ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Pro-Fac Cooperative, Inc. ("Pro-Fac" or "the Cooperative") is an agricultural cooperative corporation formed in 1960 under New York law to process and market crops grown by its members. Pro-Fac crops include fruits (cherries, apples, blueberries, peaches, and plums), vegetables (snap beans, beets, cucumbers, peas, sweet corn, carrots, cabbage, squash, asparagus, potatoes, southern peas, dry beans, turnip roots, and leafy greens), and popcorn. 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. Its approximately 650 members are growers (or associations of growers) located principally in New York, Pennsylvania, Illinois, Michigan, Washington, Oregon, Iowa, Nebraska, North Dakota, Florida, California, and Georgia. The principal office of Pro-Fac is at 90 Linden Place, Rochester, New York 14625; its telephone number is (716) 383-1850.
Curtice-Burns Foods, Inc. ("Curtice Burns" or 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, 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 (the "Integrated Agreement").
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, the 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 12.25 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 and Facilitation 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.
RELATIONSHIP WITH CURTICE BURNS
Upon consummation of the Acquisition, 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"). Under the Pro-Fac Marketing Agreement 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 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.
Purchase of Crops From Pro-Fac: Under the Pro-Fac Marketing Agreement, Curtice Burns purchases crops from Pro-Fac at the commercial market value ("CMV") of those crops. 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. Under both the Pro-Fac Marketing Agreement and the predecessor agreement to the Pro-Fac Marketing Agreement, Curtice Burns paid Pro-Fac $44.7 million, $55.9 million, and $59.2 million as CMV for crops purchased from Pro-Fac in fiscal years 1996, 1995, and 1994, respectively. The crops purchased by Curtice Burns from Pro-Fac represented approximately 72 percent, 73 percent, and 65 percent of all raw agricultural crops purchased by Curtice Burns in fiscal 1996, 1995, and 1994, respectively.
CMV is determined 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 in any year in which the Company has earnings on products which were processed from crops supplied by Pro-Fac ("Pro-Fac Products") 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 in 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.
Curtice Burns has historically paid Pro-Fac additional patronage income based on a portion of Curtice Burns' pretax income. Under the predecessor agreements to the Pro-Fac Marketing Agreement, additional patronage income has generally been equal to 50 percent of the pretax 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' pretax losses.
Curtice Burns paid additional patronage income to Pro-Fac of $9.6 million and $16.9 million in fiscal 1995 and 1994 on account of Curtice Burns' earnings for those years. In fiscal 1996, Curtice Burns reduced the amount of CMV due to Pro-Fac by $9.0 million based on an allocation of a loss at Curtice Burns on Pro-Fac products.
Additional patronage income received by Pro-Fac is deductible to Pro-Fac for federal tax purposes only to the extent distributed to its members. 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. Since the Acquisition, Pro-Fac is required to reinvest at least 70 percent of the additional patronage income in Curtice Burns.
Under the Pro-Fac Marketing Agreement, Curtice Burns manages the business and affairs of Pro-Fac and provides all personnel and systems required for its management.
NARRATIVE DESCRIPTION OF BUSINESS
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 who in turn use their own brand names on the products and (iii) "foodservice" products, which are sold to foodservice institutions such as restaurants, caterers, bakeries, and schools. In fiscal 1996, approximately 51.3 percent of the Company's net sales were branded and the remainder were split between private label and foodservice. The Company's branded products are listed under the "Trademarks" section of this report. The Company's private label products include salad dressings, salsa, fruit fillings and toppings, canned puddings, canned and frozen vegetables, Southern frozen specialties, and frozen and breaded products which are sold to customers such as A&P, Brunos, Kroger, Piggly Wiggly, Safeway, SuperValu, Topco, Wegman's and Winn-Dixie. The Company's foodservice products include salad dressings, pickles, fruit fillings and toppings, canned and frozen vegetables, frozen Southern specialties, frozen breaded and battered products, canned puddings, cheese sauces and canned and frozen fruit, which are sold to customers such as Carvel, Church's, Disney, Foodservice of America, KFC, MBM, McDonald's, PYA, and Sysco.
Comstock Michigan Fruit ("CMF"): CMF, the Company's largest division, headquartered in Rochester, New York, produces products in four principal categories: (i) fruit fillings and toppings; (ii) aseptically-produced products; (iii) canned and frozen fruits and vegetables; and (iv) popcorn. In fiscal 1996, approximately one-third of CMF's net sales represented branded products, approximately one-third represented private label products and approximately one-third represented foodservice products. CMF markets its branded products under the "Thank You," "Comstock," "Wilderness," "Greenwood," "Silver Floss," "Blue Boy," "Super Pop," and "Pops-Rite" labels.
CMF estimates the national fruit fillings and toppings market to be approximately $225.0 million. In fiscal 1996, CMF's fruit fillings and toppings held a national market share of approximately 52 percent in the fruit filling segment. In addition, CMF is also the major supplier of private label fruit fillings to retailers. CMF's fruit fillings and toppings are sold both on the retail level and to foodservice institutions such as restaurants, caterers, bakeries, schools. In fiscal 1996, the Company introduced the Pro-Can "Flavor Saver" container, a plastic container which has an easy-open end and can be resealed and stored in the refrigerator for future use. The Company believes this container has increased CMF's market share in the fruit fillings and toppings category. On July 21, 1995, the Company acquired Packer Foods, Inc. and merged this operation into CMF (see further discussion in NOTE 3 of "Notes to Consolidated Financial Statements").
The aseptic operations produce puddings, cheese sauces and dips for sale by CMF. 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 is a state-of-the-art facility. In 1996, CMF's aseptically processed puddings accounted for approximately 66 percent of the national foodservice market and aseptically processed cheese sauces accounted for approximately one-quarter of the national foodservice market.
The 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, among other things, by 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.
In the first quarter of fiscal 1997, sales and administrative functions of the Brooks Foods division were integrated into CMF.
Nalley Fine Foods: Nalley 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, "Adams" natural peanut butter, and "Farman's" pickles. Approximately three-quarters of Nalley products are branded; however, private label accounts for a growing percentage of Nalley business.
