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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended June 25, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
Commission File Number 1-7605
CURTICE-BURNS FOODS, INC.
(Exact name of registrant as specified in its charter)
New York 16-0845824
(State of incorporation) (I.R.S. Employer Identification No.)
90 Linden Place, P.O. Box 681, Rochester, New York 14603
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 383-1850
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Class A Common Stock, par value $.99 . . . . American Stock Exchange
. . . . Midwest Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Class B common stock par value $.99
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the
registrant
Class A Common Stock: $98,825,000
(based on the closing sale price on the American Stock Exchange on August
12, 1994)
Class B common stock: $349,000
(based on the closing sale price of the Class A common stock on the American
Stock Exchange on August 12, 1994; there is no established market for Class
B common stock),
Number of common shares outstanding at August 12, 1994:
Class A common stock: 6,628,430
Class B common stock: 2,056,876
The exhibit page begins on page 81
Page 1 of 82 pages
FORM 10-K ANNUAL REPORT - 1994
CURTICE-BURNS FOODS, INC.
TABLE OF CONTENTS
PART I
PAGE
----
Item 1.
Description of Business
General Development of Business. . . . . . . . . 3
Narrative Description of Business of Curtice
Burns. . . . . . . . . . . . . . . . . . . . . 5
Financial Information About Industry Segment . . 7
Sales by Product Line. . . . . . . . . . . . . . 7
Relationship with Pro-Fac. . . . . . . . . . . . 10
Raw Material Sources . . . . . . . . . . . . . . 11
Trademarks and Patents . . . . . . . . . . . . . 11
Seasonality of Business. . . . . . . . . . . . . 12
Practices Concerning Working Capital . . . . . . 12
Significant Customers. . . . . . . . . . . . . . 12
Backlog of Orders. . . . . . . . . . . . . . . . 12
Business Subject to Government Contracts . . . . 12
Competitive Conditions . . . . . . . . . . . . . 13
New Products and Research and Development. . . . 14
Compliance with EPA Regulations. . . . . . . . . 14
Employees. . . . . . . . . . . . . . . . . . . . 15
Item 2. Description of Properties. . . . . . . . . . . . 15
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . 20
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters. . . . . . . . . . 20
Item 6. Selected Financial Data. . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 22
Item 8. Financial Statements and Supplementary Data. . . 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . 55
PART III
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . 56
Item 11. Executive Compensation . . . . . . . . . . . . . 60
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . 68
Item 13. Certain Relationships and Related Transactions . 69
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. . . . . . . . . . . . . . 71
Signatures . . . . . . . . . . . . . . . . . . . 78
2
Item 1. DESCRIPTION OF BUSINESS
General Development of Business
Curtice-Burns Foods, Inc. (the 'Company' or 'Curtice Burns') was
incorporated in 1961 as a New York corporation for the purpose of acquiring
the two businesses formerly operated as Curtice Brothers Company and
Burns-Alton Corporation. Cooperative Grange League Federation Exchange,
Inc., one of the predecessor corporations of Agway Inc. ('Agway'), a farm
supply business operated as a cooperative for its farmer members and other
patrons in the Northeastern United States, was instrumental in the formation
of both the Company and Pro-Fac Cooperative, Inc. ('Pro-Fac'), an
agricultural cooperative formed under the laws of New York State for the
purpose of obtaining a dependable source of agricultural produce for the
Company. The Company and Pro-Fac have entered into a contractual
relationship (see Note 4 of 'Notes to Consolidated Financial Statements' and
'Relationship with Pro-Fac'). Agway has a substantial investment in the
Company which enables it to elect 70 percent of the Company's directors.
In addition to the results of operations there were two significant
developments in fiscal 1994: the completion of the first phase of a major
restructuring program designed to enhance Curtice Burns' shareholder value;
and significant progress made in the effort to sell the Company to serve
Agway's purpose of liquidating its interest in the Company. See Note 2 of
'Notes to Consolidated Financial Statements.'
Restructuring Program
The Conceptual Vision and Strategy
The restructuring program first initiated in fiscal 1993 was based on
Curtice Burns' new vision of a company smaller in sales but more profitable,
as measured by return on sales and equity, and possessing the financial and
management resources sufficient to drive growth in carefully selected
product line markets in which the Company can prosper for the long term.
Thus, the strategy was to focus on a more limited number of product lines
which now have a strong, competitive position.
The Plan outlined in 1993 is to restructure the business to a more
profitable base. At the same time, the remaining businesses were to be
managed to optimize earnings growth by installing corporate-wide purchasing,
and a corporate-wide focus of capital spending.
The third leg of the strategy was to accelerate the Company's national sales
and distribution programs by executing new product programs in store-brand
retail dressings, salsa and chunky soups, and the 'More Fruit/More Flavor'
pie filling program.
Execution of the Program
The first step of the restructuring program was to divest businesses that
were unprofitable or declining for the Company but would fit strategically
with other business portfolios. During fiscal 1993, the Company divested
Lucca Frozen Foods. A loss of approximately $2.7 million (before dividing
with Pro-Fac and before taxes) was recognized on this transaction. At the
end of fiscal 1993, the Company wrote down the assets and provided for the
expenses to dispose of the Hiland potato chips and meat snacks businesses
during fiscal 1994. On November 22, 1993, Curtice Burns sold certain assets
of the Hiland Potato Chip business for $2 million at closing, plus
approximately $1 million paid in installments over three months. On
February 22, 1994, Curtice Burns sold the meat snacks business located in
Denver, Colorado and Albany, Oregon to Oberto Sausage Company of Kent,
Washington. Under the agreement, Oberto has purchased certain assets and
assumed certain liabilities of the meat snacks operation, excluding plant,
equipment, and trademarks. Curtice Burns will lease its Albany Oregon
manufacturing facility and equipment and license its trademarks, trade
3
names, etc. to Oberto until February 1995, at which time Oberto is
contractually obligated to purchase these assets. The sale of the Hiland
and meat snacks businesses did not result in any significant gain or loss
in fiscal 1994 after giving effect to the restructuring charges recorded in
fiscal 1993; however, charges of $3.1 million were incurred in fiscal 1994
to adjust previous estimates. In the fiscal year ended June 26, 1993,
Curtice Burns incurred losses of $13.2 million from the meat snacks and
Hiland potato chip businesses before dividing such losses with Pro-Fac and
before taxes.
On November 19, 1993, the Company sold the oats portion of the National Oats
business for $39 million. The oats business contributed approximately $1.4
million of earnings in fiscal 1993 before dividing with Pro-Fac and before
taxes. The sale of the oats business resulted in an approximate $10.9
million gain. The popcorn portion of the National Oats Division was
transferred to the Comstock Michigan Fruit Division.
During fiscal 1993 and 1994, the Company also made staff reductions in
selected locations throughout the Company. A $1 million accrual relating
to such costs was recorded as part of the fiscal 1993 restructuring charge.
Thus, a major part of the restructuring plan was successfully executed
during fiscal 1994.
As reported above, Curtice Burns incurred restructuring charges in fiscal
1993 of $61.0 million (before dividing such charges with Pro-Fac and before
taxes), which included the loss incurred on the sale of the Lucca frozen
entree business, anticipated losses on the sale of the meat snacks and
Hiland businesses, and other costs (primarily severance and losses prior to
sale) in conjunction with the restructuring program. Virtually all of this
charge was a revaluation of assets, rather than cash expense.
Having completed the first phase of the restructuring program in fiscal
1993, the second phase was approved by the Company's Board of Directors in
August 1994. In connection with the second phase, the company is evaluating
several alternatives regarding the Nalley's snack food business in the
United States, including its possible sale to a third party. A charge, not
exceed $12 million before split with Pro-fac and before taxes, for this
phase of the restructuring program will be recorded during the first quarter
of fiscal 1995.
With respect to the potential sale of the snack food business, the Company
has signed a letter of intent with Country Crisp Foods of Salt Lake City,
Utah. The letter of intent is subject to a number of conditions, including
successful financing by the purchaser and the negotiation of a definitive
purchase agreement. Country Crisp, a regional snack food company operating
in the inter-mountain states of Colorado, Utah, Wyoming, Idaho, Nevada and
New Mexico, will continue to market the Nalley's brand snacks under a
licensing arrangement with the Company. If this sale is finalized, it may
result in a revision to the aforementioned reserve.
