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Page 1 of 13 Pages
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Registration Statement (Form S-1) Number 33-60273
PRO-FAC COOPERATIVE, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 16-6036816
State or other jurisdiction of (IRS Employer
ncorporation or organization Identification Number)
90 Linden Place, PO Box 682, Rochester, NY 14603
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (716) 383-1850
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of January 15, 1996.
Common Stock - 1,800,371
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<TABLE>
Pro-Fac Cooperative, Inc.
Consolidated Statement of Operations and Net Proceeds
<CAPTION>
(Dollars in Thousands)
Three Months Ended Six Months Ended
December 28, December 23, December 28, December 23,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $208,186 $208,186 $382,186 $373,364
Cost of sales 148,630 156,495 280,939 279,141
-------- -------- -------- --------
Gross profit 59,556 51,691 101,247 94,223
Gain on sale of Finger Lakes Packaging 3,565 0 3,565 0
Selling, administrative, and general expense (41,881) (46,308) (74,797) (83,023)
-------- -------- -------- --------
Operating income 21,240 5,383 30,015 11,200
Interest expense (9,561) (10,959) (19,442) (21,005)
-------- -------- -------- --------
Income/(loss) before taxes, dividends, allocation of net
proceeds, and cumulative effect of an accounting change 11,679 (5,576) 10,573 (9,805)
Tax (provision)/benefit (3,126) 915 (3,653) 2,711
-------- -------- -------- --------
Income/(loss) before cumulative effect of an accounting
change, dividends, and allocation of net proceeds 8,553 (4,661) 6,920 (7,094)
Cumulative effect of an accounting change 0 0 4,516 0
-------- -------- -------- --------
Net income/(loss) $ 8,553 $ (4,661) $ 11,436 $ (7,094)
======== ======== ======== ========
Allocation of Net Proceeds:
Net income/(loss) $ 8,553 $ (4,661) $ 11,436 $ (7,094)
Dividends on common and preferred stock (1,343) (1,312) (2,678) (6,347)
-------- -------- -------- -----------
Net proceeds/(deficit) 7,210 (5,973) 8,758 (13,441)
Allocation (to)/from earned surplus (3,247) 5,973 (4,282) 13,441
-------- -------- -------- ----------
Net proceeds available to members $ 3,963 $ 0 $ 4,476 $ 0
======== ======== ======== =============
Net Proceeds Available to Members:
Estimated cash payment $ 792 $ 895
Qualified retains 3,171 3,581
-------- --------
Net proceeds available to members $ 3,963 $ 4,476
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative, Inc.
Consolidated Balance Sheet
(Dollars in Thousands)
<CAPTION>
December 28, June 29, December 23,
1996 1996 1995
------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,653 $ 8,873 $ 6,188
Accounts receivable, trade, net 57,633 47,259 62,094
Accounts receivable, other 4,857 6,814 9,880
Income taxes refundable 0 0 11,987
Current deferred tax assets 9,995 13,731 3,954
Inventories -
Finished goods 142,545 97,018 165,009
Raw materials and supplies 35,128 33,556 46,581
-------- -------- --------
Total inventories 177,673 130,574 211,590
-------- -------- --------
Prepaid manufacturing expense 0 11,339 0
Prepaid expenses and other current assets 9,243 1,066 4,045
-------- -------- --------
Total current assets 267,054 219,656 309,738
Investment in Bank 24,439 24,439 22,907
Property, plant, and equipment, net 250,002 271,574 277,035
Assets held for sale 903 5,368 5,935
Goodwill and other intangible assets, net 99,842 103,760 83,706
Other assets 11,304 12,500 12,899
-------- -------- --------
Total assets $653,544 $637,297 $712,220
======== ======== ========
Liabilities and Shareholders' and Members' Capitalization Current liabilities:
Notes payable $ 32,000 $ 0 $ 70,000
Current portion of obligations under capital leases 547 547 764
Current portion of long-term debt 8,075 8,075 8,056
Accounts payable 44,582 54,791 49,361
Income taxes payable 5,723 2,289 0
Accrued interest 9,444 9,447 9,486
Accrued employee compensation 8,551 8,368 7,945
Accrued manufacturing expense 2,771 0 2,269
Other accrued expenses 30,234 24,775 27,515
Dividends payable 40 128 103
Amounts due members 21,469 7,875 17,454
-------- -------- --------
Total current liabilities 163,436 116,295 192,953
Long-term debt 133,342 167,683 181,420
Senior subordinated notes 160,000 160,000 160,000
Obligations under capital leases 1,125 1,125 1,620
Deferred income tax liabilities 40,537 44,753 26,244
Other non-current liabilities 20,693 20,741 17,906
-------- -------- --------
Total liabilities 519,133 510,597 580,143
-------- -------- --------