The Nalley products have been a vehicle for both geographic expansion and line extension. Several of Nalley products have leading market shares in the Pacific Northwest, such as chili, which had a market share of approximately 55 percent, and "Nalley" and "Farman's" pickles, which together had a market share of approximately 45 percent, for the 52-week period ended May 1996. In the Pacific Northwest, the Company's "Nalley" and "Bernstein's" brands of salad dressings had a combined market share of approximately 23 percent for the same period. Nalley has taken an aggressive position in growing its market share in the salad dressing category. It is believed by management that over the last four years, Nalley 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, 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 has been aggressively pursuing this profitable business segment. Specifically, Nalley has been executing its store label strategy on specialty Mexican products, such as chili and salsa, salad dressings and canned soups. The private label customer base continues to expand on a national basis and includes Winn-Dixie in the Southeast, Wegmans in Upstate New York, Topco in the Midwest, and Ralph's, Safeway, QFC, Albertsons and Western Family on the West Coast. Specialty businesses, such as International, continue to grow in both branded and private label products.
Southern Frozen Foods: Southern Frozen Foods, headquartered in Montezuma, Georgia, is one of the nation's leading suppliers in the production and sales of frozen, Southern-specialty products such as black-eyed peas, okra, Southern squash, and Southern specialty side dishes that include summer squash casserole, Southern-style creamed corn, and Southern-style black-eyed peas in a savory sauce as well as a line of traditional vegetables such as corn, peas, squash and green beans.
Southern's products are marketed under the brand names of "McKenzie's," "McKenzie's Gold King," "Chill Ripe," "Southern Farms," and "Tropic Isle." Approximately one-half of Southern's products are sold under the aforementioned company brand labels. This results in Southern Frozen Foods being the No. 1 brand (maintaining an approximate 26 percent share of market on Southern vegetables) in their primary geographic selling regions, on a consistent 52-week basis. The balance of Southern's sales are split between the private label and foodservice business segments servicing major accounts including SuperValu, Winn Dixie, Federated Foods, and Marketing Management (for private label), and Church's, MBM, PYA, and Foodservice of America (for foodservice needs).
In fiscal 1995, Southern Frozen Foods' breading and packaging operations were destroyed by fire. In fiscal 1996, Southern Frozen Foods brought its newly rebuilt facility on-line.
Snack Foods Group: The Snack Foods Group consists of three separate divisions: Snyder, Tim's, and Husman.
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 Mid-Atlantic states, which are 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, popcorn, cheese curls, and snack mix in the Washington, Northern Idaho, Oregon, and Montana area. Kettle frying produces a potato chip that is thicker and crisper than other potato chips.
Husman Snack Foods: Husman 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 creates a unique product niche by customizing its product development and promotions to local tastes. Multi-packs and licensing agreements with local restaurants are two ways Husman creates its 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, approximately 75 percent, are sold under the Brooks brand and consist of value-added items such as Chili Hot Beans and stewed tomatoes.
Brooks chili beans dominate the Midwest market with an average category share of more than 65 percent. Brooks value-added canned tomatoes with chili seasonings continue to grow shares under the "Just for Chili." Brooks "Rich & Tangy Ketchup" brand continues to hold a visible position in all stores in Brooks markets.
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.
In the first quarter of fiscal 1997, sales and administrative functions of Brooks Foods were integrated into CMF.
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 1996, approximately two-thirds of Finger Lakes sales were to other divisions of the Company and one-third were to other customers.
Finger Lakes' three-part, metal, sanitary cans are used in the retail, foodservice and institutional markets. These cans are recyclable and provide economical containers for the Company's products based on volume run and customer base.
As previously announced, the Company is investigating the possible sale of this subsidiary.
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 three fiscal years. The financial statements for the fiscal years ended June 29, 1996, June 24, 1995, and June 25, 1994, which are included in this report, reflect the information set forth in the 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 has its own sales personnel responsible for sales within the Pacific Northwest and uses food brokers for sales in other marketing areas. Snyder, Tim's and Husman products are marketed through distributors (some of which are owned and operated by the Company) who sell directly to retail outlets in the Mid-Atlantic and Pacific Northwest.
Customer brand operations encompass the sale of products under private labels to chain stores and under the controlled labels of buying groups. 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:
RAW MATERIAL SOURCES
In fiscal 1996, the Company acquired approximately 72 percent of its raw agricultural products from Pro-Fac. The Company also purchased 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.
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.
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.
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.
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 1996, total capital expenditures of Pro-Fac and the Company were $19.5 million of which approximately $2.0 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, will be approximately $1.7 million for the 1997 fiscal year. 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 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 Cooperative 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 contracts 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.
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. The members of Pro-Fac generally operate relatively large production units with emphasis on mechanized 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 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 emphasized the merchandising of its own brands and expanded service and product development for its high volume private label and foodservice customers. The percentage of sales under brand names owned and promoted by the Company (including franchise brands) amount to approximately 51.3 percent; sales to the foodservice industry (restaurants and institutional customers) represent approximately 24.0 percent; private label sales currently represent approximately 19.9 percent; and sales to other manufacturers are approximately 4.8 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 the Company operates 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 foodservice businesses. No new products which required the investment of a material amount of assets have been publicly announced.
EMPLOYEES
As of June 29, 1996, the Company had 3,823 full-time employees, of whom 2,520 were engaged in production and the balance in management, sales and administration. As of that date, the Company also employed approximately 626 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.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTIES
All plants, warehouses, office space and other facilities used by Curtice Burns in its business are either owned by Curtice Burns or one of its subsidiaries or leased from third parties. All 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.
Five of the properties are held for sale. These properties are located in Wall Lake, Iowa; Clifton, New Jersey; Alton, New York; South Dayton, New York; and Rushville, New York.
The following table describes all facilities leased or owned by the Company (other than the five 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.
ITEM 3.
ITEM 3. 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The information required by this item is contained in NOTES 8 and 9 to the "Notes to Consolidated Financial Statements."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA*
ITEM 7.
ITEM 7. 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 1994 through 1996.
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 1995 to Fiscal 1996: The 1996 CMV of crops delivered during the 1995 production season decreased to $44.7 million from $55.9 million in fiscal 1995. This 20.0 percent decrease was the net result of a 17.8 percent tonnage increase offset by the effect of price and mix variations from the commodities. Payment to the members for CMV was limited to 90 percent of deliveries, or $40.2 million. The 10 percent reduction in the obligation to members of $4.5 million was recognized as a reduction in other selling, general and administrative expenses.
