidation Securities issued and outstanding, payments to holders of the
Cumulative Preferred Stock, the Series 1 Preferred Stock, the Class A and B
Series Preferred Stock, the Non-Cumulative Preferred Stock and such Parity
Liquidation Securities will be made pro-rata. Neither a consolidation or merger
of Pro-Fac nor a sale, lease or transfer of all or substantially all of
Pro-Fac's assets will be considered a liquidation, dissolution or winding up,
voluntary or involuntary, of Pro-Fac.
Voting: Except as required by law, holders of Cumulative Preferred Stock and
Non-Cumulative Preferred Stock will not have any voting rights with respect to
their shares of preferred stock.
Transferability; Trading Market: Shares of Cumulative Preferred Stock and
Non-Cumulative Preferred Stock are freely transferable. The Cumulative Preferred
Stock has been approved for inclusion in the NASDAQ National Market System.
There is no active trading market for the Non-Cumulative Preferred Stock.
Although there can be no assurance that an active trading market will develop or
be sustained, Pro-Fac believes that the Cumulative Preferred Stock may, upon
inclusion in the NASDAQ National Market System, trade in a more active market
and possess a readily ascertainable market price. Although the liquidity of
trading in the Non-Cumulative Preferred Stock is already limited, such liquidity
and the trading prices of the Non-Cumulative Preferred Stock will likely be
further adversely affected by the Exchange Offer. There may not be a liquid
market for the Non-Cumulative Preferred Stock or, if there is a market for the
Non-Cumulative Preferred Stock, such stock may trade at a price lower than the
price of the Cumulative Preferred Stock.
According to NASDAQ's published guidelines, the Cumulative Preferred Stock would
not meet the criteria for continued inclusion in the NASDAQ National Market
System if, among other things, the number of publicly held shares of Cumulative
Preferred Stock (excluding Cumulative Preferred Stock held by officers or
directors or their immediate family and excluding concentrated holdings of 10
percent or more) was less than 200,000, the aggregate market value of the
publicly held Cumulative Preferred Stock was less than $2 million or there were
fewer than two market makers for the Cumulative Preferred Stock. If these
standards were not met, quotations might continue to be published in the
over-the-counter 'additional list' or one of the 'local lists' unless, as set
forth in NASDAQ's published guidelines, the number of publicly-held shares of
Cumulative Preferred Stock (excluding shares held by officers, directors or
their immediate family and concentrated holdings of 10 percent or more of the
Shares) were less than 100,000, there were fewer than 300 holders in total, or
there were not at least one market maker for the Cumulative Preferred Stock. If
the shares of Cumulative Preferred Stock are no longer eligible for NASDAQ
quotation, quotations might still be available from other sources.
Because it is included in the NASDAQ National Market System, shares of the
Cumulative Preferred Stock constitute 'margin securities' under the
26
<PAGE>
regulations of the Board of Governors of the Federal Reserve System (the
'Federal Reserve Board'), which has the effect, among other things, of allowing
brokers to extend credit on the collateral of the Cumulative Preferred Stock. If
no longer included or reported in market quotations, the Cumulative Preferred
Stock would no longer constitute 'margin securities' for the purposes of the
Federal Reserve Board's margin regulations and, therefore, could no longer be
used as collateral for loans made by brokers.
Transfer Agent: The transfer agent, dividend agent and redemption agent for
the shares of Cumulative Preferred Stock will be Harris Trust Company.
RETAINS
Annual Allocation: Retains must be allocated to the accounts of members within
8-1/2 months of the close of the fiscal year. The fiscal year of Pro-Fac ends on
the last Saturday of June; it has been and continues to be the policy of Pro-Fac
to make the allocation of the retains on or about September 15 of each year.
Each member is typically advised of the allocation of qualified and
non-qualified retains to his account by means of an investment summary which is
mailed to him each year about September 15.
Qualified Retains Mature into Preferred Stock: Qualified retains bear no
interest, but five years after issuance they generally mature into preferred
stock at the par value of $25 per share. One share of preferred stock for each
$25 of qualified retains is ordinarily issued to holders of qualified retains on
or about December 31 following the completion of the fifth year after allocation
of the qualified retains. Qualified retains are now created in multiples of $25
to avoid the necessity of paying fractional amounts in cash. In the past,
qualified retains have been converted into Non-Cumulative Preferred Stock upon
maturity. It is the intention of the Board of Directors that retains maturing in
the future, commencing with the retains expected to mature in fiscal 1996, will
be converted into Cumulative Preferred Stock. With respect to qualified retains
issued prior to September 1995, however, it is expected that the Board will
permit holders of such retains to elect to receive Non-Cumulative Preferred
Stock rather than Cumulative Preferred Stock.
Redemption of Non-Qualified Retains: It is the present intention of the Board of
Directors that non-qualified retains will be redeemed, through partial payment
in cash and the issuance of Cumulative Preferred Stock, approximately five years
after their issuance in the same fashion as qualified retains.
Methods of Allocation of Retains: The bylaws of Pro-Fac provide that the written
notice of allocation of retains may contain such terms and conditions as the
Board of Directors may deem appropriate. Pro-Fac does not issue actual
certificates to represent retains, but rather issues periodic investment
summaries showing the allocation of qualified and non-qualified retains to each
member.
Adjustment of Amount of Non-Qualified Retains: It is possible that the
allocation of proceeds made immediately following the close of a fiscal year may
not be final and may require modification because of some event which could
occur after the close of the fiscal year. Should such an event require a
reduction in the proceeds paid or allocated to members in a previous year, the
Board of Directors may in its discretion reduce the amount of the non-qualified
retains allocated to the accounts of those members for the year in question.
Transferability of Retains; Absence of Market: Non-qualified retains are not
transferable, except to the heirs or personal representative of a member in the
event of the member's death. Qualified retains are freely transferable. Although
there were, for several years preceding the
27
<PAGE>
Acquisition, two broker-dealers making a market in Pro-Fac qualified retains, no
such market currently exists, and there can be no assurance that any such market
will be reestablished. Historically, sales of qualified retains have been at
prices substantially less than the face amount. If a market for Pro-Fac and
Curtice Burns qualified retains is reestablished, the increased leverage of
Pro-Fac as a result of the Acquisition, and the limits on Pro-Fac's ability to
repurchase preferred stock resulting from the New Credit Agreement and the
Indenture, are likely to decrease the prices at which Pro-Fac qualified retains
are traded.
Liquidation Rights: All retains are junior and subordinate to all debts of
Pro-Fac. The liquidation rights of the holders of retains are described under
'Common Stock - Liquidation Rights' above.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
TO MEMBERS AND INVESTORS
The Pro-Fac Bank Guarantee places aggregate dollar limits on the amount Pro-Fac
may pay as dividends, stock repurchases or similar distributions to shareholders
each fiscal year. The Pro-Fac Bank Guarantee also includes financial covenants
with respect to working capital, minimum tangible net worth, long term debt to
equity ratio, total net worth, and cash flow coverage that may limit Pro-Fac's
ability to pay dividends on its common and preferred stock. Further, because
Curtice-Burns is the principal source of cash used by Pro-Fac to pay dividends,
the restrictions on payments from Curtice-Burns to Pro-Fac described above under
'Relationship with Curtice-Burns - Restrictions Under New Financing
Arrangements' may also limit Pro-Fac's ability to pay dividends on its common
and preferred stock.
CERTIFICATES FOR SECURITIES
Except with respect to its Cumulative Preferred Stock, Pro-Fac ordinarily does
not issue certificates representing shares of either its common or preferred
stock or its members' interests in retains, except upon specific request. In
lieu of certificates, Pro-Fac distributes to its members and its non-member
security holders periodic computerized statements referred to as 'investment
summaries.' The investment summaries detail the investment of each member or
security holder in the securities of Pro-Fac (common stock, preferred stock and
retains) by type of security, number of shares (or dollar amount) and date of
issue. In the case of qualified retains, the summaries also indicate the date
upon which they are anticipated to be replaced by corresponding par value dollar
amounts of preferred stock. Additionally, the investment summaries detail each
member's crop commitments to the Cooperative.
SELECTED HISTORICAL FINANCIAL DATA OF PRO-FAC
The following table sets forth selected historical financial data of Pro-Fac for
the periods indicated. The information should be read in conjunction with the
Pro-Fac Financial Statements and related notes thereto appearing elsewhere
herein and 'Management's Discussion and Analysis of Financial Condition and
Results of Operations of Pro-Fac.'
The selected historical financial data for each of the years ended June 26,
1993, June 25, 1994, and June 24, 1995 and as of and June 26, 1994 and June 24,
1995 have been derived from Pro-Fac's audited financial statements included
elsewhere herein. The selected historical financial information for each of the
years ended June 28, 1991 and June 25, 1992 as of June 28, 1991 and June 26,
1992, and June 26, 1993 have been derived from Pro-Fac's audited financial
statements not included herein.
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<PAGE>
<TABLE>
<CAPTION>
(Dollars in Millions)
Fiscal Years Ended
----------------------------------------------------------
June 28, June 26, June 26, June 25, June 24,
1991 1992 1993 1994 1995
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Net sales $ 62.2 $ 63.4 $ 59.7 $ 58.2 $522.4
Cost of sales 62.2 63.4 59.7 58.2 384.8
------ ------ ------ ------ ------
Gross profit -- -- -- -- 137.6
Share of Curtice-Burns earnings/(loss)
prior to acquisition 5.9 9.5 (21.8) 18.6 5.1
Interest income from Curtice-Burns prior to
acquisition 22.7 19.9 17.1 15.6 6.1
Interest income, other -- -- -- -- 4.4
Cost relating to fire claim -- -- -- -- (2.3)
Other selling, general, and administrative
(expenses)/income -- 0.5 1.0 1.1 (99.3)
------ ------ ------ ------ ------
Operating income/(loss) 28.6 29.9 (3.7) 35.3 51.6
Interest expense (20.3) (17.2) (13.8) (11.6) (29.0)
------ ------ ------- ------ ------
Income/(loss) before taxes, dividends and
allocation of net proceeds 8.3 12.7 (17.5) 23.7 22.6
Tax benefit/(provision) (3.0) 1.2 -- 0.8 7.0
------ ------ ------ ------ ------
Net income/(loss) $ 5.3 $ 13.9 $(17.5) $ 24.5 $ 29.6
====== ====== ====== ====== ======
Balance Sheet Data:
Investment in direct financing leases $193.3 $187.3 $173.5 $141.3 $ --
Total assets $385.6 $361.4 $324.9 $296.1 $689.7
Total debt $178.0 $164.0 $168.0 $127.1 $343.7
Shareholders' investment and members'
capitalization $114.6 $120.0 $ 96.4 $113.5 $135.8
</TABLE>
PRO FORMA FINANCIAL DATA OF PRO-FAC AND CURTICE-BURNS
The following unaudited pro forma condensed combined financial data (the 'Pro
Forma Combined Financial Data') of Pro-Fac and Curtice-Burns is based on the
historical Financial Statements of Pro-Fac and the historical Consolidated
Financial Statements of Curtice-Burns included elsewhere
herein, adjusted to give effect to the Acquisition.
The Unaudited Pro Forma Combined Statements of Operations of Pro-Fac and
Curtice-Burns for the year ended June 24, 1995 of Curtice-Burns give effect to
the Acquisition as if they had occurred as of June 26, 1994. The pro forma
combined financial data do not purport to represent what the combined results of
operations or financial position of Pro-Fac and Curtice-Burns would actually
have been had the Acquisition in fact occurred on such dates or to project the
combined results of operations or financial position of Pro-Fac and
Curtice-Burns for any future period or date. The pro forma combined data do not
give effect to any transactions other than the Acquisition as discussed in the
notes to the pro forma financial data set forth below.
The acquisition was accounted for using the purchase method of accounting. In
conjunction with the change in ownership all other identifiable assets and
liabilities were adjusted to reflect their fair value at the date of
acquisition. In recording the transaction, approximately $121.5 million was
recorded to adjust property, plant, and equipment to fair market value. In
addition lives were adjusted for assets acquired. The resulting annual
depreciation will approximate $23.3 million on all existing assets at the
appraised values. In addition, approximately $104.0 million of goodwill and
other intangible assets were recorded as the excess of purchase cost over net
tangible assets acquired. Included in this amount was approximately $43.8
million for deferred tax adjustments to properly reflect the effects of the
acquisition in accordance with the SFAS No. 109, 'Accounting for Income Taxes.'
The resulting annual amortization of goodwill and other
29
<PAGE>
intangible assets will approximate $3.0 million for goodwill and other
intangible assets using lives ranging from 5 to 35-years. There were no other
significant changes to accounting policies as a result of the acquisition.
The Pro Forma adjustments are based on available information and upon certain
assumptions that management of Curtice-Burns believes are reasonable under the
circumstances. The Pro Forma Combined Financial Data of Pro-Fac and
Curtice-Burns and accompanying notes should be read in conjunction with the
historical Consolidated Financial Statements of Curtice-Burns, including the
notes thereto, and other financial information pertaining to Curtice-Burns
included elsewhere herein.
Pro-Fac Cooperative, Inc. and Curtice-Burns Foods, Inc.
(Unaudited)
Pro Forma Combined Statement of Operations
For the Year Ended June 24, 1995
<TABLE>
<CAPTION>
Pro-Fac Curtice- Acquisition
Cooperative Burns and Note
Inc. Foods, Inc. Offering Pro Forma
(Historical) (Predecessor) Adjustments Combined
------------ ------------- ----------- --------
<S> <C> <C> <C> <C>
Net sales and revenues $522.4 $276.6 $(50.5)(a) $748.5
Cost of sales 384.8 195.8 (50.8)(a)(b) 529.8
------ ------ ------ ------
Gross profit 137.6 80.8 0.3 218.7
Selling, administrative and
general 99.3 60.6 (0.6)(a)(c) 159.3
Interest income from Curtice-Burns prior
to Acquisition (6.1) -- 6.1 (a) --
Interest income, other (4.4) -- -- (4.4)
Restructuring including net loss from
division disposals -- 8.4 (8.4)(g) --
Change in control expenses -- 2.2 (2.2)(d) --
Gain on assets net of additional costs
incurred as a result of fire claim 2.3 (6.5) -- (4.2)
Pro-Fac share of earnings (5.1) 4.1 1.0 (a) --
------ ------ ------ ------
Operating income 51.6 12.0 4.4 68.0
Total interest expenses 29.0 7.6 2.9 (e) 39.5
------ ------ ------ ------
Pretax earnings (loss) 22.6 4.4 1.5 28.5
(Benefit)/provision for taxes (7.0) 2.7 (1.3)(f) (5.6)(h)
------ ------ ------ ------
Net income/(loss) $ 29.6 $ 1.7 $ 2.8 $ 34.1
====== ====== ====== ======
</TABLE>
See accompanying notes to the pro forma combined financial data.
NOTES TO THE PRO FORMA COMBINED FINANCIAL DATA
NOTE 1. BASIS OF PRESENTATION
The unaudited Pro Forma Combined Statements of Operations for the year ended
June 24, 1995 have been presented assuming the Acquisition was consummated as of
June 26, 1994. The unaudited pro forma financial information should be read in
conjunction with the financial historical statements and notes thereto of
Curtice-Burns and Pro-Fac included elsewhere in this document.
NOTE 2. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR YEAR ENDED
JUNE 24, 1995 ADJUSTMENTS FOR PREDECESSOR ENTITY
(a) To reflect the elimination of the earnings split and other transactions
between Curtice-Burns and Pro-Fac.
(b) Primarily to reflect the adjustment to depreciation expense in
connection with recording fixed asset values at appraised fair market
value and to adjust the asset lives to lives deemed appropriate for the
assets acquired.
30
<PAGE>
(c) To adjust amortization of goodwill and other intangibles assuming life
of 35 years and to eliminate previously recorded amortization of
Curtice Burns.
(d) To reflect the elimination of change in control expenses incurred by
Curtice-Burns during the period.
(e) To reflect the net adjustment to interest expense for the
Predecessor entity calculated as follows:
<TABLE>
<CAPTION>
(Dollars in
Millions)
----------
<S> <C>
Notes at rate of 12.25% $ 7.1
Borrowings under New Credit Agreement:
$80.0 million Term Loan at assumed rate of 8.3% 2.4
$97.5 million Term Loan Facility at assumed rate of 7.8% 2.8
Amortization of debt issuance costs (10-year period) 0.3
Less historical interest expense net adjustment (9.7)
------
Net adjustment to interest expense $ 2.9
======
</TABLE>
(f) To reflect the income tax effect of the pro forma adjustments
(exclusive of non-deductible expenses) based on an assumed marginal
income tax rate of 40 percent.
(g) To reflect the elimination of restructuring activities relating
to divisions disposed of by the Company.
(h) The benefit for taxes includes the recognition of an operating loss
carryforward recorded by Pro-Fac in the second quarter of fiscal 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this review is to highlight the more significant changes in the
major items of Pro-Fac's statement of net proceeds from fiscal 1993 through
1995.
PRO-FAC'S RESULTS OF OPERATIONS
As a result of the Acquisition on November 3, 1994, the consolidated results of
operations of Pro-Fac after that date include gross profit, operating expenses,
and other results of operations of Curtice-Burns. Prior to November 3, 1994,
Pro-Fac's results of operations included only amounts paid or payable by
Curtice-Burns to Pro-Fac under the Integrated Agreement.
Changes From Fiscal 1994 to Fiscal 1995: For the year ended June 24, 1995, the
change in net proceeds compared to the prior year is summarized below in
millions of dollars:
<TABLE>
<S> <C>
Curtice-Burns gross profit $ 137.6
Decreased share of Curtice-Burns earnings (13.5)
Decreased interest income received from Curtice-Burns (9.5)
Interest income, other 4.4
Cost relating to fire claim (2.3)
Increased selling, general and administrative expenses (100.4)
Increased interest expense (17.5)
-------
Change in income before taxes, dividends, and allocations
of net proceeds (1.2)
Change in tax benefit 6.2
-------
Change in net income $ 5.0
=======
</TABLE>
The gross profit change represents Curtice-Burns gross profit after the
acquisition. The increased selling, general and administrative expenses were due
to the inclusion of Curtice-Burns costs since the acquisition. The
31
<PAGE>
increased interest expense was primarily attributable to the increased
borrowings related to the acquisition of Curtice-Burns by Pro-Fac. The change in
the tax benefit is the net result of the inclusion of Curtice-Burns' tax
provision after the acquisition and a tax benefit, primarily related to the
recording of the tax benefits relating to a net operating loss carryforward and
a tax settlement regarding the Cooperative's exempt status (see NOTE 7 -'Taxes
on Income').
Changes From Fiscal 1993 to Fiscal 1994: The 1994 commercial market value of
crops delivered during the production season decreased to $59.2 million from
$59.8 million in fiscal 1993. This 1.0 percent decrease was the net result of a
2.5 percent tonnage increase offset by the effect of price and mix variations
from the commodities.
For the year ended June 24, 1995, the change in net proceeds and the allocation
to members compared to the prior year is summarized below in millions of
dollars:
<TABLE>
<S> <C>
Increased proceeds from Curtice Burns $ 40.4
Increased net interest income 0.7
Change in bank dividend 0.1
Change in excess of revenues before taxes,
dividends, and allocation of net proceeds 41.2
Benefit for taxes 0.8
Change in dividends 0.2
------
Change in net proceeds 42.2
Less increase in allocation to earned surplus (30.8)
------
Increase in net proceeds available to members $ 11.4
======
</TABLE>
The $40.4 million positive change in proceeds from Curtice Burns is caused by
the 1993 restructuring charge which resulted in a negative amount of proceeds of
$21.8 million for that year. The fiscal 1994 amount of $18.6 million reflects
improved earnings at Curtice Burns and a share of the gain in sale of assets of
$3.9 million during 1994.
Prior to the acquisition most of the proceeds of Pro-Fac had always been derived
from the sale to Curtice-Burns of the crops of its members and hence depended
primarily upon the volume and commercial market value of these crops (which
accrued to Pro-Fac at the time of delivery). In addition, proceeds depended upon
the profitability of the finished products made from Pro-Fac crops and raw
materials from other sources which were then processed and sold by Curtice-Burns
during the course of the fiscal year. Under the Agreements between the two
companies previously and presently in effect, the total purchase price for crops
and the financing charge were both based in part on the results of operations of
Curtice-Burns.
Because of the profit split provisions within the Agreements between
Curtice-Burns and Pro-Fac, business conditions and trends affecting
Curtice-Burns' profitability also affected the profitability of Pro-Fac, even
before the acquisition. For these reasons, management believes discussions
relating to the financial condition and results of operations of Pro-Fac should
primarily focus on the operations of Curtice-Burns.
The following comparisons of Curtice-Burns' results to its prior-year periods
present the results of Curtice-Burns for both the period prior to its
acquisition by Pro-Fac as well as the period subsequent to the acquisition.
Therefore, comparisons to the prior-year periods are not comparable in certain
respects due to differences between the cost bases of the assets prior to the
acquisition compared to those after the acquisition as well as the effect on
Curtice-Burns' operations for adjustments to depreciation, amortization and
interest expense.
Curtice Burns' Results of Operations: The following tables illustrate the
Company's results of operations by business for the fiscal years ended June 24,
1995, June 25, 1994, and June 26, 1993, and the Company's total assets by
business as at June 24, 1995 and June 25, 1994.
32
<PAGE>
<TABLE>
<CAPTION>
Net Sales
(Dollars in Millions)
Fiscal Years Ended
----------------------------------------------------------
6/24/95 6/25/94 6/26/93
----------------- ------------------- ------------------
% of % of % of
$ Total $ Total $ Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Comstock Michigan Fruit ('CMF') 332.1 44.4 333.4 40.2 317.8 36.1
Nalley's Fine Foods 181.2 24.2 171.8 20.7 164.5 18.7
Southern Frozen Foods 96.6 12.9 94.3 11.4 93.4 10.7
Snack Foods Group 60.5 8.1 61.2 7.4 65.4 7.4
Brooks Foods 30.2 4.0 30.0 3.6 30.7 3.5
Finger Lakes Packaging 49.7 6.6 49.9 6.0 47.1 5.4
Intercompany eliminations(1) (34.3) (4.5) (34.4) (4.1) (32.9) (3.7)
----- ----- ----- ----- ----- -----
Subtotal ongoing operations 716.0 95.7 706.2 85.2 686.0 78.1
Businesses sold or to be sold(2) 32.5 4.3 122.9 14.8 192.6 21.9
----- ----- ----- ----- ----- -----
Total 748.5 100.0 829.1 100.0 878.6 100.0
===== ===== ===== ===== ===== =====
</TABLE>
(1) Intercompany sales by Finger Lakes
(2) The Company sold the oats portion of the National Oats business, the Hiland
potato chips business, the meat snacks business, and the Nalley's U.S. Chips
and Snacks business, and subsequent to 1995 fiscal year end, sold Nalley's
Canada Ltd. See NOTE 4 - 'Disposals.'
<TABLE>
<CAPTION>
Operating Income Before Dividing with Pro-Fac(1)
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------
6/24/95 6/25/94 6/26/93
------------------- ------------------ --------------------
% of % of % of
$ Total $ Total $ Total
------ ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
CMF 31.9 54.5 29.6 59.7 23.0 59.1
Nalley's Fine Foods 18.7 32.0 16.5 33.3 19.1 49.1
Southern Frozen Foods 9.2 15.7 10.2 20.5 7.6 19.5
Snack Foods Group 3.6 6.1 2.7 5.4 4.1 10.6
Brooks Foods 2.8 4.8 3.1 6.3 2.7 6.9
Finger Lakes Packaging 3.5 6.0 3.9 7.9 2.9 7.5
Intercompany eliminations and
corporate overhead(1) (10.0) (17.1) (15.1) (30.5) (14.4) (37.0)
----- ----- ----- ----- ----- -----
Subtotal ongoing operations 59.7 102.0 50.9 102.6 45.0 115.7
Businesses sold or to be sold(2) (1.2) (2.0) (1.3) (2.6) (6.1) (15.7)
----- ----- ----- ----- ----- -----
Total 58.5 100.0 49.6 100.0 38.9 100.0
===== ===== ===== ===== ===== =====
</TABLE>
(1) Table excludes restructuring (loss)/gain from division disposals of fiscal
1995, 1994, and 1993 change in control expense in fiscal 1995 and 1994, and
gain on assets net of additional costs incurred as a result of a fire claim
recorded in fiscal 1995.
(2) The Company sold the oats portion of the National Oats business, the Hiland
potato chips business, the meat snacks business, and the Nalley's U.S. Chips
and Snack business and, subsequent to 1995 fiscal year end, sold Nalley's
Canada Ltd. See NOTE 4 - 'Disposals.'
<TABLE>
<CAPTION>
Depreciation and Amortization
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------
6/24/95 6/25/94 6/26/93
--------------- ----------------- ----------------
% of % of % of
$ Total $ Total $ Total
----- ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
CMF 10.3 43.3 11.5 44.8 11.6 38.0
Nalley's Fine Foods 4.2 17.6 3.0 11.7 3.0 9.8
Southern Frozen Foods 3.9 16.4 2.5 9.7 2.1 6.9
Snack Foods Group 1.8 7.6 2.0 7.8 2.0 6.5
Brooks Foods 0.7 2.9 0.6 2.3 0.6 2.0
Finger Lakes Packaging 1.6 6.7 1.2 4.7 1.4 4.6
Corporate 0.5 2.1 1.7 6.5 2.7 8.9
---- ----- ----- ----- ----- -----
Subtotal ongoing operations 23.0 96.6 22.5 87.5 23.4 76.7
Businesses sold or to be sold(1) 0.8 3.4 3.2 12.5 7.1 23.3
---- ----- ----- ----- ----- -----
Total 23.8 100.0 25.7 100.0 30.5 100.0
==== ===== ===== ===== ===== =====
</TABLE>
(1) The Company sold the oats portion of the National Oats business, the Hiland
potato chips business, the meat snacks business, and the Nalley's U.S. Chips
and Snack business and, subsequent to 1995 fiscal year end, sold Nalley's
Canada Ltd. See NOTE 4 - 'Disposals.'
33
<PAGE>
<TABLE>
<CAPTION>
Total Assets
(Dollars in Millions)
6/24/95 6/25/94
----------------------------------
% of % of
$ Total $ Total
---- ----- ---- -----
<S> <C> <C> <C> <C>
CMF 267.9 39.9 218.5 48.9
Nalley's Fine Foods 158.9 23.6 73.8 16.5
Southern Frozen Foods 97.9 14.6 48.2 10.8
Snack Foods Group 28.4 4.2 24.5 5.4
Brooks Foods 20.9 3.1 11.0 2.5
Finger Lakes Packaging 46.1 6.9 39.3 8.8
Corporate 38.4 5.7 5.8 1.3
----- ----- ----- -----
Subtotal ongoing operations 658.5 98.0 421.1 94.2
Businesses sold or to be sold(1) 13.8 2.0 25.8 5.8
----- ----- ----- -----
Total 672.3 100.0 446.9 100.0
===== ===== ===== =====
</TABLE>
(1) The Company sold the oats portion of the National Oats business, the Hiland
potato chips business, the meat snacks business, and the Nalley's U.S. Chips
and Snack business and, subsequent to 1995 fiscal year end, sold Nalley's
Canada Ltd. See NOTE 4 - 'Disposals.'