Commitments and contingencies
Class B cumulative redeemable preferred stock liquidation preference $10 per
share, authorized - 500,000 shares; issued and
outstanding 36,531, 33,364, and 25,478 shares, respectively 365 334 255
Common stock, par value $5, authorized - 5,000,000 shares
December 28, June 29, December 23,
1996 1996 1995
----------- --------- ------------
Shares issued 1,800,371 1,836,963 1,888,154
Shares subscribed 49,422 59,359 58,013
--------- --------- ---------
Total subscribed and issued 1,849,793 1,896,322 1,946,167
Less subscriptions receivable in installments (49,422) (59,359) (58,013)
--------- --------- ---------
1,800,371 1,836,963 1,888,154 9,002 9,185 9,441
========= ========= =========
Shareholders' and members' capitalization:
Retained earnings allocated to members 35,899 32,318 34,239
Non-qualified allocation to members 3,275 3,275 3,851
Non-cumulative preferred stock, par value $25; authorized - 5,000,000 shares;
issued and outstanding - 61,597,
105,788, and 231,147, respectively 1,540 2,645 5,779
Class A cumulative preferred stock, liquidation preference
$25 per share; authorized - 49,500,000 shares; issued and
outstanding 3,076,895, 3,032,704 and 2,812,178 shares,
respectively 76,923 75,818 70,304
Earned surplus 7,407 3,125 8,208
-------- -------- --------
Total shareholders' and members' capitalization 125,044 117,181 122,381
-------- -------- --------
Total liabilities and capitalization $653,544 $637,297 $712,220
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Pro-Fac Cooperative Inc.
Consolidated Statement of Cash Flows
(Dollars in Thousands)
<CAPTION>
Six Months Ended
December 28, December 23,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 11,436 $ (7,094)
Adjustments to reconcile net income/(loss) to net cash provided by operating
activities:
Cumulative effect of an accounting change (4,516) 0
Amortization of goodwill, other intangibles, and financing fees 2,451 2,053
Depreciation 11,897 12,772
Gain on sale of Finger Lakes Packaging (3,565) 0
Change in assets and liabilities:
Accounts receivable (14,572) (3,877)
Inventories (51,790) (47,158)
Accounts payable and accrued expenses 10,409 (169)
Amounts due to members 12,699 3,644
Federal and state taxes refundable 3,620 (1,881)
Other assets and liabilities (2,131) (2,989)
-------- --------
Net cash used in operating activities (24,062) (44,699)
-------- --------
Cash flows from investing activities:
Purchase of property, plant, and equipment (6,466) (10,189)
Disposals of property, plant, and equipment 34,439 4,019
Cash paid for acquisition 0 (5,400)
-------- --------
Net cash provided by/(used in) investing activities 27,973 (11,570)
-------- --------
Cash flows from financing activities:
Proceeds from short-term debt 32,000 70,000
Proceeds from long-term debt 0 5,400
Payments on long-term debt (34,341) (11,141)
Repurchases of common stock, net of issuances (152) 301
Cash paid in lieu of fractional shares 0 (11)
Cash dividends paid (2,638) (6,244)
-------- --------
Net cash (used in)/provided by financing activities (5,131) 58,305
-------- --------
Net change in cash and cash equivalents (1,220) 2,036
Cash and cash equivalents at beginning of period 8,873) 4,152
-------- --------
Cash and cash equivalents at end of period $ 7,653 $ 6,188
======== ========
Fiscal 1996 amounts above exclude the effects of the acquisition of Packer Foods
as detailed in the Supplemental Disclosure of Cash Flow Information
Supplemental Disclosure of Cash Flow Information Cash paid/(received) during the
year for:
Interest $ 19,699 $ 25,415
======== ========
Income taxes, net 32 $ (366)
======== ========
Acquisition of Packer Foods in July 1995:
Accounts receivable $ 1,375
Inventories 4,278
Prepaid expenses and other current assets 270
Property, plant and equipment 5,884
Goodwill 128
Accounts payable (4,954)
Accrued expenses (257)
Deferred income tax (226)
Other non-current liabilities (1,098)
--------
Cash paid for acquisition $ 5,400
========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
PRO-FAC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
these periods. The following summarizes the significant accounting policies
applied in the preparation of the accompanying financial statements. These
financial statements should be read in conjunction with the financial statements
and accompanying notes contained in the Pro-Fac Cooperative, Inc. ("Pro-Fac")
Form 10-K for the fiscal year ended June 29, 1996. The results of operations for
the interim periods are not necessarily indicative of the results of operations
for the full year.