For the year ended June 29, 1996, the increase/(decrease) in net proceeds and the allocation to members compared to the prior year is summarized below in millions of dollars:
Changes From Fiscal 1994 to Fiscal 1995: For the year ended June 24, 1995, the increase/(decrease) in net proceeds compared to the prior year is summarized below in millions of dollars:
The variations in fiscal 1996 and 1995 were mainly due to the Acquisition of Curtice Burns which is reflected for all of fiscal 1996 and only a partial period in fiscal 1995. The increased interest expense was primarily attributable to the increased borrowings related to the Acquisition. 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 a net operating loss carryforward and a tax settlement regarding the Cooperative's exempt status (see NOTE 6 - "Taxes on Income").
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 CMV of these crops. In addition, proceeds depended upon the profitability of the finished products made from Pro-Fac crops.
Because of the profit/(loss) split provisions between Curtice Burns and Pro-Fac, business conditions and trends affecting Curtice Burns' profitability also affected 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.
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.
The following tables illustrate the Company's results of operations by business for the fiscal years ended June 29, 1996, June 24, 1995, and June 25, 1994, and the Company's total assets by business as at June 29, 1996 and June 24, 1995.
The following table illustrates the Consolidated Statement of Net Proceeds data and the percentage of net sales represented by these items for the fiscal years ended June 29, 1996, June 24, 1995, and June 25, 1994.
CHANGES FROM FISCAL 1995 TO FISCAL 1996
In conjunction with the Acquisition, net assets were adjusted to fair market value and additional debt was incurred. Accordingly, depreciation and interest expense have increased, making year-to-year comparisons difficult to analyze. Nonetheless, earnings before interest, depreciation and amortization (EBITDA) for ongoing businesses can be compared. 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.
EBITDA from ongoing businesses declined $32.2 million from $76.5 million in the prior year to $44.3 million in fiscal 1996.
Depressed vegetable pricing has significantly impacted the Company's financial results as well as much of the industry. The industry as a whole expected a slight increase in pricing which has not happened. The Company's vegetable category, which includes significant segments of both the CMF and Southern Frozen Foods divisions, experienced a 71.2 percent reduction in EBITDA compared to the prior year. Improvements in earnings of other product lines at the CMF division have offset part of the vegetable earnings reduction.
Other issues impacting year-to-date results include the costly start up of the Nalley dressing plant, other manufacturing variances and increased promotion expenses at Nalley. Nalley EBITDA is $20.6 million lower versus the prior year. Several steps have been taken to address these problems, including senior management changes at the division and restructuring initiatives discussed below.
A major inventory reduction program across all divisions was implemented in fiscal 1996. Long-term debt was reduced $37.5 million more in this year than during the same period last year due to significant cash flow generated from these programs and from additional payments to the Company by Pro-Fac. (See NOTES 2 and 5.)
During the fourth quarter of fiscal 1996, the Company initiated a corporate-wide restructuring program. The overall objectives of the plan are to reduce expense, improve productivity, and streamline operations. Total fiscal 1996 restructuring charge amounted to $5.9 million, which includes a fourth quarter charge of approximately $4.0 million (which will improve fiscal 1997 earnings by approximately $3.0 million), primarily comprised of employee termination benefits, and approximately $1.9 million for strategic consulting was incurred
throughout the year. Efforts will focus on the consolidation of operations and the elimination of approximately 8 percent of the work force. Reductions in personnel will include operational and administrative positions. The majority of such termination benefits will be liquidated with proceeds from operations during the first six months of fiscal 1997. Work-force reductions have been implemented at CMF, Nalley Fine Foods, and Southern Frozen Foods. In addition, the sales and administrative functions of the Brooks Foods division were integrated into the CMF division in the first quarter of fiscal 1997. Management is continuing to evaluate whether further efforts to consolidate operations will be required in the future.
Net Sales: The Company's net sales in fiscal 1996 of $739.1 million decreased $9.4 million or 1.3 percent from $748.5 million in fiscal 1995. The net sales attributable to businesses sold or to be sold discussed in NOTE 3 were $18.3 million in fiscal 1996 compared to $47.9 million in fiscal 1995. The Company's net sales from ongoing operations excluding businesses sold or to be sold were $720.8 million in fiscal 1996, an increase of $20.2 million or 2.9 percent from $700.6 million in fiscal 1995.
Gross Profit: Gross profit of $176.2 million in fiscal 1996 decreased $42.2 million or 19.3 percent from $218.4 million in fiscal 1995. Of this net decrease, a $7.4 million reduction was attributable to businesses sold or to be sold, and a decrease of $34.8 million was attributable to decreased gross profit at the Company's ongoing operations. This decrease of $34.8 million was the result of variations in volume, selling prices, costs, product mix, and increased depreciation due to the Acquisition. Division results are as follows:
The decreased gross profit at the Company's CMF and Southern Frozen Foods operations primarily relates to depressed vegetable pricing.
The decreased gross profit at the Company's Nalley operation relates to higher costs on all the product lines, but particularly in salad dressings due to plant start-up activities.
Restructuring: Restructuring expenses amounted to $5.9 million in fiscal 1996 as discussed above. Restructuring expenses in fiscal 1995 of $8.4 million reflect the impact of the sale of certain assets of the Nalley US Chips and Snacks business and other expenses relating to the disposal of this operation.
Change in Control Expenses: Change in control expenses recorded in fiscal 1995, amounting to $2.2 million, reflect non-deductible expenses relating to the sale of the Company which include legal, accounting, investment banking and other expenses.
Gain on Assets Resulting From Fire Claim: The gain on assets resulting from the fire claim recorded in fiscal 1995 amounted to $4.1 million. This represents the replacement value in excess of the depreciated book value of the building and equipment destroyed by fire on July 7, 1994 at the Southern Frozen Foods division, net of additional costs incurred.
Selling, Administrative and General Expenses: Selling, administrative and general expenses in fiscal 1996 of $156.1 million decreased $3.8 million or 2.4 percent from $159.9 million in fiscal 1995. This net decrease of $3.8 million includes:
The $0.5 million decrease in trade promotions, advertising and selling costs at the Company's ongoing operations resulted from increased costs at Nalley of $3.7 million (primarily in the canned and dressing product lines), increased costs of
$1.0 million at the Snack Group, increased costs of $0.5 million at Southern Frozen Foods, and increased costs at Brooks of $0.2 million, offset by decreases at CMF of $5.9 million primarily in the filling and topping product lines.