The following table illustrates the Company's income statement data and the
percentage of net sales represented by these items for the fiscal years ended
June 24, 1995, June 25, 1994, and June 26, 1993.
<TABLE>
<CAPTION>
Consolidated Statement of Operations
(Dollars in Millions)
Fiscal Years Ended
-------------------------------------------------------------
6/24/95 6/25/94 6/26/93
---------------- ----------------- ------------------
% of % of % of
$ Sales $ Sales $ Sales
------- ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales 748.5 100.0 829.1 100.0 878.6 100.0
Cost of sales 530.1 70.8 592.6 71.5 632.6 72.0
------ ----- ------ ----- ------ -----
Gross profit 218.4 29.2 236.5 28.5 246.0 28.0
Restructuring expenses, including
net (loss)/gain from division
disposals (8.4) (1.1) 7.8 0.9 (61.0) (6.9)
Change in control expenses (2.2) (0.3) (3.5) (0.4) -- --
Gain on assets net of additional costs
incurred as result of a fire claim 4.1 0.5 -- -- -- --
Other selling, administrative and
general expenses (159.9) (21.3) (186.9) (22.5) (207.1) (23.6)
------ ----- ------ ----- ------ -----
Operating income/(loss) before
dividing with Pro-Fac 52.0 6.9 53.9 6.5 (22.1) (2.5)
Interest expense (32.4) (4.3) (18.2) (2.2) (19.6) (2.2)
------ ----- ------ ----- ------ -----
Pretax earnings/(loss) before dividing
with Pro-Fac 19.6 2.6 35.7 4.3 (41.7) (4.7)
Pro-Fac share of (earnings)/loss (9.6) (1.3) (16.9) (2.0) 21.8 2.5
------ ----- ------ ----- ------ -----
Income/(loss) before taxes 10.0 1.3 18.8 2.3 (19.9) (2.2)
Provision for taxes (6.0) (0.8) (8.7) (1.1) (3.9) (0.5)
------ ----- ------ ----- ------ -----
Net income/(loss) 4.0 0.5 10.1 1.2 (23.8) (2.7)
====== ===== ====== ===== ====== =====
</TABLE>
CHANGES FROM FISCAL 1994 TO FISCAL 1995
General: Net sales declined 9.7 percent in the year, to $748.5 million from
$829.1 million the previous year due primarily to divested businesses. Operating
earnings for fiscal 1995 reflect changes in many product lines.
The chips and snacks segment posted gains, while the popcorn earnings at CMF
declined. Vegetable prices decreased during the year because there was an ample
national supply in the fall of 1994, but vegetable earnings for the year were
still ahead of fiscal 1994. Net income of $4.0 million for fiscal 1995 compared
to $10.1 million a year ago. The decrease in net income is primarily due to
increased interest expense caused by the revised capital structure of the
Company and the gain on the sale of National Oats included in the fiscal 1994
results.
34
<PAGE>
Net Sales: The Company's net sales in fiscal 1995 of $748.5 million decreased
$80.6 million or 9.7 percent from $829.1 million in fiscal 1994. The net sales
attributable to businesses sold or to be sold in connection with the Company's
restructuring program discussed in NOTE 4 were $32.5 million in fiscal 1995 and
$122.9 million in fiscal 1994. The Company's net sales from ongoing operations,
excluding businesses sold or to be sold, were $716.0 million in fiscal 1995, an
increase of $9.8 million or 1.4 percent from $706.2 million in fiscal 1994. This
net sales variance of $9.8 million for ongoing operations is primarily comprised
of a $9.4 million increase at Nalley's with minor variations at other divisions.
An increase of $5.4 million in sales of pickles and relishes and an increase of
$2.7 million in dressing sales were the primary reasons for Nalley's increase.
Gross Profit: Gross profit of $218.4 million in fiscal 1995 decreased $18.1
million or 7.7 percent from $236.5 million in fiscal 1994. Of this net decrease,
a $23.9 million reduction was attributable to businesses sold or to be sold, and
an increase of $5.8 million was attributable to increased gross profit at the
Company's ongoing operations. This increase of $5.8 million was the result of
variations in volume, selling prices, costs, and product mix. The increase in
gross profit for ongoing operations is comprised of increases and decreases as
follow:
<TABLE>
<CAPTION>
Gross
Profit
Variance
----------
<S> <C>
CMF $(0.8)
Nalley's Fine Foods 5.1
Southern Frozen Foods (0.9)
Snack Foods Group 0.5
All Other 1.9
-----
$ 5.8
=====
</TABLE>
Nalley's Fine Foods increased gross profit primarily relates to improved margins
on canned entrees and soups ($3.4 million) and improved margins on dressings
($1.2 million).
Restructuring Expenses Including Net (Loss)/Gain From Division Disposals:
Restructuring expenses, including net (loss)/gain from division disposals,
resulted in a charge in fiscal 1995 of $8.4 million to reflect the impact of the
sale of certain assets of the Nalley's U.S. Chips and Snack business and other
expenses relating to the disposal of this operation. Included in fiscal 1994 was
an $7.8 million net gain from restructuring, including division disposals, for a
net increase in this expense from year to year of $16.2 million, all of which
was incurred by the Predecessor entity. See NOTE 4 -- 'Disposals.'
Change in Control Expenses: Change in control expenses recorded in fiscal 1995
and fiscal 1994, amounting to $2.2 million and $3.5 million, respectively,
reflect non-deductible expenses relating to the sale of the Company covering
legal, accounting, investment banking, and other expenses relative to the change
in control issue. All of these expenses were incurred prior to the acquisition.
See NOTE 3 - 'Change in Control of Curtice Burns.'
Gain on Assets Net of Additional Costs Incurred as a Result of Fire Claim at
Southern Frozen Foods: The gain on assets net of additional costs incurred as a
result of a fire claim recorded in fiscal 1995 amounted to $4.2 million.
Other Selling, Administrative, and General Expenses: Other selling,
administrative, and general expenses in fiscal 1995 of $159.9 million decreased
$27.0 million or 14.4 percent from $186.9 million in fiscal 1994. This net
decrease of $27.0 million includes primarily:
35
<PAGE>
<TABLE>
<CAPTION>
(In Millions)
Businesses
----------------------------------
Sold or to be Sold Ongoing Total
------------------ ------- -----
<S> <C> <C> <C>
Change in trade promotions $ (8.1) $(2.8) $(10.9)
Change in advertising and selling costs (13.8) 2.0 (11.8)
All other (5.6) 1.3 (4.3)
------ ----- ------
Change in selling, administrative,
and general expenses $(27.5) $ 0.5 $(27.0)
====== ===== ======
</TABLE>
The $2.8 million decrease in trade promotions at the Company's ongoing
operations is primarily comprised of a decrease at CMF of $4.0 million (which
primarily relates to reduced spending on the fruit filling and topping category,
with minor increases in other categories) and increased trade promotions at
Nalley's Fine Foods of $0.8 million (primarily related to increased spending on
canned entrees and soups and salad dressings, offsetting decreased spending on
other product lines).
The $2.0 million increase in advertising and selling costs at the Company's
ongoing operations represents increased costs at CMF ($1.5 million) and Nalley's
Fine Foods ($1.6 million), with minor offsetting variations at other operations.
The increase at CMF primarily relates to fruit fillings and toppings, with minor
variations in other product lines. The increase at Nalley's Fine Foods primarily
relates to costs associated with canned entrees and soups and salad dressings,
with minor variations in other product lines.
The $1.3 million increase in other administrative expenses primarily relates to
increased amortization of intangibles resulting from the acquisition and other
minor offsetting variances.
Operating Income Before Dividing with Pro-Fac: The Company's operating income
(before dividing with Pro-Fac) for fiscal 1995 of $52.0 million decreased $1.8
million or 3.3 percent from $53.8 million in fiscal 1994. Included in the 1995
operating income: the restructuring charges, including a loss from division
disposals of $8.4 million; change in control expenses of $2.2 million; net gain
on assets resulting from fire claim of $4.2 million; and operating losses
attributable to businesses sold or to be sold of $1.2 million. Included in the
1994 operating income: the restructuring gain from division disposals of $7.8
million; change in control expenses of $3.5 million; and operating losses
attributable to businesses sold or to be sold of $4.8 million. Excluding the
restructuring loss/gain from division disposals, change in control expense, gain
on assets net of additional costs incurred resulting from the fire claim, and
operating losses attributable to businesses sold or to be sold, the Company's
operating income (before dividing with Pro-Fac) from ongoing operations for
fiscal 1995 of $59.7 million increased $5.3 million or 9.7 percent from $54.4
million in fiscal 1994.
Interest Expense: Interest expense in fiscal 1995 of $32.4 million increased
$14.2 million or 78.0 percent from $18.2 million in fiscal 1994. This increase
was primarily attributable to the increased borrowing and increased interest
rates related to the acquisition of the Company by Pro-Fac.
Pro-Fac Share of Earnings: Pro-Fac's share of the Company's earnings in fiscal
1995 of $9.6 million decreased $7.3 million or 43.1 percent from $16.9 million
in fiscal 1994. The restructuring expenses, change in control expense, and fire
claim discussed above accounted for $5.4 million of this decrease. The Pro-Fac
share of earnings in fiscal 1995 and fiscal 1994 was 49.0 percent and 47.3
percent, respectively, of the Company's pretax earnings before dividing with
Pro-Fac.
Income Before Taxes: The Company's income before taxes in fiscal 1995 of
$10.0 million decreased $8.8 million or 46.8 percent from $18.8 million in
fiscal 1994. The restructuring expenses, change in control expense, and
36
<PAGE>
fire claim discussed above accounted for $5.4 million or 61.4 percent of the
decrease.
Provision for Taxes: The provision for taxes in fiscal 1995 of $6.0 million
decreased $2.7 million or 31.0 percent from $8.7 million in fiscal 1994. The
effective tax rate in fiscal 1995 was 60.0 percent compared to 46.2 percent in
fiscal 1994. The non-deductibility of the amortization of excess purchase cost
over net assets acquired was primarily responsible for the significantly
increased rate.
Net Income: The Company's net income for fiscal 1995 of $4.0 million decreased
$6.1 million or 60.4 percent from $10.1 million in fiscal 1994.
The primary reasons for the Company's $6.1 million decrease in net income are
the after-tax effect of the increased expenses relating to restructuring, change
in control, and interest, partially offset by the net gains resulting from the
Southern Frozen Foods' fire claim and improvements in divisions' operating
results as well as the change in the Company's effective tax rate -- all
discussed above.
CHANGES FROM FISCAL 1993 TO FISCAL 1994
Net Sales: The Company's net sales in fiscal 1994 of $829.1 million decreased
$49.5 million, or 5.6 percent, from $878.6 million in fiscal 1993. The net sales
attributable to businesses sold or to be sold in connection with the Company's
restructuring program were $122.9 million in fiscal 1994 and $192.6 million in
fiscal 1993. The Company's net sales from ongoing operations excluding
businesses sold or to be sold in fiscal 1994 were $706.2 million, an increase of
$20.2 million, or 2.9 percent, from $686.0 million in fiscal 1993. The increase
in net sales from ongoing operations is attributable in part to CMF. Net sales
at CMF in fiscal 1994 of $333.4 million increased $15.6 million, or 4.9 percent,
from $317.8 million in fiscal 1993. The increase in net sales at CMF was due to
an increase in net sales at CMF's New York vegetables business resulting from
increased prices and volumes associated with a national shortage in supply in
the vegetable market attributable to floods in the Midwest and a drought in the
South in the 1993 growing season. This increase in sales at CMF was offset in
part by reduced raw material costs at the Company, that were reflected in
reduced selling prices of the Company's products. Net sales at Nalley's in
fiscal 1994 of $171.8 million increased $7.3 million, or 4.4 percent, from
$164.5 million in fiscal 1993. The increase in net sales at Nalley's was
primarily attributable to an $8.5 million increase in the salad dressing and a
$1.0 million decrease in pickles and relishes related to reduced volume. Net
sales at Southern in fiscal 1994 of $94.3 million remained essentially flat
compared to $93.4 million in fiscal 1993. Net sales at the Snack Foods Group in
fiscal 1994 of $61.2 million decreased $4.2 million, or 6.4 percent, from $65.4
million in fiscal 1993. The decrease was caused by reduced volume related
principally to the competitive pressures of the salty snacks business and the
decline in consumption for the potato chip category. Net sales at Brooks in
fiscal 1994 of $30.0 million decreased $0.7 million, or 2.3 percent, from $30.7
million in fiscal 1993. This net decrease is comprised of a decrease of $2.8
million of tomato products almost completely offset by increased sales of bean
products. The decrease in tomato products sold was the result of the decision to
exit the private label ketchup business. The increase in bean products was due
to a 21.0 percent increase in units sold. Net sales at Finger Lakes in fiscal
1994 of $49.9 million increased $2.8 million, or 5.9 percent, from $47.1 million
(before elimination of intercompany sales) in fiscal 1993. This was primarily
the result of a 10.2 percent increase in volume.
Gross Profit: Gross profit of $236.5 million in fiscal 1994 decreased $9.5
million, or 3.9 percent, from $246.0 million in fiscal 1993. Of this net
decrease, a $23.6 million reduction was attributable to businesses sold or to be
sold and an increase of $14.1 million was attributable to increased gross profit
at the Company's ongoing operations. Gross profit for CMF increased $8.5
million, Nalley's increased $4.8 million, Southern increased
37
<PAGE>
$2.5 million, and the Snack Foods Group decreased $2.8 million. These changes
were the result of variations in volume, selling prices, costs and product mix.
Restructuring Including Net (Gain)/Loss From Division Disposals: Included in the
fiscal 1994 results was a net gain of $7.8 million comprised of a gain on the
sale of the oats operations of National Oats of $10.9 million, net of a charge
of $3.1 million to adjust previous estimates regarding activities initiated in
fiscal 1993. Consummation of the sale of Nalley's U.S. Chips and Snacks
completed the Company's dispositions pursuant to the restructuring program
initiated in 1993. The Company incurred restructuring charges in fiscal 1993 of
$61.0 million, which included the loss incurred on the sale of the Lucca frozen
entree business, anticipated losses on the sale of the meat snacks and Hiland
potato chips businesses, and other costs anticipated in conjunction with the
restructuring program.
Change in Control Expenses: During fiscal 1994, the Company expensed $3.5
million of legal, accounting, investment banking and other expenses relative to
the change in control issue. In recognizing this expense, the Company allocated
half of this amount to Pro-Fac as a deduction to the profit split.
Selling, Administrative and General Expenses: Selling, administrative and
general expenses of $186.9 million in fiscal 1994 decreased $20.2 million, or
9.8 percent, from $207.1 million in fiscal 1993. Cost reductions include (i) a
$0.7 million decrease in trade promotions, (ii) a $13.1 million decrease in
advertising and selling costs and (iii) a $5.1 million decrease in
administrative costs. Of the net decrease in trade promotions, an $8.8 million
decrease was attributable to businesses sold or to be sold and an increase of
$8.1 million was attributable to increased trade promotions at the Company's
ongoing operations. Of this increase, $2.6 million was due to increased
promotions on a reformulated fruit filling and topping product of CMF and to the
expansion of the pumpkin pie filling category and $4.3 million was primarily due
to new product promotions for Nalley's salad dressings and canned meats and
entrees introduced in fiscal 1993 and 1994. Of the net decrease in advertising
and selling costs, $13.2 million was attributable to businesses sold or to be
sold. The remaining increase of $0.1 million was primarily attributable to a
$2.1 million decrease in advertising and selling costs net of an increase in
such costs of $1.8 million at Nalley's. The increase at Nalley's was primarily
related to canned meats and entrees and salad dressings.
Operating Income Before Dividing Profits With Pro-Fac: The Company's operating
income in fiscal 1994 of $53.8 million increased $76.0 million from an operating
loss of $22.2 million in fiscal 1993. Excluding restructuring charges and change
in control expenses, the Company's operating income in fiscal 1994 was $49.6
million, a $10.7 million increase, or 27.5 percent, from an operating income of
$38.9 million in fiscal 1993. Operating losses attributable to businesses sold
or to be sold in connection with the Company's restructuring program were $4.8
million in fiscal 1994 and $6.1 million in fiscal 1993. Excluding operating
losses from businesses sold or to be sold, the Company's operating income from
continuing operations in fiscal 1994 was $54.4 million, an increase of $9.4
million, or 20.9 percent, from $45.0 million in fiscal 1993. Of this increase,
CMF contributed $6.6 million, Southern contributed $2.6 million and Finger Lakes
contributed $1.0 million. These increases were offset in part by decreased
operating income at Nalley's of $2.6 million and $1.4 million for the Snack
Foods Group. The increases for CMF's New York vegetables business and Southern
were attributable to increased selling prices as a result of the short crop of
vegetables nationally due to poor weather conditions in the Midwest during the
1993 growing season. Finger Lakes benefitted from improved production
efficiencies and procedures as a result of capital improvements. The decrease at
Nalley's pertained to both a sales volume decline and an increase in costs for
the peanut butter and pickles and relishes categories, and trade promotions and
selling costs on the canned meat and entree category. In addition, CMF's fruit
fillings and
38
<PAGE>
toppings business experienced increased trade promotions and advertising costs
related to reformulated fruit fillings and toppings and expansion of the pumpkin
pie filling markets. The decrease in the Snack Foods Group is the result of the
sales decline as previously mentioned. An increase of $1.2 million related to
the management incentive plan also reduced operating income.
Interest Expense: Interest expense in fiscal 1994 of $18.2 million decreased
$1.4 million, or 7.1 percent, from $19.6 million in fiscal 1993. The reduction
in interest expense is due to lower interest rates off-set in part by an
increase in loan volume.
Pro-Fac Share of Earnings/(Loss): Pro-Fac share of earnings in 1994 of $16.9
million increased $38.7 million from a share of loss of $21.8 million in fiscal
1993. The increase is attributable to the factors described above. The Pro-Fac
share of earnings/(loss) in fiscal 1994 and fiscal 1993 was 47.3 percent and
52.2 percent, respectively, of the Company's pre-tax earnings/(loss) before
dividing with Pro-Fac. The change in percentage is the result of changes in the
dividend paid by the Bank that Pro-Fac shares with the Company.
Income/(Loss) Before Taxes: Income/(loss) before taxes in fiscal 1994 of $18.8
million increased $38.7 million from a loss of $19.9 million in fiscal 1993.
Excluding restructuring charges and change in control expenses, the Company's
income before taxes in fiscal 1994 was $16.6 million, a $6.0 million increase,
or 56.6 percent, from income before taxes of $10.6 million in fiscal 1993. The
increase is attributable to the factors described above.
Provision for Taxes: Provision for taxes in fiscal 1994 of $8.7 million
increased $4.8 million from a provision of $3.9 million in fiscal 1993. Included
in the fiscal 1994 results was a charge against earnings of $0.5 million to
adjust deferred taxes to the higher rate as legislated by Congress and as
required under Financial Accounting and Standards Board No. 109. The Company's
effective tax rate was significantly impacted during fiscal 1994 by
non-deductible legal and advisory expenses incurred in conjunction with the
change in control, the increase in the federal statutory income tax rate enacted
on August 10, 1993 and the adjustment of a valuation allowance previously
recorded.
Net Income/(Loss): The Company's fiscal 1994 net earnings were $10.1 million
compared to a loss of $23.8 million in fiscal 1993. Also included in the fiscal
1994 results was a net gain of $7.8 million comprised of a gain on the sale of
the oats operations of National Oats of $10.9 million, net of a charge of $3.1
million to adjust previous estimates regarding activities initiated in 1993, and
a charge of $3.5 million of legal, accounting and investment banking and other
expenses relating to the potential change of control of the Company. Included in
fiscal 1993 results ere restructuring charges of $61.0 million. Net earnings,
excluding these items, were approximately $9.1 million in fiscal 1994 and $5.8
million in fiscal 1993, an increase of 56.9 percent.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1995, net cash provided by operating activities of $111.5 million
reflects net income of $29.5 million. Depreciation and amortization of assets
amounted to $16.4 million. Accounts receivable and inventories decreased $12.1
million and $67.0 million, respectively. Changes in other assets and liabilities
used cash of $7.3 million.
Cash flows from investing activities include the acquisition of property, plant,
and equipment, and other assets held for or used in the production goods, and
the amounts received from Curtice-Burns prior to the acquisition for payments on
capital leases. Net cash used in investing activities of $17.3 million in fiscal
1995 was comprised of $28.7 million paid for
39
<PAGE>
property, plant, and equipment and $11.4 million received for capital leases.
Net cash used in financing activities of $90.0 million is primarily related to
the acquisition of Curtice Burns in fiscal 1995. Proceeds from the issuance of
long-term debt (net of repayments) amounted to $107 million. The amounts paid to
the former shareholders of Curtice-Burns totaled $167.8 million, and the net
assets acquired amounted to $81.3 million.
Because of the additional debt as a result of the acquisition of the Company by
Pro-Fac, the cash flow of the Company is the single, most important measure of
performance. Net cash provided from operations is expected to be sufficient to
cover scheduled payments on long-term debt and planned capital expenditures.
New Borrowings: Under the New Credit Agreement, Curtice-Burns is able to borrow
up to $86.0 million for seasonal working capital purposes under the Seasonal
Facility, subject to a borrowing base limitation, and obtain up to $11.0 million
in aggregate face amount of letters of credit pursuant to a Letter of Credit
Facility. The borrowing base is defined as the lesser of (i) $86.0 million and
(ii) the sum of 60 percent of eligible accounts receivable plus 50 percent of
eligible inventory.
As of June 24, 1995, (i) cash borrowings outstanding under the Seasonal Facility
were zero and (ii) availability under the Seasonal Facility, after taking into
account the amount of the borrowing base, was $20.0 million. In addition to its
seasonal financing, as of June 24, 1995, Pro-Fac had $1.0 million available for
long-term borrowings under the Term Loan Facility. Pro-Fac believes that the
cash flow generated by its operations and the amounts available under the
Seasonal Facility should be sufficient to fund its working capital needs, fund
its capital expenditures and service its debt for the foreseeable future.
As a result of the acquisition of Curtice-Burns by Pro-Fac, Pro-Fac's total debt
and interest expense have increased because the Notes have a substantially
higher interest rate than the debt that was repaid with the proceeds from the
Note Offering. The New Credit Agreement requires that Pro-Fac and Curtice Burns
meet certain financial tests and ratios and comply with certain other
restrictions and limitations. As of June 24, 1995, Pro-Fac is in compliance with
or has obtained waivers for all such restrictions and limitations.
Short- and Long-Term Trends: The 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 differ regionally because of variations in weather. For
example, the 1993 floods in the Midwest and the drought in the South produced
lower crop yields in those areas and increased prices nationally even though the
crops in the Company's growing areas were at normal levels.
As a result of the shortage situation of the national supply due to the low
yields from the 1993 crop year, many vegetable producers intentionally increased
planned production for the 1994 crop year attempting to return the supplies to
ample levels. Favorable weather conditions in the 1994 growing season, however,
produced high crop yields in addition to the increased planned production. This
resulted in somewhat depressed selling prices, increased inventory levels
throughout fiscal 1995, and left a higher carryover inventory at the end of
fiscal 1995 than at the end of fiscal 1994 for the Company. As of June 24, 1995,
the Company's total inventories were
40
<PAGE>
$160.2 million, an increase of $4.9 million or 3.2 percent from $155.3 million
in the prior year. This excess will be gradually reduced by the end of the 1996
fiscal year due to a decrease in the planned production for the 1995 crop year.
There are variations among the specific commodities and the effect on pricing
and profitability in fiscal 1995 has depended upon individual company pricing
practices and the effect of recent industry plant closings and production
realignments. Decreased vegetable prices are expected to depress earnings for
the first quarter of fiscal 1996 as are increased slotting allowances for
certain new items.
The impact of the 1993 growing season principally affected the Company's
operating results in fiscal 1994, and the impact of the 1994 growing season
principally affected the Company's operating results in fiscal 1995. The impact
of the 1995 growing season on the Company's operating results for fiscal 1996
cannot be determined until late fall of 1995 when national supplies can be
determined.
In addition to the excess inventory discussed above, another element affecting
cash flow in fiscal 1995 was the timing of reimbursement for cash expenditures
relative to the facility repairs and other activities of the Company's
Montezuma, Georgia plant which was destroyed by fire in July 1994. See 'Fire
Claim' in NOTE 6. As of June 24, 1995, approximately $10.0 million of such
expenditures were receivable from insurance companies. Final settlements with
insurance carriers regarding claims for business interruption are currently
being negotiated.
Primarily due to higher inventory levels and the timing of the insurance
proceeds of the fire claim, the average seasonal loan balance in fiscal 1995 was
$66.5 million, an increase of $15.0 million or 29.1 percent over the fiscal 1994
average of $51.5 million.
Capital expenditures (excluding the expenditures relating to the fire for which
reimbursement was received) amounted to $19.8 million in fiscal 1995. The
largest, single capital project in process during fiscal 1995 was renovation and
updates to the Nalley's salad dressing plant in Tacoma, Washington. This capital
project amounts to approximately $10.0 million and will provide increased
production and efficiencies for the salad dressing line.
Required scheduled payments on long-term debt will approximate $8.0 million in
the coming year. Cash proceeds from the sale of Nalley's Canada Ltd., sold
subsequent to fiscal year end of approximately $3.8 million, were applied to
long-term debt in accordance with the terms of the New Credit Agreement.
Supplemental Information on Inflation: The changes in costs and prices within
the Company's business due to inflation were not significantly different from
inflation in the United States economy as a whole. Levels of capital investment,
pricing and inventory investment were not materially affected by the moderate
inflation.
Sale of Nalley's Canada Ltd.: On March 20, 1995 Curtice-Burns announced its
intention to sell its Canadian subsidiary, Nalley's Canada Ltd., located in
Vancouver, British Columbia, to a management group within the Canadian
subsidiary. This sale was finalized subsequent to year end (as of June 26, 1995)
and was contemplated by Pro-Fac in conjunction with the acquisition. Nalley's
U.S. will have an ongoing supply agreement with Nalley's Canada Ltd. as a result
of the sale. See further discussion at 'Certain Transactions.'
Subsequent Event: On July 21, 1995, the Company completed the acquisition of
Packer Foods, a privately owned, Michigan-based food processor. The total cost
of acquisition was approximately $5.4 million in notes plus interest at 10
percent to be paid until the notes mature in the year 2000. The transaction will
be accounted for as a purchase. For its latest fiscal
41
<PAGE>
year ended December 31, 1994, Packer had net sales of approximately $13 million,
operating income of approximately $300,000, and income before extraordinary
items of approximately $100,000. Packer Foods is in the process of being merged
into the Company's CMF operations.
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 1991 in the amount of approximately
$7.2 million and interest payments of approximately $4.9 million. In addition,
it is anticipated that the Cooperative will file for tax refunds for fiscal 1992
in the amount of approximately $1.6 million and interest payments of
approximately $.3 million. Based upon the status of the government's review of
the refunds for fiscal years 1986 to 1990 the legal counsel to the Cooperative
has issued an opinion that such refunds constitute a legally enforceable account
receivable from the government. Accordingly, refund amounts of $10.1 million for
tax and interest have been reflected in the financial statements of Pro-Fac as
of June 24, 1995. It is anticipated that such amounts will be received in the
first half of fiscal 1996. The Board of Directors of the Cooperative has
committed that substantially all of such refunds and interest payments, when
received, will be invested in its subsidiary, Curtice-Burns Foods, Inc.