Consolidation: As of all dates after November 3, 1994, and for all periods after
such date, the consolidated financial statements include Pro-Fac and its
wholly-owned subsidiary, Curtice-Burns Foods, Inc. ("Curtice Burns" or "the
Company") after elimination of intercompany transactions and balances.
Change in Accounting Principle: Effective June 30, 1996, accounting procedures
were changed to include in prepaid expenses and other current assets,
manufacturing spare parts previously charged directly to expense. This change is
preferable because it provides a better matching of costs with related revenues.
In addition, the Company's independent accountants have agreed that this change
in accounting is preferable. The Indenture, which covers the Company's Senior
Subordinated Notes (the "Notes") provides among other things that, if holders of
greater than 25 percent of the Notes object to this change, the Company must
return to its previous accounting practice. The favorable cumulative effect of
the change (net of income taxes of $1.2 million) was $4.5 million. Pro forma
amounts for the cumulative effect of the accounting change on prior periods are
not determinable due to the lack of physical inventory counts required to
establish quantities at the respective dates.
Reclassification: Certain items for fiscal 1996 have been reclassified to
conform with fiscal 1997 presentation.
NOTE 2. AGREEMENTS WITH CURTICE BURNS
The contractual relationship between the two parties is defined in the Pro-Fac
Marketing and Facilitation Agreement ("Agreement"). Under the Agreement, the
Company pays Pro-Fac the commercial market value ("CMV") for all crops supplied
by Pro-Fac. CMV is defined as the weighted average price paid by other
commercial processors for similar crops sold under preseason contracts and in
the open market in the same or competing market area. 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 Agreement. Under the Agreement the Company is
required to have on its board of directors some persons who are neither members
of nor affiliated with Pro-Fac ("Disinterested Directors"). The number of
Disinterested Directors must at least equal the number of directors who are
members of Pro-Fac. The volume and type of crops to be purchased by Curtice
Burns under the Agreement are determined pursuant to its annual profit plan,
which requires the approval of a majority of the Disinterested Directors. In
addition, in any year in which the Company has earnings on products which were
processed from crops supplied by Pro-Fac ("Pro-Fac Products"), the Company pays
to Pro-Fac up to 90 percent of such earnings, but in no case more than 50
percent of all pretax earnings (before dividing with Pro-Fac) of the Company. In
years in which the Company has losses on Pro-Fac Products, the Company reduces
the CMV it would otherwise pay to Pro-Fac by up to 90 percent of such losses,
but in no case by more than 50 percent of all pretax losses (before dividing
with Pro-Fac) of the Company. 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 of losses of certain operations of the
business. Earnings and losses are determined at the end of the fiscal year, but
are accrued on an estimated basis during the year.
Some of the additional patronage income received by Pro-Fac from the Company is
not paid in cash by Pro-Fac to its members but is instead allocated to them
through notices of allocation ("Retains"). Funds represented by Retains have
historically been reinvested by Pro-Fac in the Company. Under the Indenture
related to the Notes, Pro-Fac is required to reinvest at least 70 percent of the
additional patronage income in Curtice Burns.