The $4.2 million increase in other administrative costs attributable to the Company's ongoing operations was primarily related to increased expense at Nalley. The increased expense at Nalley included administrative expenses which previously had been allocated to Nalley Chips and Snacks and Nalley Canada Ltd. The disposal of these businesses did not eliminate centralized functions leaving costs which will be reduced over a period of time.
Interest Expense: Interest expense in fiscal 1996 of $42.0 million increased $9.6 million or 29.6 percent from $32.4. million in fiscal 1995. This increase was primarily attributable to the increased borrowing and increased rates related to the acquisition of the Company by Pro-Fac which was reflected for the full year in fiscal 1996 and for only a partial year in fiscal 1995.
Benefit/(Provision) for Taxes: The benefit for taxes in fiscal 1996 of $6.9 million compared to a provision of $6.0 million in fiscal 1995. See NOTE 6 of "Notes to Consolidated Financial Statements."
CHANGES FROM FISCAL 1994 TO FISCAL 1995
General: 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.
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 3 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 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 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, product mix, and increased depreciation due to the acquisition. The increase in gross profit for ongoing operations is comprised of increases and decreases as follow:
Nalley 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: Restructuring expenses resulted in a charge in fiscal 1995 of $8.4 million to reflect the impact of the sale of certain assets of the Nalley US Chips and Snack business and other expenses relating to the disposal of this operation. Included in fiscal 1994 was a $7.8 million net gain from restructuring, 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 3.
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 by the Predecessor entity. See NOTE 2 - "Change in Control of the Company."
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 $4.1 million.
Selling, Administrative, and General Expenses: 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:
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 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 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 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.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1996 net cash provided by operating activities of $54.3 million reflects a net loss of $9.5 million. Depreciation and amortization of assets amounted to $30.3 million. Accounts receivable and inventories decreased $13.5 million and $33.3 million, respectively. Accounts receivable decreased primarily due to the receipt of insurance proceeds and the IRS refund. The reduction in inventories was accomplished primarily as a result of a company-wide inventory reduction program.
Cash flows from investing activities include the Acquisition of property, plant, and equipment, and other assets held for or used in the production of goods, and the amounts received from Curtice Burns prior to the Acquisition for payments on capital leases. Net cash used in investing activities of $20.2 million in fiscal 1996 was comprised of $19.5 million paid for property, plant, and equipment, and disposals provided $5.0 million. The sale of Nalley Canada Ltd. accounted for the majority of the proceeds from disposals. The acquisition of Packer Foods and Matthews Candy Co. used $5.8 million.
Net cash used in financing activities of $29.4 million is primarily comprised of payments on long-term debt of $25.0 million. Proceeds from the issuance of long-term debt (to finance the Packer acquisition) amounted to $5.4 million. Cash dividends paid amounted to $8.9 million. The payments on long-term debt included required scheduled payments, proceeds from disposals of property,
primarily Nalley Ltd., and excess cash provided from operations, primarily a result of the receipt of insurance claims, the IRS refund, and inventory reduction.
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 were paid quarterly (with dividends 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 resulted in the payment of 1-3/4 years of dividends to the holders of exchanged shares in fiscal 1996. The depletion to earned surplus caused by the higher dividend payments in fiscal 1996 and the loss incurred from operations resulted in a 10 percent reduction in the payment to members for CMV in fiscal 1996.
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, Pro-Fac is able to borrow up to $84.0 million for seasonal working capital purposes under the Seasonal Facility, subject to a borrowing base limitation, and obtain up to $14.2 million in aggregate face amount of letters of credit pursuant to a Letter of Credit Facility (see NOTE 5). The borrowing base is defined as the lesser of (i) $84.0 million or (ii) the sum of 60 percent of eligible accounts receivable plus 50 percent of eligible inventory.
As of June 29, 1996, (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 $84.0 million. In addition to its seasonal financing, as of June 29, 1996, Pro-Fac had $9.8 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.
The New Credit Agreement and Indenture requires that Pro-Fac and Curtice Burns meet certain financial tests and ratios and comply with certain other restrictions and limitations. The consequence for the failure to achieve financial ratios in the New Credit Agreement is to limit the Cooperative's payment to its members to 90 percent of CMV. As of June 29, 1996, 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.
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 their own inventories to normal. Favorable weather conditions in the 1994 growing season 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 a higher carryover inventory at the end of fiscal 1995 than at the end of fiscal 1994 for the Company. With the harvesting completed for the smaller 1995 vegetable crop, it had been anticipated that prices would gradually increase during the 1996 fiscal year. This did not occur, however, to the degree expected.
The effect of the 1996 growing season on fiscal 1997 financial results cannot be estimated until late fall 1996 or early calendar 1997 when harvesting is complete and national supplies can be determined. The Company began fiscal 1997 with $29.6 million less inventories than the beginning of fiscal 1996. 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 and to improve the utilization of capital. The spring of 1996 produced excessive rain in some of the Company's growing areas and drought conditions in some others. These adverse weather conditions delayed or reduced the processing of certain early 1996 crops which further reduced inventory levels somewhat. The Company anticipates, however, that all customers' needs will be met in fiscal 1997.
Required scheduled payments on long-term debt will approximate $8.0 million in the next 12 months. In fiscal 1996, cash proceeds of approximately $4.4 million from the sale of Nalley Canada Ltd. and other real estate that had been held for sale were applied to long-term debt in accordance with the terms of the New Credit Agreement.
Effective June 30, 1996 (fiscal 1997), accounting procedures will be changed to include in prepaids and other assets, general purpose spare parts previously charged directly to expense. This change is preferable as it provides a better matching of costs with related revenues. The estimated favorable cumulative effect of the change (net of income taxes of approximately $1.6 to $1.9 million) is approximately $2.4 to $3.0 million.
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.
Finger Lakes Packaging: On April 9, 1996, the Company announced its intent to sell its Finger Lakes Packaging Company subsidiary ("Finger Lakes"), a can-making operation based in Lyons, New York. Finger Lakes also has an operation in Benton Harbor, Michigan. Approximately 60 percent of the cans manufactured by Finger Lakes are used by divisions of the Company. The Company plans to enter into a long-term supply agreement in conjunction with the sale. The Company anticipates that proceeds from the sale will be utilized to reduce debt.