As a result of the acquisition, the Cooperative's exempt status has ceased.
BUSINESS OF CURTICE-BURNS ('THE COMPANY')
General: The Company is a producer and marketer of processed food products
including canned and frozen fruits and vegetables, canned desserts and
condiments, fruit fillings and toppings, canned chilies and stews, salad
dressings, pickles, peanut butter and snack foods. In addition, the Company
manufactures cans which are both utilized by the Company and sold to third
parties.
The Company sells products in three principal categories: (i) 'branded'
products, which are sold under the Company's trademarks, (ii) 'private label'
products, which are sold to grocers that in turn use their own brand names on
the products and (iii) 'food service' products, which are sold to food service
institutions such as restaurants, caterers and bakeries and to schools. In
fiscal 1995, approximately one-half of the Company's net sales were branded and
the remainder were split between private label and food service. The Company's
branded products include 'Comstock,' 'Thank You' and 'Wilderness' fruit fillings
and toppings, 'Nalley' chilies and stews, 'Bernstein's' salad dressings and
'Adams' peanut butter. The Company's private label products include salad
dressings, salsa, fruit fillings and toppings, canned puddings and canned and
frozen vegetables, which are sold to customers such as A&P, Kroger, Safeway,
Topco, Wegman's and Winn-Dixie. The Company's food service products include
salad dressings, pickles, fruit fillings and toppings, canned and frozen
vegetables, canned puddings, cheese sauces and canned and frozen fruit, which
are sold to customers such as Carvel, Disney, Foodservice of America, KFC,
McDonald's and Sysco.
Comstock Michigan Fruit: CMF, the Company's largest division, headquartered in
Rochester, New York, produces products in three principal categories: (i) fruit
fillings and toppings, (ii) aseptically produced products and (iii) canned and
frozen fruits and vegetables. In fiscal 1995, approximately one-third of CMF's
net sales represented branded products,
42
<PAGE>
approximately one-third represented private label products and approximately
one-third represented food service products. CMF markets its branded products
under the 'Thank You,' 'Comstock,' 'Wilderness,' 'Greenwood,' 'Silver Floss,'
'Blue Boy,' 'Super Pop,' 'Pop-Eye,' and 'Pops-Rite' labels. The following table
sets forth the net sales and division operating income for CMF for the periods
shown:
<TABLE>
<CAPTION>
(Dollars in Millions)
Fiscal Year Ended
------------------------------------
June 24, June 25, June 26,
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Net sales $332.1 $333.4 $317.8
Operating income 31.9 29.6 23.0
</TABLE>
CMF estimates the national fruit fillings and toppings market to be
approximately $225.0 million. CMF's fruit fillings and toppings are marketed
under the 'Comstock', 'Thank You' and 'Wilderness' brands, which held a national
market share of approximately 52 percent in the fruit filling segment in fiscal
1995. CMF's fruit fillings and toppings are sold both through grocers to the
public and to food service institutions such as restaurants, caterers and
bakeries and to schools. In fiscal 1994, the Company introduced the 'More
Fruit/More Flavor' program at CMF, which involved the production of fruit
fillings and toppings with more fruit content, which CMF sells at a premium
price. The Company believes this program has increased CMF's market share in the
fruit fillings and toppings category.
CMF's aseptic operations produce puddings, cheese sauces and dips for sale by
CMF and diet drinks for sale by a third party under a co-packing arrangement.
The aseptic production process involves preparation of the product in a sterile
environment beginning with batch formulation and continuing through packaging.
As a result, once packaged, the product requires no further cooking. The Company
believes its aseptic production facility is state-of-the-art. In 1994, CMF's
aseptically processed puddings accounted for approximately 66 percent of the
national food service market and aseptically processed cheese sauces accounted
for approximately one-quarter of the national food service market.
CMF's fruit and vegetable processing business includes both branded and private
label production. It also includes value added products such as canned specialty
fruits and frozen vegetable mixes. Success in the fruit and vegetable processing
business is driven by, among other things, an ability to control costs. The
Company has aggressively sought to reduce costs in the fruit and vegetable
processing business by closing plants, making capital investments in the
modernization of processing equipment, changing its product mix and refining
advertising strategies. For example, in fiscal 1993, the Company initiated
production consolidation efforts involving the closing of CMF plants located in
Michigan and New York. Programs aimed at further reducing costs include
continued capital investment in cost savings projects and further vegetable
plant production efficiencies. Subsequent to the end of fiscal 1995, on July 21,
1995, the Company acquired Packer Foods, Inc (see further discussion in NOTE 11
of the Consolidated Financial Statements). Packer's operation is in the process
of being merged into the CMF operations.
Nalley's Fine Foods: Nalley's is headquartered in Tacoma, Washington. It markets
canned meat products such as chilies and stews, pickles, salad dressings, peanut
butter and syrup, which are sold throughout the Northwest and Western United
States under the 'Nalley' brand and other premium brand names, such as
'Bernstein's' salad dressing and 'Adams' natural peanut butter. Approximately
three-quarters of Nalley's products are branded; however, private label accounts
for a growing percentage of Nalley's business. The following table sets forth
the net sales and division operating income for Nalley's for the periods shown:
43
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Millions)
Fiscal Year Ended
----------------------------------------
June 24, June 25, June 26,
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Net sales $181.2 $171.8 $164.5
Operating income 18.7 16.5 19.1
</TABLE>
The Nalley's products have been a vehicle for growth through both geographic
expansion and line extension. Several of Nalley's products have leading market
shares in the Pacific Northwest, such as Nalley's chili, which had a market
share of approximately 55 percent, and 'Nalley' and 'Farman's' pickles, which
together had a market share of approximately 48 percent, for the 52-week period
ended June 1995. In the Pacific Northwest, the Company's 'Nalley' and
'Bernstein's' brands of salad dressings had a combined market share of
approximately 18 percent for the same period. Nalley's has taken an aggressive
position in growing its market share in the salad dressing category. It is
believed by management that over the last three years, Nalley's has been the
only major salad dressing company on the West Coast to grow its share
consistently. It has done this by pursuing unique line extensions (e.g.,
Bernstein's 'Wine Country Italian'), entering fast-growing market segments with
superior-quality products (e.g., Bernstein's fat-free dressings), and by
entering new markets, such as refrigerated dressings (e.g., Bernstein's
refrigerated dressings).
In line with the growing trend toward private label, Nalley's has been
aggressively pursuing this profitable business segment. Specifically, Nalley's
has been executing its three-tiered store label strategy on specialty Mexican
products, such as chili and salsa, salad dressings and canned soups. The
three-tiered strategy allows the Company to offer to its private label customers
products in a 'good,' 'better,' 'best' format. For example, if the grocer seeks
a premium salsa brand, Nalley's can offer its top-tier brand of salsa. By using
the three-tiered approach, the Company has successfully extended the reach of
its available products. The private label customer base continues to expand on a
national basis and includes Winn-Dixie in the Southeast, Wegman's in Upstate New
York, Topco in the Midwest, and Ralph's and Western Family on the West Coast.
Southern Frozen Foods: Southern Frozen Foods, headquartered in Montezuma,
Georgia, freezes and sells a full line of southern vegetables such as black-eyed
peas, okra and leafy greens as well as a line of traditional vegetables such as
corn, peas, squash and green beans. Southern also produces specialty side
dishes, breaded vegetables and onion rings, and a small amount of frozen fruit.
The following table sets forth the net sales and division operating income for
Southern for the periods shown:
<TABLE>
<CAPTION>
(Dollars in Millions)
Fiscal Year Ended
-----------------------------------------
June 24, June 25, June 26,
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Net sales $96.6 $94.3 $93.4
Operating income 9.2 10.2 7.6
</TABLE>
Southern's products are marketed under the following brand names: McKenzie's',
'Southern Farms', 'Gold King', 'Chill-Ripe' and 'Tropic Isle.' Approximately
one-half of Southern's products are sold under brand labels, with 'McKenzie's'
and 'Southern Farms' accounting for approximately 27 percent of the southern
vegetable market in the Southeastern United States for the 52-week period ended
February 5, 1995. Approximately 15 percent of Southern's products are sold to
private label customers with major accounts including Winn-Dixie, Federated
Foods, SuperValu and Marketing Management. Distribution is primarily in the
Southeast and South Central portions of the United States.
44
<PAGE>
On July 7, 1994, a fire destroyed Southern's breading and packaging operations.
In the interim the Division outsourced these functions. On July 7, 1995, the new
plant and all production lines were back in operation. The new facility is 35
percent larger and houses state of the art packaging, breading and fryer
equipment.
Snack Foods Group: The Snack Foods Group consists of three separate divisions:
(i) Snyder, (ii) Tim's and (iii) Husman. The following table sets forth the net
sales and division operating income for the Snack Foods Group for the periods
shown:
<TABLE>
<CAPTION>
(Dollars in Millions)
Fiscal Year Ended
-----------------------------------------
June 24, June 25, June 26,
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Net sales $60.5 $61.2 $65.4
Operating income 3.6 2.7 4.1
</TABLE>
Snyder of Berlin: Snyder of Berlin, headquartered in Berlin, Pennsylvania,
produces and markets several varieties of potato chips in distinctive
silver-colored bags, as well as several varieties of corn-based snack
products in conventional packaging, primarily under the 'Snyder of Berlin'
brand. Snyder products are recognized for their unique taste and freshness
among users in Western Pennsylvania, Ohio and West Virginia, some of the
country's highest per capita snack consumption markets.
Tim's Cascade Chips: Tim's Cascade Chips, located in Auburn, Washington,
produces kettle-fried potato chips for distribution in the Washington,
Northern Idaho, and Western Oregon area. Kettle frying produces a potato
chip that is thicker and crisper than other potato chips.
Husman's Snack Foods: Husman's Snack Foods, located in Cincinnati, Ohio,
manufactures and markets potato chips, popcorn, and cheese curls and
distributes other snack items in Cincinnati and Dayton, Ohio and areas of
northern Kentucky. Husman's targets unique products and packaging to
maintain a strong potato chip market share. Multi-packs and licensing
agreements with local restaurants are two ways Husman's creates their
value added proposition.
Brooks Foods: Brooks Foods located in Mt. Summit, Indiana markets canned beans
and tomato products under their 'Brooks' brand and private label or store
brands. The majority of sales, over 75 percent, are sold under the Brooks brand
and consist of value added items such as Chili Hot Beans and stewed tomatoes.
The following table sets forth the net sales and division operating income for
Brooks for the periods shown:
<TABLE>
<CAPTION>
(Dollars in Millions)
Fiscal Year Ended
-----------------------------------------
June 24, June 25, June 26,
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Net sales $30.2 $30.0 $30.7
Operating income 2.8 3.1 2.7
</TABLE>
Brooks chili beans are the dominant leader with an average category share of
more than 65 percent. Brooks value-added canned tomatoes with chili seasonings
continue to grow share under the 'Just for Chili' brand name after only a few
short years from introduction. Brooks brand 'Rich & Tangy Ketchup' continues to
hold a very visible position in all stores in Brooks markets; in fact, has been
experiencing some unit growth in recent months.
45
<PAGE>
Brooks growth in store-brand canned bean sales has continued, attributable in
large part to efficiency improvements and cost controls. Brooks has made great
strides in becoming a low-cost producer for these items and should see further
strides in this direction over the next two years. In the large-volume category,
opportunity continues to further decrease costs.
Brooks also co-packs for other companies and further opportunities are being
explored in this area.
Finger Lakes Packaging Company: Finger Lakes, headquartered in Lyons, New York,
manufactures various sizes of three-piece sanitary food cans for sale to the
Company and third parties. In fiscal 1994, approximately two-thirds of Finger
Lakes sales were to other divisions of the Company and one-third were to other
customers. The following table sets forth the net sales and division operating
income (before elimination of intercompany sales) for Finger Lakes for the
periods shown:
<TABLE>
<CAPTION>
(Dollars in Millions)
Fiscal Year Ended
-----------------------------------------
June 24, June 25, June 26,
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Net sales $49.7 $49.9 $47.1
Operating income 3.5 3.9 2.9
</TABLE>
Finger Lakes' three-part, metal sanitary cans are used in the retail, food
service and institutional markets. These cans are recyclable and provide
economical containers for the Company's products based on volume run and
customer base.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The business of Pro-Fac is principally conducted in one industry segment, the
processing and sale of various food products. The table set forth below shows
certain financial information relating to that industry segment for each of
Pro-Fac's last five fiscal years. The financial statements for the fiscal years
ended June 24, 1995, June 25, 1994, and June 26, 1993, which are included in
this report, reflect the information set forth in the table.
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------------------------------------
Dollars in Millions June 24, June 25, June 26, June 26, June 28,
1995 1994 1993 1992 1991
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $522.4 $ 58.2 $ 59.7 $ 63.4 $ 62.2
Sales to unaffiliated customers $522.4 $ 58.2 $ 59.7 $ 63.4 $ 62.2
Net income/(loss) $ 29.5 $ 24.5 $(17.5) $ 13.9 $ 5.3
Total assets $689.7 $296.1 $324.9 $361.4 $385.6
</TABLE>
PACKAGING AND DISTRIBUTION
The food products produced by the Company are distributed to various consumer
markets in all 50 states as well as in Canada. Branded lines of CMF, Southern
and Brooks divisions are sold through food brokers which sell primarily to
supermarket chains and various institutional feeders. Nalley's has its own sales
personnel responsible for sales within the Pacific Northwest and uses food
brokers for sales in other marketing areas. Snyder's, Tim's and Husman's
products are marketed through distributors, some of which are owned and operated
by the Company, who sell directly to retail outlets in Kentucky, Maryland, Ohio,
Pennsylvania, Virginia, West Virginia, Washington, Northern Idaho and Western
Oregon.
Customer brand operations encompass the sale of products under private labels to
chain stores and under the controlled labels of buying groups.
46
<PAGE>
For example, private label customers of CMF include such major food distributors
as A&P, Kroger, Safeway, Topco, Wegman's and Winn-Dixie. The Company has
developed central storage and distribution facilities that permit multi-item
single shipment to customers in key marketing areas.
Curtice-Burns Express ('CBX'), a subsidiary of the Company, is a licensed common
carrier with authority in 48 states. It is used by the Company to obtain
backhaul volume on shipments via the Company's trucks or contract haulers. The
other divisions of the Company lease their equipment to CBX for these backhauls.
TRADEMARKS
The major brand names under which the Company markets its products are
trademarks of the Company. Such brand names are considered to be of material
importance to the business of the Company since they have the effect of
developing brand identification and maintaining consumer loyalty. All of the
Company's trademarks are of perpetual duration so long as periodically renewed,
and it is currently intended that the Company will maintain them in force. The
major brand names utilized by the Company are as follows:
<TABLE>
<CAPTION>
Product Brand Name
- --------------------------- -------------------------------------------
<S> <C>
Chilies, stews and soups Brooks, Mariners Cove, Nalley
Fruits and vegetables Blue Boy, Brooks, Chill-Ripe, Gold King,
Gracias, Greenwood, Hoosier Sweets, Just for
Chili, McKenzie's, Naturally Good, Ritter,
Southern Farms, Southland, Thank You, Tropic
Isle
Fruit fillings and toppings Comstock, Globe, Gracias, Thank You,
Wilderness
Peanut butter Adams
Pickles Farman's, Nalley
Popcorn Pop-Eye, Pops-Rite, Super Pop
Puddings Gracias, Thank You
Salad dressings Bernstein's, Bernstein's Light Fantastic,
Nalley
Sauerkraut Silver Floss
Snack food Cheese Pleezers, Husman, La Restaurante,
Snyder of Berlin, Thunder Crunch, Tim's
Cascade Chips
Syrup Lumberjack
</TABLE>
RAW MATERIAL SOURCES
It is currently anticipated that the Company will continue to acquire a
substantial part of its raw agricultural products from Pro-Fac. In fiscal 1995,
approximately 73 percent of the crops processed by the Company were supplied by
Pro-Fac. The Company also will purchase on the open market some crops of the
same type and condition as those purchased from Pro-Fac. Such open market
purchases may occur at prices higher or lower than those paid to Pro-Fac for
similar products.
47
<PAGE>
The canned and frozen vegetable portion of the Company's 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 in a given year. This oversupply
typically will result in depressed selling prices and reduced profitability to
the Company on the inventory produced from that year's crops. Excessive rain or
drought conditions can produce low crop yields and a shortage situation. This
shortage typically will result in higher selling prices and increased
profitability to the Company. While the national supply situation controls the
pricing, the supply can differ regionally because of variations in weather. For
example, the 1993 floods in the Midwest and the drought in the South produced
lower crop yields in those areas and increased prices, even though the crops in
the Company's growing areas were at normal levels. Favorable weather conditions
in the 1994 growing season produced high crop yields resulting in somewhat
depressed selling prices, increased inventory levels throughout the year, and a
higher carryover inventory at the end of the year. The impact of the 1993
growing season principally affected the Company's operating results in fiscal
1994, and the impact of the 1994 growing season principally affected the
Company's operating results in fiscal 1995. The impact of the 1995 growing
season on the Company's operating results for fiscal 1996 cannot be determined
until late fall of 1995 when national supplies are known.
Except for cans manufactured by Finger Lakes, the Company purchases all of its
requirements for nonagricultural products, including containers, on the open
market. Although the Company has not experienced any difficulty in obtaining
adequate supplies of such items, occasional periods of short supply of certain
raw materials may occur.
ENVIRONMENTAL MATTERS
The disposal of solid and liquid waste material resulting from the preparation
and processing of foods and the emission of wastes and odors inherent in the
heating of foods during preparation are subject to various federal, state, and
local environmental laws and regulations. Such laws and regulations have had an
important effect on the food processing industry as a whole, requiring
substantially all firms in the industry to incur material expenditures for
modification of existing processing facilities and for construction of new waste
treatment facilities. The Company is also subject to standards imposed by
regulatory agencies pertaining to the occupational health and safety of its
employees. Management believes that continued measures to comply with such laws
and regulations will not have a material adverse effect upon its competitive
position.
Among the various programs for the protection of the environment which have been
adopted to date, the most important for the operations of the Company are the
waste water discharge permit programs administered by the environmental
protection agencies in those states in which the Company does business and by
the federal Environmental Protection Agency. Under these programs, permits are
required for processing facilities which discharge certain wastes into streams
and other bodies of water, and the Company is required to meet certain discharge
standards in accordance with compliance schedules established by such agencies.
The Company has to date received permits for all facilities for which permits
are required, and each year submits applications for renewal permits for some of
the facilities. Such renewal permits are currently being processed, and the
Company expects that they will be issued by the agencies in due course.
While the Company cannot predict with certainty the effect of any proposed or
future environmental legislation or regulations on its processing operations,
management of the Company believes that the waste disposal systems which are now
in operation or which are being constructed or designed are sufficient to comply
with all currently applicable laws and regulations.
48
<PAGE>
A facility owned by the Company in Brockport, New York, known as the Former
3M/Dynacolor Plant Site (DEC Site No. 828066) and used by prior owners as a
manufacturing facility, was in May 1995 classified as a hazardous waste site
presenting a significant threat to the environment. DEC is currently assessing
any impact on groundwater from soil contamination. Until the results of DEC's
assessment are available, it is not possible to determine what, if any, response
actions will be required at the facility.
The Company has been identified as a potentially responsible party ('PRP') under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, ('CERCLA') along with over 100 other entities, at the Ellis
Road Site in Jacksonville, Florida. To date, the Company has paid approximately
$45,000 toward the completion of various removal actions and soil clean up. EPA
is evaluating the need for groundwater remediation which, if required, the
Company does not believe will have a material impact on its earnings given its
relatively small contribution of material to the site and the availability of
other viable PRPs.
The Company has been identified by EPA as a PRP under CERCLA at the Spectron
Inc. Site located in Elkton, Maryland. The investigation of the site is still in
the preliminary stages, and it is not yet possible to estimate the scope or cost
of whatever remedial action may be required. However, based upon its very small
contribution of material to the site and the large number of other viable PRPs,
the Company does not believe this matter will have a material impact on its
earnings.
The Company is cooperating with environmental authorities in remedying various
leaks and spills at several of its plants, primarily associated with underground
storage tanks. Such actions are being conducted pursuant to procedures approved
by the appropriate environmental authorities at a cost that is not significant,
except for one project at the Company's Nalley's plant in Tacoma, Washington,
where the cost of remediation is expected to be approximately $1,250,000, which
amount has been properly accrued in the financial statements.
Expenditures related to environmental programs and facilities have not had, and
are not expected to have, a material effect on the earnings of the Company.
In fiscal 1995, total capital expenditures of Pro-Fac and the Company were $32.6
million (including $12.8 million relating to a fire claim reimbursed by
insurance proceeds), of which approximately $1.6 million was devoted to the
construction of environmental facilities. The Company estimates that the capital
expenditures for environmental control facilities, principally waste water
treatment facilities, for the 1996 fiscal year will be approximately $3.3
million. However, there can be no assurance that expenditures will not be
higher.
SEASONALITY OF BUSINESS
From the point of view of sales, the business of the Company is not highly
seasonal, since the demand for its products is fairly constant throughout the
year. Exceptions to this general rule include some products that have higher
sales volume in the cool weather months (such as canned fruits and vegetables,
chili, and fruit fillings and toppings), and others that have higher sales
volume in the warm weather months (such as potato chips, and condiments). Since
many of the raw materials processed by the Company are agricultural crops,
production of these products is predominantly seasonal, occurring during and
immediately following the harvest seasons of such crops.
PRACTICES CONCERNING WORKING CAPITAL
The Company must maintain substantial inventories throughout the year of
49
<PAGE>
those finished products produced from seasonal raw materials; these inventories
are generally financed through seasonal borrowings.
A short-term line of credit is extended to the Company under agreements with
CoBank, ACB. This line of credit is used primarily for seasonal borrowing, the
amount of which fluctuates during the year. The line of credit is subject to
annual renewal.
Both the maintenance of substantial inventories and the practice of seasonal
borrowing are common to the food processing industry.
SIGNIFICANT CUSTOMERS
The Company's one principal industry segment is not dependent upon the business
of a single customer or a few customers. The Company does not have any customers
to which sales are made in an amount which equals 10 percent or more of the
Company's net sales. The loss of even its biggest customer would not have a
materially adverse effect on the Company.
BACKLOG OF ORDERS
Backlog of orders has not historically been significant in the business of the
Company. Orders are filled shortly after receipt from inventories of packaged
and processed foods.
BUSINESS SUBJECT TO GOVERNMENTAL CONTRACTS
No material portion of the business of the Company is subject to renegotiation
of profits with, or termination by, any governmental agency.
COMPETITIVE CONDITIONS
All products of the Company, particularly branded products, compete with those
of national and major regional food processors under highly competitive
conditions. Many of the national manufacturers have substantially greater
resources than the Company. The principal methods of competition in the food
industry are ready availability of a broad line of products, product quality,
price, and advertising and sales promotion.
In recent years, and particularly when various food items are in short supply,
the constant availability of a full line of food items and the ability to
deliver the required items rapidly and economically have been among the most
important competitive factors in the markets in which the Company operates. The
Company believes that it is competitive with national brands in this area since
distribution of many of its regional brands and custom-pack food items are
limited to areas which can easily be served from its production and distribution
facilities. In this way, the problems inherent in attempting to supply markets
remote from its principal areas of operation are minimized, and the marketing
area is commensurate with the production and storage facilities.
The expansion of the operations of the Company over the years has also allowed
it to offer more complete and diverse lines of products. In the early years of
its existence, the Company marketed principally commodity canned vegetables. The
Company now also markets a broad range of snack foods, desserts, condiments and
other specialty food items, canned and other frozen entrees, salad dressings and
branded frozen vegetables. While all of these products are not offered in every
marketing area, in many areas the Company can offer a diverse line of products,
and the original commodity vegetable items now account for only 18.0 percent of
Company sales.
Quality of product and uniformity of quality are also important methods of
competition. The Company's relationship with Pro-Fac gives the Company local
sources of supply, thus allowing the Company to exercise control over the
quality and uniformity of much of the raw product which it purchases.
50
<PAGE>
The members of Pro-Fac generally operate relatively large production units with
emphasis on mechanical growing and harvesting techniques. This factor is also an
advantage in producing uniform, high-quality food products.
The Company's pricing is generally competitive with that of other food
processors for products of comparable quality. The branded products of the
Company are marketed under regional brands and its marketing programs are
focused on local tastes and preferences as a means of developing consumer brand
loyalty. The Company's advertising program utilizes local media, and strong
emphasis is placed on in-store promotions.
Although the relative importance of the above factors may vary as between
particular products or customers, the above description is generally applicable
to all of the products of the Company in the various markets in which they are
distributed.
Profit margins for canned and frozen fruits and vegetables are subject to
industry supply and demand fluctuations, attributable to changes in growing
conditions, acreage planted, inventory carryover, and other factors. The Company
has endeavored to protect against changing growing conditions through
geographical expansion of its sources of supply. The Company has also taken
steps to lessen the impact of such cycles on its earnings by diversifying into
food product lines which are not affected as severely by fluctuation in profit
margins. The Company has emphasized the merchandising of its own brands and
expanded service and product development for its high volume private label and
food service customers. The percentage of sales under brand names owned and
promoted by the Company (including franchise brands) increased from 35 percent
in fiscal 1972 to a current level of approximately 52.2 percent; sales to the
food service industry (restaurants and institutional customers), which were
insignificant in 1972, now represent approximately 23.5 percent; private label
sales, which were more than half the Company's sales in 1972, currently
represent approximately 20.6 percent; and sales to other manufacturers are
approximately 3.7 percent of total sales.
An estimate of the number of competitors in the markets served by the Company is
very difficult. Nearly all products sold by the Company compete with the
nationally advertised brands of the leading food processors, including Borden,
DelMonte, Green Giant, Heinz, Frito-Lay, Kraft, Vlasic, Birdseye, and similar
major brands, as well as with the branded and private label products of a number
of regional processors, many of which operate only in portions of the marketing
area served by the Company. While the major brands are dominant in branded
products on a national level, the Company believes that it is a significant
factor in many of the marketing areas served by one or more of its regional
brands.
NEW PRODUCTS AND RESEARCH AND DEVELOPMENT
The amount expensed during the last three fiscal years on Company-sponsored and
customer-sponsored research activities relating to the development of new
products or the improvement of existing products was not material, and the
number of employees engaged full-time in such research activities is also not
material. While several divisions of the Company operate test kitchens and pilot
plants for the development of new products, the emphasis generally has been on
the development of related products or modifications of existing products for
the Company's brands and customized products for the Company's private label and
food service businesses. No new products which required the investment of a
material amount of assets have been publicly announced.
EMPLOYEES
As of June 24, 1995, the Company had 3,802 full-time employees, of whom 2,720
were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately
51
<PAGE>
950 seasonal and other part-time employees, almost all of whom were engaged in
production. Most of the production employees are members of various labor
unions. The Company believes its relationship with its employees is good.
DESCRIPTION OF PROPERTIES
Historically, Pro-Fac has held title to, and leased to the Company, most of the
processing facilities, warehouses and other plants and equipment (including
equipment located in properties not owned by Pro-Fac) utilized in the Company's
business.