Potential Change of Control of Curtice Burns
On March 23, 1993, the Company announced that Agway Inc., which owns 99
percent of Curtice Burns' Class B shares and approximately 14 percent of
Class A shares, was considering the potential sale of its interest in the
Company. At its meeting held on August 9 and 10, 1993, the Curtice Burns
Board of Directors authorized Curtice Burns' management, with the advice of
its investment bankers, to pursue strategic alternatives for Curtice Burns.
These options included negotiations with Pro-Fac relative to Pro-Fac gaining
control of the business; the possible sale of the entire equity of Curtice
Burns to a third party; and the implementation of additional restructuring
actions that may include recapitalizing the Company to buy out Pro-Fac and
possibly, eventually Agway as well. Under the Agreement with Pro-Fac, title
to substantially all of Curtice Burns' fixed assets is held by Pro-Fac, and
4
Pro-Fac provides the major portion of the financing of Curtice Burns'
operations. Under the Agreement, Curtice Burns has an option to purchase
these assets from Pro-Fac at their book value. However, as mentioned in
Note 4 of the 'Notes to Consolidated Financial Statements,' there presently
exists a disagreement with Pro-Fac as to how such settlement amount would
be calculated. Exercise of the buy-out option would result in the
termination of the Agreement with Pro-Fac. In such event, Curtice Burns
would be required to repay all debt owed to Pro-Fac.
The Company actively explored these alternatives during fiscal 1994. On
June 8, 1994, the Curtice Burns Board of Directors voted to pursue a
proposal submitted by Dean Foods Company ('Dean Foods') to acquire all the
outstanding shares of common stock of Curtice Burns at a maximum cash price
of $20 per share, subject to a number of contingencies, including an
agreement with Pro-Fac covering the termination of the Integrated Agreement,
an agreement with Hormel Foods Corporation for the purchase of the Nalley's
Fine Foods Division of Curtice Burns, clearance of the transaction by
appropriate government agencies, negotiation of definitive agreements and
approval of any transaction by Curtice Burns' shareholders.
As a result of Pro-Fac's unwillingness to enter into the agreement required
by Dean Foods, on July 11, 1994, Curtice Burns commenced arbitration
proceedings against Pro-Fac under the Integrated Agreement. These
arbitration proceedings are discussed in more detail under 'Legal
Proceedings' below. On August 4, 1994, Pro-Fac responded to the claim and
served the Company with a counter claim demanding arbitration.
On August 4, 1994, Pro-Fac also submitted a proposal for acquisition of all
the outstanding stock of Curtice Burns for $19.00 per share in cash, and
upon acceptance of the offer, Pro-Fac would relinquish its claims against
Curtice Burns. Pro-Fac has stated that it believes the value of these
claims represents at least $5.75 per share based on the amount that would
be due Pro-Fac upon completion of the proposed transaction between Curtice
Burns and Dean Foods as discussed above. The contingencies of the Pro-Fac
offer involve shareholder approval and financing. This was the second
proposal submitted by Pro-Fac. The first was for $16.87 per share, in cash,
which the Company rejected in favor of pursuing the Dean Foods offer. The
Curtice Burns Board of Directors has not yet taken any definitive action
with respect to this revised proposal.
No assurance can be given that any transaction for the acquisition of
Curtice Burns by Dean Foods, Pro-Fac or any third party will be
consummated.
During fiscal 1994, the Company expensed $3.5 million of legal, accounting,
investment banking and other expenses relative to the change in control
issue. In recognizing this expense, the Company allocated half of this
amount to Pro-Fac as a deduction to the annual profit split. The allocation
to Pro-Fac is being disputed by Pro-Fac. See Notes 4 and 5 of 'Consolidated
Notes to Financial Statements.'
Narrative Description of Business
The Company's business is principally conducted in one industry segment, the
processing and sale of various food products. Through its seven operating
divisions, the Company produces and markets a variety of processed food
products, including canned vegetables, frozen vegetables and fruits, canned
desserts, canned fruits, condiments and salad dressings, snack foods,
pickles, canned meat dishes, soups, and peanut butter and produces
containers for some of its food products.
5
The Comstock Michigan Fruit Division, headquartered in Rochester, New York
produces fruit fillings and toppings, popcorn, puddings, dips, cheese sauce,
and canned and frozen vegetables and fruits such as peas, corn, beets,
beans, carrots, sauerkraut and applesauce. Variations of product type such
as sliced, whole or diced, pickled and dietetic, are offered in several
product lines, as well as a choice of sizes of containers. This division
markets its branded products under its 'Thank You', 'Comstock', 'Wilder-
ness', 'Greenwood', 'Silver Floss', 'Blue Boy', 'Victor', 'Cortland Valley,'
'Cerise,' 'Super Pop,' 'Pop-Eye,' and 'Popsrite' labels and also markets its
products under customer brands throughout the Eastern United States and
sells products to food service institutional and bakery customers.
The Brooks Foods Division, Mt. Summit, Indiana, produces specialty tomato
products, barbecue sauce, specialty chili beans, and related products under
the 'Brooks' label. Its principal markets are in the Midwest. Sales of the
specialty products of this division have continued to increase, due in part
to an ongoing program of advertising and sales promotion.
The Curtice Burns Snack Food Group consists of:
1. Nalley's U.S. Chips & Snacks, Tacoma, Washington, which
produces potato chips and a variety of snack foods marketed
throughout the Northwestern and Western states under the
'Nalley' brand.
2. Snyder of Berlin, Berlin, Pennsylvania, manufactures and
markets several varieties of potato chips in distinctive
aluminum foil bags, as well as several varieties of corn
chips, and similar snack products in conventional packaging,
primarily under the 'Snyder of Berlin' brand. Snyder
operates several snack food distributorships and contracts
with independent distributors.
3. Tim's Cascade Chips, Tacoma, Washington, produces kettle-
fried potato chips for distribution in the Tacoma/Seattle,
Washington area.
4. Husman Snack Foods, Cincinnati, Ohio, acquired in fiscal
1991, is the leading marketer of potato chips in Cincinnati.
The Nalley's Fine Foods Division, Tacoma, Washington, produces canned meat
products, pickles, salad dressings, peanut butter and syrup, which are
marketed throughout the Northwestern and Western states under the 'Nalley's'
brand and other brands of the Company (such as 'Bernstein's' salad dressing
and 'Adams' natural peanut butter). In fiscal 1994, the Company continued
to test the Bernstein's salad dressings in the Northeast and has achieved
distribution of a refrigerated version of the dressings in a test market in
its Pacific Northwest markets.
Nalley's Canada Ltd., Vancouver, British Columbia, manufactures salad
dressings, syrup, canned meat products, potato chips and other snack foods.
The Division markets these items and small amounts of pickles and other food
products obtained from Nalley's Fine Foods in Western Canada.
The Southern Frozen Foods Division, Montezuma, Georgia, freezes and sells
a full line of Southern vegetables such as black eyed peas, okra, and greens
as well as a line of other vegetables such as corn, peas, and green beans
and specialty side dishes. The Division also produces a small amount of
frozen fruit. The brand names include 'McKenzie's,' 'Gold King,'
'Chill-Ripe,' and 'Tropic Isle.' Distribution is primarily in the Southeast
and South Central portions of the United States.
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
the Brooks, Comstock Michigan Fruit, and Southern Frozen Foods divisions are
6
sold through food brokers which sell primarily to supermarket chains and
various institutional feeders. Snyder's, 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 Pennsylvania, West Virginia,
Ohio, Maryland, Kentucky, and Virginia. Nalley's has its own sales
personnel responsible for sales within the Pacific Northwest and utilizes
food brokers for sales in other marketing areas.
Customer brand operations encompass the sale of products under private
labels to chain stores and under the controlled labels of buying groups.
For example, private label customers of Comstock Michigan Fruit include such
major food distributors as A&P, Kroger, Scrivner, Safeway, Shurfine, Topco,
Wakefern, and Winn-Dixie. The Company has developed central storage and
distribution facilities that permit multi-item single shipment to customers
in key marketing areas.