Favorable Tax Ruling and Developments: In August of 1993, the Internal Revenue Service issued a determination letter which concluded that the Cooperative was exempt from federal income tax to the extent provided by Section 521 of the Internal Revenue Code, "Exemption of Farmers' Cooperative from Tax." Unlike a nonexempt 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 was retroactive to fiscal year 1986. In conjunction with this ruling, the Cooperative filed for tax refunds for fiscal years 1986 to 1992 in the amount of approximately $8.8 million and interest payments of approximately $5.2 million. A refund amount of $10.1 million for tax and interest was reflected in the financial statements of the Cooperative as of June 24, 1995. In addition, refund amounts of $3.9 million for tax and interest have been reflected in the financial statements of the Cooperative as of June 29, 1996. The refunds and interest for the fiscal years 1986 to 1991 were received in March of 1996.
As a result of the Acquisition, the Cooperative's exempt status has ceased.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary: Management's Responsibility for Financial Statements Report of Independent Accountants Consolidated Financial Statements: Consolidated Statement of Operations and Net Proceeds for the years ended June 29, 1996, June 24, 1995, and June 25, 1994 Consolidated Balance Sheet for the years ended June 29, 1996 and June 24, 1995 Consolidated Statement of Cash Flows for the years ended June 29, 1996, June 24, 1995, and June 25, 1994 Consolidated Statement of Changes in Shareholders' and Members' Capitalization and Redeemable Stock for the years ended June 29, 1996, June 24, 1995, and June 25, 1994 Notes to Consolidated Financial Statements Selected Quarterly Financial Data
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the financial statements and related notes which begins on the page following the "Report of Independent Accountants." These statements have been prepared in accordance with generally accepted accounting principles.
The Company's accounting systems include internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are monitored through the internal and external audit programs.
The financial statements have been audited by Price Waterhouse LLP, independent accountants, who were responsible for conducting their examination in accordance with generally accepted auditing standards. Their resulting report is on the succeeding page.
The Board of Directors exercises its responsibility for these financial statements. The independent accountants and internal auditors of the Company have full and free access to the Board. The Board periodically meets with the independent accountants and the internal auditors, without management present, to discuss accounting, auditing and financial reporting matters.
/s/Stephen R. Wright /s/William D. Rice Stephen R. Wright William D. Rice General Manager Assistant Treasurer and Management Chief Financial Officer
August 9, 1996
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 29, 1996 and June 24, 1995 and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 29, 1996, 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 9, 1996
FINANCIAL STATEMENTS
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, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Pro-Fac Cooperative, Inc. ("Pro-Fac" or the "Cooperative") is an agricultural cooperative which processes and markets crops grown by its members through its wholly-owned subsidiary Curtice-Burns Foods, Inc. ("Curtice Burns" or the "Company").
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, the Company manufactures cans, which are both utilized by the Company and sold to third parties. The vegetable and fruit product lines account for approximately 70 percent of sales. The Company's products are primarily distributed in the United States.
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.
Fiscal Year: Fiscal 1996 ended on June 29, 1996, the last Saturday in June and comprised 53 weeks. Fiscal 1995 and fiscal 1994 ended on June 24, 1995 and June 25, 1994, respectively, the last Saturday in June and comprised 52 weeks each.
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 2 "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 1995 and fiscal 1994 have been reclassified to conform with fiscal 1996 presentations.
Cash and Cash Equivalents: Cash and cash equivalents include short-term investments with maturities of three months or less. Short-term investments amounted to $5.3 million at June 29, 1996. There were no such short-term investments at June 24, 1995.
Inventories: Inventories are stated at the lower of cost or market on the first-in, first-out ("FIFO") method.
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.
Other Assets: Other assets are primarily comprised of debt issuance costs and a long-term receivable issued in connection with the sale of Nalley Canada Ltd. The debt issuance costs are amortized over the term of the debt. The receivable relating to the sale of Nalley Canada Ltd. is due on various dates between the years 1998 and 2005.
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 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."
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.
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.
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. These activities are not significant to the Company's operations as a whole.
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.
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 1996 and 1995 amounted to $9,831,000 and $13,150,000, respectively.
NOTE 2. 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 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.
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. Prior to the Acquisition on 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 contractual relationship between Pro-Fac and the Company is defined in the Pro-Fac Marketing and Facilitation Agreement. Under the Pro-Fac Marketing and Facilitation 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 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. 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 in 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.
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. These allocations were finalized in fiscal 1996. 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 $110.0 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 $42.0 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 using lives ranging from 5 to 35-years. There were no other significant changes to accounting policies as a result of the Acquisition.
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.
NOTE 3. RESTRUCTURING, ACQUISITIONS, AND 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 ("CMF"). The sale of the oats business resulted in an approximate $10.9 million pretax gain in fiscal 1994, prior to the Acquisition.
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.
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. See further discussion at NOTE 6 - "Taxes on Income."
Sale of Nalley Canada Ltd.: On June 26, 1995, Curtice Burns sold its Canadian subsidiary, Nalley Canada Ltd., located in Vancouver, British Columbia, to a management group within the Canadian subsidiary. Nalley US has an ongoing supply agreement with Nalley Canada Ltd. as a result of the sale.
Packer Foods: On July 21, 1995, the Company acquired 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 was 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 has been merged into the Company's CMF operations.
Matthews Candy Co.: In the fourth quarter of fiscal 1996, the Company acquired Matthews Candy Co., a privately owned Washington-based snack food distributor. The total cost of the acquisition was approximately $0.4 million and was paid for in cash. Matthews Candy Co. has been merged into the Company's Tim's Cascade Chips operation of the Snack Foods Group.
Finger Lakes Packaging: On April 9, 1996, the Company announced its intent to sell its Finger Lakes Packaging Company subsidiary ("Finger Lakes"), a can-making operation based in Lyons, New York. Finger Lakes also has an operation in Benton Harbor, Michigan. Approximately 60 percent of the cans manufactured by Finger Lakes are used by divisions of the Company. The Company plans to enter into a long-term supply agreement in conjunction with the sale.
The business divestitures resulted in the following charges to earnings of the company in fiscal 1994, 1995, and 1996:
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 National Oats business of $10.9 million, net of a charge of $3.1 million to adjust previous estimates regarding restructuring activities initiated in fiscal 1993. This gain was incurred prior to the Acquisition.
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 US Chips and Snacks operation and other expenses relating to the disposal of this operation. On December 19, 1994 this operation was sold for approximately $2.0 million. This sale was contemplated by Pro-Fac in conjunction with the Acquisition. This loss was incurred prior to the Acquisition.