NOTE 3. OTHER MATTERS
Seneca to Purchase Private Label Canned Vegetable Businesses: On January 6,
1997, the Company and Seneca Foods Corporation ("Seneca") jointly announced that
they have signed a letter of intent for Seneca to acquire certain Curtice Burns
assets and to realign
<PAGE>
the sourcing of Seneca's New York State raw vegetable products. The transaction
calls for Seneca to acquire the Curtice Burns Leicester, New York production
facility and the LeRoy, New York distribution center, as well as the Blue Boy
brand.
Seneca will produce, market and sell the Blue Boy brand canned vegetables and
private label canned vegetables and will also pack certain products on a
contractual basis for Curtice Burns. The acquisition will not include the
Greenwood and Silver Floss labels, or Curtice Burns sauerkraut, beets in glass
containers, or frozen vegetable business. Terms and conditions of the agreement
are subject to ongoing negotiations and board approval from Seneca and Pro-Fac.
Seneca and the Company will also forge a long-term strategic alliance to combine
their agricultural departments into one organization to be managed by Curtice
Burns. The objective is to maximize sourcing efficiencies of New York State
vegetable requirements for both companies. This agreement will initially have a
minimum ten-year term.
The parties are working towards finalizing the agreement, subject to further due
diligence by both parties, and expect to close by the end of March. A
mutually-agreed goal for both companies is a continuity of employment at the
facilities.
No significant gain or loss is anticipated as a result of this transaction.
Finger Lakes Packaging: On October 9, 1996, the Company completed the sale of
Finger Lakes Packaging, Inc. ("Finger Lakes Packaging"), a subsidiary of the
Company, to Silgan Containers Corporation, an indirect, wholly-owned subsidiary
of Silgan Holdings, Inc., headquartered in Stamford, Connecticut. The Company
received proceeds of approximately $30.0 million. The transaction also included
a long-term supply agreement between Silgan and Curtice Burns. A gain of
approximately $3.6 million was recorded. Proceeds from this sale were applied to
the outstanding loans at CoBank, ACB (the "Bank").
Dividends: Subsequent to quarter end, the Cooperative declared a cash dividend
of $.43 per share on the Class A Cumulative Preferred Stock. These dividends
amounted to $1.3 million and will be paid on January 30, 1997.
ITEM 2. 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 operations and net proceeds in the first
six months and second quarter of fiscal 1997 and 1996.
PRO-FAC'S RESULTS OF OPERATIONS
Changes From December 1995 to December 1996: For the three and six months ended
December 28, 1996, the change in net proceeds compared to the prior year is
summarized below in millions of dollars:
<TABLE>
Three Six
Month Month
Change Change
<CAPTION>
<S> <C> <C>
Change in gross profit $ 7.9 $ 7.0
Change in selling, general and administrative expenses 4.4 8.2
Change in interest expense 1.4 1.6
Gain on sale of Finger Lakes Packaging 3.6 3.6
----- -----
Change in income before taxes, dividends, allocations
of net proceeds, and cumulative effect of an accounting change 17.3 20.4
Change in taxes on income (4.1) (6.4)
Cumulative effect of an accounting change 0.0 4.5
----- -----
Change in net income $13.2 $18.5
===== =====
</TABLE>
Because Curtice Burns is Pro-Fac's principal subsidiary, business conditions and
trends affecting Curtice Burns' profitability also affect the profitability of
Pro-Fac. 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.
<PAGE>
CURTICE BURNS RESULTS OF OPERATIONS
The following tables illustrate the Company's results of operations by business
for the three- and six-month periods ended December 28, 1996 and December 23,
1995, and the Company's total assets by business as of December 28, 1996 and
December 23, 1995.