In connection with the Acquisition, Pro-Fac transferred to Curtice-Burns all of
the plants, other real property, and equipment previously owned by ProFac and
leased to Curtice-Burns. As a result, all plants, warehouses, office space and
other facilities used by Curtice-Burns in its business are now either owned by
Curtice-Burns or one of its subsidiaries or leased from third parties. Most of
the properties owned by Curtice-Burns are subject to mortgages in favor of the
Bank. In general, each division occupies a large facility in which its executive
offices, a processing plant and warehouse space are located. Some divisions have
additional processing plants located in rural areas that are convenient for the
delivery of crops from Pro-Fac members and/or additional warehouse locations
dispersed to facilitate the distribution of finished products. Curtice-Burns
believes that its facilities are in good condition and suitable for the
operations of the Company.
Eight of the properties are held for sale. These properties are located in
Denver, Colorado; Wall Lake, Iowa; Clifton, New Jersey; Alton, New York; South
Dayton, New York; Rushville, New York; Albany, Oregon; and Vancouver, British
Columbia, Canada.
In July 1994, a plant operated by Southern, located in Montezuma, Georgia, was
damaged by fire. All material costs associated with repairs to the facility have
been covered under the Company's insurance policies. Costs associated with
business interruption are currently under negotiation with the insurance
carriers.
The following table describes all facilities leased or owned by the Company
(other than the eight properties held for sale and certain public warehouses
leased by the Company from third parties from time to time). Except as otherwise
noted, each facility set forth below is owned by the Company.
FACILITIES UTILIZED BY THE COMPANY
<TABLE>
<CAPTION>
Type of Property Square
(By Division) Location Feet
- -------------------------------------------------- ------------------- --------------
<S> <C> <C>
COMSTOCK MICHIGAN FRUIT:
Office building, manufacturing plant and warehouse* Benton Harbor, MI 239,252
Distribution center Coloma, MI 400,000
Manufacturing plant and warehouse Fennville, MI 370,600
Warehouse Sodus, MI 243,138
Warehouse and office; public storage facility (1) Vineland, NJ 198,000
Warehouse Alton, NY 60,060
Freezing plant; warehouse; office and dry storage Barker, NY 150,100
Freezing plant Bergen, NY 122,009
Cold storage and repack facility and public storage warehouse Brockport, NY 429,052
Cutting, curing and packaging plant Gorham, NY 55,534
Canning plant and warehouse; freezing plant Leicester, NY 205,599
Distribution center and warehouse LeRoy, NY 137,300
Canning plant and warehouse; freezing plant Oakfield, NY 203,403
Canning plant and warehouse Red Creek, NY 137,264
Cutting, curing and canning plant Shortsville, NY 103,686
Cutting and curing plant Waterport, NY 21,626
Manufacturing plant Ridgway, IL 50,000
Distribution and warehouse North Bend, NE 50,000
</TABLE>
52
<PAGE>
FACILITIES UTILIZED BY THE COMPANY
(Continued)
<TABLE>
<CAPTION>
Type of Property Square
(By Division) Location Feet
- ------------------------------------------- -------------------- --------
<S> <C> <C>
NALLEY'S FINE FOODS:
Office building, warehouse and tank farm Enumclaw, WA 87,313
Office building, manufacturing plant and warehouse Tacoma, WA 438,000
Parking lot and yards (1) Tacoma, WA 162,570
Warehouses (1) Tacoma, WA 254,000
Receiving and grading station (1) Cornelius, OR 11,700
Receiving and grading station (1) Mount Vernon, WA 30,206
SOUTHERN FROZEN FOODS:
Office, freezing plant, cold storage and repackaging facility Montezuma, GA 563,442
Office, freezing plant and cold storage Alamo, TX 110,000
SNACK FOODS GROUP:
Office, plant and warehouse Berlin, PA 190,225
Administrative, plant, warehouse and distribution center (1) Auburn, WA 37,600
Office, plant and warehouse Cincinnati, OH 113,576
Distribution Center Elwood City, PA 8,000
Distribution Center Monessen, PA 10,000
BROOKS FOODS:
Office building, canning plant and warehouse Mt. Summit, IN 200,000
FINGER LAKES PACKAGING:
Can manufacturing plant Lyons, NY 147,376
CORPORATE HEADQUARTERS:
Headquarters office (1) (Includes office space for CMF
as well as Corporate Conference Center) Rochester, NY 62,500
</TABLE>
(1) Leased from third parties, although certain related equipment is owned by
the Company.
* Also includes can manufacturing equipment operated by Finger Lakes Packaging.
LEGAL PROCEEDINGS
There are no material pending legal proceedings other than routine litigation
incidental to the business to which either the Company or Pro-Fac is a party or
to which any of their property is subject. Further, no such proceedings are
known to be contemplated by governmental authorities.
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers of the Registrant and Subsidiary: Set forth
below is certain information concerning the individuals who serve as directors
and executive officers of Pro-Fac.
<TABLE>
<CAPTION>
Date
Name of Birth Positions
- ---------------------- --------- -------------------------------------------
<S> <C> <C>
Bruce R. Fox 1947 President and Director
Albert P. Fazio 1936 Vice President and Director
Steven D. Koinzan 1948 Treasurer and Director
Tommy R. Croner 1942 Secretary and Director
Stephen R. Wright 1947 General Manager
William D. Rice 1934 Assistant Treasurer
Thomas R. Kalchik 1947 Vice President Administration and Planning
Kevin M. Murphy 1953 Vice President of Member Relations
Dale W. Burmeister 1940 Director
Robert V. Call, Jr. 1926 Director
Glen Lee Chase 1937 Director
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Date
Name of Birth Positions
- --------------------- ---------- ------------------------------------
<S> <C> <C>
Kenneth A. Mattingly 1948 Director
Allan D. Mitchell 1927 Director
Allan W. Overhiser 1960 Director
Paul E. Roe 1939 Director
Edward L. Whitaker 1926 Director
</TABLE>
Bruce R. Fox has been a Director of Pro-Fac since 1974. For information
regarding Mr. Fox, see 'Management -- The Company -- Directors and Officers.'
Albert P. Fazio has been a Director of Pro-Fac since 1976. He was Vice President
of Pro-Fac between March 1993 and acted as President from January 28, 1995 to
March 27, 1995. He has been a member of Pro-Fac since 1975. He was Secretary of
Pro-Fac from 1991 to 1993. Mr. Fazio is a vegetable, grain and livestock farmer
(New Columbia Garden Co., Inc.; Vancouver, Washington). Mr. Fazio also operates
a sand and gravel business (Fazio Bros. Sand Co.; Vancouver, Washington).
Steven D. Koinzan has been a Director of Pro-Fac since 1983. For information
regarding Mr. Koinzan, see 'Management -- The Company -- Directors and
Officers.'
Tommy R. Croner has been a Director of Pro-Fac since 1985 and a member of
Pro-Fac since 1973. He was elected Secretary on March 27, 1995. Mr. Croner is a
dairy and potato farmer (T-Rich Inc.; Berlin, Pennsylvania).
William D. Rice has been Assistant Treasurer of Pro-Fac since 1970. For
information regarding Mr. Rice, see 'Management -- The Company -- Directors and
Officers.'
Stephen R. Wright has been General Manager of Pro-Fac since March 1995, having
previously served as Assistant General Manager since November 1994. For
information regarding Mr. Wright, see 'Management -- The Company -- Directors
and Officers.'
Thomas R. Kalchik has served as Vice President of Administration and Planning
since June 1995 and had been Vice President of Member Relations of Pro-Fac from
June 1990 to June 1995 and Assistant Secretary of Pro-Fac since 1983. Mr.
Kalchik was Director of Member Relations of Pro-Fac from August 1983 to June
1990.
Kevin M. Murphy has been Vice President of Member Relations of Pro-Fac since
June 1995. Mr. Murphy was Director of Pro-Fac Communications and Member
Relations from August 1990 to June 1995.
Dale W. Burmeister has been a Director of Pro-Fac since 1992 and a member of
Pro-Fac since 1974. Mr. Burmeister is a fruit and vegetable grower (Lakeshore
Farms, Inc.; Shelby, Michigan).
Robert V. Call, Jr. has been a Director of Pro-Fac since 1962. For information
regarding Mr. Call, see 'Management -- The Company -- Directors and Officers.'
Glen Lee Chase has been a Director of Pro-Fac since 1989 and a member of Pro-Fac
since 1984. Mr. Chase is a peanut, poultry, grain and vegetable farmer (Chase
Farms Inc.; Oglethorpe, Georgia).
Kenneth A. Mattingly has been a Director of Pro-Fac since 1993 and a member of
Pro-Fac since 1978. Mr. Mattingly is a vegetable and grain farmer (M-B Farms
Inc.; LeRoy, New York).
54
<PAGE>
Allan D. Mitchell has been a Director of Pro-Fac since 1975 and a member of
Pro-Fac since 1961. He was Secretary of Pro-Fac from 1985 to 1990. Mr. Mitchell
is a fruit grower (North Rose, New York).
Allan W. Overhiser has been a Director of Pro-Fac since March 1994 and a member
of Pro-Fac since 1984. Mr. Overhiser is a fruit farmer (A.W. Overhiser Orchards;
South Haven, Michigan).
Paul E. Roe has been a Director of Pro-Fac since 1986 and a member of Pro-Fac
since 1961. Mr. Roe is a vegetable, grain and dry bean farmer (Roe Acres, Inc.;
Bellona, New York).
Edward L. Whitaker has been a Director of Pro-Fac since 1992 and a member of
Pro-Fac since 1988. Mr. Whitaker is a farm land owner and a popcorn grower
(Forest City, Illinois).
Term of Office: Directors of Pro-Fac are elected for three-year terms. Officers
of Pro-Fac are elected for one-year terms.
MANAGEMENT AND DIRECTORS OF CURTICE BURNS
Effective upon consummation of the Acquisition, Pro-Fac established a management
structure for the Company, providing for a Board of Directors consisting of one
management director, Pro-Fac Directors and Disinterested Directors. The number
of Pro-Fac Directors is equal to the number of Disinterested Directors. The
Chairman of the Board is a Pro-Fac Director. The initial management and
directors are listed below. The Company may in the future expand the Board of
Directors, but Pro-Fac has undertaken to cause the Company to maintain a Board
on which the number of Pro-Fac Directors does not exceed the number of
Disinterested Directors. Both the New Credit Agreement and the Indenture provide
that there will be a Change of Control if, for a period of 120 consecutive days,
the number of Disinterested Directors on the Board of Directors of the Company
is less than the greater of (i) two and (ii) the number of directors of the
Company who are Pro-Fac Directors.
Set forth below is certain information concerning the individuals who serve as
directors and executive officers of the Company as well as other corporate
officers and the individuals who serve as presidents and chief executive
officers of certain of the Company's divisions.
<TABLE>
<CAPTION>
Year of
Name Birth Positions
- ----------------------- --------- --------------------------------------------------
<S> <C> <C>
Roy A. Myers(1) 1931 President and Chief Executive Officer and Director
William D. Rice 1934 Senior Vice President, Chief Financial Officer, Secretary
and Treasurer
Stephen R. Wright 1947 Senior Vice President -- Procurement
Patrick D. Lindenbach 1955 Executive Vice President of the Company and President
and Chief Executive Officer of Nalley's
Diana T. Bartalo 1946 Assistant Treasurer and Director of Financial Reporting
Robert E. McMahon 1941 Vice President Information Systems
Blaine B. Petersen 1928 Vice President Operations
Earl L. Powers 1944 Vice President and Controller
Beatrice B. Slizewski 1943 Vice President Corporate Communications
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Name Birth Positions
- ----------------------- -------- -----------------------------------------------
<S> <C> <C>
Lois J. Warlick-Jarvie 1958 Vice President Human Resources
Dennis M. Mullen 1953 President and Chief Executive Officer of CMF
Thomas A. Collins 1938 President and Chief Executive Officer of Southern
Eugene W. Hermenet 1936 President and Chief Executive Officer of Brooks
Ronald R. Fithen 1946 President and Chief Executive Officer of Finger Lakes
Robert V. Call, Jr.(2) 1926 Director and Chairman of the Board
Bruce R. Fox(2) 1947 Director
Cornelius D. Harrington, Jr.(3) 1927 Director
Steven D. Koinzan(2) 1948 Director
William B. McKnight, Jr.(3) 1945 Director
Frank M. Stotz(3) 1930 Director
</TABLE>
(1) Management Director.
(2) Pro-Fac Director.
(3) Disinterested Director.
Roy A. Myers has been the Chief Executive Officer and a Director of the Company
since the completion of the Acquisition. Mr. Myers served as a Director and
Executive Vice President of the Company from 1987 to the completion of the
Acquisition (at which time he was appointed the Chief Executive Officer). He
served as Vice President-Operations of the Company from 1985 to 1987 and as Vice
President of the Company from 1983 to 1985. He has been an employee of the
Company or a predecessor to the Company since 1955 in various other capacities
including Industrial Relations Manager, Operations Manager and President of the
Corporate Services Division. He was General Manager of Pro-Fac from 1987 until
the completion of the Acquisition, having served as Assistant General Manager
from 1983 to 1987.
William D. Rice has been Senior Vice President Finance and Administration of the
Company since 1991, Secretary of the Company since 1989 and Treasurer of the
Company since 1975. He was Vice President-Finance of the Company from 1969 to
1991. He has been Assistant Treasurer of Pro-Fac since 1970.
Stephen R. Wright has been Senior Vice President -- Procurement of the Company
since the completion of the Acquisition. He was Vice President -- Procurement
for the Company from 1990 to November, 1994, having served as Director of
Commodities and Administration Services for the Company from 1988 to 1990. He
became General Manager of Pro-Fac in March 1995.
Patrick D. Lindenbach has been an Executive Vice President of the Company since
March 1993 and Division President and Chief Executive Officer of Nalley's since
June 1990. He was Division President and Chief Executive Officer of Nalley's
Canada Ltd. from 1988 to 1990. Prior to working at the Company, he held various
positions at Kellogg Salada Canada Inc., Warner Lambert Canada, Inc. and
Standard Brands Canada Ltd.
Diana T. Bartalo has been Director of Financial Reporting since 1992; Assistant
Treasurer since 1988; Corporate Accounting Manager 1976-1992; and held several
administrative staff positions 1970-1976.
56
<PAGE>
Robert E. McMahon has been Vice President Information Systems since November
1993; prior to that he was Vice President, Information Systems for the Comstock
Michigan Fruit Division 1992-1993 and Director of Corporate Information Systems
since December 1991. He joined the Comstock Michigan Fruit Division as Systems
Integration Manager in 1989 and became Director of Information Systems for that
Division in 1990. Prior to employment with Curtice Burns, he held management,
executive and technical positions with such organizations as Abbott Labs, BASF,
IBM, MTech, and Price Waterhouse.
Blaine B. Petersen has been Vice President Operations since 1991; prior to that
he was Director of Operations since 1990. Before joining Curtice Burns, he was
Vice President Plant Operations, Grace Culinary Systems Division of W.R. Grace &
Co. 1988-1990, Vice President Operations, Fishery Products, Inc. 1983-1988.
Various executive management positions 1969-1983.
Earl L. Powers has been Vice President and Controller since March 1993, and Vice
President Finance and Management Information Systems, Comstock Michigan Fruit
Division of the Company 1991 to March 1993. Prior to joining the Company, he was
Controller of various Pillsbury Company divisions 1987-1990 and various other
executive management positions at the Pillsbury Company 1976-1987.
Beatrice B. Slizewski has been Vice President of Corporate Communications for
Curtice-Burns and Pro-Fac since March 1995. She joined the Company as Director
of Corporate Communications in 1991. Prior to joining Curtice Burns (1988-1991),
she worked as a marketing and public relations consultant for J.P. Associates, a
small business consulting agency in Rochester, New York. Previous food industry
experience includes 14 years with the R.T. French Company (1974 - 1988) -- eight
years in public relations and seven years in various accounting functions.
Lois J. Warlick-Jarvie has been Vice President Human Resources since January
1993; Corporate Director Human Resources July 1991 to January 1993; Manager
Compensation, Benefits and Risk Management January 1989 to July 1991; various
administrative staff positions within the Company 1982 to 1989.
Dennis M. Mullen has been President and Chief Executive Officer of CMF since
March 1993. He was Senior Vice President and Business Unit Manager Food Service
of CMF from 1991 to 1993, and Senior Vice President-Custom Pack Sales for
Nalley's from 1990 to 1991. Prior to employment with the Company, he was
President and Chief Executive Officer of Globe Products Company.
Thomas A. Collins has been President and Chief Executive Officer of Southern
since 1990. He was Executive Vice President of Southern from 1989 to 1990, Vice
President-Sales and Marketing of Southern from 1985 to 1989, Vice President,
Marketing for Retail and Foodservice of Southern from 1981 to 1985 and Vice
President, Foodservice Sales of Southern from 1975 to 1981.
Ronald R. Fithen has been President and Chief Executive Officer of Finger Lakes
since 1991. Prior to joining the Company in 1991, he was Plant Manager for
Continental Can's largest manufacturing operation in St. Louis.
Eugene W. Hermenet has been President and Chief Executive Officer of Brooks
since 1978. He was Executive Vice President of Brooks from 1975 to 1978. He was
President of Silver Floss from 1972 to 1975, Vice President of Silver Floss from
1971 to 1972 and Assistant to the President of Silver Floss from 1969 to 1971.
Robert V. Call, Jr. has been a Director of the Company since the completion of
the Acquisition. Mr. Call had been a Director of the Company since 1986 until
completion of the Acquisition (at which time he resigned and was reappointed).
He has been a Director of Pro-Fac since 1962. He was
57
<PAGE>
President of Pro-Fac from 1986 to March 27, 1995, having served as Treasurer
from 1973 to 1984. He has been a member of Pro-Fac since 1961. He is a
vegetable, fruit and grain farmer (My-T Acres, Inc., Batavia, NY).
Bruce R. Fox has been a Director of the Company since the completion of the
Acquisition. He has been a Director of Pro-Fac since 1974. He was Treasurer of
Pro-Fac from 1984 until March 27, 1995, when he was elected President. He has
been a member of Pro-Fac since 1974. Mr. Fox is a fruit and vegetable grower
(N.J. Fox & Sons, Inc., Shelby, MI).
Cornelius D. Harrington, prior to his retirement, was President of the Bank of
New England-West in Springfield, MA or a predecessor to the Bank of New
England-West from 1978 to December 1990. He was Chief Executive Officer of the
Bank of New England-West from 1984 to December 1990. Until 1987, he served as
Chairman of the Board of Directors of BayState Medical Center in Springfield,
MA. He has been a Director of the Farm Credit Bank of Springfield since January
1994.
Steven D. Koinzan has been a Director of the Company since the completion of the
Acquisition. He has been a Director of Pro-Fac since 1983. He was Secretary of
Pro-Fac from March 1993 until March 27, 1995, when he was elected Treasurer. He
has been a member of Pro-Fac since 1979. Mr. Koinzan is a popcorn, field corn
and soybean farmer (Koinzan Farms; Norden, Nebraska).
William B. McKnight, Jr. has been a Director of the Company since the completion
of the Acquisition. Mr. McKnight is President and Chief Executive Officer of
Wise Snack Foods. He was Executive Vice President of the Nabisco Foods Group of
RJR Nabisco, Inc. until 1993. He was President and Chief Executive Officer of
the Nabisco Foods Company from 1988 to 1992 and President of the Biscuit
Division of the Nabisco Foods Group from 1986 to 1988. Mr. McKnight was
President of the Grocery Division of the Nabisco Foods Group from 1984 to 1986,
President of the Grocery Products Division from 1982 to 1984 and Vice President,
Marketing of the Special Products Division from 1981 to 1982. From 1968 to 1981,
he held various management positions at General Mills, Inc. Mr. McKnight has
been a Director of VideOcart, Inc. since 1989 and a Director of Ghirardelli
Chocolate Company since 1991. He is a member of the Executive Committee of the
Kenyon College Fund and St. Clare's Riverside Hospital.
Frank M. Stotz has been a Director of the Company since the completion of the
Acquisition. Mr. Stotz retired in 1994 from his position as Senior Vice
President -- Finance of Bausch & Lomb Incorporated. Before joining Bausch & Lomb
in that capacity in 1991, Mr. Stotz was a partner with Price Waterhouse. He
joined Price Waterhouse in Chicago in 1954, was admitted to partnership in 1966
and retired from the firm in 1991 to join Bausch & Lomb. From 1980 to 1991, he
was partner in charge of the Rochester office of Price Waterhouse. Mr. Stotz
serves on the Boards of Trustees of St. John Fisher College, The Genesee
Hospital, The Rochester Center for Governmental Research and The Automobile Club
of Rochester. He is also a member of the Bishop's Council of the Catholic
Diocese of Rochester.
Term of Office: All directors of the Company will hold office from the date of
election until the next annual meeting of shareholders or until their successors
are duly elected and qualified. Each executive officer of the Company will hold
office from the date of election until his successor is elected or appointed.
There are no family relationships between any Director, executive officer, or
any person nominated or chosen by the Company to become a Director or executive
officer. Officers of the Company serve for a term of office from the date of
election to the next organization meeting of the Board of
58
<PAGE>
Directors and until their respective successors are elected and qualified,
except in the case of death, resignation, or removal.
EXECUTIVE COMPENSATION
The following table shows the cash compensation and certain other components of
the compensation of the chief executive officer and the four (4) other most
highly compensated Executive Officers of the Cooperative earned during fiscal
year ended June 24, 1995.
<TABLE>
<CAPTION>
Executive Compensation
Summary Compensation Table
Annual Long-Term
Compensation(1) Compensation Deferred
-------------------- Awards Profit
Name and Principal Position Year Salary Bonus(2) Options Sharing
- ----------------------------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
Roy A. Myers - 1995 $258,375 $200,539 $ 0 $10,609
President, CEO of
Curtice-Burns
William D. Rice - 1995 $159,081 $116,143 $ 0 $ 9,791
Senior Vice President, CFO,
Secretary and Treasurer of
Curtice-Burns
Patrick D. Lindenbach - 1995 $128,927 $ 71,504 $ 0 $ 8,134
Executive Vice President of
Curtice-Burns
Dennis M. Mullen - 1995 $112,772 $ 71,207 $ 0 $ 7,265
President, Comstock
Michigan Fruit Division
Stephen R. Wright 1995 $ 98,373 $ 51,628 $ 0 $ 4,520
General Manager and
CEO of Pro-Fac
Cooperative, Inc.
</TABLE>
(1) No named Executive Officer has received personal benefits during the listed
years in excess of the lesser of $50,000 or 10 percent of annual salary.
(2) Pursuant to the Management Incentive Plan of the Company (the 'Incentive
Plan'), additional compensation is paid if justified by the activities of
the officers and employees eligible under the Incentive Plan and by the
earnings of the Company and of Pro-Fac Cooperative, Inc. ('Pro-Fac').
Retirement Plans: The Company's Master Salaried Retirement Plan (the 'Pension
Plan') provides defined retirement benefits for its officers and all salaried
and clerical personnel. The compensation upon which the pension benefits are
determined is included in the salary column of the 'summary compensation table'.
For retirement before age 65, the annual benefits are reduced by an amount for
each year prior to age 65 at which such retirement occurs so that if retirement
occurs at age 55, the benefits are 70 percent of those payable at age 65.
The approximate number of years of Plan participation under the Company's
Pension Plan as of June 24, 1995, of the Executive Officers listed in the
compensation table are as follows: Patrick D. Lindenbach-6, Dennis M. Mullen-5,
Roy A. Myers-33, William D. Rice-23, and Stephen R. Wright-22.
On January 28, 1992, the Company adopted an Excess Benefit Retirement Plan which
serves to provide employees with the same retirement benefit they would have
received from the Company's Master Salaried Retirement Plan under the career
average base pay formula, but for changes required under the 1986 Tax Reform Act
and the compensation limitation under Section 401(a)(17) of the Internal Revenue
Code, which was $150,000 on January 1, 1994, having been revised in the 1992
Omnibus Budget Reform Act.
59
<PAGE>
The following table shows the estimated pension benefits payable to a covered
participant, at age 65, at the specified final average pay, and years of
credited service levels under the Company's Master Salaried Retirement Plan and
the Excess Benefit Retirement Plan.
<TABLE>
<CAPTION>
Pension Plan Table
Years of Plan Participation
Final -------------------------------------------------------------------------------------
Average Pay 15 20 25 30 35
- ----------- ------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$125,000 $22,586 $ 29,522 $ 36,435 $ 43,397 $ 50,540
150,000 27,836 36,522 45,185 53,897 62,790
175,000 33,086 43,522 53,935 64,397 75,040
200,000 38,336 50,522 62,685 74,897 87,290
225,000 43,586 57,522 71,435 85,397 99,540
250,000 48,836 64,522 80,185 95,897 111,790
275,000 54,086 71,522 88,935 106,397 124,040
300,000 59,336 78,522 97,685 116,897 136,290
325,000 64,586 85,522 106,435 127,397 148,540
350,000 69,836 92,522 115,185 137,897 160,790
375,000 75,086 99,522 123,935 148,397 173,040
400,000 80,336 106,522 132,685 158,897 185,290
The benefits listed on the Pension Plan Table are not subject to any deduction
for Social Security.
Change of Control Provisions of Severance and Other Benefit Plans: The Company
has adopted a Change of Control Severance Plan concerning certain key employees
and Executive Officers (the 'Plan'). The Plan provides salary and benefit
continuation to designated executives (including the named executives listed in
the compensation table) in the event their employment is terminated within a
specified period after a change of control of the Company, as such term is
defined in the Plan.
The Plan will remain in existence until November 3, 1996. The Plan provides for
salary and benefit continuation upon termination other than for cause within the
two-year period following a change of control as follows: one year of salary and
benefit continuation for Messrs. Myers and Rice; two years of salary and benefit
continuation for the other designated executives including Messrs. Lindenbach
and Mullen, or until the executive obtains other employment at an annual salary
not less than 75 percent of his annual salary at termination, whichever occurs
first.
The Profit Sharing Plan and the Incentive Plan also contain a change of control
provision pursuant to which, in the event of a change of control of the Company,
participants in such plan who are terminated within two years following a change
in control are entitled to an allocation of benefits under such plan for the
fiscal year of their termination on a pro rata basis for the part of the year
they were employed.
Directors Compensation: In fiscal 1995, directors of Pro-Fac received an annual
stipend of $6,000 per year, plus $200 per day for attending Board or Committee
meetings, except for the President, who received double those amounts.
In fiscal 1995, non-employee directors of Curtice-Burns who were designated by
Pro-Fac received an annual stipend of $6,000 per year, plus $200 per day for
attending Board or Committee meetings. In fiscal 1995, all other outside
directors, Messrs. Harrington, McKnight, and Stotz received $18,000 in addition
to $600 per day. The Chairman of the Board receives a fixed amount in lieu of
the standard attendance fees and annual stipend. The Company accrued an annual
stipend of $24,700 for Mr. Call as Chairman of the Board. Mr. Myers was not paid
directors' fees.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of August 21, 1995, with
respect to (i) each person known by Pro-Fac to own beneficially 5 percent or
more of any class of Pro-Fac's voting securities, (ii) each
60
<PAGE>
director and executive officer of Pro-Fac and (iii) all directors and executive
officers of Pro-Fac as a group.