Fiscal 1996 Restructuring Charge: During the fourth quarter of fiscal 1996, the Company began implementation of a corporate-wide restructuring program. The overall objectives of the plan are to reduce expenses, improve productivity, and streamline operations. The total fiscal 1996 restructuring charge amounted to $5.9 million which included a fourth quarter charge of approximately $4.0 million, primarily comprised of employee termination benefits, and approximately $1.9 million for strategic consulting incurred throughout the year. Efforts will focus on the consolidation of operations and the elimination of approximately 8 percent of the work force. Reductions in personnel will include operational and administrative positions. The majority of such termination benefits will be liquidated during the first six months of fiscal 1997. Work-force reductions at CMF, Nalley Fine Foods, and Southern Frozen Foods were implemented. In addition, the sales and administrative functions of the Brooks Foods division were integrated into the Company's CMF division in the first quarter of fiscal 1997.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT AND RELATED OBLIGATIONS
The following is a summary of property, plant and equipment and related obligations at June 29, 1996 and June 24, 1995.
Interest capitalized in conjunction with construction amounted to $470,000 and $1,841,000 in fiscal 1996 and 1995, 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 29, 1996.
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 $10,927,000 and $6,017,000 for fiscal years 1996 and 1995, respectively.
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 $170.0 million at June 29, 1996.
The Bank also has provided the Company and Pro-Fac, subject to the terms and conditions set out in the New Credit Agreement, as amended, with seasonal financing of up to $84.0 million and a $14.2 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."
The senior subordinated notes (see below) limits the amount Pro-Fac can borrow from the Company to $10.0 million and provides that, if Pro-Fac borrows from a source other than the Company, Pro-Fac is restricted from borrowing from the Company. On June 28, 1996, Pro-Fac established a line of credit with CoBank, but did not increase the total seasonal line. Accordingly, proceeds of $18.0 million from such borrowing were utilized to extinguish outstanding obligations with the Company. In accordance with the loan agreement with the Bank, in consolidation, the seasonal borrowings by Pro-Fac will be consolidated with term loans.
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 US 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 US 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 fiscal 1996.
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 1996 of 9.6 percent for long-term debt with similar terms and maturities, the fair value of the Cooperative's long-term debt outstanding was approximately $172.4 million at June 29, 1996.
Borrowings under the Seasonal Facility are payable at the expiration of that portion of the facility, which is December 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 $53.7 million during fiscal 1996, and the weighted-average interest rate on such borrowing was 7.4 percent. There were no borrowings under this Seasonal Facility at June 29, 1996. The Letter of Credit Facility provides for the issuance of letters of credit through December 1996. Management anticipates timely renewals for both the Seasonal Facility and the Letter of Credit Facility.
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 consequence for the failure to achieve financial ratios is to limit the Cooperative's payment to its members to 90 percent of CMV. The Company is in compliance with, or has obtained waivers for, all covenants, restrictions, and requirements under the terms of the borrowing agreement.
OtherDebt: Other debt of $5.8 million carries rates up to 11.0 percent at June 29, 1996.
Maturities: Total long-term debt maturities during each of the next five fiscal years are as follows: 1997 through 1999, $8.0 million each; 2000, $18.2 million; and 2001, $28.4 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. Provisions of the Term Loan Facility also require that cash proceeds from the sale of businesses be applied to the Term Loan Facility.
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. 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 Indenture limits the amount Pro-Fac can borrow from the Company to $10.0 million and provides that, if Pro-Fac borrows from a source other than the Company, Pro-Fac is restricted from borrowing from the Company. On June 28, 1996, Pro-Fac established a line of credit with the Bank. Accordingly, proceeds of $18.0 million from such borrowing were utilized to extinguish outstanding obligations with the Company.
The Indenture also limits the amount and timing of dividends and other payments ("Restricted Payments") from the Company to Pro-Fac or to holders of other 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' 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.
Based on an estimated borrowing rate at 1995 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.
Based on an estimated borrowing rate at 1996 fiscal year end of 12.5 percent for borrowings with similar terms and maturities, the fair value of the Notes was $163.3 million at June 29, 1996.
Short-Term Borrowings: Short-term borrowings for the three years ended June 29, 1996 were as follows:
The above amounts include borrowings under existing and pre-existing loan agreements.
NOTE 6. TAXES ON INCOME
Taxes on income include the following:
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:
The consolidated deferred tax (liabilities)/assets consist of the following at June 29, 1996:
The Cooperative has recorded a benefit for the net operating loss carryforwards resulting from fiscal 1993, 1995 and 1996 results. As of June 29, 1996 the net operating loss carryforward available is $44.2 million ($16.1 million net of tax). Such amounts expire between 2008 and 2011.
During fiscal year 1996 the Cooperative's wholly owned subsidiary, Curtice Burns, sold the stock of its wholly owned subsidiary Curtice Burns Meat Snacks, Inc. Substantially all of the assets of this subsidiary were previously sold. The sale resulted in a capital loss of $36.3 million ($14.2 million net of tax). A full valuation allowance has been recorded against the capital loss carryforward, as it is more likely than not that a tax benefit will not be realized. The increase to the Cooperative's capital loss carryforward corresponds to the increase in the valuation allowance. The capital loss carryforward expires in 2001. In conjunction with the Acquisition of Curtice Burns by the Cooperative, any future recognition of the capital loss carryforward will reduce goodwill.
In January 1995, the Boards of Directors of Curtice Burns and Pro-Fac approved appropriate amendments to the Bylaws of the Curtice Burns to allow the company to qualify as a cooperative under Subchapter T of the Internal Revenue Code. In August 1995, Curtice Burns and Pro-Fac received a favorable ruling from the Internal Revenue Service approving the change in tax treatment effective for fiscal 1996. This ruling also confirmed that the change in Curtice Burns tax status would have no affect on Pro-Fac's ongoing treatment as a cooperative under Subchapter T of the Internal Revenue Code of 1986.
In August of 1993, the Internal Revenue Service issued a determination letter which concluded that the Cooperative was exempt from federal income tax to the extent provided by Section 521 of the Internal Revenue Code, "Exemption of Farmers' Cooperative from Tax." Unlike a nonexempt 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 was retroactive to fiscal year 1986. In conjunction with this ruling, the Cooperative had filed for tax refunds for fiscal years 1986 to 1992 in the amount of approximately $8.8 million and interest payments of approximately $5.2 million. A refund amount of $10.1 million for tax and interest was reflected in the financial statements of the Cooperative as of June 24, 1995. In addition, refund amounts of $3.9 million for tax and interest have been reflected in the financial statements of the Cooperative as of June 29, 1996. The refunds and interest for the fiscal years 1986 to 1991 were received in March of 1996.