The Curtice-Burns Express ('CBX') subsidiary of the Company is a licensed
common carrier with authority in 48 states. It is used by the other units
of the Company to obtain backhaul volume to prevent empty backhauls on
shipments via Company trucks or contract haulers. The other Curtice Burns
operations lease their equipment to CBX for these backhauls.
The Finger Lakes Packaging Company manufactures various sizes of sanitary
food cans for sale to other companies and for the Comstock Michigan Fruit
and Brooks Foods divisions of Curtice Burns. Approximately two-thirds of
the containers manufactured by Finger Lakes are produced for the Comstock
Michigan Fruit and Brooks divisions. The facility is well-equipped and
staffed to furnish quality containers at competitive cost.
During the fiscal year ended June 25, 1994, neither the Company nor any of
its subsidiaries was involved in any bankruptcy, receivership, or similar
proceeding; with any reclassification, merger, or consolidation; or with any
acquisition or disposition of any material amount of assets other than those
disclosed and those in the ordinary course of business. During such period,
the Company did not make any material changes in the manner in which it
conducts its business.
Financial Information About Industry Segments
As described above, the business of the Company 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 the Company's last five fiscal years. The
financial statements for the fiscal years ended June 25, 1994, June 26, 1993
and June 26, 1992, which are included in this report, reflect the
information set forth in the table.
Fiscal Years
--------------------------------------------------------
June 25, June 26, June 26, June 28, June 29,
Dollars in Thousands 1994** 1993** 1992 1991 1990
------- ------- ------- ------- -------
Net sales $829,116 $878,627 $896,931 $933,084 $926,879
Sales to unaffiliated
customers* $829,087 $878,342 $896,572 $932,575 $926,340
Net income/(loss) $ 10,110 $(23,837) $ 6,148 $ 3,657 $ 11,601
Total assets $446,938 $493,729 $529,739 $557,860 $567,142
* The only sales by the Company to affiliated customers are made to Agway.
Such sales consist principally of frozen foods and are made at
competitive prices. There are no intersegment sales or transfers since
the business of the Company is principally conducted in one industry
segment.
7
** Including restructuring charges, net gain/(loss) from division disposals
of $3.1 million (after split with Pro-Fac and after taxes) and change
of control costs of $1.7 million (after split with Pro-Fac and after
taxes) in 1994; and $(29.9) million (after split with Pro-Fac and after
taxes) in 1993. See Notes 2 and 3 to 'Notes to Consolidated Financial
Statements.'
Sales By Product Line
In its industry segment, the Company manufactures and sells six classes of
similar products:
1. vegetables;
2. condiments and specialty products (including salad dressings, chip
dip, salsa, sauces, syrups, pickles, relishes, peanut butter and
ketchup);
3. snack foods;
4. canned and frozen fruits;
5. meats, soups and entrees;
6. miscellaneous products (including aseptic products, containers and
discontinued product lines such as cereals and soft drinks).
The principal products produced by the Company and the principal markets
for, and methods of distribution of, such products are discussed under
'General Development of Business.'
The following tabulation shows, for each of the last five fiscal years of
the Company, the dollar amount and percentage of total revenues contributed
by each class of similar products produced by the Company:
SALES BY PRODUCT LINE
Fiscal Years
Thousands of Dollars
1994 1993 1992 1991 1990
---------------- ---------------- ---------------- ---------------- ----------------
$ % $ % $ % $ % $ %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Vegetables 252,051 30.4 226,648 25.8 222,030 24.72 38,198 25.5 229,207 24.7
Condiments and specialty
sauces 170,680 20.6 166,686 19.0 173,822 19.4 168,915 18.1 157,602 17.0
Snack foods 147,597 17.8 183,814 20.9 184,711 20.6 188,300 20.2 191,701 20.7
Fruits 111,317 13.4 118,027 13.4 121,170 13.5 133,207 14.3 126,680 13.7
Entrees, meats, soups 67,286 8.1 74,199 8.4 75,431 8.4 77,962 8.4 78,170 8.4
Other 80,185 9.7 109,253 12.5 119,767 13.4 126,502 13.5 143,519 15.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
829,116 100.0 878,627 100.0 896,931 100.0 933,084 100.0 926,879 100.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Relationship with Pro-Fac
The Company has a long-standing contractual relationship with Pro-Fac, a New
York agricultural cooperative corporation formed in 1960 to market crops
grown by its members. The relationship between Pro-Fac and Curtice Burns
is governed by an Integrated Agreement (the 'Agreement') between them
consisting of five sections: operations financing; marketing; facilities
financing; management; and settlement.
8
Broadly speaking, the Company pays Pro-Fac, as the purchase price for those
crops purchased through Pro-Fac, the commercial market value ('CMV') of the
crops, which is defined as the weighted average of the prices paid by other
commercial processors for similar crops sold under pre-season contracts and
in the open market in the same or competing market area.
Curtice Burns pays rent for the use of the fixed and intangible assets
leased to it by Pro-Fac. The rental payments are equal to the amortization
of the leased assets plus any other costs such as taxes and utilities which
may be incurred by Pro-Fac associated with the ownership of the facilities.
Curtice Burns also pays a basic financing charge equal to the interest
expense incurred by Pro-Fac in financing its facilities leased to Curtice
Burns and in carrying the loans of funds which have been loaned to Curtice
Burns. In addition, Curtice Burns pays or receives an adjustment based upon
the earnings or losses of Curtice Burns on all products determined according
to a formula which reflects the respective adjusted equity investments of
the two companies.
Curtice Burns and Pro-Fac were both formed with support from Agway. As a
farm supply business operated as a cooperative, Agway had an interest in
ensuring a market for crops grown by its grower members. Agway initiated
meetings between representatives of small New York food processors and their
suppliers and suggested the outlines of a relationship between them. Agway
provided Pro-Fac with advice concerning operating as a cooperative, and
Agway's involvement assisted Pro-Fac in enlisting members. Agway provided
Curtice Burns with financial support and retains a substantial investment
in Curtice Burns which enables Agway to elect 70 percent of the directors
of Curtice Burns. Agway owns no stock of Pro-Fac, although two directors
of Agway, Donald E. Pease and Christian F. Wolff, Jr., served as directors
of Pro-Fac until their resignation in fiscal 1994.
The Agreement between Pro-Fac and Curtice Burns extends to 1997, and
provides for two successive renewals, each for a term of five years at the
option of Curtice Burns. Curtice Burns has the right, at any time upon 60-
day written notice to Pro-Fac, to purchase the assets to which Pro-Fac holds
title pursuant to the Agreement, together with finance receivable relating
to certain of the Company's intangible assets, in each case at the book
value thereof. Upon exercise of such option, the Agreement would
automatically terminate. Upon termination, the Company would be required
to repay to Pro-Fac all outstanding indebtedness due to Pro-Fac. Provisions
of the Agreement also allow Pro-Fac, with sufficient notice, to accelerate
the repayment of outstanding debt. In the arbitration proceedings currently
pending between Curtice Burns and Pro-Fac, Pro-Fac has asserted, among other
matters, (1) that Pro-Fac is entitled to a 50 percent share of the profits
from the consummation of the pending acquisition proposal from Dean Foods,
which share Pro-Fac calculates to be greater than $5.75 per share of Curtice
Burns; (2) that Curtice Burns cannot terminate the Agreement at all or not
before, at the earliest, June 1996; and (3) that the book value of Pro-Fac's
assets for the purpose of calculating the buyout price under the Integrated
Agreement should not take into account specified writedowns by Curtice Burns
of those assets. In addition, Pro-Fac maintains that the $3.5 million
charge to cover legal, accounting, investment banking and other costs
associated with the change of control issue should not be included in the
fiscal 1994 profit split. See also 'General Development of Business,'
'Restructuring Program,' 'Potential Change of Control of Curtice Burns,'
and 'Legal Proceedings.'
Raw Material Sources
The Company acquires a substantial part of its raw agricultural product
requirements from Pro-Fac and from Pro-Fac's members. See 'Relationship
with Pro-Fac' and Note 4 of 'Notes to Consolidated Financial Statements.'
The Company schedules the planting and harvesting of crops grown by Pro-Fac
members based on Company standards for quality and uniformity. Planting
9
schedules are arranged to anticipate the maturing of a crop on a date
compatible with the manufacturing schedules at Company plants. Control of
planting schedules and the use of largely mechanical harvesting techniques
are designed to permit a steady and efficient flow of raw produce to the
manufacturing plants of the Company, which are located close to growing
areas. Approximately 60 percent of the raw agricultural crops used by
Curtice Burns in its processing and marketing operations have been supplied
by Pro-Fac.