</TABLE>
<TABLE>
<CAPTION>
Title Amount and Nature of Percent of
Name of Class Beneficial Ownership(A) Class(B)
- -------------------------------- -------- ------------------------ -----------
<S> <C> <C> <C>
Cherry Central Cooperative, Inc. Common 383,942 20.43%
P.O. Box 988 Preferred 41,638 1.37%
Traverse City, MI 49685
Michigan Blueberry Growers Assoc. Common 116,400 6.20%
P.O. Drawer B Preferred 93,200 3.06%
Grand Junction, MI 49056
Dale E. Burmeister Common 3,218(c) 0.17%
Preferred 703(c) 0.02%
8,490 0.28%
Robert V. Call, Jr. Common 39,116(d) 2.08%
Preferred 23,702(d) 0.78%
13,088(e) 0.43%
5,361(f) 0.18%
1,506 0.05%
Glen Lee Chase Common 9,472(g) 0.50%
Preferred 4,962(g) 0.16%
Tommy R. Croner Common 7,026(h) 0.37%
Preferred 10,076(i) 0.33%
Albert P. Fazio Common 8,000(j) 0.43%
Preferred 8,430(j) 0.28%
Bruce R. Fox Common 20,597(k) 1.10%
Preferred 8,572(k) 0.28%
3,902(l) 0.13%
1,589 0.05%
Thomas R. Kalchik Preferred 328(n) 0.01%
Steven D. Koinzan Common 7,140 0.38%
Preferred 1,924 0.06%
Kenneth A. Mattingly Common 5,150(m) 0.27%
Preferred 3,147(m) 0.10%
Allan D. Mitchell Common 78 0.00%
Preferred 1,674(n) 0.06%
5,006 0.16%
Kevin M. Murphy Preferred 300 0.01%
Allan W. Overhiser Common 1,379(o) 0.07%
Preferred 1,512(o) 0.05%
Paul E. Roe Common 12,851(p) 0.68%
Preferred 3,160(p) 0.10%
Edward L. Whitaker Common 240 0.01%
Preferred 117 0.00%
Stephen R. Wright Preferred 840 0.03%
All directors and officers
as a group Common 114,267 6.08%
Preferred 108,389 3.56%
</TABLE>
61
<PAGE>
(a) Certain of the directors named above may have the opportunity, along with
the other members producing a specific crop, to acquire beneficial
ownership of additional shares of the common stock of Pro-Fac within a
period of approximately 60 days commencing February 1, 1995 if Pro-Fac
determines that a permanent change is required in the total quantity of
that particular crop.
(b) In the above table, each director who has direct beneficial ownership of
common or preferred shares by reason of being the record owner of such
shares has sole voting and investment power with respect to such shares,
while each director who has direct beneficial ownership of common or
preferred shares as a result of owning such shares as a joint tenant has
shared voting and investment power regarding such shares. Each director who
has indirect beneficial ownership of common or preferred shares resulting
from his status as a shareholder or a partner of a corporation or
partnership which is the record owner of such shares has sole voting and
investment power if he controls such cor- poration or partnership. If he
does not control such corporation or partnership, he has shared voting and
investment power. Pro-Fac does not believe that the percentage ownership of
any such corporation or partnership by a director is material, since in the
aggregate no director beneficially owns in excess of 5 percent of either
the common or preferred shares of Pro-Fac.
(c) Record ownership by Lakeshore Farms, Inc.
(d) Record ownership by My-T Acres, Inc.
(e) Record ownership by My-T Acres, Inc. Employee Profit-Sharing Plan
(f) Record ownership by Call Farms, Inc.
(g) Record ownership by Chase Farms, Inc.
(h) Record ownership by Richard Croner & Son
(i) Record ownership by T-Rich, Inc.
(j) Record ownership by New Columbia Garden Co., Inc.
(k) Record ownership by N.J. Fox & Sons, Inc.
(l) Record ownership by K. Fox
(m) Record ownership by M-B Farms, Inc.
(n) Record ownership jointly with spouse
(o) Record ownership by A.W. Overhiser Orchards
(p) Record ownership by Roe Acres, Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Equity Ownership in CoBank: As part of its historical lending arrangements with
the Bank, which is a cooperative, Pro-Fac made investments in the Bank. Pro-Fac
made these investments through (i) a capital purchase obligation equal to a
percentage, set annually based on the Bank's capital needs, of its interest paid
to the Bank and (ii) a patronage rebate on interest paid by Pro-Fac to the Bank
based on the Bank's earnings, which is paid in cash and capital certificates.
The investments in the Bank are capital certificates that are redeemed by the
Bank, currently beginning six years after issuance in four quarterly
installments. As of June 24, 1995, the amount of Pro-Fac's investment in the
Bank was approximately $22.9 million. Pursuant to its capital purchase
obligation, Pro-Fac increased its investment in the Bank by $1.3 million and
$2.6 million in fiscal 1995 and 1994, respectively. Amounts paid to Pro-Fac on
account of dividends and the redemption of capital certificates in connection
with such investment were $2.3 million and $3.1 million in fiscal 1995 and 1994,
respectively. In connection with the Transactions, Pro-Fac contributed its
investment in the Bank to the capital of the Company.
Purchase of Crops by Pro-Fac: Each of the members of Pro-Fac sells crops to
Pro-Fac pursuant to a general marketing agreement between such member and
62
<PAGE>
Pro-Fac, which crops in turn are sold to the Company pursuant to the Pro-Fac
Marketing and Facilitation Agreement. Prior to the Acquisition, these crops were
sold to the Company pursuant to the Integrated Agreement. During fiscal 1995,
the following directors and executive officers of Pro-Fac directly or through
sole proprietorships or corporations, sold crops to Pro-Fac and provided
harvesting, trucking and waste removal services to Curtice Burns for the
following aggregate amounts:
<TABLE>
<CAPTION>
Relationship Aggregate Amount Paid
Name To Pro-Fac In Fiscal 1995
- ----------------------------------------------- ------------------------- ---------------------
(Dollars in Millions)
<S> <C> <C>
Dale E. Burmeister................................ Director $ 0.1
Robert V. Call, Jr................................ Director 2.1
Glen Lee Chase.................................... Director 0.1
Tommy R. Croner................................... Director and Secretary 0.3
Albert P. Fazio................................... Director and Vice President 0.2
Bruce R. Fox...................................... Director and President 1.1
Steven D. Koinzan................................. Director and Treasurer 0.2
Kenneth A. Mattingly.............................. Director 0.7
Paul E. Roe....................................... Director 0.5
Allan D. Mitchell................................. Director 0.2
</TABLE>
Stock Option Payments to Management: In conjunction with the acquisition of the
Company, $1.7 million representing the aggregate payments that were made in
connection with the cancellation of certain outstanding options to purchase
shares of Curtice Burns stock which were exercisable at a price less than $19.00
per share.
Of the total stock option payments made in conjunction with the acquisition,
following were the payments to those listed in the summary compensation table:
<TABLE>
<CAPTION>
Name Amount
------------------------ ---------
<S> <C>
Roy A. Myers $148,348
William D. Rice $154,231
Patrick D. Lindenbach $ 85,545
Dennis M. Mullen $ 17,850
Stephen R. Wright $ 27,746
</TABLE>
Sale of Nalley's Canada Ltd: Subsequent to the end of the fiscal year, the
Company sold its Nalley's Canada Ltd. subsidiary to a group of investors led by
Mr. Patrick Lindenbach, who is Chief Executive Officer for the Company's
Nalley's Fine Foods Division. The sale price was approximately $8 million,
one-half in cash and one-half in notes. The effect on ongoing earnings is
negligible and appropriate incentives, reporting relationships, and management
reports have been instituted to avoid any problems or appearance of problems
with conflict of interest.
Directors and Officers Liability Insurance: As authorized by New York law and in
accordance with the policy of that state, the Company has obtained insurance
from Chubb Group Insurance insuring the Company against any obligation it incurs
as a result of its indemnification of its officers and directors, and insuring
such officers and directors for liability against which they may not be
indemnified by the Cooperative. This insurance has a term expiring on August 15,
1996, at an annual cost of approximately $85,000. As of this date, no sums have
been paid to any officers or directors of the Cooperative under this
indemnification insurance contract.
63
<PAGE>
LEGAL OPINION
The validity of the securities offered hereby has been passed upon for Pro-Fac
by Harris Beach & Wilcox, LLP, 130 East Main Street, Rochester, New York 14604.
EXPERTS
The consolidated financial statements and financial statement schedule of
Pro-Fac Cooperative, Inc. at June 24, 1995 and June 25, 1994 and for each of the
three years in the period ended June 24, 1995, included in the Prospectus, have
been so included in reliance on the reports of Price Waterhouse LLP, independent
accountants given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements and financial statement schedule of
Curtice-Burns Foods, Inc. at June 24, 1995 and June 25, 1994, and for the
periods from June 26, 1994 to November 3, 1994, the period from November 4, 1994
to June 27, 1995, and for each of the two years in the period ended June 25,
1994 included in the Prospectus, have been so included in reliance on the
reports of Price Waterhouse, LLP, independent accounts.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM Page
- ----------------- ----
<S> <C>
Curtice-Burns Foods, Inc. and Consolidated Subsidiaries:
Reports of Independent Accountants............................................................... F-2
Consolidated Financial Statements for the years ended
June 24, 1995, June 25, 1994, and June 26, 1993:
Consolidated Statement of Operations and
Retained Earnings.......................................................................... F-4
Consolidated Balance Sheet.................................................................... F-5
Consolidated Statement of Cash Flows.......................................................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
Pro-Fac Cooperative, Inc.:
Report of Independent Accountants................................................................ F-21
Consolidated Financial Statements for the years ended
June 24, 1995, June 25, 1994, and June 26, 1993:
Consolidated Statement of Operations and Net Proceeds......................................... F-22
Consolidated Balance Sheet.................................................................... F-23
Consolidated Statement of Cash Flows.......................................................... F-24
Consolidated Statement of Changes in Shareholders' and
Members' Capitalization and Common Stock................................................... F-26
Notes to Consolidated Financial Statements.................................................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
August 16, 1995
To the Shareholder and
Board of Directors of
Curtice-Burns Foods, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations and retained earnings and of cash flows listed under
Item 8 of this Form 10-K present fairly, in all material respects, the financial
position of Curtice-Burns Foods, Inc. and its subsidiaries ('Successor Company')
at June 24, 1995, and the results of their operations and their cash flows for
the period November 4, 1994 to June 24, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Successor Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Notes 2 and 3 to the financial statements, as of November 3,
1994, the Successor Company became a wholly owned subsidiary of Pro-Fac
Cooperative, Inc. In conjunction with this change in ownership, identifiable
assets and liabilities were adjusted to reflect their fair values at the date of
acquisition.
Our audits of the consolidated financial statements also included an audit of
the financial statement schedule listed in the accompanying index and appearing
under Item 14 of the Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein for the period November 4, 1994 to June 24, 1995 when read in
conjunction with the consolidated financial statements.
/s/Price Waterhouse, LLP
- -------------------------
Price Waterhouse, LLP
Rochester, New York
August 16, 1995
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
August 16, 1995
To the Shareholder and
Board of Directors of
Curtice-Burns Foods, Inc.
In our opinion, the consolidated balance sheet and related consolidated
statements of operations and retained earnings and of cash flows listed under
Item 8 of this Form 10-K present fairly, in all material respects, the financial
position of Curtice-Burns Foods, Inc. and its subsidiaries ('Predecessor
Company') at June 25, 1994 and the results of their operations and their cash
flows for the period from June 26, 1994 to November 3, 1994 and for each of the
two fiscal years in the period ended June 25, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Predecessor Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Our audits of the consolidated financial statements also included an audit of
the financial statement schedule listed in the accompanying index and appearing
under Item 14 of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein for the period from June 26, 1994 to November 3, 1994 and for each of
the two fiscal years in the period ended June 25, 1994 when read in conjunction
with the related consolidated financial statements.
/s/Price Waterhouse, LLP
- -------------------------
Price Waterhouse, LLP
Rochester, New York
August 16, 1995
F-3
<PAGE>
FINANCIAL STATEMENTS
The Company is a wholly-owned subsidiary of Pro-Fac. The financial statements
contained herein present the results of the Company during the period prior to
its acquisition by Pro-Fac (the 'Predecessor entity') as well as the period
subsequent to its November 3, 1994 acquisition (the 'Successor entity'). The
financial statements of the Predecessor entity and Successor entity are not
comparable in certain respects because of differences between the cost bases of
the assets held by the Predecessor entity compared to that of the Successor
entity as well as the effect on the Successor entity's operations for
adjustments to depreciation, amortization, and interest expense.
Curtice-Burns Foods, Inc.
Consolidated Statement of Operations and Retained Earnings
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal 1995
----------------------
11/4/94 - 6/26/94 -
6/24/95 11/3/94 Fiscal 1994 Fiscal 1993
Successor Predecessor Predecessor Predecessor
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 471,904 $276,621 $ 829,116 $ 878,627
Cost of sales 334,329 195,810 592,621 632,663
--------- -------- --------- ---------
Gross profit 137,575 80,811 236,495 245,964
Restructuring expenses, including net
(loss)/gain from division disposals -- (8,415) 7,768 (61,037)
Change in control expenses -- (2,150) (3,500) --
Gain on assets net of additional costs
incurred as a result of the fire (2,315) 6,469 -- --
Other selling, administrative, and
general expenses (99,361) (60,576) (186,934) (207,119)
--------- -------- --------- ---------
Operating income/(loss) before dividing
with Pro-Fac 35,899 16,139 53,829 (22,192)
Interest expense (24,790) (7,624) (18,205) (19,550)
--------- -------- --------- ---------
Pretax earnings/(loss) before dividing
with Pro-Fac 11,109 8,515 35,624 (41,742)
Pro-Fac share of (earnings)/loss (5,554) (4,062) (16,849) 21,800
--------- -------- --------- ---------
Income/(loss) before taxes 5,555 4,453 18,775 (19,942)
Provision for taxes (3,291) (2,735) (8,665) (3,895)
--------- -------- --------- ---------
Net income/(loss) 2,264 1,718 10,110 (23,837)
Retained earnings at beginning of period -- 58,121 53,541 82,882
Less cash dividends declared (2,264) (1,390) (5,530) (5,504)
--------- -------- --------- ---------
Retained earnings at end of period $ -- $ 58,449 $ 58,121 $ 53,541
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Curtice-Burns Foods, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(Dollars in Thousands) Successor Predecessor
6/24/95 6/25/94
--------- -----------
<S> <C> <C>
Assets
Current assets:
Cash $ 4,158 $ 2,928
Accounts receivable trade, less allowances for bad
debts of $673 and $1,066, respectively 47,341 57,640
Accounts receivable, other 19,812 8,460
Income taxes refundable 1,043 237
Current deferred tax asset 6,784 10,487
Inventories -
Finished goods 108,691 108,538
Raw materials and supplies 51,491 46,721
-------- --------
Total inventories 160,182 155,259
-------- --------
Receivable from Pro-Fac 1,001 --
Prepaid manufacturing expense 9,903 8,190
Prepaid expenses and other current assets 2,306 4,305
-------- --------
Total current assets 252,530 247,506
Investment in Bank 22,907 --
Property, plant, and equipment, net 272,192 167,516
Goodwill and other intangibles, less accumulated
amortization of $2,539 and $10,335, respectively 101,494 24,909
Assets held for sale 13,863 --
Other assets 9,298 7,007
-------- --------
Total Assets $672,284 $446,938
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 60,112 $ 62,335
Due to Pro-Fac -- 9,447
Accrued interest 9,171 93
Accrued employee compensation 11,644 11,482
Other accrued expenses 15,116 26,854
Current portion of obligations under capital leases 764 18,430
Current portion of long-term debt 11,552 14,816
-------- --------
Total current liabilities 108,359 143,457
Long-term debt 183,665 79,061
Senior subordinated notes 160,000 --
Obligations under capital leases 1,620 124,973
Deferred income tax liabilities 59,721 14,958
Other non-current liabilities 17,836 3,591
-------- --------
Total liabilities 531,201 366,040
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Class A common - $.99 par value; -0- and
10,125,000 shares authorized; -0- and
6,628,430 outstanding, respectively -- 6,562
Class B common - $.99 par value; -0- and
4,050,000 shares authorized; -0- and
2,056,876 outstanding, respectively -- 2,036
Common stock, par value $.01; 10,000 shares
outstanding, owned by Pro-Fac -- --
Additional paid-in capital: 6/24/95 6/25/94
Shareholder paid-in capital 151,083 14,224 -- --
Less capital contribution receivable (10,000) -- -- --
-------- --------
141,083 14,224 141,083 14,224
======== ========
Retained earnings -- 58,121
Minimum pension liability -- (45)
-------- --------
Total shareholders' equity 141,083 80,898
-------- --------
Total liabilities and shareholders' equity $672,284 $446,938
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Curtice-Burns Foods, Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal 1995
----------------------
11/4/94 - 6/26/94 -
6/24/95 11/3/94 Fiscal 1994 Fiscal 1993
Successor Predecessor Predecessor Predecessor
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income/(loss) $ 2,264 $ 1,718 $ 10,110 $(23,837)
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities -
Restructuring:
Net loss/(gain) from division disposals -- 5,567 (7,768) 61,037
Including net operating losses subsequent to decision to dispose -- 2,848 -- --
Gain on assets resulting from fire claim -- (6,469) -- --
Amortization of goodwill, other intangibles, and financing fees 3,218 753 1,685 2,538
Depreciation 13,864 6,228 22,322 25,432
Provision for deferred taxes 4,205 (4,705) 2,670 (10,642)
Provision for losses on accounts receivable 91 292 709 346
Equity in undistributed earnings of Bank (1,288) -- -- --
Change in assets and liabilities:
Accounts receivable 11,540 (12,722) 5,704 (8,043)
Inventories 67,022 (70,961) 250 4,738
Income taxes refundable/payable (1,043) 1,491 (9,283) 11,617
Deferred taxes 517 3,481 -- --
Accounts payable and accrued expenses (13,140) (5,662) (7,313) 2,497
Receivable from/payable to Pro-Fac (20,098) 9,650 834 (1,654)
Other assets and liabilities 15,012 8,733 2,055 (3,345)
--------- -------- -------- --------
Net cash provided by/(used in) operating activities 82,164 (59,758) 21,975 60,684
--------- -------- -------- --------
Cash Flows From Investing Activities:
Goodwill and other intangible assets -- -- (1,637) (26,898)
Purchase of property, plant, and equipment (26,891) (5,689) (9,543) (8,360)
Proceeds from disposals -- -- 45,068 8,834
--------- -------- -------- --------
Net cash (used in)/provided by investing activities (26,891) (5,689) 33,888 (26,424)
--------- -------- -------- --------
Cash Flows From Financing Activities:
Receivable from/payable to Pro-Fac (42,000) 42,000 (500) (16,000)
Proceeds from issuance of short-term debt -- 30,000 -- --
Proceeds from issuance of long-term debt 359,000 10,886 40,378 33,348
Payments on short term debt (30,000) -- -- --
Payments on long-term debt including acquisition-related financing fees (178,015) (350) (50,194) (16,644)
Payments on capital leases (1,259) (11,344) (44,293) (29,570)
Stock activity relating to Predecessor's equity -- 52 688 500
Amounts paid to shareholders for acquisition (167,800) -- -- --
Capital contribution by Pro-Fac 3,888 -- -- --
Cash dividends paid (2,264) (1,390) (5,530) (5,504)
--------- -------- -------- --------
Net cash (used in)/provided by financing activities (58,450) 69,854 (59,451) (33,870)
--------- -------- -------- --------
Net change in cash (3,177) 4,407 (3,588) 390
Cash at beginning of period 7,335 2,928 6,516 6,126
--------- -------- -------- --------
Cash at end of period $ 4,158 $ 7,335 $ 2,928 $ 6,516
========= ======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for -
Interest (net of amount capitalized) $ 17,531 $ 6,967 $ 18,623 $ 19,757
========= ======== ======== ========
Income taxes, net $ 5,567 $ 1,417 $ 15,077 $ 1,909
========= ======== ======== ========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
In conjunction with the purchase of Curtice-Burns by Pro-Fac during fiscal
1995, the following non-cash transactions occurred:
Transfer of Investment in CoBank from Pro-Fac $ 21,619 $ -- $ -- $ --
Debt forgiven by Pro-Fac 110,576 -- -- --
Other assets contributed by Pro-Fac 5,000 -- -- --
--------- -------- -------- --------
$ 137,195 $ -- $ -- $ --
========= ======== ======== ========
Capital lease obligations incurred $ 1,562 $ -- $ 10,723 $ 16,065
========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CURTICE-BURNS FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The following
summarizes the significant accounting policies applied in the preparation of the
accompanying financial statements. On November 3, 1994, Curtice-Burns was
acquired by Pro-Fac Cooperative, Inc. ('Pro-Fac') at which time the Company
became a wholly-owned subsidiary of Pro-Fac. The accounting policies apply to
both the Predecessor entity and Successor entity companies unless otherwise
noted.
Fiscal Year: The financial statements of the Predecessor entity include the
period from June 26, 1994 through November 3, 1994, the acquisition date. The
financial statements of the Successor entity include the period from November 3,
1994 through June 24, 1995, the fiscal year end (see NOTE 3). The fiscal year of
the Successor entity corresponds with that of its parent, Pro-Fac, and ends on
the last Saturday in June.
Consolidation: The consolidated financial statements include the Company and its
wholly-owned subsidiaries after elimination of intercompany transactions and
balances.
Reclassification: Certain items for fiscal 1994 and 1993 have been reclassified
to conform with fiscal 1995 presentations.
Inventories: Inventories are stated at the lower of cost or market on the
first-in, first-out ('FIFO') method. Inventory reserves are recorded to reflect
the difference between FIFO cost and the market applicable to canned and frozen
fruit and vegetable inventories. These reserves amounted to $.1 million, $.4
million, $1.2 million for fiscal 1995, 1994, and 1993, respectively.
Investment in CoBank ('The Bank'): The Company's investment in the Bank is
required as a condition of borrowing. These securities are not physically issued
by the Bank, but the Company is notified as to their monetary value. The
investment is carried at cost plus the Company's share of the undistributed
earnings of the Bank (that portion of patronage refunds not distributed
currently in cash) which approximates market. The investment was contributed to
the Company by Pro-Fac in conjunction with the acquisition.
Manufacturing Overhead: Allocation of manufacturing overhead to finished goods
produced is on the basis of a production year; thus at the end of each fiscal
year, manufacturing costs incurred by seasonal plants, subsequent to the
previous pack, are deferred and included in the accompanying balance sheet under
the caption 'Prepaid manufacturing expense.'
Property, Plant, and Equipment and Related Lease Arrangements: Property, plant,
and equipment are depreciated over the estimated useful lives of the assets
using the straight-line method, half-year convention, over 4 to 40 years.
Assets held for sale are separately classified on the balance sheet. The
recorded value represents an estimate of net realizable value.
Lease arrangements are capitalized when such leases convey substantially all of
the risks and benefits incidental to ownership. Capital leases are amortized
over either the lease term or the life of the related assets, depending upon
available purchase options and lease renewal features.
F-7
<PAGE>
Income Taxes: Income taxes are provided on income for financial reporting
purposes. Deferred income taxes resulting from temporary differences between
financial reporting and tax reporting are appropriately classified in the
balance sheet and properly reflect the effects of the acquisition in accordance
with the Statement of Financial Accounting Standards ('SFAS') No. 109,
'Accounting for Income Taxes.' See NOTE 7 - 'Taxes on Income.'
Pension: The Company and its subsidiaries have several pension plans and
participate in various union pension plans which on a combined basis cover
substantially all employees. Charges to income with respect to plans sponsored
by the Company and its subsidiaries are based upon actuarially determined costs.
Pension liabilities are funded by periodic payments to the various pension plan
trusts.
Employers' Accounting for Postemployment Benefits: On June 26, 1994, the Company
adopted the SFAS No. 112, 'Employers' Accounting for Postemployment Benefits,'
with no significant impact. This statement establishes accounting standards for
employers who provide benefits to former or inactive employees after employment
but before retirement. Postemployment benefits are all types of benefits
provided to former or inactive employees, their beneficiaries, and covered
dependents.
Goodwill and Other Intangibles: Goodwill and other intangible assets include the
cost in excess of the fair value of net tangible assets acquired in purchase
transactions and acquired non-competition agreements and trademarks. Goodwill
and other intangible assets, stated net of accumulated amortization, are
amortized on a straight-line basis over 5 to 35 years. The Company periodically
assesses whether there has been a permanent impairment in the value of goodwill.
This is accomplished by determining whether the estimated, undiscounted future
cash flows from operating activities exceed the carrying value of goodwill as of
the assessment date. Should aggregate future cash flows be less than the
carrying value, a writedown would be required, measured by the difference
between the discounted future cash flows and the carrying value of goodwill.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of' (SFAS No. 121). SFAS No. 121 establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. Management believes
current policies in effect, such as that pertaining to goodwill and intangibles
(as stated previously in this NOTE 1), satisfy the requirements of SFAS No. 121,
and no further action on the part of the Company will be required for
compliance.
Commodities Options Contracts: In connection with the purchase of certain
commodities for anticipated manufacturing requirements, the Company occasionally
enters into options contracts as deemed appropriate to reduce the effect of
price fluctuations. These options contracts are accounted for as hedges and,
accordingly, gains and losses are deferred and recognized in cost of sales as
part of the product cost.
Casualty Insurance: The Company is insured for workers compensation and
automobile liability through a self-insurance program. The Company accrues for
the estimated losses from both asserted and unasserted claims. The estimate of
the liability for unasserted claims arising from unreported incidents is based
on an analysis of historical claims data.
Earnings Per Share Data Omitted: Earnings per share amounts are not presented,
as subsequent to November 3, 1994, the Company is a wholly-owned subsidiary of
Pro-Fac.
F-8
<PAGE>
Environmental Expenditures: Environmental expenditures that pertain to current
operations are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations that do not contribute to current
or future revenues are expensed. Liabilities are recorded when remedial
activities are probable, and the cost can be reasonably estimated.
Advertising: Production costs of commercials and programming are charged to
operations in the year first aired. The costs of other advertising promotion and
marketing programs are charged in the year incurred. Advertising expense
incurred in fiscal year 1995, 1994, and 1993 amounted to $13,150,000,
$13,318,000, and $16,499,000, respectively.
NOTE 2. AGREEMENTS WITH PRO-FAC
On November 3, 1994, Curtice-Burns was acquired by Pro-Fac. See NOTE 3 - 'Change
in Control of the Company.' Pro-Fac and the Company were established together in
the early 1960s and, before Pro-Fac's recent acquisition of the Company, had a
long-standing contractual relationship under the Integrated Agreement and
similar Predecessor entity agreements. The Integrated Agreement, which has been
superseded by the Pro-Fac Marketing and Facilitation Agreement, consisted of
four principal sections: Operations Financing, Marketing, Facilities Financing,
and Management.
The provisions of the Integrated Agreement included the financing of certain
assets utilized in the business of the Company and provided a sharing of income
and losses between Curtice-Burns and Pro-Fac. Under the Pro-Fac Marketing and
Facilitation Agreement, Pro-Fac and the Company will continue the Marketing and
Management arrangements of the Integrated Agreement as well as the sharing of
income and losses. The capital contribution of Pro-Fac to the Company at
acquisition primarily included the cancellation of indebtedness and capital
lease obligations.