As a result of the Acquisition of Curtice Burns, the Cooperative's tax exempt status has ceased.
During the second quarter of fiscal 1996 the net deferred taxes liabilities of the Cooperative subsidiary, Curtice Burns, were reduced by approximately $22 million. The adjustment was made in conjunction with Curtice Burns 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 Pro-Fac Acquisition. Based on further advice from outside counsel, it was later determined that such an adjustment was not warranted. Accordingly, the net deferred taxes were re-established during the fourth quarter. The reversal had no material effect on the operations of the Cooperative.
NOTE 7. 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 US government obligations.
The Company also participates in several union sponsored pension plans. 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 1996 and 1995 includes the following components:
The pension plan's funded status was as follows:
In 1996 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. The year end projected obligation increased by approximately $7,587,000 due to the decrease in the discount rate from 8.5 percent to 7.75 percent.
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/401(k): Under the prior 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.
On October 1, 1995, the Company merged the Deferred Profit Sharing Plan into the 401(k) Investment Plan. Under the new combined plan, the Retirement Savings and Incentive Plan ("RSIP"), the Company makes an incentive contribution to the Plan if certain pre-established divisional earnings goals are achieved. The maximum incentive contribution is 3 percent of base salary earned during the fiscal year. In addition, the Company contributes 401(k) matching contributions to the plan for the benefit of employees who elect to defer a portion of their salary into the Plan. During fiscal 1996 the Company allocated $400,000 in the form of matching contributions and $211,000 in the form of incentive contributions for the benefit of its employees.
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.
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.
This plan's funded status was as follows:
Net periodic postretirement benefit cost included the following components:
The weighted-average, assumed-discount rate used to measure the benefit obligations was 8.50 percent at the beginning and 7.75 percent at the end of fiscal 1996.
The annual rate of increase in the per capita cost of health care benefits was assumed to be 12 percent for 1995 and 11 percent for 1996. The rate was assumed to decrease gradually to 5.0 percent by the year 2006 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:
Employee Stock Purchase Plan: During fiscal 1996 the Company introduced an Employee Stock Purchase Plan which affords employees the opportunity to purchase semi-annually, in cash or via payroll deduction, shares of Class B Cumulative Pro-Fac Preferred Stock to a maximum value of 5 percent of salary. The purchase price of such shares is par value, $10 per share. During fiscal 1996, 33,364 shares were purchased by employees, and 3,447 shares were subscribed to as of June 29, 1996.
Long-Term Incentive Plan: On June 24, 1996, the Company introduced a long-term incentive program, the Curtice Burns Foods Equity Value Plan, which provides performance units to a select group of management. The future value of the performance units is determined by the Company's performance on earnings and debt repayment. The performance units vest 25 percent each year after the first anniversary of the grant, becoming 100 percent vested after five years. The performance units expire upon the tenth anniversary of grant. The appreciated value of units in excess of the initial grant price converts to cash compensation upon expiration of the units. The total units granted on June 24, 1996 under this plan were 248,511 at $13.38 per unit. The value of the June 24, 1996 grants from the Curtice Burns Foods Equity Value Plan will be based on the Company's earnings and debt repayment in fiscal 1997. The beginning value of these performance units was set at a level requiring improved earnings and debt-repayment performance. If future performance equals fiscal 1996 performance, no payouts will be made from the plan relative to the option granted on June 24, 1996.
NOTE 8. 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 9 for common stock dividend information.)
At June 29, 1996 and June 24, 1995, there were outstanding subscriptions, at par value, for 59,359 and 59,568 shares of common stock, respectively. These shares are issued as subscription payments are received.
Preferred Stock: Except for the Class B Cumulative Preferred Stock all 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). Pro-Fac's Class A Cumulative Preferred Stock is listed 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. At least once a year Pro-Fac plans to offer to repurchase at least 5 percent of the outstanding shares of Class B Stock.
The dividend rates for the preferred stock are as follows:
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 were paid quarterly (with dividends 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 resulted in the payment of 1-3/4 years of dividends to the holders of exchanged shares in fiscal 1996.
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.
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 9. 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. In fiscal 1996 and 1995 dividends on non-cumulative preferred stock were paid at a rate of 6.0 and 6.75 percent, respectively, of the par value and dividends on common stock were paid at a rate of 5.0 and 5.5 percent, respectively, of the par value.
Subsequent to June 29, 1996, the Cooperative declared a cash dividend of $1.50 per share on the non-cumulative preferred stock and $.43 per share on the cumulative preferred stock. These dividends amounted to $1.3 million.
NOTE 10. OTHER MATTERS
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 were covered under the Company's insurance policies.
PRO-FAC COOPERATIVE, INC. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the fiscal year ended June 29, 1996 appears in the following table. All quarters reflect 13-week periods, except the fourth quarter, which reflects a 14-week period.
In the opinion of management, all adjustments necessary for a fair presentation of the unaudited quarterly data have been made.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND OFFICERS
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.
Diana Bartalo has been Assistant Treasurer of Pro-Fac since 1988. For information regarding Ms. Bartalo, see "Management -- The Company -- Directors and Officers."
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).
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 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 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.
Year of
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.
Dennis M. Mullen has been Chief Operating Officer of the Company since May 1996 and Executive Vice President since January 1996.. He had been President and Chief Executive Officer of CMF from March 1993 to May 1996. He was Senior Vice President and Business Unit Manager Foodservice of CMF from 1991 to 1993, and Senior Vice President-Custom Pack Sales for Nalley from 1990 to 1991. Prior to employment with the Company, he was President and Chief Executive Officer of Globe Products Company.
William D. Rice has been Senior Vice President, Chief Financial Officer, and Secretary of the Company since 1991, Secretary of the Company since 1989. He was Treasurer of the Company from 1975 to 1996. He was Vice President-Finance of the Company from 1969 to 1991. He has been Assistant Treasurer of Pro-Fac since 1970 (Management Chief Financial Officer for Pro-Fac).