<TABLE>
Net Sales
(Dollars in Millions)
<CAPTION>
Three Months Ended Six Months Ended
December 28, December 23, December 28, December 23,
1996 1995 1996 1995
-------------------- ------------------ ------------------- ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------- ----- ------ ----- ------ -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Comstock Michigan Fruit ("CMF") $109.2 52.5% $104.2 50.0% $187.3 49.0% $172.9 46.3%
Nalley Fine Foods 45.6 21.9 46.5 22.3 89.8 23.5 92.9 24.9
Southern Frozen Foods 25.0 12.0 26.5 12.7 47.3 12.4 49.4 13.2
Snack Foods Group 16.3 7.8 15.0 7.2 33.5 8.8 30.4 8.1
Brooks Foods 12.1 5.8 12.4 6.0 19.2 5.0 19.3 5.2
------ ----- ------ ----- ------ ----- ------ -------
Subtotal ongoing operations 208.2 100.0 204.6 98.2 377.1 98.7 364.9 97.7
Finger Lakes Packaging 0.0 0.0 3.6 1.8 5.1 1.3 8.5 2.3
------ ----- ------ ----- ------ ----- ------ -------
Total $208.2 100.0% $208.2 100.0% $382.2 100.0% $373.4 100.0%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
Operating Income1
(Dollars in Millions)
Three Months Ended Six Months Ended
December 28, December 23, December 28, December 23,
1996 1995 1996 1995
-------------------- ------------------ ------------------ ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMF $ 9.9 46.7% $ 8.2 151.9% $13.6 45.5% $12.1 108.0%
Nalley Fine Foods 3.0 14.1 (5.7) (105.6) 5.1 17.1 (4.7) (42.0)
Southern Frozen Foods 2.8 13.2 2.1 38.9 4.6 15.4 3.1 27.7
Snack Foods Group 1.6 7.5 0.9 16.7 3.1 10.4 1.9 17.0
Brooks Foods 2.2 10.4 1.8 33.3 2.7 9.0 2.2 19.6
Corporate overhead (2.4) (11.2) (2.0) (37.1) (4.1) (13.8) (4.0) (35.7)
----- ----- ----- ----- ----- ----- ----- ------
Subtotal 17.1 80.7 5.3 98.1 25.0 83.6 10.6 94.6
Business sold and other nonrecurring2 4.1 19.3 0.1 1.9 4.9 16.4 0.6 5.4
----- ----- ----- ----- ----- ----- ----- ------
Total $21.2 100.0% $ 5.4 100.0% $29.9 100.0% $11.2 100.0%
===== ===== ===== ===== ===== ===== ===== =====
<FN>
1 Excludes cumulative effect of an accounting change. See NOTE 1 - "Summary
of Accounting Policies - Change in Accounting Principle."
2 Includes Finger Lakes Packaging earnings and gain on sale. See NOTE 3 -
"Other Matters." Also includes strategic plan consulting fees, a loss on the
disposal of property held for sale, and final settlement of an insurance
claim.
</FN>
</TABLE>
<PAGE>
<TABLE>
EBITDA1
(Dollars in Millions)
<CAPTION>
Three Months Ended Six Months Ended
December 28, December 23, December 28, December 23,
1996 1995 1996 1995
-------------------- ------------------ ------------------ ------------------
% of % of % of % of
$ Total $ Total $ Total $ Total
------ ----- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMF $13.4 48.0% $11.6 92.8% $20.5 46.7% $19.0 74.2%
Nalley Fine Foods 4.5 16.1 (4.3) (34.4) 8.1 18.4 (2.0) (7.8)
Southern Frozen Foods 3.8 13.6 3.4 27.2 6.8 15.5 5.7 22.3
Snack Foods Group 2.0 7.2 1.3 10.4 4.1 9.3 2.8 10.9
Brooks Foods 2.4 8.6 2.0 16.0 3.1 7.1 2.6 10.2
Corporate overhead (2.4) (8.6) (2.0) (16.0) (4.1) (9.3) (4.0) (15.7)
----- ------- ------- ------ ------- ------ ------- ------
Subtotal 23.7 84.9 12.0 96.0 38.5 87.7 24.1 94.1
Business sold and other nonrecurring2 4.2 15.1 0.5 4.0 5.4 12.3 1.5 5.9
----- ------ ------- ------- ------- ------ ------- -------
Total $27.9 100.0% $12.5 100.0% $43.9 100.0% $25.6 100.0%
===== ===== ===== ===== ===== ===== ===== =====
<FN>
1 EBITDA does not represent information prepared in accordance with generally
accepted accounting principles, nor is such information considered superior
to information presented in accordance with generally accepted accounting
principles. Excludes cumulative effect of an accounting change. See NOTE 1 -
"Summary of Accounting Policies - Change in Accounting Principle."
2 Includes Finger Lakes Packaging earnings and gain on sale. See NOTE 3 -
"Other Matters." Also includes strategic plan consulting fees, a loss on the
disposal of property held for sale, and final settlement of an insurance
claim.