The Company also purchases on the open market some crops of the same type
and condition as those purchased from Pro-Fac.
In March 1994, the Company advised Pro-Fac that in view of the possibility
that the Company might be acquired by a third party, Pro-Fac should not rely
on Curtice Burns to purchase any crops from Pro-Fac or its growers in
calendar 1995 and beyond. In addition, the Company notified Pro-Fac that
Curtice Burns will not commit to purchase a substantial portion of the crops
historically purchased from Pro-Fac in the 1995 growing season. As a
result, Pro-Fac has given notice to its affected members terminating Pro-
Fac's obligation to purchase these crops beginning next year. The affected
Pro-Fac growers are principally Pro-Fac's New York fruit and vegetable
growers, Illinois and Nebraska popcorn growers, and Northwest potato growers
who represent more than half of Pro-Fac's membership and have accounted for
approximately $29.9 million or 50 percent of the total crops delivered by
Pro-Fac to Curtice Burns in the past year. In the arbitration proceedings
currently pending between Curtice Burns and Pro-Fac, Pro-Fac has asserted,
among other matters, that Curtice Burns is in default under the Integrated
Agreement for improper termination of crops and has claimed damages that
Pro-Fac estimates at more than $50 million. See Note 2 of the 'Notes to
Consolidated Financial Statements.' The Company believes that its only
obligation to purchase crops from Pro-Fac is as set forth in the Profit Plan
as approved each year by the Boards of Directors of both Pro-Fac and the
Company. Because the most recent approved Profit Plan was for fiscal year
1995 (which Plan corresponds to the 1994 calendar year crops), the Company
believes that it is not currently obligated to purchase any crops from Pro-
Fac for calendar year 1995 or later.
The Company purchases substantially all of the raw materials used in certain
of its products, such as cheese sauce, meat entrees, salad dressings, and
puddings, on the open market. Except for cans manufactured by its
subsidiary, Finger Lakes Packaging Company, Inc., the Company purchases all
of its requirements for nonagricultural products, including containers, on
the open market and has not experienced any difficulty in obtaining adequate
supplies of such items.
The price and availability of raw agricultural products are subject to the
vagaries of nature.
Trademarks and Patents
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.
The major brand names utilized by the Company are 'Blue Boy' (vegetables and
fruits), 'Silver Floss' (sauerkraut), 'Victor' (sauerkraut), 'Cortland
Valley' (sauerkraut), 'Ritter' (specialty butter beans), 'Snyder of Berlin',
'Thunder Crunch', 'La Restaurante', and 'Tim's Cascade Chips' (snack foods),
'Brooks' (smooth and tangy ketchup, specialty tomato products, chili hot
beans, and other canned dry bean items), 'Thank You Brand' and 'Gracias'
(puddings, fruit fillings and toppings, fruits, vegetables, and specialty
food items), 'Nalley's' (canned meat products, snack foods, salad dressing,
pickles, and specialty food items), 'Lumberjack' (syrup), 'Bernstein's'
(salad dressings), 'Comstock' (fruit fillings and toppings), 'Greenwood'
(beets), 'Super Pop' (popcorn), 'McKenzie's' (frozen vegetables), 'Gold
10
King' (frozen breaded vegetables), 'Chill-Ripe' and 'Tropic Isle' (frozen
vegetables and fruit), 'Wilderness' (fruit fillings and toppings), 'Cerise'
(maraschino cherries), 'Pop-Eye' and 'POPS-RITE' (popcorn), 'Adams' (peanut
butter), and 'Farman's' (pickles). All of the foregoing trademarks are of
perpetual duration so long as periodically renewed, and the Company intends
to maintain them in force.
The Company does not hold any material patents or concessions.
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. In
addition, Pro-Fac has agreed to lend the Company (to the extent needed by
the Company) all funds of Pro-Fac not immediately needed for its operations.
(See Notes 4 and 5 of 'Notes to Consolidated Financial Statements.')
Short-term bank lines of credit are extended to both the Company and
Pro-Fac. Under agreements with the Springfield Bank for Cooperatives, both
companies participate on a proportionate basis in the average short-term
borrowings under such lines; at least 55 percent of such borrowing is
obtained by Pro-Fac from the Springfield Bank for Cooperatives, and 45
percent is borrowed by the Company from six commercial banks. These lines
of credit are used primarily for seasonal borrowing, the amount of which
fluctuates during the year. The lines of credit are subject to annual
renewal. The Company has guaranteed payment of all bank indebtedness of
Pro-Fac. Pro-Fac also guarantees payment of all bank indebtedness of
Curtice Burns.
Both the maintenance of substantial inventories and the practice of seasonal
borrowing are common to the food processing industry.
Significant Customers
The Company's one principal industry segment is not dependent upon the
business of a single customer or a few customers. The Company does not have
any customers to which sales are made in an amount which equals 10 percent
or more of the Company's net sales. The loss of even its biggest customer
would not have a materially adverse effect on the Company.
Backlog of Orders
Backlog of orders has not historically been significant in the business of
the Company. Orders are filled shortly after receipt from inventories of
packaged and processed foods.
Business Subject to Governmental Contracts
No material portion of the business of the Company is subject to
renegotiation of profits with, or termination by, any governmental agency.
11
Competitive Conditions
All products of the Company, particularly branded products, compete with
those of national and major regional food processors under highly
competitive conditions. Many of the national manufacturers have
substantially greater resources than the Company. The principal methods of
competition in the food industry are ready availability of a broad line of
products, product quality, price, and advertising and sales promotion.
In recent years, and particularly when various food items are in short
supply, the constant availability of a full line of food items and the
ability to deliver the required items rapidly and economically have been
among the most important competitive factors in the markets in which the
Company operates. The Company believes that it is competitive with national
brands in this area since distribution of many of its regional brands and
custom-pack food items are limited to areas which can easily be served from
its production and distribution facilities. In this way, the problems
inherent in attempting to supply markets remote from its principal areas of
operation are minimized, and the marketing area is commensurate with the
production and storage facilities.
The expansion of the operations of the Company over the years has also
allowed it to offer more complete and diverse lines of products. In the
early years of its existence, the Company marketed principally commodity
canned vegetables. The Company now also markets a broad range of snack
foods, desserts, condiments and other specialty food items, canned and other
frozen entrees, salad dressings and branded frozen vegetables. While all
of these products are not offered in every marketing area, in many areas the
Company can offer a diverse line of products, and the original commodity
vegetable items now account for only 8.8 percent of Company sales. During
fiscal 1994, the Company made progress on its program to focus on a more
limited number of product lines and businesses. See 'General Development
of Business - Restructuring Program.'
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 mechanical growing and harvesting techniques. This factor
is also an advantage in producing uniform, high-quality food products. See
'Relationship with Pro-Fac' and Note 4 of 'Notes to Consolidated Financial
Statements.'
The Company's pricing is generally competitive with that of other food
processors for products of comparable quality. The branded products of the
Company are marketed under regional brands and its marketing programs are
focused on local tastes and preferences as a means of developing consumer
brand loyalty. The Company's advertising program utilizes local media, and
strong emphasis is placed on in-store promotions.
Although the relative importance of the above factors may vary as between
particular products or customers, the above description is generally
applicable to all of the products of the Company in the various markets in
which they are distributed.
Profit margins for canned and frozen fruits and vegetables are subject to
industry supply and demand fluctuations, attributable to changes in growing
conditions, acreage planted, inventory carryover, and other factors. The
Company has endeavored to protect against changing growing conditions
through geographical expansion of its sources of supply. In recent years,
the Company has also taken steps to lessen the impact of such cycles on its
earnings by diversifying into food product lines which are not affected as
severely by fluctuation in profit margins. The Company has emphasized the
merchandising of its own brands and expanded service and product development
for its high volume private label and food service customers. The
12
percentage of sales under brand names owned and promoted by the Company
(including franchise brands) increased from 35 percent in fiscal 1972 to a
current level of approximately 54 percent; sales to the food service
industry (restaurants and institutional customers), which were insignificant
in 1972, now represent approximately 21 percent; private label sales, which
were more than half the Company's sales in 1972, currently represent
approximately 21 percent; and sales to other manufacturers are approximately
4 percent of total sales.