Diana Bartalo has been Treasurer since March 1996 and Director of Financial Reporting since 1992; Assistant Treasurer since from 1988 to March 1996; Corporate Accounting Manager 1976-1992. She held several administrative staff positions 1970-1976 and has been Assistant Treasurer of Pro-Fac since 1987.
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, and Vice President Operations, Fishery Products, Inc. 1983-1988. He held 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 from 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.
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.
Carl W. Caughran has been President and Chief Executive Officer of Nalley Fine Foods since March 1996. Prior to joining the Company, he was Vice President/General Manager of Borden's Eastern Snacks Group 1993 to 1995, Vice President/General Manager of Borden's Western Snacks Group 1991 to 1993, and held various executive positions at Borden 1983 to 1991.
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.
Bernhard Frega has been President and Chief Executive Officer of CMF since May 1996. He had been Executive Vice President and Chief Operating Officer of CMF from December 1995 to May 1996. Prior to that he held increasingly responsible positions at CMF, beginning in 1974 in sales and marketing. He became Marketing Director in 1984, Vice President Private Label in 1987 and Senior Vice President for Consumer Products in 1995.
Michael A. Gaffney has been President and Chief Executive Officer of Snyder since 1995. He was Executive Vice President and Chief Operating Officer of Snyder from 1990 to 1995. Prior to 1990, he held various management and executive positions with State Line Snacks, Frito-Lay, Gallo, and Procter and Gamble.
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.
Tim Kennedy has been President and Chief Executive Officer of Tim's since its acquisition by the Company in 1989. Prior to that, he was President and Chief Executive Officer at Tim's which was a privately-held corporation since its inception in 1986.
David R. Ray has been President and Chief Executive Officer of Husman since 1995. He was Executive Vice President and Chief Operating Officer of Husman 1990 to 1995 and Director of Sales for Chips and Snacks at Nalley 1987 to 1990.
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 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).
Walter F. Payne has been a Director of the Company since January 1996 and President and Chief Executive Officer of Blue Diamond Growers since 1992. He held various positions at Blue Diamond Growers between 1973 and 1992. He is currently on the Board of Directors of the Almond Board of California and the International Nut Council, a board alternate for the National Council of Farmer Cooperatives, and a member of the Board of Trustees for the Graduate Institute of Cooperative Leadership.
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 the shareholder 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 Directors or until their respective successors are elected and qualified, except in the case of death, resignation, or removal.
Section 16(a) Beneficial Ownership Reporting Compliance: In accordance with the rules of the Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934, directors, executive officers, and beneficial owners of 10 percent or more of the Company's stock must file certain reports of stock ownership and changes of stock ownership. Based solely upon its review of copies of such reports received by it, or written representations of certain reporting persons that no forms were required to be filed, Pro-Fac believes that for the fiscal year ended June 29, 1996, all reports required by such reporting persons were timely filed with the Securities and Exchange Commission, except the following: Diana Bartalo, Assistant Treasurer of Pro-Fac and Treasurer and Director of Financial Reporting of the Company, failed to file one Form 3 and one Form 4 relating to the acquisition of 140 shares of Class B, Series 1, 10% Cumulative Preferred Stock of Pro-Fac ("Class B Stock"); and William D. Rice, Management Chief Financial Officer and Assistant Treasurer of Pro-Fac and Senior Vice President, Chief Financial Officer, and Secretary of the Company, failed to file one Form 3 and one Form 4 relating to the acquisition of 200 shares of Class B Stock.
ITEM 11.
ITEM 11. 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 29, 1996 and June 24, 1995 (collectively, the "Named Executive Officers").
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 columns 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 29, 1996, of the Executive Officers listed in the Summary Compensation Table are as follows: Roy A. Myers-34, Dennis M. Mullen-6, William D. Rice-24, Stephen R. Wright-22, and Earl L. Powers-4.
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.
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.
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 Summary 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. Petty, Myers and Rice; two years of salary and benefit continuation for the other designated executives including Messrs. Mullen, and Powers, 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.
Under the terms of the Agreement, Messrs. Myers and Rice would be entitled to a supplemental retirement benefit equal to the benefit they would receive from the Curtice Burns Foods Master Salaried Retirement Plan if they were to continue working until age 65 at their current salary level, less their actual retirement benefit from this Plan. In all cases, the supplemental retirement benefits begin at the end of the salary and benefit continuation period. Also, upon a Change of Control all stock options granted prior to February 18, 1994 became exercisable.
The Incentive Plan also contains 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 1996, 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 1996, 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 1996, all other outside directors, Messrs. Harrington, Payne, and Stotz received an annual rate of $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.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of July 29, 1996, 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 director and Named Executive Officer of Pro-Fac and (iii) all directors and officers of Pro-Fac as a group.
ITEM 13.
ITEM 13. 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 required to be a percentage of the five-year average borrowing. As of June 29, 1996, the amount of Pro-Fac's investment in the Bank was approximately $24.4 million. Pursuant to its capital purchase obligation, Pro-Fac increased its investment in the Bank by $1.5 million and $1.3 million in fiscal 1996 and 1995, 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 in fiscal 1995 and none in fiscal 1996. 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 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 1996, 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:
Pro-Fac's payment to the members for CMV was limited to 90 percent of deliveries in fiscal 1996.
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, 1997, at an annual cost of approximately $80,000. As of this date, no sums have been paid to any officers or directors of the Cooperative under this indemnification insurance contract.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following appears in ITEM 8 of This Report
ITEM
Pro-Fac Cooperative, Inc. and Consolidated Subsidiary: Management's Responsibility for Financial Statements Report of Independent Accountants Consolidated Financial Statements for the years ended June 29, 1996, June 24, 1995, and June 25, 1994: Consolidated Statement of Operations and Net Proceeds Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Shareholders' and Members' Capitalization and Common Stock Notes to Consolidated Financial Statements Selected Quarterly Financial Data
(2) The following additional financial data are set forth herein:
SCHEDULE II: Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because they are either not applicable or not required, or the required information is shown in the financial statements or the notes thereto.
(3) The following exhibits are filed herein or have been previously filed with the Securities and Exchange Commission:
(b) Report on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRO-FAC COOPERATIVE, INC.
Date: August 22, 1996 BY: /s/ Stephen R. Wright --------------- STEPHEN R. WRIGHT GENERAL MANAGER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints STEPHEN R. WRIGHT AND WILLIAM D. RICE, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby satisfying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.