</FN>
</TABLE>
<TABLE>
Total Assets
(Dollars in Millions)
<CAPTION>
December 28, December 23,
1996 1995
% of % of
$ Total $ Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
CMF and Brooks Foods1 $327.1 50.1% $345.6 48.8%
Nalley Fine Foods 155.0 23.7 153.9 21.8
Southern Frozen Foods 87.9 13.4 100.2 14.2
Snack Foods Group 26.9 4.1 28.1 4.0
Corporate 56.7 8.7 47.9 6.8
------- ------- -------- ------
Subtotal ongoing operations 653.6 100.0 675.7 95.6
Finger Lakes Packaging 0.0 0.0 31.6 4.4
------- ------- -------- ------
Total $653.6 100.0% $707.3 100.0%
====== ===== ====== =====
<FN>
1 Effective October 1, 1996, CMF and Brooks operations were consolidated.
</FN>
</TABLE>
CHANGES FROM SECOND QUARTER FISCAL 1996 TO SECOND QUARTER FISCAL 1997
Net Sales: The total net sales in the second quarter compared to the prior year
were unchanged at $208.2 million. The disposition of Finger Lakes Packaging on
October 9, 1996 caused a $3.6 million decrease in sales which was offset by a
small net increase in sales of the ongoing business.
Gross Profit: Gross profit of $59.6 million in the quarter ended December 28,
1996 increased $7.9 million or 15.3 percent from $51.7 million in the quarter
ended December 23, 1995. This increase is attributable to improvements at CMF
($3.6 million) and Nalley ($4.2 million), reflecting higher margins on greater
sales.
<PAGE>
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $4.0 million as compared with the prior year. A
$1.1 million decrease in selling and advertising expenses and trade promotions
related primarily to decreased spending at the Nalley division. Reductions in
other administrative expenses accounted for $3.3 million and were primarily
attributable to the reduction of consulting and legal expenses incurred in the
prior year, benefits from the restructuring initiative, and the attendant
headcount reduction that began late in fiscal 1996.
Interest Expense: The decrease in interest expense was a benefit of inventory
reduction and cash flow management programs initiated in fiscal 1996 as well as
the debt reduction attributable to the sale of Finger Lakes Packaging.
Provision for Taxes: The provision for taxes in the quarter ended December 28,
1996 of $2.7 million changed $3.6 million from the benefit of $0.9 million in
the quarter ended December 23, 1995 resulting from an increase in earnings
before tax of $9.2 million. The tax provision was also negatively impacted by
the non-deductibility of goodwill.
Gain on Sale of Finger Lakes Packaging: On October 9, 1996, the Company
completed the sale of Finger Lakes Packaging to Silgan Containers Corporation,
an indirect, wholly-owned subsidiary of Silgan Holdings, Inc., headquartered in
Stamford, Connecticut. The Company received proceeds of approximately $30
million. The transaction also included a long-term supply agreement. A gain of
approximately $3.6 million was recognized. Proceeds from this sale were applied
to Bank debt.
CHANGES FROM FIRST SIX MONTHS FISCAL 1996 TO FIRST SIX MONTHS FISCAL 1997
Net Sales: The net sales increase in the first six months compared to the prior
year of $8.8 million is primarily attributable to increased volume and improved
pricing at both CMF and the Snack Foods Group.
The vegetable category at CMF has experienced improved pricing due to several
industry factors as well as increasing sales to new customers. Net sales for the
CMF vegetable category increased $7.2 million. Higher product costs have
increased pricing in the canned fruit and aseptic categories which, along with
incremental sales from the Packer Foods acquisition, have resulted in net sales
increases of approximately $6.4 million.
Increases at the Snack Foods Group are attributable to successful
sales/marketing efforts and the acquisition of Matthews Candy Company during the
fourth quarter of fiscal 1996.
Gross Profit: Gross profit of $101.2 million in the six months ended December
28, 1996 increased $7.0 million or 7.5 percent from $94.2 million in the six
months ended December 23, 1995. This increase is attributable to improved
margins in all operations but primarily at CMF and Nalley. Somewhat improved
pricing in the vegetable and popcorn categories at CMF have helped improve
profitability from a year ago. Nalley, which experienced extremely high start-up
costs on the new salad dressing line a year ago, has managed through those
issues and has significantly improved margins.