Subsequent to the acquisition date, Pro-Fac invested an additional $3.9 million
and committed to another $10.0 million investment which is reflected as a
capital contribution on the balance sheet.
Funds made available by the distribution of investment certificates to members,
in lieu of cash by Pro-Fac, have historically been reinvested by Pro-Fac in the
Company. Under the Indentures related to the Notes, Pro-Fac will be required to
reinvest at least 70 percent of the additional Patronage income in
Curtice-Burns.
Amounts received by Pro-Fac from Curtice-Burns under both Agreements for the
fiscal years ended June 24, 1995, June 25, 1994, and June 26, 1993 include:
commercial market value of crops delivered, $55.9 million, $59.2 million and
$59.8 million, respectively; interest income, $6.1 million, $15.6 million, and
$17.1 million, respectively; and additional proceeds from profit/(loss) sharing
provisions, $9.6 million, $16.8 million and $(21.8) million, respectively.
Payments by the Company to Pro-Fac for interest, amortization, and lease
financing payments ceased as of November 3, 1994.
NOTE 3. CHANGE IN CONTROL OF THE COMPANY
In 1993, the Company's management and Board of Directors began exploring several
strategic alternatives for the Company, including a possible sale of all the
equity of the Company. Those activities ultimately resulted in the Company
entering into an Agreement and Plan of Merger with Pro-Fac and its subsidiary
PFAC on September 27, 1994 (the 'Merger Agreement'). Pursuant to the Merger
Agreement, on October 4, 1994, Pro-Fac initiated a tender offer for all of the
Company's outstanding stock at $19.00 per share. At the expiration of the tender
offer on November 2, 1994, 6,229,442 shares
F-9
<PAGE>
of Class A and 2,046,997 shares of Class B common stock (or approximately 94
percent and 99 percent, respectively, of the total number of outstanding shares
of Class A and Class B common stock of the Company) had been validly tendered
and not withdrawn. All such tendered shares were accepted for payment by PFAC.
On November 3, 1994, PFAC merged into the Company, making the Company a
wholly-owned subsidiary of Pro-Fac.
Prior to November 3, 1994, the Company expensed $2.2 million of legal,
accounting, investment banking, and other expenses relative to the change of
control issue. In recognizing these expenses, the Company allocated half of
these amounts to Pro-Fac as a deduction to the profit split. Pro-Fac disputed
these charges, but such dispute was resolved with the merger.
The acquisition was accounted for using the purchase method of accounting. In
conjunction with the change in ownership all other identifiable assets and
liabilities were adjusted to reflect their fair values at the date of
acquisition. In recording the transaction, approximately $121.5 million was
recorded to adjust property, plant, and equipment to fair market value, and the
asset lives were adjusted for assets acquired. The resulting annual depreciation
will approximate $23.3 million on all existing assets at the appraised values.
In addition, approximately $104.0 million of goodwill and other intangible
assets were recorded as the excess of purchase cost over net assets acquired.
Included in this amount was approximately $43.8 million for deferred tax
adjustments to properly reflect the effects of the acquisition in accordance
with the SFAS No. 109, 'Accounting for Income Taxes.' The resulting annual
amortization of goodwill and other intangible assets will approximate $3.0
million for goodwill and other intangible assets using lives ranging from 5 to
35-years.
There were no other significant changes to accounting policies as a result of
the acquisition.
In connection with the acquisition, PFAC sold $160.0 million of 12.25 percent
Senior Subordinated Notes (the 'Notes') due 2005 and entered into a credit
agreement (the 'New Credit Agreement') with the Bank, which provided for a term
loan, a term-loan facility, a seasonal-loan facility, and a letter-of-credit
facility. All obligations of PFAC under the Notes and the New Credit Agreement
have become obligations of the Company.
Following, in capsule form, is the consolidated, unaudited results of operations
of Curtice-Burns Foods for the fiscal years ended June 24, 1995 and June 25,
1994, assuming the acquisition by Pro-Fac took place at the beginning of the
1994 fiscal year. The column headed 'Actual' for June 24, 1995 is the total of
Successor and Predecessor entities.
<TABLE>
<CAPTION>
(In Millions)
Fiscal Year Ended
(Pro Forma is Unaudited)
June 24, 1995 June 25, 1994
---------------------- -----------------------
Actual Pro Forma Actual Pro Forma
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Net sales $748.5 $748.5 $829.1 $829.1
Income before taxes $ 10.0 $ 7.0 $ 18.8 $ 9.1
Net income $ 4.0 $ 2.9 $ 10.1 $ 3.1
</TABLE>
NOTE 4. DISPOSALS
National Oats: On November 19, 1993, the Company sold the oats portion of the
National Oats business for $39.0 million and transferred the popcorn business to
CMF. The sale of the oats business resulted in an approximate $10.9 million
pretax gain in fiscal 1994.
F-10
<PAGE>
Hiland Potato Chips: On November 22, 1993, the Company sold certain assets of
the Hiland potato chips business for approximately $3.0 million. There was no
material gain or loss on this transaction after taking into account the fiscal
1993 restructuring charge.
Meat Snacks: On February 22, 1994, the Company sold the meat snacks business for
approximately $5.0 million. There was no material gain or loss on this
transaction after taking into account a restructuring charge recorded in
fiscal 1993.
Nalley's U.S. Chips and Snacks: On December 19, 1994, the Company sold the
Nalley's U.S. Chips and Snacks business for approximately $2.0 million. In the
first quarter of fiscal 1995, the Company recognized a charge of approximately
$8.4 million in connection with the elimination of this line of business. This
sale was contemplated by Pro-Fac in conjunction with the acquisition.
Nalley's Canada Ltd.: On March 30, 1995, the Company announced the potential
sale of Nalley's Canada Ltd., located in Vancouver, British Columbia, to a group
led by management within its Canadian subsidiary. This sale was finalized,
subsequent to fiscal year end (as of June 26, 1995) and was contemplated by
Pro-Fac in conjunction with the acquisition. The assets of Nalley's Canada Ltd.
are classified as held for sale as of June 24, 1995.
The Company's Nalley's U.S. division will provide to Nalley's Canada Ltd.,
through a supply agreement, those products which would no longer be manufactured
in Canada.
The business divestitures resulted in the following charges to earnings of the
Predecessor company in fiscal 1993, 1994 and fiscal 1995:
Fiscal 1993 Restructuring Charge: To reflect completed and anticipated effects
of the restructuring program, the Company incurred restructuring charges in
fiscal 1993 of $61.0 million. This charge included the loss incurred on the sale
of the Lucca Frozen Foods business, anticipated losses on the sale of the Hiland
potato chips and meat snacks businesses, and other costs anticipated in
conjunction with the restructuring program.
Fiscal 1994 Restructuring Gain: Included in fiscal 1994 results was a net gain
of $7.8 million comprised of a gain on the sale of the oats business of $10.9
million, net of a charge of $3.1 million to adjust previous estimates regarding
activities initiated in fiscal 1993.
Fiscal 1995 Restructuring Charge: Included in fiscal 1995 results was a
restructuring charge of $8.4 million to reflect the estimated impact of the sale
of certain assets of the Nalley's U.S. Chips and Snacks operation and other
expenses relating to the disposal of this operation.
NOTE 5. DEBT
New Credit Agreement: The Bank has provided the Company, subject to the terms
and conditions set out in the New Credit Agreement, as amended, with loans of up
to $200 million to finance the purchase of shares pursuant to the tender offer
and the merger, to refinance certain existing indebtedness of Pro-Fac and the
Company, and to pay fees and expenses related to the purchase of shares. The
outstanding borrowings under the New Credit Agreement were $195.0 million at
June 24, 1995.
The Bank also has provided the Company, subject to the terms and conditions set
out in the New Credit Agreement, as amended, with seasonal financing of up to
$86.0 million and a $11.0 million Letter of Credit Facility. The Acquisition
Facility, the Seasonal Facility, and the Letter of Credit Facility are
collectively referred to herein as the 'Bank Facility.'
F-11
<PAGE>
Guarantees and Security: All obligations under the Bank Facility are
guaranteed by Pro-Fac and certain subsidiaries of Curtice-Burns (the
'Subsidiary Guarantors'). The Company's obligations under the Bank
Facility and Pro-Fac's and the Subsidiary Guarantors' obligations under
their respective guaranties are secured by all of the assets of the
Company and each guarantor, respectively, including (i) all present and
future accounts, contracts rights, chattel paper, instruments (excluding
shares of capital stock), documents, inventory, general intangibles, and
equipment; (ii) all real property; and (iii) all products and proceeds of
the foregoing.
Interest: The Bank Facility provides for interest rates on the Acquisition
Facility, at the Company's option, equal to (i) the relevant London
interbank offered rate plus 2.60 percent, (ii) the relevant prime rate
plus 0.50 percent, or (iii) the relevant U.S.
Treasury Rate plus 3.00 percent.
The Seasonal Facility provides for interest rates on amounts outstanding
thereunder at the Company's option equal to (i) the relevant London
interbank offered rate plus 1.75 percent, (ii) the relevant prime rate
minus 0.25 percent, or (iii) the relevant U.S. Treasury Rate plus 2.00
percent. The Bank has extended to a portion of the Acquisition Facility
for a limited period of time certain fixed rates that were in effect with
respect to indebtedness repaid to the Bank on November 3, 1994. The
weighted-average rate of interest applicable to the Acquisition Facility
was 8.7 percent per annum for the period from November 3, 1994 through
June 24, 1995.
Based on an estimated borrowing rate at fiscal year end 1995 of 9.0
percent for long-term debt with similar terms and maturities, the fair
value of the Company's long-term debt outstanding is approximately $193.8
million at June 24, 1995.
Based on an estimated borrowing rate at fiscal year end 1994 of 8.0
percent for long-term debt with similar terms and maturities, the fair
value of the Company's long-term debt outstanding was approximately $88.7
million for Pro-Fac related debt and $1.8 million for other debt at June
25, 1994.
Borrowings under the Seasonal Facility are payable at the expiration of
that portion of the facility, which is May 1996; except that for 15
consecutive calendar days during each fiscal year, the borrowings under
the Seasonal Facility must be zero. The average borrowing under the
Seasonal Facility was $65.1 million during fiscal 1995, and the
weighted-average interest rate on such borrowing was 7.2 percent. There
were no borrowings under this Seasonal Facility at June 24, 1995. The
Letter of Credit Facility provides for the issuance of letters of credit
through May 1996.
Certain Covenants: The Pro-Fac Bank Guarantee requires Pro-Fac, on a
consolidated basis, to maintain specified levels with regard to working
capital, tangible net worth, fixed charges, the incurrence of additional
debt, and limitations on dividends, investments, acquisitions, and asset
sales. The Company is in compliance with, or has obtained waivers for, all
restrictions and requirements under the terms of the borrowing agreement.
Other Debt: Other debt of $.2 million carries rates up to 11.0
percent at June 24, 1995.
F-12
<PAGE>
Maturities: Total long-term debt maturities during each of the next five
fiscal years are as follows: 1996, $11.5 million; 1997 through 1999, $8.0
million each; and 2000, $31.1 million. Provisions of the Term Loan
Facility require annual payments in the years 1996 through 2000 on October
1 of each year in an amount equal to the 'annual cash sweep' (equivalent
to approximately 80 percent of net income adjusted for certain cash and
non-cash items) for the preceding fiscal year as defined in the
Acquisition Facility. The annual sweep to be paid on October 1, 1995
(included in the fiscal 1996 amount above) relating to fiscal 1995
amounted to $3.5 million. Provisions of the Term Loan Facility also
require that cash proceeds from the sale of businesses be applied to the
Term Loan Facility. The sale of Nalley's Canada Ltd. subsequent to 1995
fiscal year end resulted in $3.8 million cash proceeds that were applied
to this debt.
The Senior Subordinated Notes ('Notes'): The Notes represent general unsecured
obligations of the Company, subordinated in right of payment to certain other
debt obligations of the Company (including the Company's obligations under the
New Credit Agreement).
The Notes are limited in aggregate principal amount to $160.0 million and will
mature on February 1, 2005. Interest on the Notes accrues at the rate of 12.25
percent per annum and is payable semi-annually in arrears on February 1 and
August 1, commencing on February 1, 1995, to holders of record on the
immediately preceding January 15 and July 15, respectively. Except as provided
above, interest on the Notes accrues from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest is computed on the basis of a 360-day year, comprised of 12
30-day months.
Each of the Pro-Fac and the Subsidiary Guarantors has unconditionally guaranteed
the payment of Obligations of the Company under the Notes. Rights of holders,
pursuant to such guarantees, are subordinate to the rights of the holders of the
Senior Indebtedness of Pro-Fac and the Subsidiary Guarantors to payment in full
in the same manner as the rights of holders of the Notes are subordinate to
those of the holders of the Senior Indebtedness of the Company.
The Notes also provide that the Company will not declare or pay any dividend or
make any distribution to its parent or other holders of Curtice Burns debt or
equity, unless at the time of such payment: (a) no default or event of default
shall have occurred; and (b) the Company's fixed charge coverage ratio (as
defined in the Note Agreement) for the preceding four quarters is at least 1.75
to 1.00. In addition, payments are subject to an overall limit that is based
on the Company's net income and the amount of additional equity invested in
the Company.
Based on an estimated borrowing rate at fiscal year end of 11.6 percent for
borrowings with similar terms and maturities, the fair value of the Notes was
$149.8 million at June 24, 1995.
Short-Term Borrowings: Short-term borrowings for the three years ended June
24, 1995 were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal Fiscal Fiscal
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance at end of period $ -- $11,500 $12,000
Rate at fiscal year end --% 5.5% 4.3%
Maximum outstanding during the period $94,000 $81,000 $96,000
Average amount outstanding during the period $66,541 $51,516 $70,949
Weighted average interest rate during the period 7.3% 4.6% 4.6%
</TABLE>
The above amounts include borrowings from commercial banks and from Pro-Fac
under existing and pre-existing loan agreements.
F-13
<PAGE>
NOTE 6. PROPERTY, PLANT AND EQUIPMENT AND RELATED OBLIGATIONS
The following is a summary of property, plant and equipment and related
obligations at June 24, 1995 and June 25, 1994.
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 24, 1995 June 25, 1994
---------------------------- ------------------------------------
Leased From
Owned Leased Owned ----------------
Assets Assets Total Assets Pro-Fac Others Total
------ ------ ----- ------ ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Land $ 5,467 $ -- $ 5,467 $ 6 $ 8,635 $ -- $ 8,641
Land improvements 1,540 -- 1,540 85 3,467 -- 3,552
Buildings 92,215 795 93,010 1,150 86,903 720 88,773
Machinery and equipment 168,477 3,520 171,997 8,953 219,971 4,609 233,533
Construction in progress 18,719 -- 18,719 21,085 -- -- 21,085
Valuation allowance -- -- -- -- (3,970) -- (3,970)
-------- ------ -------- -------- -------- ------ --------
286,418 4,315 290,733 31,279 315,006 5,329 351,614
Less accumulated depreciation 16,695 1,846 18,541 7,142 173,684 3,272 184,098
-------- ------ -------- -------- -------- ------ --------
Net $269,723 $2,469 $272,192 $ 24,137 $141,322 $2,057 $167,516
======== ====== ======== ======== ======== ====== ========
Obligations under capital leases(1) $2,384 $ 2,384 $141,322 $2,081 $143,403
Less current portion 764 764 17,645 785 18,430
------ -------- -------- ------ --------
Long-term portion $1,620 $ 1,620 $123,677 $1,296 $124,973
====== ======== ======== ====== ========
</TABLE>
(1) Represents the present value of net minimum lease payments calculated at
the Company's incremental borrowing rate at the inception of the leases,
which ranged from 6 to 9 percent.
Interest capitalized in conjunction with construction amounted to $1,841,000 and
$79,000 in fiscal 1995 and 1994, respectively.
The following is a schedule of future minimum lease payments together with the
present value of the minimum lease payments related to capitalized leases, both
as of June 24, 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal Year Ending Last Capital Operating Total Future
Saturday In June Leases Leases Commitment
----------------------- --------- --------- ------------
<S> <C> <C> <C>
1996 $1,225 $ 4,868 $ 6,093
1997 842 2,804 3,646
1998 637 2,028 2,665
1999 395 1,422 1,817
2000 75 366 441
Later years 320 597 917
------ ------- -------
Net minimum lease payments 3,494 12,085 $15,579
======= =======
Less amount representing interest 1,110
------
Present value of minimum lease payments $2,384
======
</TABLE>
Total rent expense related to operating leases (including lease arrangements of
less than one year which are not included in the previous table) amounted to
$10,297,000, $11,721,000, and $13,713,000 for fiscal years 1995, 1994, and 1993,
respectively. The fiscal 1995 amount is comprised of $4,280,000 for the
Predecessor entity and $6,017,000 for the Successor entity.
F-14
<PAGE>
NOTE 7. TAXES ON INCOME
Taxes on income include the following:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal 1995
--------------------------
11/4/94 - 6/26/94 -
6/24/95 11/3/94 Fiscal 1994 Fiscal 1993
Successor Predecessor Predecessor Predecessor
--------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Federal -
Current $(1,368) $ 5,834 $4,047 $10,132
Deferred 3,810 (3,529) 1,831 (7,407)
------- ------- ------ -------
2,442 2,305 5,878 2,725
------- ------- ------ -------
State and foreign -
Current (46) 1,106 1,948 4,405
Deferred 895 (676) 839 (3,235)
------- ------- ------ -------
849 430 2,787 1,170
------- ------- ------ -------
$ 3,291 $ 2,735 $8,665 $ 3,895
======= ======= ====== =======
</TABLE>
The deferred tax liabilities/assets consist of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- ------
<S> <C> <C> <C>
Liabilities
Depreciation $ 66,736 $22,147 $19,854
Non-compete agreements 1,120 513 620
Long-term receivables 626 1,416 885
Prepaid manufacturing 3,827 -- --
Other 45 486 592
-------- ------- -------
72,354 24,562 21,951
-------- ------- -------
Assets
Inventory reserves 3,416 319 796
Allowance for doubtful accounts 382 514 364
Reserve for restructuring -- 3,526 6,459
Capital loss carryforward 3,738 3,979 3,979
Accrued employee benefits 3,711 2,180 1,817
Insurance accruals 1,659 2,022 1,249
Pension/OPEB accruals 6,237 2,971 2,179
Plant consolidation and closing expenses 2,572 3,639 2,321
Alternative minimum income tax -- -- 376
Tax credits 3,628 -- --
Other 1,440 941 1,460
-------- ------- -------
26,783 20,091 21,000
-------- ------- -------
Net deferred liabilities (45,571) (4,471) (951)
Valuation allowance (7,366) -- (850)
-------- ------- -------
$(52,937) $(4,471) $(1,801)
======== ======= =======
</TABLE>
In conjunction with the acquisition, a valuation allowance was established in
fiscal 1995 for that portion of the capital loss carryforward and tax credits
where it was more likely than not that a tax benefit would not be realized.
F-15
<PAGE>
A reconciliation of the Company's effective tax rate to the amount computed by
applying the federal income tax rates of 35 and 34 percent to income before
taxes, is as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal 1995
----------------------
11/4/94 - 6/26/94 -
6/24/95 11/3/94 Fiscal 1994 Fiscal 1993
Successor Predecessor Predecessor Predecessor
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income tax provision (benefit),
at 35% in 1995 and 1994 and 34% in
the previous year $1,942 $1,558 $6,571 $(6,797)
State income taxes, net of
federal income tax effect 552 294 900 189
Goodwill amortization 637 167 480 9,248
Valuation allowance -- -- (850) 850
Statutory rate change -- -- 480 --
Non-deductible legal and
advisory expenses -- 753 1,058 --
Other, net 160 (37) 26 405
------ ------ ------ -------
$3,291 $2,735 $8,665 $ 3,895
====== ====== ====== =======
Effective Tax Rate 59.3% 61.4% 46.2% N/M*
====== ====== ====== =======
</TABLE>
* The effective tax rate calculation for 1993 is not meaningful.
In January 1995, the Boards of Directors of Curtice-Burns Foods, Inc. and
Pro-Fac Cooperative, Inc. approved appropriate amendments to the Bylaws of
Curtice-Burns Foods, Inc. to allow the Company to qualify as a cooperative under
Subchapter T of the Internal Revenue Code. A private letter ruling agreeing to
this change was received from the Internal Revenue Service in August 1995. The
effective date of the change is June 25, 1995. As a cooperative, patronage
income will be deductible to the extent distributed to its members. Accordingly,
taxation on patronage income is only imposed at the patron level.
On August 10, 1993, President Clinton signed into law a new income tax bill
which increased corporate income tax rates from 34 percent to 35 percent. Under
the provisions of SFAS 109 the Company recorded the impact of this rate increase
during the first quarter of fiscal 1994. The impact of this rate increase on the
Company's deferred tax assets and liabilities resulted in an increase to income
tax expense of approximately $480,000.
Although the Company reported a pretax loss for fiscal 1993, a tax provision of
$3,895,000 was recorded, primarily due to the non-deductible writedown of
goodwill recorded in conjunction with the Company's overall restructuring plan.
NOTE 8. PENSIONS, PROFIT SHARING, AND OTHER EMPLOYEE BENEFITS
Pensions: The Company has primarily noncontributory defined benefit plans
covering most employees. The benefits for these plans are based primarily on
years of service and employees' pay near retirement. The Company's funding
policy is consistent with the funding requirements of Federal law and
regulations. Plan assets consist principally of common stocks, corporate bonds
and U.S. Government obligations.
The Company also participates in several union sponsored pension plans; however,
it is not possible to determine the Company's relative share of the accumulated
benefit obligations or net assets for these plans.
Pension cost for fiscal years ended 1995, 1994, and 1993 includes the following
components:
F-16
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal 1995
------------------------
11/4/94 - 6/26/94 -
6/24/95 11/3/94 Fiscal 1994 Fiscal 1993
Successor Predecessor Predecessor Predecessor
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service cost -- benefits earned
during the period $ 2,427 $ 1,270 $ 3,958 $ 3,927
Interest cost on projected benefit
obligation 4,365 2,225 6,815 6,259
Return on assets
Actual gain -- (1,717) (2,044) (6,311)
Deferred gain (4,789) (678) (5,213) (842)
------- ------- ------- -------
Total gain (4,789) (2,395) (7,257) (7,153)
Amortization of transition amount
at June 29, 1985 -- (265) (1,001) (1,001)
Amortization of prior service cost -- 61 426 130
Recognition of curtailment gain -- -- (874) --
Amortization of gain -- 57 6 --
------- ------- ------- -------
2,003 953 2,073 2,162
Union and other pension costs 147 1,182 593 555
------- ------- ------- -------
Net pension cost $ 2,150 $ 2,135 $ 2,666 $ 2,717
======= ======= ======= =======
</TABLE>
As a result of the change of control of the Company, the Plan assets and
obligations were remeasured on November 3, 1994, and the entire balance of the
transition obligation, unrecognized prior service costs, and outstanding gains
and losses totaling $5,167,266 were adjusted at the time of the acquisition.
As a result of restructuring activities, the Plan assets and obligations were
remeasured as of November 22, 1993. The restructuring and the resulting
curtailment caused the projected benefit obligation to decrease by approximately
$874,000 and caused approximately $311,000 of previously unrecognized prior
service cost to be recognized immediately. This resulted in a net decrease in
annual pension cost of $563,000.
The pension plans' funded status was as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) June 24, 1995 June 25, 1994 June 26, 1993
------------- ------------- -------------
Assets Accumulated Assets
Exceed Benefits Exceed
Accumulated Exceed Accumulated
Benefits Assets Benefits
----------- ----------- ------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(65,350) $(71,302) $(66,927)
======== ======== ========
Accumulated benefit obligation $(69,449) $(76,649) $(70,522)
======== ======== ========
Projected benefit obligation $(78,809) $(87,744) $(85,277)
Plan assets at fair value 74,897 71,875 74,147
-------- -------- --------
Projected benefit obligation in excess of
Plan assets (3,912) (15,869) (11,130)
Unrecognized net (gain)/loss (8,787) 11,075 8,305
Unrecognized prior service cost -- 1,088 1,693
Unrecognized net asset at year end -- (4,408) (5,410)
Liability for unfunded accumulated
benefit obligation -- (1,401) --
-------- -------- --------
(12,699) (9,515) (6,542)
Union and other pension plans (281) (958) (711)
-------- -------- --------
Pension liability at year end $(12,980) $(10,473) $ (7,253)
======== ======== ========
</TABLE>
In 1995 the assumed discount rate, assumed long-term of rate return on Plan
assets, and the assumed long-term rate of compensation increase were 8.50
percent, 10.0 percent, and 4.50 percent, respectively.
F-17
<PAGE>
In 1994 the assumed discount rate, assumed long-term rate of return on Plan
assets and the assumed long-term rate of compensation increase were 7.75
percent, 10.0 percent and 4.50 percent, respectively. In 1993 the assumed
discount rate, assumed long-term rate of return on Plan assets, and the assumed
long-term rate of compensation increase were 8.25 percent, 10.0 percent and 6.0
percent, respectively.
Provisions of the Financial Accounting Standards Board SFAS No. 87, 'Employers
Accounting for Pensions,' require the Company to record a minimum pension
liability relating to certain unfunded pension obligations, establish an
intangible asset thereto and reduce stockholders equity. At June 25, 1994, a
minimum pension liability of $1,401,000 was recorded as required by SFAS 87. A
related intangible asset was recorded for $1,356,000 and stockholders equity was
reduced by $45,000. The adjustment in the minimum pension liability at June 25,
1994 resulted mainly from a decrease in the discount rate and the general
performance of investment markets.
Profit Sharing: Under the Deferred Profit Sharing Plan and the Non-Qualified
Profit Sharing Plan, the Company allocated to all salaried exempt employees a
percentage of its earnings in excess of 7.0 percent in 1994 and 5.0 percent in
1995 of the combined long-term debt and equity (as defined) of Pro-Fac and the
Company. In fiscal 1995 and 1994, $1,400,000 and $1,171,000, respectively, was
allocated to the Plans while no awards were allocated in fiscal 1993.
Postretirement Benefits Other Than Pensions: Generally, other than pensions, the
Company does not pay retirees' benefit costs. Isolated exceptions exist, which
have evolved from union negotiations, early retirement incentives and existing
retiree commitments from acquired companies.
In December 1990, the Financial Accounting Standards Board issued SFAS No. 106,
'Employers' Accounting for Postretirement Benefits Other Than Pensions.' SFAS
106, effective for fiscal years beginning after December 15, 1992, requires
employers to accrue the cost of retiree health and other postretirement benefits
during the working careers of active employees and allows the transition
obligation to be recognized in net income either immediately or over 20 years.
The Company adopted SFAS 106 during the first quarter of fiscal 1994. The
Company has elected to amortize the unrecognized transition obligation over 20
years. The adoption of SFAS 106 is not considered material to the financial
statements as a whole.
The Company has not prefunded any of its retiree medical or life insurance
liabilities. Consequently there are no Plan assets held in a trust, and there is
no expected long-term rate of return assumption for purposes of determining the
annual expense.