An estimate of the number of competitors in the markets served by the
Company is very difficult. Nearly all products sold by the Company compete
with the nationally advertised brands of the leading food processors,
including Borden, DelMonte, Green Giant, Heinz, Frito-Lay, Kraft, Vlasic,
Birdseye, and similar major brands, as well as with the branded and private
label products of a number of regional processors, many of which operate
only in portions of the marketing area served by the Company. While the
major brands are dominant in branded products on a national level, the
Company believes that it is a significant factor in many of the marketing
areas served by one or more of its regional brands.
New Products and Research and Development
The amount expensed during the last three fiscal years on Company-sponsored
and customer-sponsored research activities relating to the development of
new products or the improvement of existing products was not material, and
the number of employees engaged full-time in such research activities is
also not material. While several divisions of the Company operate test
kitchens and pilot plants for the development of new products, the emphasis
generally has been on the development of related products or modifications
of existing products for the Company's brands and customized products for
the Company's private label and food service businesses. No new products
which required the investment of a material amount of assets have been
publicly announced.
Compliance with EPA Regulations
The disposal of solid and liquid waste material resulting from the
preparation and processing of foods and the emission of odors inherent in
the heating of foods during preparation are subject to various federal,
state, and local laws and regulations relating to the protection of the
environment. 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 believes that it is in a position at least equal
to the industry leaders with respect to compliance with such laws and
related regulations. The Company also 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 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 industrial
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 under normal agency procedures and it
is expected that they will be issued in due course.
While the Company cannot predict with certainty the effect of any proposed
or future environmental legislation or regulations on its processing
13
operations, 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.
Expenditures for facilities related to protection of the environment are
made from the regular capital budget of Pro-Fac and such facilities are then
leased to the Company pursuant to the facilities financing section of the
Agreement, as described under Item 2 below. 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 recent years,
they have not represented a significant percentage of total capital
expenditures. The table below shows the total capital expenditures and the
amounts devoted to the construction of environmental facilities for each of
the last five fiscal years:
$(000) Fiscal Year Ended June
-------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Total capital expenditures $19,545 $21,503 $16,163 $24,852 $39,978
Amount devoted to environmental
facilities $ 2,116 $ 870 $ 1,325 $ 1,433 $ 1,631
Percentage devoted to
environmental facilities 10.8% 4.0% 8.2% 5.8% 4.1%
Additional expenditures as may be necessary for compliance with environ-
mental laws will be made from future capital budgets, and it is expected
that they will continue to constitute a similar portion of the annual
capital expenditures of Pro-Fac for equipment which is leased to the
Company. Pro-Fac and the Company estimate that the capital expenditures of
Pro-Fac for environmental control facilities, principally waste water
treatment facilities, for fiscal 1995 will be approximately $2,668,000 and
for fiscal 1996 will be approximately $1,855,000. However, the estimate for
1996 is based on recent experience rather than detailed budget proposals.
Employees
As of June 25, 1994, the Company had 4,325 full-time employees, of whom
2,750 were engaged in production and the balance in management, sales and
administration. As of that date, the Company also employed approximately
1,000 seasonal and other part-time employees, almost all of whom were
engaged in production.
Item 2. DESCRIPTION OF PROPERTIES
Pro-Fac holds title to all processing facilities, warehouses, and other
plant and equipment utilized in the Company's business, except for the
facility owned by Nalley's Canada Ltd., or those leased from third parties.
The Company, including its subsidiaries, owns one processing facility in
Canada and occupies 37 other properties, 26 of which are used under the
facilities financing section of the Agreement with Pro-Fac and 11 of which
are leased from third parties. In the properties leased from third parties,
however, title to substantially all of the operating equipment is held by
Pro-Fac. Under the facilities financing section of the Agreement with
Pro-Fac, the Company pays all taxes, insurance, and other operating costs,
as well as an amount equal to the annual amortization taken on the assets.
In addition to the 26 Pro-Fac properties mentioned above, 7 Pro-Fac
properties are not being utilized for production and are held for resale.
The net book value of these properties held for resale was $11,898,000 at
June 25, 1994.
The following table describes the properties leased or owned by the Company
as of the end of the 1994 fiscal year. Unless otherwise indicated, all
properties are leased from Pro-Fac.
14
Type of Property Square
(by Division) Location Feet
- ----------------- -------- ------
COMSTOCK-MICHIGAN FRUIT:
Office building, manufacturing
plant, and warehouse for
cheese sauce, snack dips,
puddings, and fruit fillings
and toppings . . . . . . . . . . Benton Harbor, MI 239,252
Distribution center. . . . . . . Coloma, MI 400,000
Manufacturing plant and ware-
house for canned fruits and
vegetables, fruit fillings and
toppings . . . . . . . . . . . . Fennville, MI 370,600
Warehouse for maraschino
cherries, frozen fruits and
vegetables, fruit fillings
and supplies . . . . . . . . . . Sodus, MI 243,138
Property held for resale . . . . Clifton, NJ 250,000
Warehouse and office;
public storage facility (1). . . Vineland, NJ 198,000
Warehouse for finished goods . . Alton, NY 60,060
Property held for resale . . . . Alton, NY 170,000
Freezing Plant for green beans;
warehouse for frozen goods;
office and dry storage . . . . . Barker, NY 150,100
Freezing plant for peas, snap
beans, corn, and carrots . . . . Bergen, NY 122,009
Cold storage and repack
facility for frozen fruits
and vegetables and public
storage warehouse. . . . . . . Brockport, NY 429,052
Cutting, curing and packaging
plant for sauerkraut . . . . . . Gorham, NY 55,534
Canning plant and warehouse
for peas, corn, lima beans,
beets, and dried bean
products; freezing plant
for corn . . . . . . . . . . . . Leicester, NY 205,599
Distribution center and
warehouse. . . . . . . . . . . . LeRoy, NY 137,300
Canning plant and warehouse
for snap beans and carrots;
freezing plant for snap beans,
corn and cabbage . . . . . . . . Oakfield, NY 203,403
Canning plant and warehouse for
snap beans . . . . . . . . . . . So. Dayton, NY 151,140
15
Type of Property Square
(by Division) Location Feet
- ----------------- -------- ------
COMSTOCK-MICHIGAN FRUIT (Cont'd.):
Canning plant and warehouse for
fruit fillings and toppings, fruit
specialty products and
applesauce . . . . . . . . . . . Red Creek, NY 137,264
Property held for resale . . . . Rushville, NY 315,701
Cutting, curing, and canning
plant for sauerkraut . . . . . Shortsville, NY 103,686
Cutting and curing plant for
sauerkraut . . . . . . . . . . Waterport, NY 21,626
Manufacturing plant - popcorn. . Ridgway, IL 50,000
Closed plant held for resale . . Wall Lake, IA 39,000
Manufacturing plant - popcorn. . North Bend, NE 50,000
BROOKS FOODS:
Office building, canning
plant, and warehouse for
dried bean products and
tomato products. . . . . . . . . Mt. Summit, IN 200,000
CURTICE BURNS SNACK FOOD GROUP:
SNYDER SNACK FOODS:
Office, plant and warehouse
for potato chips and corn
snack foods. . . . . . . . . . . Berlin, PA 190,225
TIM'S:
Administrative, plant, warehouse
and distribution center (1). . . Auburn, WA 37,600
HUSMANS SNACK FOODS:
Office, plant and warehouse
for potato chips, and other
snack food . . . . . . . . . . . Cincinnati, OH 113,576
NALLEY'S FINE FOODS:
Office building, warehouse
and tank farm for pickles. . . . Enumclaw, WA 87,313
Office building, manufacturing
plant, and warehouse for pickles,
canned meat products, salad
dressings, peanut butter and
snack foods. . . . . . . . . . . Tacoma, WA 438,000
Sales offices and distribution
warehouse for chips and
snacks (1) . . . . . . . . . . . Spokane, WA 16,300
16
Type of Property Square
(by Division) Location Feet
- ----------------- -------- ------
NALLEY'S FINE FOODS (Cont'd.):
Parking lot and pickle vat
yards (1). . . . . . . . . . . . Tacoma, WA 162,570
Cucumber receiving and
grading station (1). . . . . . . Cornelius, OR 11,700
Sales offices and distribution
warehouses for chips and
snacks (1) . . . . . . . . . . . Portland, OR 14,365
Cucumber receiving and
grading station (1). . . . . . . Mount Vernon, WA 30,206
NALLEY'S CANADA LTD.:
Office, manufacturing plant
and distribution warehouse
for chips and snacks,
dressings, pickles, syrup,
peanut butter, canned
products and oatmeal (1) . . . . Anacis Island, BC 108,000
Main office (1). . . . . . . . . Burnaby, BC 8,350
Office building and warehouse
for chips and snack food
distribution (1) . . . . . . . . Kelowna, BC 15,900
Office, manufacturing plant and ware-
house for salad dressings, syrup,
chip dip, and pickles (2). . . . Vancouver, BC 48,000
SOUTHERN FROZEN FOODS:
Office, freezing plant, cold
storage and repackaging facility
for southern vegetables, breaded
vegetables and other vegetables
and fruits . . . . . . . . . . . Montezuma, GA 545,942
Office, freezing plant and
cold storage for southern
vegetables . . . . . . . . . . . Alamo, TX 110,000
FINGER LAKES PACKAGING:
Can manufacturing plant. . . . . Lyons, NY 147,376
CORPORATE HEADQUARTERS:
Headquarters office (1)
(Includes office space for
Comstock Michigan Fruit Division
as well as Corporate Conference
Center). . . . . . . . . . . . . Rochester, NY 62,500
Sales Office (1) . . . . . . . . Cordova, TN 1,000
17
Type of Property Square
(by Division) Location Feet
- ----------------- -------- ------
CORPORATE HEADQUARTERS (Cont'd.):
Closed facility held for resale. Denver, CO 80,000
Closed facility held for resale
(Subleased to Oberto sausage). . Albany, OR 140,000
Closed plant held for resale . . Des Moines, IA 82,958
1. Leased from third parties, although the related equipment may be owned
by Pro-Fac.