Selling, Administrative, and General Expenses: Selling, administrative, and
general expenses have decreased $8.2 million as compared with the prior year. A
$2.6 million decrease in selling and advertising expenses and trade promotions
related primarily to decreased spending at the Nalley division. Reductions in
other administrative expenses accounted for $5.8 million and were primarily
attributable to benefits from the restructuring initiative that began late in
fiscal 1996 and the reduction of consulting and legal expenses incurred in the
prior year.
Interest Expense: The decrease in interest expense was a benefit of inventory
reduction and cash flow management programs initiated in fiscal 1996 as well as
the debt reduction attributable to the sale of Finger Lakes Packaging.
Provision for Taxes: The provision for taxes in the six months ended December
28, 1996 of $2.7 million changed $3.9 million from the benefit of $1.2 million
in the six months ended December 23, 1995 resulting from the increased earnings
before tax. The tax provision was also negatively impacted by the
non-deductibility of goodwill.
Cumulative Effect of a Change in Accounting: Effective June 30, 1996, accounting
procedures were changed to include in prepaid expenses and other current assets,
manufacturing spare parts previously charged directly to expense. Management
believes this change is preferable because it provides a better matching of
costs with related revenues. In addition, the Company's independent accountants
have agreed that this change in accounting is preferable. The favorable
cumulative effect of the change (net of Pro-Fac's share of $2.6 million and
income taxes of $1.2 million) was $1.9 million. Pro forma amounts for the
cumulative effect of the accounting change on prior periods are not determinable
due to the lack of physical inventory counts required to establish quantities at
the respective dates.
<PAGE>
Gain on Sale of Finger Lakes Packaging: On October 9, 1996, the Company
completed the sale of Finger Lakes Packaging to Silgan Containers Corporation,
an indirect, wholly-owned subsidiary of Silgan Holdings, Inc., headquartered in
Stamford, Connecticut. The Company received proceeds of approximately $30
million. The transaction also included a long-term supply agreement. A gain of
approximately $3.6 million was recognized. Proceeds from this sale were applied
to Bank debt.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion highlights the major variances in the "Consolidated
Statement of Changes in Cash Flows" for the first six months of fiscal 1997
compared to the first six months of fiscal 1996.
Net cash used in operating activities improved in the first six months of fiscal
1997 primarily due to increased earnings and an inventory-reduction program
initiated in fiscal 1996. The change to amounts payable to members increased
primarily due to increased deliveries. Cash flow relating to accounts receivable
in the first six months of fiscal 1997 decreased from the prior year primarily
due to the receipt of insurance proceeds in the prior year period.
Net cash provided by/(used in) investing activities varied significantly from
year to year, primarily due to the sale of Finger Lakes Packaging. Besides the
$30 million from the sale of Finger Lakes, the Company also received
approximately $4 million for the sale of the Clifton, New Jersey plant which had
been idle. Offsetting items in the prior year included the disposition of
Nalley's Ltd. and the acquisition of Packer. The purchase of property, plant,
and equipment in both years was for general operating purposes.
Net cash (used in)/provided by financing activities decreased from the prior
year primarily due to increased earnings, the inventory-reduction program
initiated in fiscal 1996, and proceeds from the sale of Finger Lakes Packaging
and the Clifton property. This total decrease was offset by the additional debt
incurred in the prior year to finance the Packer acquisition. The decrease in
dividends resulted from the payment of both the annual fiscal 1995 dividend and
quarterly fiscal 1996 dividend. The change in dividend payment resulted from the
conversion of non-cumulative preferred stock to cumulative preferred stock and
the Nasdaq listing requirement of quarterly dividend payments. In addition, the
prior year included a common dividend of $0.5 million which was not made in
fiscal 1997.
Borrowings: Under the Company's New Credit Agreement with the Bank, as amended,
$76.0 million is available for seasonal working capital purposes under the
Seasonal Facility, subject to a borrowing base limitation, and up to $13.2
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) the total
line and (ii) the sum of 60 percent of eligible accounts receivable plus 50
percent of eligible inventory.