F-18
<PAGE>
The Plan's funded status was as follows:
<TABLE>
<CAPTION>
(Dollars In Thousands)
June 24, 1995 June 25, 1994
------------- -------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Fully eligible active participants $ 113 $ 202
Other active participants 244 288
Retirees 2,386 2,474
------- -------
Total 2,743 2,964
Less Plan assets at fair value -- --
------- -------
Accumulated postretirement benefit obligation in excess of
fair value of assets (2,743) (2,964)
Unrecognized transition obligation -- 2,622
Unrecognized prior service cost -- --
Unrecognized losses/(gains) (274) 6
------- -------
Accrued postretirement benefit cost $(3,017) $ (336)
======= =======
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal 1995
--------------------------
11/4/94 - 6/26/94 -
6/24/95 11/3/94 Fiscal 1994
Successor Predecessor Predecessor
---------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 15 $ 8 $ 38
Interest cost 154 74 248
Actual return on assets -- -- --
Net amortization and deferral -- 46 155
---- ---- -----
Net periodic postretirement benefit cost $169 $128 $ 441
==== ==== =====
</TABLE>
As a result of the change in control, the entire balance of the transition
obligation and the outstanding gains and losses totaling $2,538,000 were charged
to goodwill at the time of the sale.
Restructuring activities during fiscal 1994 resulted in a curtailment which
caused the Accumulated Postretirement Obligation to decrease by approximately
$878,000 and the Unrecognized Transition Obligation to decrease by approximately
$817,000. This resulted in a net decrease in the Net Postretirement Benefit Cost
of $92,000.
The weighted-average, assumed-discount rate used to measure the benefit
obligations was 7.75 percent at the beginning and 8.50 percent at the end of the
fiscal year.
The annual rate of increase in the per capita cost of health care benefits was
assumed to be 14 percent for 1994 and 12 percent for 1995. The rate was assumed
to decrease gradually to 6.0 percent by the year 2005 and remain at that level
thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation (APBO) and the aggregate of the service and
interest cost components of the net periodic postretirement benefit cost as
follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Successor Predecessor Predecessor
11/4/94 - 6/24/95 6/26/94 - 11/3/94 Fiscal 1994
-------------------- -------------------- --------------------
Current 1% Higher Current 1% Higher Current 1% Higher
Trend Trend Trend Trend Trend Trend
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
APBO $2,743 $2,874 $2,948 $3,118 $2,964 $3,149
Service cost+interest cost $ 170 $ 178 $ 82 $ 86 286 301
</TABLE>
F-19
<PAGE>
EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board issued SFAS No. 112,
'Employers' Accounting for Postemployment Benefits.'
This Statement establishes accounting standards for employers who provide
benefits to former or inactive employees after employment but before retirement.
Postemployment benefits are all types of benefits provided to former or inactive
employees, their beneficiaries, and covered dependents.
The Company adopted the provisions of FAS No. 112 effective June 26, 1994. The
adoption did not have a significant impact on the operations or cash flow of the
Company.
NOTE 9. OTHER MATTERS
Sale of Nalley's Canada Ltd.: On March 20, 1995 Curtice-Burns announced its
intention to sell its Canadian subsidiary, Nalley's Canada Ltd., located in
Vancouver, British Columbia, to a management group within the Canadian
subsidiary. This sale was finalized subsequent to year end (as of June 26, 1995)
and was contemplated by Pro-Fac in conjunction with the acquisition. Nalley's
U.S. will have an ongoing supply agreement with Nalley's Canada Ltd. as a result
of the sale.
Subsequent Event: On July 21, 1995, the Company completed the acquisition of
Packer Foods, a privately owned, Michigan-based food processor. The total cost
of acquisition was approximately $5.4 million in notes plus interest at 10
percent to be paid until the notes mature in the year 2000. The transaction will
be accounted for as a purchase. For its latest fiscal year ended December 31,
1994, Packer had net sales of $13 million, operating income of $300,000, and
income before extraordinary items of $100,000. Packer Foods is in the process of
being merged into the Company's Comstock Michigan Fruit operations.
Commitments: The Company's Southern Frozen Foods Division has guaranteed an
approximate $1.4 million loan for the City of Montezuma to renovate a sewage
treatment plant operated by Southern Frozen Foods on behalf of the City.
Southern Frozen Foods Fire: In July 1994, a plant operated by the Company's
Southern Frozen Foods Division, located in Montezuma, Georgia, was damaged by
fire. All material costs associated with the facility repairs and business
interruption are anticipated to be covered under the Company's insurance
policies. A gain on assets destroyed in the fire was recognized by Curtice-Burns
prior to the acquisition. Subsequent to the acquisition, additional costs in the
amount of $2.3 million were incurred for which negotiations are currently in
progress with the insurance carriers. As of June 24, 1995, the Company has
received $10.0 million in proceeds from the insurance claims for the fire.
Subsequent to fiscal year end, $2.5 million was received for a total of $12.5
million with $10.0 million receivable at August 30, 1995.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Pro-Fac Cooperative, Inc.
In our opinion, the consolidated financial statements listed under ITEM 8 of
this Form 10-K present fairly, in all material respects, the financial position
of Pro-Fac Cooperative, Inc. and its subsidiary at June 24, 1995 and June 25,
1994, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended June 24, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Cooperative's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Our audits of the consolidated financial statements also included an audit of
the financial statement schedule listed in the accompanying index and appearing
under ITEM 14 of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/Price Waterhouse, LLP
- -------------------------
Price Waterhouse, LLP
Rochester, New York
August 16, 1995
F-21
<PAGE>
FINANCIAL STATEMENTS
Pro-Fac Cooperative, Inc.
Consolidated Statement of Operations and Net Proceeds
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal Years Ended
---------------------------------
June 24, June 25, June 26,
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Net sales $522,413 $ 58,237 $ 59,735
Cost of sales 384,838 58,237 59,735
-------- -------- --------
Gross profit 137,575 -- --
Share of Curtice-Burns earnings/(loss)
prior to acquisition 5,137 18,599 (21,800)
Interest income from Curtice-Burns prior to acquisition 6,102 15,630 17,090
Interest income, other 4,402 -- --
Additional costs incurred as a result of the fire (2,315) -- --
Other selling, general, and administrative (expenses)/income (99,341) 1,056 965
-------- -------- --------
Operating income/(loss) 51,560 35,285 (3,745)
Interest expense (29,035) (11,587) (13,753)
-------- -------- --------
Income/(loss) before taxes, dividends and allocation
of net proceeds 22,525 23,698 (17,498)
Tax benefit 7,028 844 --
-------- -------- --------
Net income/(loss) $ 29,553 $ 24,542 $(17,498)
======== ======== ========
Allocation of Net Proceeds:
Net income/(loss) $ 29,553 $ 24,542 $(17,498)
Dividends on common and preferred stock (4,914) (4,390) (4,548)
-------- -------- --------
Net proceeds/(deficit) 24,639 20,152 (22,046)
Allocation (to)/from earned surplus (16,964) (2,856) 27,917
-------- -------- --------
Net proceeds available to members $ 7,675 $ 17,296 $ 5,871
======== ======== ========
Allocation of net proceeds available to members:
Payable to members currently (20% of qualified
proceeds available to members) $ 1,475 $ 3,109 $ 1,052
Allocated to members but retained by the Cooperative:
Qualified retains 5,900 12,437 4,209
Non-qualified retains 300 1,750 610
-------- -------- --------
Net proceeds available to members $ 7,675 $ 17,296 $ 5,871
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
Pro-Fac Cooperative, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 24, June 25,
ASSETS 1995 1994
-------- ------
<S> <C> <C> <C>
Current assets:
Cash $ 4,152 $ 10
Accounts receivable, trade, less allowance for doubtful
accounts of $673 47,341 --
Accounts receivable, other 19,840 68
Receivable from Curtice-Burns Foods, Inc. -- 11,197
Current portion of long-term loans receivable
from Curtice-Burns Foods, Inc. -- 14,000
Current portion of investment in direct financing leases -- 17,645
Current portion of investment in Bank -- 1,324
Current deferred tax assets 6,784 --
Income taxes refundable 10,106 --
Inventories -
Finished goods 108,691 --
Materials and supplies 51,491 --
-------- --------
Total inventories 160,182 --
-------- --------
Prepaid manufacturing expense 9,903 --
Prepaid expenses and other current assets 2,306 2,464
-------- --------
Total current assets 260,614 46,708
Property, plant, and equipment, net 273,962 --
Goodwill and other intangible assets, less accumulated
amortization of $ 2,539 101,494 --
Long-term portion of investment in direct financing leases -- 123,677
Long-term loans receivable from Curtice-Burns Foods, Inc. -- 78,040
Investment in Bank 22,907 19,632
Deferred tax assets 7,466 2,623
Finance receivable related to intangibles -- 24,909
Assets held for sale 13,838 --
Other assets 9,458 462
-------- --------
Total assets $689,739 $296,051
======== ========
LIABILITIES AND SHAREHOLDERS' AND MEMBERS' CAPITALIZATION
Current liabilities:
Notes payable $ -- $ 11,500
Current portion of obligations under capital leases 764 --
Accounts payable 60,074 617
Accrued interest 9,171 2,530
Accrued employee compensation 11,644 --
Other accrued expenses 15,116 6
Current portion of long-term debt 11,552 14,000
Income taxes payable -- 668
Amounts due members 13,348 15,327
-------- --------
Total current liabilities 121,669 44,648
Obligations under capital leases 1,620 --
Long-term debt 183,665 127,134
Senior subordinated notes 160,000 --
Deferred tax liability 59,721 --
Other non-current liabilities 17,836 504
-------- --------
Total liabilities 544,511 172,286
-------- --------
Commitments and contingencies -- --
Common stock, par value $5, authorized -
5,000,000 shares
June 24, June 25,
1995 1994
-------- ---------
Shares issued 1,878,926 2,056,878
Shares subscribed 59,568 9,270
--------- ---------
Total subscribed and issued 1,938,494 2,066,148
Less subscriptions receivable in
installments (59,568) (9,270)
--------- ---------
1,878,926 2,056,878 9,395 10,284
========= =========
Shareholders' and members' capitalization:
Retained earnings allocated to members 34,250 36,924
Non-qualified allocation to members 3,851 7,454
Preferred stock, par value $25, authorized -
5,000,000 shares; issued and outstanding -
3,043,325 and 2,576,720, respectively 76,083 64,418
Earned surplus 21,649 4,685
-------- --------
Total shareholders' and members' capitalization 135,833 113,481
-------- --------
Total liabilities and capitalization $689,739 $296,051
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
Pro-Fac Cooperative Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal Years Ended
----------------------------------
June 24, June 25, June 26,
1995 1994 1993
---------- ---------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 29,553 $ 24,542 $(17,498)
Amount payable to members currently (1,475) (3,109) (1,052)
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill, other intangibles, and
financing fees 3,218 -- --
Depreciation 13,864 -- --
Provision for losses on accounts receivable 91 -- --
Deferred tax (benefit)/provision (3,686) (613) 207
Equity in undistributed earnings of the Bank (1,288) (1,541) (1,486)
Change in assets and liabilities:
Accounts receivable 12,148 (43) 618
Inventories 67,022 -- --
Accounts payable and accrued expenses (16,331) (885) 309
Amounts due to members (729) 802 (2,277)
Federal and state taxes refundable (9,520) 738 (1,180)
Other assets and liabilities 18,639 (1,895) (319)
--------- -------- --------
Net cash provided by/(used in) operating activities 111,506 17,996 (22,678)
--------- -------- --------
Cash flows from investing activities:
Due from Curtice-Burns, net -- 524 (1,694)
Return from investment in direct financing leases 11,344 32,191 13,785
Investment in Bank -- (1,429) (1,937)
Finance receivable related to intangibles -- 1,636 26,898
Purchase of property, plant, and equipment (28,661) -- --
--------- -------- --------
Net cash (used in)/provided by investing activities (17,317) 32,922 37,052
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 359,000 120 20,000
Payments on short-term debt -- (500) (16,000)
Payments on long-term debt (including acquisition
related financing fees) (192,095) (42,986) (14,025)
Payments on capital leases (1,259) -- --
Amount paid to shareholders for acquisition (167,800) -- --
Net assets acquired from Curtice-Burns (81,278)
Repurchase of common stock, net of issuances (889) (3,171) 358
Repurchase of preferred stock -- -- (165)
Cash portion of non-qualified conversion (802) -- --
Cash paid in lieu of fractional shares (10) -- --
Cash dividends paid (4,914) (4,390) (4,548)
--------- -------- --------
Net cash used in financing activities (90,047) (50,927) (14,380)
--------- -------- --------
Net change in cash 4,142 (9) (6)
Cash at beginning of period 10 19 25
--------- -------- --------
Cash at end of period $ 4,152 $ 10 $ 19
========= ======== ========
</TABLE>
All amounts above exclude the effects of the acquisition
as detailed in the Supplemental Disclosure of
Cash Flow Information
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
Pro-Fac Cooperative Inc.
Consolidated Statement of Cash Flows (Continued)
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal Years Ended
----------------------------------
June 24, June 25, June 26,
1995 1994 1993
---------- -------- -------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information Cash paid/(received) during
the year for:
Interest $ 24,498 $12,068 $14,050
========= ======= =======
Income taxes, net $ 5,567 $ (970) $ 970
========= ======= =======
Net assets acquired from Curtice-Burns:
Accounts receivable $ 79,068 $ -- $ --
Inventories 226,220 -- --
Other assets 27,664 -- --
Goodwill and other intangible assets 24,156 -- --
Fixed assets 159,985 -- --
Accounts payable and accrued expenses (100,594) -- --
Short-term debt (49,097) -- --
Long-term debt (276,391) -- --
Deferred tax liability (3,247) -- --
Other liabilities (6,486) -- --
--------- ------- -------
$ 81,278 $ -- $ --
========= ======= =======
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Conversion of retains to preferred stock $ 11,665 $ 4,948 $ 5,934
========= ======= =======
Net proceeds allocated to members but retained by
the Cooperative $ 6,200 $14,187 $ 4,819
========= ======= =======
Capital lease obligations incurred $ 1,562 $ -- $ --
========= ======= =======
Receivables from Curtice-Burns Forgiven in the
Acquisition:
Due from Curtice-Burns for long-term debt $ 110,576 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
Pro-Fac Cooperative, Inc.
Consolidated Statement of Changes in Shareholders' and Members' Capitalization
and Common Stock
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal Years Ended June 24, June 25, June 26,
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Retained earnings allocated to members:
Qualified retains:
Balance at beginning of period $ 36,924 $ 29,446 $ 29,950
Net proceeds allocated to members 5,900 12,437 4,209
Converted to preferred stock (8,564) (4,948) (4,702)
Cash paid in lieu of fractional shares (10) (11) (11)
-------- -------- --------
Balance at end of period 34,250 36,924 29,446
-------- -------- --------
Non-qualified retains:
Balance at beginning of period 7,454 5,704 6,645
Distribution of 1989, 1988, and 1987 non-
qualified retains:
Cash paid (802) -- (319)
Converted to preferred stock (3,101) -- (1,232)
Net proceeds allocated to members 300 1,750 610
-------- -------- ------
Balance at end of period 3,851 7,454 5,704
-------- -------- --------
Total retains allocated to members
at end of period 38,101 44,378 35,150
-------- -------- --------
Preferred stock:
Balance at beginning of period 64,418 59,470 53,701
Converted from earnings retained for
preferred stock 8,564 4,948 4,702
Conversion of 1989, 1988 and 1987 non-
qualified retains 3,101 -- 1,232
Repurchased and canceled -- -- (165)
-------- -------- --------
Balance at end of period 76,083 64,418 59,470
-------- -------- --------
Earned surplus (unallocated and apportioned):
Balance at beginning of period 4,685 1,829 29,746
Net proceeds arising from after tax
undistributed income/(loss) 16,964 2,856 (27,917)
-------- -------- --------
Balance at end of period 21,649 4,685 1,829
-------- -------- --------
Total shareholders' and members' capitalization $135,833 $113,481 $ 96,449
======== ======== ========
Common stock:
Balance at beginning of period $ 10,284 $ 13,455 $ 13,097
Repurchased, net of issued (889) (3,171) 358
-------- -------- --------
Balance at end of period $ 9,395 $ 10,284 $ 13,455
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
PRO-FAC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The following
summarizes the significant accounting policies applied in the preparation of the
accompanying financial statements.
Fiscal Year: Fiscal 1995, fiscal 1994, and fiscal 1993 ended on June 24, 1995,
June 25, 1994, and June 26, 1993, respectively, the last Saturday in June. Each
year comprised 52 weeks.
Consolidation: As of all dates after November 3, 1994, and for all periods after
such date, the consolidated financial statements include the Cooperative and its
wholly-owned subsidiary, Curtice-Burns Foods, Inc. ('Curtice-Burns' or 'the
Company') after elimination of intercompany transactions and balances. The
acquisition of Curtice Burns was completed on November 3, 1994 (see NOTE 3 -
'Change in Control of Curtice-Burns'). Prior to November 3, 1994, Curtice-Burns
was not included in the financial statements.
Reclassification: Certain items for fiscal 1994 and fiscal 1993 have been
reclassified to conform with fiscal 1995 presentations.
Inventories: Inventories are stated at the lower of cost or market on the
first-in, first-out ('FIFO') method. Inventory reserves are recorded to reflect
the difference between FIFO cost and the market value applicable to canned and
frozen fruit and vegetable inventories. These reserves amounted to $.1 million
for fiscal 1995.
Investment in CoBank ('The Bank'): The investment in the Bank is required as a
condition of borrowing. These securities are not physically issued by the Bank,
but the Company is notified as to their monetary value. The investment is
carried at cost plus the Company's share of the undistributed earnings of the
Bank (that portion of patronage refunds not distributed currently in cash) which
approximates market.
Manufacturing Overhead: Allocation of manufacturing overhead to finished goods
produced is on the basis of a production year; thus at the end of each fiscal
year, manufacturing costs incurred by seasonal plants, subsequent to the
previous pack, are deferred and included in the accompanying balance sheet under
the caption 'Prepaid manufacturing expense.'
Property, Plant, and Equipment and Related Lease Arrangements: Property, plant,
and equipment are depreciated over the estimated useful lives of the assets
using the straight-line method, half-year convention, over 4 to 40 years.
Assets held for sale are separately classified on the balance sheet. The
recorded value represents an estimate of net realizable value.
Lease arrangements are capitalized when such leases convey substantially all of
the risks and benefits incidental to ownership. Capital leases are amortized
over either the lease term or the life of the related assets, depending upon
available purchase options and lease renewal features.
Income Taxes: Income taxes are provided on non-patronage income for financial
reporting purposes. Deferred income taxes resulting from temporary differences
between financial reporting and tax reporting as well as from the issuance of
non-qualified retains are appropriately classified
F-27
<PAGE>
in the balance sheet and properly reflect the effects of the acquisition in
accordance with the Statement of Financial Accounting Standards ('SFAS') No.
109, 'Accounting for Income Taxes.' See NOTE 7. - 'Taxes on Income.'
Pension: The Company and its subsidiaries have several pension plans and
participate in various union pension plans which on a combined basis cover
substantially all employees. Charges to income with respect to plans sponsored
by the Company and its subsidiaries are based upon actuarially determined costs.
Pension liabilities are funded by periodic payments to the various pension plan
trusts.
Employers' Accounting for Postemployment Benefits: On June 26, 1994, the Company
adopted the SFAS No. 112, 'Employers' Accounting for Postemployment Benefits,'
with no significant impact. This statement establishes accounting standards for
employers who provide benefits to former or inactive employees after employment
but before retirement. Postemployment benefits are all types of benefits
provided to former or inactive employees, their beneficiaries, and covered
dependents.
Goodwill and Other Intangibles: Goodwill and other intangible assets include the
cost in excess of the fair value of net tangible assets acquired and acquired
non-competition agreements and trademarks. Goodwill and other intangible assets,
stated net of accumulated amortization, are amortized on a straight-line basis
over approximately 35 years. The Company periodically assesses whether there has
been a permanent impairment in the value of goodwill. This is accomplished by
determining whether the estimated, undiscounted future cash flows from operating
activities exceed the carrying value of goodwill as of the assessment date.
Should aggregate future cash flows be less than the carrying value, a writedown
would be required, measured by the difference between the discounted future cash
flows and the carrying value of goodwill.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of' (SFAS No. 121). SFAS No. 121 establishes accounting standards
for the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. Management believes
current policies in effect, such as that pertaining to goodwill and intangibles,
satisfy the requirements of SFAS No. 121, and no further action on the part of
the Company will be required for compliance.
Commodities Options Contracts: In connection with the purchase of certain
commodities for anticipated manufacturing requirements, the Company occasionally
enters into options contracts as deemed appropriate to reduce the effect of
price fluctuations. These options contracts are accounted for as hedges and,
accordingly, gains and losses are deferred and recognized in cost of sales as
part of the product cost.
Casualty Insurance: The Company is insured for workers compensation and
automobile liability through a self-insurance program. The Company accrues for
the estimated losses from both asserted and unasserted claims. The estimate of
the liability for unasserted claims arising from unreported incidents is based
on an analysis of historical claims data.
Earnings Per Share Data Omitted: Earnings are not distributed to members in
proportion to their common stock holdings. For example, patronage related
earnings (representing those earnings derived from patronage-sourced business)
are distributed to members in proportion to the dollar value of deliveries under
Pro-Fac contracts rather than based on the number of shares of common stock
held.
F-28
<PAGE>
Environmental Expenditures: Environmental expenditures that pertain to current
operations are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations that do not contribute to current
or future revenues are expensed. Liabilities are recorded when remedial
activities are probable, and the cost can be reasonably estimated.
Advertising: Production costs of commercials and programming are charged to
operations in the year first aired. The cost of other advertising promotion and
marketing programs are charged in the year incurred. Advertising expense
incurred in fiscal 1995 amounted to $13,150,000.
NOTE 2. AGREEMENTS WITH CURTICE-BURNS
On November 3, 1994, Curtice Burns was acquired by Pro-Fac (see NOTE 3 -'Change
in Control of Curtice-Burns'). Pro-Fac and the Company were established together
in the early 1960s and, before Pro-Fac's recent acquisition of the Company, had
a long-standing contractual relationship under the Integrated Agreement and
similar Predecessor entity agreements. The Integrated Agreement, which has been
superseded by the Pro-Fac Marketing and Facilitation Agreement, consisted of
four principal sections: Operations Financing, Marketing, Facilities Financing,
and Management.
The provisions of the Integrated Agreement included the financing of certain
assets utilized in the business of the Company and provided a sharing of income
and losses between Curtice-Burns and Pro-Fac. Under the Pro-Fac Marketing and
Facilitation Agreement, Pro-Fac and the Company will continue the Marketing and
Management arrangements of the Integrated Agreement as well as the sharing of
income and losses. The capital contribution of Pro-Fac to the Company at
acquisition primarily included the cancellation of indebtedness and capital
lease obligations.
Subsequent to the acquisition date, Pro-Fac invested an additional $3.9 million
and committed to another $10.0 million investment which is reflected as a
capital contribution receivable on the Curtice-Burns balance sheet.
Funds made available by the distribution of investment certificates to members,
in lieu of cash by Pro-Fac, have historically been reinvested by Pro-Fac in the
Company. Under the Indentures related to the Notes, Pro-Fac will be required to
reinvest at least 70 percent of the additional Patronage income in
Curtice-Burns.
Amounts received by Pro-Fac from Curtice-Burns under both Agreements for the
fiscal years ended June 24, 1995, June 25, 1994, and June 26, 1993 include:
commercial market value of crops delivered, $55.9 million, $59.2 million and
$59.8 million, respectively; interest income, $6.1 million, $15.6 million, and
$17.1 million, respectively; and additional proceeds from profit/(loss) sharing
provisions, $9.6 million, $16.8 million and $(21.8) million, respectively.
Payments by the Company to Pro-Fac for interest, amortization, and lease
financing payments ceased as of November 3, 1994.
NOTE 3. CHANGE IN CONTROL OF CURTICE-BURNS
In 1993, the Company's management and Board of Directors began exploring several
strategic alternatives for the Company, including a possible sale of all the
equity of the Company. Those activities ultimately resulted in the Company
entering into an Agreement and Plan of Merger with Pro-Fac and its subsidiary
PFAC on September 27, 1994 (the 'Merger Agreement'). Pursuant to the Merger
Agreement, on October 4, 1994, Pro-Fac initiated a tender offer for all of the
Company's outstanding stock at $19.00 per share. At the expiration of the tender
offer on November 2, 1994, 6,229,442 shares of Class A and 2,046,997 shares of
Class B common stock (or approximately
F-29
<PAGE>
94 percent and 99 percent, respectively, of the total number of outstanding
shares of Class A and Class B common stock of the Company) had been validly
tendered and not withdrawn. All such tendered shares were accepted for payment
by PFAC. On November 3, 1994, PFAC merged into the Company, making the Company a
wholly-owned subsidiary of Pro-Fac.
Prior to November 3, 1994, the Company expensed $2.2 million of legal,
accounting, investment banking, and other expenses relative to the change of
control issue. In recognizing these expenses, the Company allocated half of
these amounts to Pro-Fac as a deduction to the profit split. Pro-Fac disputed
these charges, but such dispute was resolved with the merger.
The acquisition was accounted for using the purchase method of accounting. In
conjunction with the change in ownership all other identifiable assets and
liabilities were adjusted to reflect their fair value at the date of
acquisition. In recording the transaction, approximately $121.5 million was
recorded to adjust property, plant, and equipment to fair market value. In
addition lives were adjusted for assets acquired. The resulting annual
depreciation will approximate $23.3 million on all existing assets at the
appraised values. In addition, approximately $104.0 million of goodwill and
other intangible assets were recorded as the excess of purchase cost over net
tangible assets acquired. Included in this amount was approximately $43.8
million for deferred tax adjustments to properly reflect the effects of the
acquisition in accordance with the SFAS No. 109, 'Accounting for Income Taxes.'
The resulting annual amortization of goodwill and other intangible assets will
approximate $3.0 million for goodwill and other intangible assets using lives
ranging from 5 to 35-years. There were no other significant changes to
accounting policies as a result of the acquisition.
In connection with the acquisition, PFAC sold $160.0 million of 12.25 percent
Senior Subordinated Notes (the 'Notes') due 2005 and entered into a credit
agreement (the 'New Credit Agreement') with the Bank, which provided for a term
loan, a term loan facility, a seasonal loan facility, and a letter of credit
facility. All obligations of PFAC under the Notes and the New Credit Agreement
have become obligations of the Company.
Following, in capsule form, is the consolidated, unaudited results of operations
of Pro-Fac for the fiscal years ended June 24, 1995 and June 25, 1994, assuming
the acquisition by Pro-Fac took place at the beginning of the 1994 fiscal year.
<TABLE>
<CAPTION>
(In Millions)
Fiscal Year Ended
(Pro Forma is unaudited)
June 24, 1995 June 25, 1994
--------------------- ----------------------
Actual Pro Forma Actual Pro Forma
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Net sales $522.4 $748.5 $58.2 $829.1
Income before taxes $ 22.5 $ 28.4 $23.7 $ 10.1
Net income $ 29.5 $ 31.4 $24.5 $ 6.1
</TABLE>
NOTE 4. DISPOSALS
National Oats: On November 19, 1993, the Company sold the oats portion of the
National Oats business for $39.0 million and transferred the popcorn business to
Comstock Michigan Fruit. The sale of the oats business resulted in an
approximate $10.9 million pretax gain in fiscal 1994.