2. Owned by the Company or one of its wholly-owned subsidiaries.
The Company has the option of terminating the Agreement with Pro-Fac by
exercising its right to purchase all plant and equipment covered by the
facilities financing section at its then book value as well as certain
intangible assets. However, as discussed in Note 4 of 'Notes to
Consolidated Financial Statements,' there presently exists a disagreement
with Pro-Fac as to how such purchase price would be calculated. The
Agreement extends to June 27, 1997 and provides for two successive renewals,
each for five years, at the option of the Company.
In the opinion of management of the Company, all of the properties used by
the Company are suitable for the use intended and adequately maintained.
The extent of utilization of such properties varies from property to
property and from time to time. In addition, from time to time, the Company
leases space in various public warehouses of close proximity to customers
in order to expedite delivery times.
Item 3. LEGAL PROCEEDINGS
On July 11, 1994, Curtice Burns commenced arbitration proceedings against
Pro-Fac under the Integrated Agreement by serving a Demand for Arbitration
on Pro-Fac. A copy of Curtice Burns' Demand for Arbitration is attached as
Exhibit 1 to Curtice Burns' current Report on Form 8-K dated July 11, 1994.
In the arbitration, Curtice Burns is seeking, among other relief, a
declaration confirming its right to terminate the Integrated Agreement and
to purchase the assets owned by Pro-Fac but used by Curtice Burns in the
conduct of its business upon tender of the then current book value thereof,
determined in accordance with generally accepted accounting principles, a
declaration confirming the effect of termination of he Integrated Agreement
on the obligations of Curtice Burns under the Integrated Agreement and a
declaration confirming that Curtice Burns does not have any obligations
under the Integrated Agreement to purchase crops except as set forth in the
fiscal 1995 Profit Plan. Curtice Burns is also seeking an award of damages
sustained by Curtice Burns in an amount to be determined by the arbitrators,
but in no event less than the difference in value between the Dean Foods $20
per share offer and the market price per share of Curtice Burns' common
stock following any public announcement that the Dean Foods acquisition
proposal has been withdrawn. On August 2, 1994, Curtice Burns filed a
petition in the Supreme Court of New York for an order compelling Pro-Fac
to proceed with the arbitration.
On August 4, 1994, Pro-Fac served Curtice Burns with Pro-Fac's Response and
Counterdemand for Arbitration (the 'Response'), a copy of which is attached
as Exhibit 1 to Curtice Burns' current Report on Form 8-K dated August 2,
1994. In the Response, Pro-Fac asserted (1) that Pro-Fac is entitled to a
50 percent share of the profits from the consummation of the of the pending
acquisition proposal from Dean Foods, which share Pro-Fac calculated to be
greater than $5.75 per share of Curtice Burns' common stock; (2) that
18
Curtice Burns cannot terminate the Integrated Agreement at all or not
before, at the earliest, June 1996; (3) that the book value of Pro-Fac's
assets for the purposes of calculating the price at which Curtice Burns may
buy those assets and terminate the Integrated Agreement should not take into
account specified writedowns by Curtice Burns of those assets; (4) that
Curtice Burns is in default under the Integrated Agreement for improper
termination of crops; and (5) that Curtice Burns is in default under the
Integrated Agreement for failing to manage the business of Pro-Fac. Pro-Fac
also claimed damages that it estimated at more than $50 million. In the
Response, Pro-Fac also generally denied Curtice Burns' allegations in its
Demand for Arbitration.
Curtice Burns believes that Pro-Fac's allegations are without merit and
intends to resist them vigorously.
A grower has filed suit against the Company for damages resulting from
defective seed which was purchased from the Southern Frozen Foods Division.
The lawsuit alleges that the defective seed resulted in the loss of crops
and acreage, and the grower is seeking $950,000 in damages. Management
believes this claim is without merit and intends to vigorously defend its
position. As the amount of damages is neither probable nor reasonably
estimable, no accrual for loss has been included in the fiscal 1994
financial statements. In addition, management anticipates that any material
costs of settlement, if incurred, will be covered under its insurance
policies.
There are no other material pending legal proceedings other than routine
litigation incidental to the business to which the Company is a party or to
which any of its property is subject. Further, no such proceedings are
known to be contemplated by governmental authorities
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Class A Common Stock is listed on the American and Midwest
stock exchanges (trading symbol CBI). There is no established public
trading market for the Company's Class B Common Stock. The Company pays a
common stock cash dividend each quarter and has paid 85 consecutive
quarterly dividends since becoming public in 1973. See 'Quarterly Financial
Data' in Item 8 for market price per share highs and lows for each quarter
of fiscal 1994 and 1993.
The Dividend Reinvestment and Stock Purchase Plan for shareholders offers
shareholders of record a convenient method of acquiring additional shares
of Curtice Burns common stock through reinvestment of dividends and
voluntary cash contributions. The Company pays service charges for the
Plan, which offers benefits of dollar-cost averaging, simplified record
keeping, bank custodian service and investment accumulation similar to the
effect of compound interest.
As of June 25, 1994, there were approximately 3,300 registered holders of
Class A Common Stock and 64 registered holders of Class B Common Stock.
The Company's registrar, stock transfer agent, dividend disbursing and
reinvestment agent is First Union National Bank of North Carolina, 230 South
Tryon Street, 10th Floor, Charlotte, North Carolina 28288-1154, telephone
number (800) 829-8432.
Requests for annual reports to shareholders, 10-K, and quarterly reports on
Form 10-Q may be obtained by contacting the Director of Corporate
Communications, Curtice-Burns Foods, Inc., PO Box 681, Rochester, New York
14603-0681, telephone (716) 264-3199.
19
Item 6. SELECTED FINANCIAL DATA
Curtice Burns Foods, Inc.