As of December 28, 1996, (i) cash borrowings outstanding under the Seasonal
Facility were $32.0 million and (ii) additional availability under the Seasonal
Facility, after taking into account the amount of the borrowing was $44.0
million. In addition to its seasonal financing, as of December 28, 1996, the
Company had $15.1 million available for long-term borrowings under the Term Loan
Facility. 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. Pro-Fac believes that the cash flow generated by
operations and the amounts available under the Seasonal and Term Loan Facilities
should be sufficient to fund working capital needs, fund capital expenditures,
service debt, and pay dividends for the foreseeable future.
Certain financing arrangements require that Pro-Fac and Curtice Burns meet
certain financial tests and ratios and comply with certain other restrictions
and limitations. As of December 28, 1996, Pro-Fac is in compliance with, or has
obtained waivers for, all such covenants, restrictions and limitations.
Short- and Long-Term Trends: The vegetable portion of the business, which
includes CMF and Southern Frozen Foods, 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.
The effect of the 1996 growing season on fiscal 1997 financial results so far
has been a moderate improvement from the prior year in earnings on vegetable
products. The Company began fiscal 1997 with $29.6 million less in inventories
than the beginning of fiscal 1996 and at the end of the first six months of
fiscal 1997 inventories were $33.9 million less than the prior year. The
reduction in inventories was primarily accomplished as a result of decreased
production and increased sales and was planned to correct the higher carryover
inventory situation from the previous year as well as to manage nonseasonal
inventories for shorter lead times in order to improve the utilization of
capital. The spring of 1996 produced excessive rain in some of the Company's
growing areas and drought
<PAGE>
conditions in some others. These adverse weather conditions delayed or reduced
the processing of certain early 1996 crops, but a significant proportion of
these throughputs have been replaced by later production.
Other Matters:
Seneca to Purchase Private Label Canned Vegetable Businesses: On January 6,
1997, the Company and Seneca jointly announced that they have signed a letter of
intent for Seneca to acquire certain Curtice Burns assets and to realign the
sourcing of Seneca's New York State raw vegetable products. The transaction
calls for Seneca to acquire the Curtice Burns Leicester, New York production
facility and the LeRoy, New York distribution center, as well as the Blue Boy
brand.
Seneca will produce, market and sell the Blue Boy brand canned vegetables and
private label canned vegetables and will also pack certain products on a
contractual basis for Curtice Burns. The acquisition will not include the
Greenwood and Silver Floss labels, or Curtice Burns sauerkraut, beets in glass
containers, or frozen vegetable business. Terms and conditions of the agreement
are subject to ongoing negotiations and board approval from Seneca and Pro-Fac.
Seneca and the Company will also forge a long-term strategic alliance to combine
their agricultural departments into one organization to be managed by Curtice
Burns. The objective is to maximize sourcing efficiencies of New York State
vegetable requirements for both companies. This agreement will initially have a
minimum ten-year term.
The parties are working towards finalizing the agreement, subject to further due
diligence by both parties, and expect to close by the end of March. A
mutually-agreed goal for both companies is a continuity of employment at the
facilities.
No significant gain or loss is anticipated as a result of this transaction.
Restructuring: During the fourth quarter of fiscal 1996, the Company initiated a
corporate-wide restructuring program. Approximately $4 million of the
restructuring charge comprised employee termination benefits. During the first
six months of fiscal 1997, approximately $1.5 million of this reserve has been
liquidated for this purpose.
Deferred Taxes: During the first quarter of fiscal 1996 the net deferred taxes
liabilities of the Company were reduced by approximately $22 million. The
adjustment was made in conjunction with the Company obtaining its cooperative
tax status and was applied against goodwill, as it represented an uncertainty
related to income taxes outstanding at the date of the acquisition. Based on
further guidance from outside counsel, the adjustment was reversed at the end of
fiscal 1996.
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
Exhibit 27 Financial Data Schedule
(b) No current report on Form 8-K was filed during the fiscal period to
which this report relates.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date January 28, 1997 BY:/s/ Stephen R. Wright
--------------------- ------------------------------------
STEPHEN R. WRIGHT,
GENERAL MANAGER
Date: January 28 , 1997 BY:/s/ William D. Rice
--------------------- ---------------------------------------
WILLIAM D. RICE,
ASSISTANT TREASURER AND
MANAGEMENT CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
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