Hiland Potato Chips: On November 22, 1993, the Company sold certain assets of
the Hiland potato chips business for approximately $3.0 million. There
F-30
<PAGE>
was no material gain or loss on this transaction after taking into account the
fiscal 1993 restructuring charge.
Meat Snacks: On February 22, 1994, the Company sold the meat snacks business for
approximately $5.0 million. There was no material gain or loss on this
transaction after taking into account this restructuring charge recorded in
fiscal 1993.
Nalley's U.S. Chips and Snacks: On December 19, 1994, the Company sold the
Nalley's U.S. Chips and Snacks business for approximately $2.0 million. In the
first quarter of fiscal 1995, the Company recognized a charge of approximately
$8.4 million in connection with the elimination of this line of business. This
sale was contemplated by Pro-Fac in conjunction with the acquisition.
Nalley's Canada Ltd.: On March 30, 1995, the Company announced the potential
sale of Nalley's Canada Ltd., located in Vancouver, British Columbia, to a group
led by management within its Canadian subsidiary. This sale was finalized,
subsequent to fiscal year end (as of June 26, 1995) and was contemplated by
Pro-Fac in conjunction with the acquisition. The assets of Nalley's Canada Ltd.
are classified as held for sale as of June 24, 1995.
The Company's Nalley's U.S. division will provide to Nalley's Canada Ltd.,
through a supply agreement, those products which would no longer be manufactured
in Canada.
The business divestitures resulted in the following charges to earnings of the
Predecessor company in fiscal 1993, 1994 and fiscal 1995:
Fiscal 1993 Restructuring Charge: To reflect completed and anticipated effects
of the restructuring program, the Company incurred restructuring charges in
fiscal 1993 of $61.0 million. This charge included the loss incurred on the sale
of the Lucca Frozen Foods business, anticipated losses on the sale of the Hiland
potato chips and meat snacks businesses, and other costs anticipated in
conjunction with the restructuring program.
Fiscal 1994 Restructuring Gain: Included in fiscal 1994 results was a net gain
of $7.8 million comprised of a gain on the sale of the oats business of $10.9
million, net of a charge of $3.1 million to adjust previous estimates regarding
activities initiated in fiscal 1993.
Fiscal 1995 Restructuring Charge: Included in fiscal 1995 results was a
restructuring charge of $8.4 million to reflect the estimated impact of the sale
of certain assets of the Nalley's U.S. Chips and Snacks operation and other
expenses relating to the disposal of this operation.
NOTE 5. DEBT
New Credit Agreement: The Bank has provided the Company, subject to the terms
and conditions set out in the New Credit Agreement, as amended, with loans of up
to $200 million to finance the purchase of shares pursuant to the tender offer
and the merger, to refinance certain existing indebtedness of Pro-Fac and the
Company, and to pay fees and expenses related to the purchase of shares. The
balance outstanding under the New Credit Agreement was $195.0 million at June
24, 1995.
The Bank also has provided the Company, subject to the terms and conditions set
out in the New Credit Agreement, as amended, with seasonal financing of up to
$86.0 million and a $11.0 million Letter of Credit Facility. The Acquisition
Facility, the Seasonal Facility, and the Letter of Credit Facility are
collectively referred to herein as the 'Bank Facility.'
F-31
<PAGE>
Guarantees and Security: All obligations under the Bank Facility are
guaranteed by Pro-Fac and certain subsidiaries of Curtice-Burns (the
'Subsidiary Guarantors'). The Company's obligations under the Bank
Facility and Pro-Fac's and the Subsidiary Guarantors' obligations under
their respective guaranties are secured by all of the assets of the
Company and each guarantor, respectively, including (i) all present and
future accounts, contracts rights, chattel paper, instruments (excluding
shares of capital stock), documents, inventory, general intangibles, and
equipment; (ii) all real property; and (iii) all products and proceeds of
the foregoing.
Interest: The Bank Facility provides for interest rates on the Acquisition
Facility, at the Company's option, equal to (i) the relevant London
interbank offered rate plus 2.60 percent, (ii) the relevant prime rate
plus 0.50 percent, or (iii) the relevant U.S.
Treasury Rate plus 3.00 percent.
The Seasonal Facility provides for interest rates on amounts outstanding
thereunder at the Company's option equal to (i) the relevant London
interbank offered rate plus 1.75 percent, (ii) the relevant prime rate
minus 0.25 percent, or (iii) the relevant U.S. Treasury Rate plus 2.00
percent. The Bank has extended to a portion of the Acquisition Facility
for a limited period of time certain fixed rates that were in effect with
respect to indebtedness repaid to the Bank on November 3, 1994. The
weighted-average rate of interest applicable to the Acquisition Facility
was 8.7 percent per annum for the period from November 3, 1994 through
June 24, 1995.
Based on an estimated borrowing rate at fiscal year end 1995 of 9.0
percent for long-term debt with similar terms and maturities, the fair
value of the Cooperative's long-term debt outstanding is approximately
$193.8 million at June 24, 1995.
Based on an estimated borrowing rate at fiscal year end 1994 of 8.0
percent for long-term debt with similar terms and maturities, the fair
value of the Cooperative's long-term debt outstanding was approximately
$136.8 million at June 24, 1995.
Borrowings under the Seasonal Facility are payable at the expiration of
that portion of the facility, which is May 1996; except that for 15
consecutive calendar days during each fiscal year, the borrowings under
the Seasonal Facility must be zero. The average borrowing under the
Seasonal Facility was $65.1 million during fiscal 1995, and the
weighted-average interest rate on such borrowing was 7.2 percent. There
were no borrowings under this Seasonal Facility at June 24, 1995. The
Letter of Credit Facility provides for the issuance of letters of credit
through May 1996.
Certain Covenants: The Pro-Fac Bank Guarantee requires Pro-Fac, on a
consolidated basis, to maintain specified levels with regard to working
capital, tangible net worth, fixed charges, the incurrence of additional
debt, and limitations on dividends, investments, acquisitions, and asset
sales. The Company is in compliance with, or has obtained waivers for, all
restrictions and requirements under the terms of the borrowing agreement.
Other Debt: Other debt of $.2 million carries rates up to 11.0 percent at
June 24, 1995.
F-32
<PAGE>
Maturities: Total long-term debt maturities during each of the next five fiscal
years are as follows: 1996, $11.5 million; 1997 through 1999, $8.0 million each;
and 2000, $31.1 million. Provisions of the Term Loan Facility require annual
payments in the years 1996 through 2000 in October of each year in an amount
equal to the 'annual cash sweep' (equivalent to approximately 80 percent of net
income adjusted for certain cash and non-cash items) for the preceding fiscal
year as defined in the Acquisition Facility. The annual sweep to be paid on
October 1, 1995 (included in the fiscal 1996 amount above) relating to fiscal
1995 amounted to $3.5 million. Provisions of the Term Loan Facility also require
that cash proceeds from the sale of businesses be applied to the Term Loan
Facility. The sale of Nalley's Canada Ltd. subsequent to 1995 fiscal year end
resulted in $3.8 million cash proceeds that were applied to this debt.
The Senior Subordinated Notes ('Notes'): The Notes represent general unsecured
obligations of the Company, subordinated in right of payment to certain other
debt obligations of the Company (including the Company's obligations under the
New Credit Agreement).
The Notes are limited in aggregate principal amount to $160.0 million and will
mature on February 1, 2005. Interest on the Notes accrues at the rate of 12.25
percent per annum and is payable semi-annually in arrears on February 1 and
August 1, commencing on February 1, 1995, to holders of record on the
immediately preceding January 15 and July 15, respectively. Except as provided
above, interest on the Notes accrues from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest is computed on the basis of a 360-day year, comprised of 12
30-day months.
Each of the Pro-Fac and the Subsidiary Guarantors has unconditionally guaranteed
the payment of Obligations of the Company under the Notes. Rights of holders,
pursuant to such guarantees, are subordinate to the rights of the holders of the
Senior Indebtedness of Pro-Fac and the Subsidiary Guarantors to payment in full
in the same manner as the rights of holders of the Notes are subordinate to
those of the holders of the Senior Indebtedness of the Company.
Based on an estimated borrowing rate at fiscal year end 1995 of 11.6 percent for
borrowings with similar terms and maturity, the fair value of the Notes was
$149.8 million at June 24, 1995.
Short-Term Borrowings: Short-term borrowings for the three years ended June
24, 1995 were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal Fiscal Fiscal
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance at end of period $ -- $11,500 $12,000
Rate at fiscal year end --% 5.5% 4.3%
Maximum outstanding during the period $73,000 $46,000 $56,000
Average amount outstanding during the period $55,648 $30,464 $39,444
Weighted average interest rate during the period 7.5% 4.8% 4.6%
</TABLE>
The above amounts include borrowings under existing and pre-existing loan
agreements.
F-33
<PAGE>
NOTE 6. PROPERTY, PLANT AND EQUIPMENT AND RELATED OBLIGATIONS
The following is a summary of property, plant and equipment and related
obligations at June 24, 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands)
June 24, 1995
---------------------------------------
Owned Leased
Assets Assets Total
------ ------ -----
<S> <C> <C> <C>
Land $ 5,467 $ -- $ 5,467
Land improvements 1,540 -- 1,540
Buildings 92,215 795 93,010
Machinery and equipment 168,477 3,520 171,997
Construction in progress 20,489 -- 20,489
-------- ------ --------
288,188 4,315 292,503
Less accumulated depreciation 16,695 1,846 18,541
-------- ------ --------
Net $271,493 $2,469 $273,962
======== ====== ========
Obligations under capital leases(1) $2,384 $ 2,384
Less current portion 764 764
------ --------
Long-term portion $1,620 $ 1,620
====== ========
</TABLE>
(1) Represents the present value of net minimum lease payments calculated at the
Company's incremental borrowing rate at the inception of the leases, which
ranged from 6 to 9 percent.
Interest capitalized in conjunction with construction amounted to $1,841,000 and
$79,000 in fiscal 1995 and 1994, respectively.
The following is a schedule of future minimum lease payments together with the
present value of the minimum lease payments related to capitalized leases, both
as of June 24, 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Fiscal Year Ending Last Capital Operating Total Future
Saturday in June Leases Leases Commitment
----------------------- ------- --------- ------------
<S> <C> <C> <C>
1996 $1,225 $ 4,868 $ 6,093
1997 842 2,804 3,646
1998 637 2,028 2,665
1999 395 1,422 1,817
2000 75 366 441
Later years 320 597 917
------ ------- -------
Net minimum lease payments 3,494 12,085 $15,579
======= =======
Less amount representing interest 1,110
------
Present value of minimum lease payments $2,384
======
</TABLE>
Total rent expense related to operating leases (including lease arrangements of
less than one year which are not included in the previous table) amounted to
$6,107,000 for fiscal year 1995.
NOTE 7. TAXES ON INCOME
The consolidated financial statements reflect the tax status of the Cooperative
and its wholly-owned subsidiary, Curtice-Burns Foods, Inc. Pro-Fac has been
taxed as a cooperative since its inception. Curtice-Burns has consistently been
taxed as a Subchapter C Corporation.
F-34
<PAGE>
A summary of the Cooperative's taxable income/(loss) and the related
(benefit)/provision for income taxes for fiscal 1995, 1994, and 1993 follows:
<TABLE>
<CAPTION>
Dollars in Thousands
Fiscal Years Ended June 24, June 25, June 26,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Consolidated income/(loss) before taxes
dividends and allocation of net proceeds $ 22,525 $ 23,698 $(17,498)
Taxable (income)/loss of Curtice-Burns (5,555) -- --
Dividend received from Curtice-Burns 2,264 -- --
-------- -------- --------
Excess/(deficiency) of revenues before
taxes, dividends and allocation of
net proceeds 19,234 23,698 (17,498)
Less:
Patronage income to be allocated to members
for current period (7,375) (15,546) (5,261)
Cash dividends paid on capital stock (4,914) (4,390) (4,548)
Dividend received deduction on Curtice-Burns
dividend (2,264) -- --
Utilization of net operating loss
carryforwards (4,665) (3,857) --
Difference between book and tax
methodologies (16) 95 52
-------- -------- --------
Taxable income/(loss) to the Cooperative $ -- $ -- $(27,255)
======== ======== ========
(Benefit)/provision for income taxes:
Federal -
Current $ (2,428) $ 267 $ 207
Deferred (7,891) (613) (207)
-------- -------- --------
(10,319) (346) --
State -- (498) --
-------- -------- --------
$(10,319) $ (844) $ --
======== ======== ========
</TABLE>
A summary of Curtice Burns taxes on income include the following for the period
subsequent to acquisition:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Federal -
Current $(1,368)
Deferred 3,810
-------
2,442
-------
State and foreign -
Current (46)
Deferred 895
-------
849
-------
$ 3,291
=======
</TABLE>
F-35
<PAGE>
The consolidated deferred tax liabilities/assets consist of the following at
June 24, 1995:
<TABLE>
<S> <C>
Liabilities
Depreciation $(66,736)
Non-compete agreements (1,120)
Long-term receivables (626)
Prepaid manufacturing (3,827)
Other (45)
--------
(72,354)
--------
Assets
Non-qualified retains 1,181
Inventory reserves 3,416
Allowance for doubtful accounts 382
Capital and operating loss carryforwards 9,838
Accrued employee benefits 3,711
Insurance accruals 1,659
Pension/OPEB accruals 6,237
Plant consolidation and closing expenses 2,572
Tax credits 3,628
Other 1,625
--------
34,249
--------
Net deferred liabilities (38,105)
Valuation allowance (7,366)
--------
$(45,471)
========
</TABLE>
A benefit for the Cooperative has been recorded for a net operating loss
carryforward resulting from 1993 operations. As of June 24, 1995, the amount
available is $17.4 million ($6.1 million net of tax) which expires in 2008.
In conjunction with the acquisition, a valuation allowance was recorded in
fiscal 1995 for that portion of the Curtice Burns capital loss carryforward and
tax credits where it was more likely than not that a tax benefit would not be
realized.
A reconciliation of the consolidated effective tax rate to the amount computed
by applying the federal income tax rate to income before taxes, is as follows:
<TABLE>
Effective Tax Rate (Percent):
June 24, June 25, June 26,
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Federal 35.0% 34.0% (34.0)%
State income taxes, net of federal income tax effect 2.5 0.4 --
Goodwill amortization 2.8 -- --
Loss for which no benefit was recorded -- -- 34.0
Utilization of net operating loss carryforward (26.4) (34.0) --
Other (net) (0.3) (4.0) --
----- ----- -----
Subtotal 13.6 (3.6) --
Tax benefit resulting from exempt status (44.8) -- --
----- ----- -----
Total (31.2)% (3.6)% --%
===== ===== =====
</TABLE>
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. This exempt
F-36
<PAGE>
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 1991 in the amount of approximately
$7.2 million and interest payments of approximately $4.9 million. In addition,
it is anticipated that the Cooperative will file for tax refunds for fiscal 1992
in the amount of approximately $1.6 million and interest payments of
approximately $.3 million. Based upon the status of the government's review of
the refunds for fiscal years 1986 to 1990, the legal counsel to the Cooperative
has issued an opinion that such refunds constitute a legally enforceable account
receivable from the government. Accordingly, refund amounts of $10.1 million for
tax and interest have been reflected in the financial statements of Pro-Fac as
of June 24, 1995. It is anticipated that such amounts will be received in the
first half of fiscal 1996. The Board of Directors of the Cooperative has
committed that substantially all of such refunds and interest payments, when
received, will be invested in its subsidiary, Curtice-Burns Foods, Inc.
As a result of the acquisition, the Cooperative's exempt status has ceased.
In January 1995, the Boards of Directors of Curtice-Burns Foods, Inc. and
Pro-Fac Cooperative, Inc. approved appropriate amendments to the Bylaws of
Curtice-Burns Foods, Inc. to allow the Company to qualify as a cooperative under
Subchapter T of the Internal Revenue Code. A private letter ruling agreeing to
this change was received from the Internal Revenue Service in August 1995. The
effective date of the change is June 25, 1995. As a cooperative, patronage
income will be deductible to the extent distributed to its members. Accordingly,
taxation on patronage income is only imposed at the patron level.
NOTE 8. PENSIONS, PROFIT SHARING, AND OTHER EMPLOYEE BENEFITS
Pensions: The Company has primarily noncontributory defined benefit plans
covering most employees. The benefits for these plans are based primarily on
years of service and employees' pay near retirement. The Company's funding
policy is consistent with the funding requirements of Federal law and
regulations. Plan assets consist principally of common stocks, corporate bonds
and U.S. Government obligations.
The Company also participates in several union sponsored pension plans; however,
it is not possible to determine the Company's relative share of the accumulated
benefit obligations or net assets for these plans.
Pension cost for fiscal year ended 1995 includes the following components:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Service cost -- benefits earned during the period $ 2,427
Interest cost on projected benefit obligation 4,365
Return on assets
Deferred gain (4,789)
-------
2,003
Union and other pension costs 147
-------
Net pension cost $ 2,150
=======
</TABLE>
F-37
<PAGE>
The pension plans' funded status was as follows at June 24, 1995:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(65,350)
========
Accumulated benefit obligation $(69,449)
========
Projected benefit obligation $(78,809)
Plan assets at fair value 74,897
--------
Projected benefit obligation in excess of Plan assets (3,912)
Unrecognized net gain (8,787)
--------
(12,699)
Union and other pension plans (281)
--------
Pension liability at year end $(12,980)
========
</TABLE>
In 1995 the assumed discount rate, assumed long-term rate of return on Plan
assets, and the assumed long-term rate of compensation increase were 8.50
percent, 10.0 percent, and 4.50 percent, respectively.
Profit Sharing: Under the Deferred Profit Sharing Plan and the Non-Qualified
Profit Sharing Plan, the Company allocated to all salaried exempt employees a
percentage of its earnings in excess of 5.0 percent in 1995 of the combined
long-term debt and equity (as defined) of Pro-Fac and the Company. In fiscal
1995, $1,400,000 was allocated to the Plans.
Postretirement Benefits Other Than Pensions: Generally, other than pensions, the
Company does not pay retirees' benefit costs. Isolated exceptions exist, which
have evolved from union negotiations, early retirement incentives and existing
retiree commitments from acquired companies.
In December 1990, the Financial Accounting Standards Board issued SFAS No. 106,
'Employers' Accounting for Postretirement Benefits Other Than Pensions.' SFAS
106, effective for fiscal years beginning after December 15, 1992, requires
employers to accrue the cost of retiree health and other postretirement benefits
during the working careers of active employees and allows the transition
obligation to be recognized in net income either immediately or over 20 years.
The Company adopted SFAS 106 during the first quarter of fiscal 1994. The
Company has elected to amortize the unrecognized transition obligation over 20
years. The adoption of SFAS 106 is not considered material to the financial
statements as a whole.
The Company has not prefunded any of its retiree medical or life insurance
liabilities. Consequently there are no Plan assets held in a trust, and there is
no expected long-term rate of return assumption for purposes of determining the
annual expense.
The Plan's funded status was as follows at June 24, 1995:
<TABLE>
<CAPTION>
(Dollars In Thousands)
<S> <C>
Accumulated postretirement benefit obligation:
Fully eligible active participants $ 113
Other active participants 244
Retirees 2,386
-------
Total 2,743
Less Plan assets at fair value --
-------
Accumulated postretirement benefit obligation
in excess of fair value of assets (2,743)
Unrecognized transition obligation --
Unrecognized prior service cost --
Unrecognized losses/(gains) (274)
-------
Accrued postretirement benefit cost $(3,017)
=======
</TABLE>
F-38
<PAGE>
Net periodic postretirement benefit cost included the following components in
fiscal 1995:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Service cost $ 15
Interest cost 154
Actual return on assets --
Net amortization and deferral --
----
Net periodic postretirement benefit cost $169
====
</TABLE>
The weighted-average, assumed-discount rate used to measure the benefit
obligations was 7.75 percent at the beginning and 8.50 percent at the end of the
fiscal year.
The annual rate of increase in the per capita cost of health care benefits was
assumed to be 12 percent for 1995. The rate was assumed to decrease gradually to
6.0 percent by the year 2005 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point would increase the accumulated postretirement
benefit obligation (APBO) and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost as follows for fiscal
1995:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Current 1% Higher
Trend Trend
------- ---------
<S> <C> <C>
APBO $2,743 $2,874
Service cost+interest cost $ 170 $ 178
</TABLE>
Employers' Accounting For Postemployment Benefits: In November 1992, the
Financial Accounting Standards Board issued SFAS No. 112, 'Employers' Accounting
for Postemployment Benefits.'
This Statement establishes accounting standards for employers who provide
benefits to former or inactive employees after employment but before retirement.
Postemployment benefits are all types of benefits provided to former or inactive
employees, their beneficiaries, and covered dependents.
The Company adopted the provisions of FAS No. 112 effective June 26, 1994. The
adoption did not have a significant impact on the operations or cash flow of the
Company.
NOTE 9. COMMON STOCK AND CAPITALIZATION
Common Stock: The common stock purchased by members is related to the crop
delivery of each member. Regardless of the number of shares held, each
member has one vote.
Common stock may be transferred to another grower only with approval of the
Pro-Fac Board of Directors. If a member ceases to be a producer of agricultural
products which he markets through the Cooperative, then he must sell his common
stock to another grower acceptable to the Cooperative. If no such grower is
available to purchase the stock, then the member must provide one year's advance
written notice of his intent to withdraw, after which the Cooperative must
purchase his common stock at par value. (See NOTE 10 for common stock dividend
information.)
At June 24, 1995 and June 25, 1994, there were outstanding subscriptions, at par
value, for 59,568 and 9,270 shares of common stock, respectively. These shares
are issued as subscription payments are received.
F-39
<PAGE>
Preferred Stock: The existing preferred stock originated from the conversion at
par value of retains. This stock is non-voting and non-cumulative, except that
the holders of preferred and common stock would be entitled to vote as separate
classes on certain matters which would affect or subordinate the rights of the
class.
At the Cooperative's annual meeting in January 1995, shareholders approved an
amendment to the certification of incorporation to authorize the creation of
five additional classes of preferred stock.
On August 23, 1995, the Cooperative commenced an offer to exchange one share of
its Class A cumulative preferred stock (liquidation preference $25 per share)
for each of its existing non-cumulative preferred stock (liquidation preference
$25 per share). The exchange offer is scheduled to expire on October 10, 1995
unless extended. Pro-Fac has applied to include, and received conditional
approval for inclusion of, the cumulative preferred stock on the National Market
System of the National Association of Securities Dealers Automated Quotation
System ('NASDAQ').
In June 1995, the Board approved, pursuant to its authority under the Charter
Amendment the creation of a new series of preferred stock, to be designated the
'Class B, Series 1, 10% cumulative preferred stock' (the 'Class B Stock').
Pro-Fac expects to issue up to 500,000 shares of the Class B Stock at $10 per
share (liquidation value $10 per share) to employees of Curtice-Burns pursuant
to an Employee Stock Purchase Plan adopted by the Curtice-Burns and Pro-Fac
Boards of Directors in June 1995 and implemented in the fall of 1995.
The dividend rates for the preferred stock are as follows:
Non-Cumulative Preferred $1.50 per share paid annually at
the discretion of the Board.
Cumulative Class A Preferred $1.72 per share annually, paid in
four quarterly installments of $.43
per share.
Cumulative Class B Preferred $1.00 per share paid annually.
Retained Earnings Allocated to Members ('Retains'): Retains arise from patronage
income and are allocated to the accounts of members within 8.5 months of the end
of each fiscal year.
Qualified Retains: Qualified retains are freely transferable and normally
mature into preferred stock in December of the fifth year after
allocation. Qualified retains are taxable income to the member in the year
the allocation is made.
Non-Qualified Retains: Non-qualified retains may not be sold or purchased.
The present intention of the board of directors is that the non-qualified
retains allocation be redeemed in five years through partial payment in
cash and issuance of preferred stock. The non-qualified retains will not
be taxable to the member until the year of conversion. Non-qualified
retains may be subject to later adjustment if such is deemed necessary by
the Board of Directors because of events which may occur after the retains
were allocated.
Beginning with the retains issued in 1995, the maturity of all future
retains will result in the issuance of Class A cumulative preferred stock.
Earned Surplus (Unallocated and Apportioned): Earned surplus consists of
accumulated income after distribution of earnings allocated to members,
dividends and after state and federal income taxes. Earned surplus is reinvested
in the business in the same fashion as retains. (See NOTE 7.)
F-40
<PAGE>
Market for Pro-Fac Securities: There is no established market for trading
Pro-Fac common stock. All trades have been arranged on a private basis between
buyers and sellers.
NOTE 10. DIVIDENDS ON CAPITAL STOCK
Dividends on preferred and common stock are declared at the discretion of the
board of directors and are paid out of legally available funds. Effective
January 1995, preferred shareholders are entitled to dividends as disclosed in
the table in the previous NOTE. Pursuant to New York State laws, applicable to
agricultural cooperatives, dividends have been declared and paid subsequent to
the fiscal year to which they relate. In fiscal 1995 and 1994, dividends on
preferred stock were paid at a rate of 6.75 and 6.25 percent, respectively, of
the par value and dividends on common stock were paid at a rate of 5.5 and 5.0
percent, respectively, of the par value.
Subsequent to June 24, 1995, the Cooperative declared a cash dividend of 6.0
percent of the par value of preferred stock and 5.0 percent of the par value of
the common stock, payable on July 15, 1995. These dividends amounted to
$5,035,000.
NOTE 11. OTHER MATTERS
SUBSEQUENT EVENTS
Sale of Nalley's Canada Ltd.: On March 20, 1995 Curtice-Burns announced its
intention to sell its Canadian subsidiary, Nalley's Canada Ltd., located in
Vancouver, British Columbia, to a management group within the Canadian
subsidiary. This sale was finalized subsequent to year end (as of June 26, 1995)
and was contemplated by Pro-Fac is conjunction with the acquisition. Nalley's
U.S. will have an ongoing supply agreement with Nalley's Canada Ltd. as a result
of the sale.
Purchase of Packer Foods: On July 21, 1995, the Company completed the
acquisition of Packer Foods, a privately owned, Michigan-based food processor.
The total cost of acquisition was approximately $5.4 million in notes plus
interest at 10 percent to be paid until the notes mature in the year 2000. The
transaction will be accounted for as a purchase. For its latest fiscal year
ended December 31, 1994, Packer had net sales of $13 million, operating income
of $300,000, and income before extraordinary items of $100,000. Packer Foods is
in the process of being merged into the Company's Comstock Michigan Fruit
operations.
Commitments: The Company's Southern Frozen Foods Division has guaranteed an
approximate $1.4 million loan for the City of Montezuma to renovate a sewage
treatment plant operated by Southern Frozen Foods on behalf of the City.
In July 1994, a plant operated by the Company's Southern Frozen Foods Division,
located in Montezuma, Georgia, was damaged by fire. All material costs
associated with the facility repairs and business interruption are anticipated
to be covered under the Company's insurance policies. A gain on assets destroyed
in the fire was recognized by the Company prior to the acquisition. Subsequent
to the acquisition, additional costs in the amount of $2.3 million were incurred
for which negotiations are currently in progress with the insurance carriers. As
of June 24, 1995, the Company has received $10.0 million in proceeds from the
insurance claims for the fire. Subsequent to fiscal year end, $2.5 million was
received for a total of $12.5 million with $10.0 million receivable at August
30, 1995.
F-41