FIVE YEAR SELECTED FINANCIAL DATA
Fiscal Year Ended June
--------------------------------------------------------------
Dollars in Thousands Except Share Data 1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
Summary of Operations
Net sales $ 829,116 $ 878,627 $ 896,931 $ 933,084 $ 926,879
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales 592,621 632,663 652,347 673,258 658,528
Restructuring including net (gain)/loss from
division disposals (7,768) 61,037 -- -- --
Change in control expenses 3,500 -- -- -- --
Selling, administrative and general expenses 186,934 207,119 201,327 220,943 218,424
Interest expense 18,205 19,550 22,835 26,135 25,946
--------- --------- --------- --------- ---------
793,492 920,369 876,509 920,336 902,898
--------- --------- --------- --------- ---------
Pretax earnings/(loss) before dividing with
Pro-Fac 35,624 (41,742) 20,422 12,748 23,981
Pro-Fac share of earnings/(loss) 16,849 (21,800) 9,505 5,907 11,448
--------- --------- --------- --------- ---------
Income/(loss) before taxes and cumulative
effect of an accounting change 18,775 (19,942) 10,917 6,841 12,533
Provision for taxes 8,665 3,895 4,769 3,184 5,182
--------- --------- --------- --------- ---------
Income/(loss) before cumulative effect of an
accounting change 10,110 (23,837) 6,148 3,657 7,351
Cumulative effect of an accounting change -- -- -- -- 4,250
--------- --------- --------- --------- ---------
Net income/(loss) $ 10,110 $ (23,837) $ 6,148 $ 3,657 $ 11,601
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Balance Sheet Data:
Working capital $ 104,049 $ 100,422 $ 101,706 $ 106,849 $ 121,442
Ratio of current assets to current
liabilities 1.7-1 1.6-1 1.6-1 1.6-1 1.7-1
Total assets $ 446,938 $ 493,729 $ 529,739 $ 557,860 $ 567,142
Long-term debt $ 79,061 $ 85,037 $ 70,345 $ 72,691 $ 135,897
Long-term obligations under capital leases $ 124,973 $ 154,102 $ 167,291 $ 174,113 $ 133,757
Average shareholders' equity $ 78,287 $ 90,096 $ 105,893 $ 105,336 $ 99,033
Return on average shareholders' equity 12.9% (26.5)% 5.8% 3.5% 11.7%
Common Stock Data:
Income/(loss) per share before cumulative
effect of an accounting change $ 1.17 $ (2.77) $ .71 $ .42 $ .87
Cumulative effect of an accounting change
per share -- -- -- -- .50
--------- --------- --------- --------- ---------
Net income/(loss) per share $ 1.17 $ (2.77) $ .71 $ .42 $ 1.37
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash dividends paid $ 5,530 $ 5,504 $ 5,540 $ 5,620 $ 5,095
Cash dividends paid per share $ .64 $ .64 $ .64 $ .64 $ .62
Book value per share $ 9.31 $ 8.77 $ 12.18 $ 12.04 $ 12.17
Weighted average number of shares
outstanding 8,640,399 8,600,712 8,667,154 8,783,866 8,452,721
Other Statistics:
Number of shareholders 3,362 3,507 3,708 3,524 3,138
Average number of employees:
Regular 5,169 5,325 5,573 5,779 5,631
Seasonal 1,596 1,347 1,808 1,982 1,879
20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to outline the most significant reasons
for changes in net sales, expenses and earnings from fiscal 1992 through
1994. The relevant figures are shown in the Summary of Operations which
appears in the 'Five Year Selected Financial Data' the previous page of this
report.
CHANGES FROM FISCAL 1993 TO FISCAL 1994
In addition to the results of operations there were two significant
developments in fiscal 1994: the completion of the first phase of a major
restructuring program designed to enhance Curtice Burns' shareholder value;
and significant progress made in the effort to sell the Company to serve
Agway's purpose of liquidating its interest in the Company. See Note 2 of
'Notes to Consolidated Financial Statements.'
Restructuring Program
The Conceptual Vision and Strategy
The restructuring program first initiated in fiscal 1993 was based on
Curtice Burns' new vision of a company smaller in sales but more profitable,
as measured by return on sales and equity, and possessing the financial and
management resources sufficient to drive growth in carefully selected
product line markets in which the Company can prosper for the long term.
Thus, the strategy was to focus on a more limited number of product lines
which now have a strong, competitive position.
The Plan outlined in 1993 is to restructure the business to a more
profitable base. At the same time, the remaining businesses were to be
managed to optimize earnings growth by installing corporate-wide purchasing,
and a corporate-wide focus of capital spending.
The third leg of the strategy was to accelerate the Company's national sales
and distribution programs by executing new product programs in store-brand
retail dressings, salsa and chunky soups, and the 'More Fruit/More Flavor'
pie filling program.
Execution of the Program
The first step of the restructuring program was to divest businesses that
were unprofitable or declining for the Company but would fit strategically
with other business portfolios. During fiscal 1993, the Company divested
Lucca Frozen Foods. A loss of approximately $2.7 million (before dividing
with Pro-Fac and before taxes) was recognized on this transaction. At the
end of fiscal 1993, the Company wrote down the assets and provided for the
expenses to dispose of the Hiland potato chips and meat snacks businesses
during fiscal 1994. On November 22, 1993, Curtice Burns sold certain assets
of the Hiland Potato Chip business for $2 million at closing, plus
approximately $1 million paid in installments over three months. On
February 22, 1994, Curtice Burns sold the meat snacks business located in
Denver, Colorado and Albany, Oregon to Oberto Sausage Company of Kent,
Washington. Under the agreement, Oberto has purchased certain assets and
assumed certain liabilities of the meat snacks operation, excluding plant,
equipment, and trademarks. Curtice Burns will lease its Albany Oregon
manufacturing facility and equipment and license its trademarks, trade
names, etc. to Oberto until February 1995, at which time Oberto is
contractually obligated to purchase these assets. The sale of the Hiland
and meat snacks businesses did not result in any significant gain or loss
in fiscal 1994 after giving effect to the restructuring charges recorded in
fiscal 1993; however, charges of $3.1 million were incurred in fiscal 1994
to adjust previous estimates. In the fiscal year ended June 26, 1993,
Curtice Burns incurred losses of $13.2 million from the meat snacks and
Hiland potato chip businesses before dividing such losses with Pro-Fac and
before taxes.
On November 19, 1993, the Company sold the oats portion of the National Oats
business for $39 million. The oats business contributed approximately $1.4
21
million of earnings in fiscal 1993 before dividing with Pro-Fac and before
taxes. The sale of the oats business resulted in an approximate $10.9
million gain. The popcorn portion of the National Oats Division was
transferred to the Comstock Michigan Fruit Division.
During fiscal 1993 and 1994, the Company also made staff reductions in
selected locations throughout the Company. A $1 million accrual relating
to such costs was recorded as part of the fiscal 1993 restructuring charge.
Thus, a major part of the restructuring plan was successfully executed
during fiscal 1994.
As reported above, Curtice Burns incurred restructuring charges in fiscal
1993 of $61.0 million (before dividing such charges with Pro-Fac and before
taxes), which included the loss incurred on the sale of the Lucca frozen
entree business, anticipated losses on the sale of the meat snacks and
Hiland businesses, and other costs (primarily severance and unexpected
losses prior to sale) in conjunction with the restructuring program.
Virtually all of this charge was a revaluation of assets, rather than cash
expense.
Having completed the first phase of the restructuring program in fiscal
1993, the second phase was approved by the Company's Board of Directors in
August 1994. In connection with the second phase, the company is evaluating
several alternatives regarding the Nalley's snack food business in the
United States, including its possible sale to a third party. A charge, not
exceed $12 million before split with Pro-fac and before taxes, for this
phase of the restructuring program will be recorded during the first quarter
of fiscal 1995.
With respect to the potential sale of the snack food business, the Company
has signed a letter of intent with Country Crisp Foods of Salt Lake City,
Utah. The letter of intent is subject to a number of conditions, including
successful financing by the purchaser and the negotiation of a definitive
purchase agreement. Country Crisp, a regional snack food company operating
in the inter-mountain states of Colorado, Utah, Wyoming, Idaho, Nevada and
New Mexico, will continue to market the Nalley's brand snacks under a
licensing arrangement with the Company. If this sale is finalized, it may
result in a revision to the aforementioned reserve.
Potential Change of Control of Curtice Burns
On March 23, 1993, the Company announced that Agway Inc., which owns 99
percent of Curtice Burns' Class B shares and approximately 14 percent of
Class A shares, was considering the potential sale of its interest in the
Company. At its meeting held on August 9 and 10, 1993, the Curtice Burns
Board of Directors authorized Curtice Burns' management, with the advice of
its investment bankers, to pursue strategic alternatives for Curtice Burns.
These options included negotiations with Pro-Fac relative to Pro-Fac gaining
control of the business; the possible sale of the entire equity of Curtice
Burns to a third party; and the implementation of additional restructuring
actions that may include recapitalizing the Company to buy out Pro-Fac and
potentially Agway as well. Under the Agreement with Pro-Fac, title to
substantially all of Curtice Burns' fixed assets is held by Pro-Fac, and
Pro-Fac provides the major portion of the financing of Curtice Burns'
operations. Under the Agreement Curtice Burns has an option to purchase
these assets from Pro-Fac at their book value. However, as mentioned in
Note 4 of the 'Notes to Consolidated Financial Statements,' there presently
exists a disagreement with Pro-Fac as to how such settlement amount would
be calculated. Exercise of the buyout option would result in the
termination of the Agreement with Pro-Fac. In such event, Curtice Burns
would be required to repay all debt owed to Pro-Fac.
The Company actively explored these alternatives during fiscal 1994. On
June 8, 1994, the Curtice Burns Board of Directors voted to pursue a
proposal submitted by Dean Foods Company ('Dean Foods') to acquire all the
outstanding shares of common stock of Curtice Burns at a maximum cash price
of $20 per share, subject to a number of contingencies, including an
agreement with Pro-Fac covering the termination of the Integrated Agreement,
22
an agreement with Hormel Foods Corporation for the purchase of the Nalley's
Fine Foods Division of Curtice Burns, clearance of the transaction by
appropriate government agencies, negotiation of definitive agreements and
approval of any transaction by Curtice Burns' shareholders.
As a result of Pro-Fac's unwillingness to enter into the agreement required
by Dean Foods, on July 11, 1994, Curtice Burns commenced arbitration
proceedings against Pro-Fac under the Integrated Agreement. On August 4,
1994, Pro-Fac responded to the claim and served the Company with a counter
claim demanding arbitration. These arbitration proceedings are discussed
in more detail under 'Legal Proceedings.'
On August 4, 1994, Pro-Fac also submitted a proposal for acquisition of all
the outstanding stock of Curtice Burns for $19.00 per share in cash, and
upon acceptance of the offer, Pro-Fac would relinquish its claims against
Curtice Burns. Pro-Fac has stated that it believes the value of these
claims represents at least $5.75 per share based on the amount that would
be due Pro-Fac upon completion of the proposed transaction between Curtice
Burns and Dean Foods. The contingencies of the Pro-Fac offer involve
shareholder approval and financing. This was the second proposal submitted
by Pro-Fac. The first was for $16.87 per share, in cash, which the Company
rejected in favor of pursuing the Dean Foods offer. The Curtice Burns Board
of Directors has not yet taken definitive action with respect to this
revised proposal.
No assurance can be given that any transaction for the acquisition of
Curtice Burns by Dean Foods, Pro-Fac or any third party will be
consummated.
During fiscal 1994, the Company expensed $3.5 million of legal, accounting,
investment banking and other expenses relative to the change in control
issue. In recognizing this expense, the Company allocated half of this
amount to Pro-Fac as a deduction to the profit split. The allocation to
Pro-Fac is being disputed by Pro-Fac. See Notes 4 and 5 of 'Consolidated
Notes to Financial Statements.'
Results of Operations - General
The Company's fiscal 1994 net earnings were $10.1 million or $1.17 per share
compared to a loss of $23.8 million or $2.77 per share for fiscal 1993.
Included in the fiscal 1994 results was a charge against earnings of $.5
million, equivalent to $.06 per share, to adjust deferred taxes to the
higher rate as legislated by Congress and as required under Financial
Accounting Standards Board No. 109. Also included in fiscal 1994 results
was a net gain of $7.8 million ($3.1 million after dividing with Pro-Fac and
after taxes) comprised of a gain on sale of $10.9 million, net of a charge
of $3.1 million to adjust previous estimates regarding activities initiated
in fiscal 1993, and a charge of $3.5 million of legal, accounting,
investment banking and other expenses ($1.7 millon after dividing with Pro-
Fac and after taxes) relating to the potential change in control of the
Company. Included in the fiscal 1993 results were restructuring charges of
$61.0 million ($29.9 million after dividing with Pro-Fac and after taxes).
Net earnings, excluding these items, was approximately $9.1 million
(equivalent to $1.05 per share) for fiscal 1994 and $5.9 million (equivalent
to $.68 per share) for fiscal 1993, an increase of 54.2 percent.
Pretax earnings before dividing with Pro-Fac increased $77.4 million from
the prior year. The major elements of this change are:
23
(Millions)
----------
Restructuring including net gain/(loss) from
division disposals $68.8
Change in control expenses (3.5)
Disposed operations, including Hiland, meat snacks, oats,
and Lucca businesses 13.2
Nalley's U.S. Chips and Snacks to be sold in fiscal 1995 (2.6)
Major product line changes from ongoing businesses 4.1
Deferred profit sharing and other (2.6)
-----
$77.4
------
------
Change in control expenses are anticipated to occur in fiscal 1995 until a
final resolution is reached.
The major changes from the prior year for product line earnings (before
dividing with Pro-Fac and before taxes), excluding operations sold or to be
sold are as follows:
Increase/(Decrease)
---------------------
Amount %
(Millions) Change
--------- --------
Vegetables $13.2 681.1%
Fruits (4.5) (37.0)
Condiments and specialty products (2.0) (10.3)
Snack foods (1.2) (188.6)
Entrees (1.4) (32.5)
-----
$ 4.1
-----
-----
The increased profitability in the vegetable category was driven by the
price increases permitted by the national short crop due to poor weather
conditions in the Midwest during the 1993 growing season.
The fruit category was negatively affected by increased trade promotion and
advertising related to reformulated fruit fillings and promotions on pumpkin
pie filling.
The snack foods category has continued to be affected by the competitive
pressures of the salty snacks business and the decline in consumption for
the potato chip category.
The change in condiments and specialty products was primarily because the
profitability of peanut butter and pickles and relishes was negatively
affected by both a sales volume decline and an increase in costs. While the
canned meats and entree product line produced increased volume, increased
trade promotions and selling costs exceeded the effect of the sales
increase.
The following sets forth the major changes in the consolidated statement of
income from the prior year.
Net sales for the year ended June 25, 1994 decreased $49.5 million or 5.6
percent from the prior year. This decrease is comprised of the following:
Variance in Millions of Dollars
---------------------------------------------
Due to Due to Due to Total
Dispositions Other Volume Price/Mix Variance
------------ ------------ --------- --------
Vegetables $ -- $ 17.6 $ 7.8 $ 25.4
Condiment and specialty
products -- 1.1 3.0 4.1
Snack foods (20.3) (15.8) (.2) (36.3)
Fruits -- (3.8) (2.7) (6.5)
Entrees (7.6) .6 .1 (6.9)
Other (includes aseptic, can
making and cereals) (31.1) 6.3 (4.5) (29.3)
------- ------ ----- ------
$(59.0) $ 6.0 $ 3.5 $(49.5)
------- ------ ----- ------
------- ------ ----- ------
24
The disposition of businesses reduced sales by $59.0 million as shown above.
The increase in vegetable sales volume resulted from higher demand created
by a vegetable crop shortage caused by flooding in the Midwest and a drought
in the South during the 1993 growing season. The decrease in sales volume
for snack foods is due to the continued competitive pressures of the salty
snack business and the decline in consumption for the potato chip category.
Cost of sales decreased $40.0 million. As a percent of sales, costs
decreased to 71.4 percent from 72.0 percent. Gross profit decreased $9.5
million or 3.8 percent. These changes resulted primarily from dispositions
and changes in volume, price and product mix.
Selling, administrative and general expenses decreased $20.2 million or 9.7
percent. Cost reductions include a $.7 million decrease in trade
promotions, a $13.1 million decrease in advertising and selling costs and
a $6.4 million decrease in administrative costs.
Interest expense decreased $1.3 million or 6.9 percent resulting from a $.2
million increase due to loan volume on Pro-Fac related debt and a $1.5
million reduction due to lower interest rates.
Income before taxes improved $38.7 million or 194.1 percent. The Company's
effective tax rate was significantly impacted during fiscal 1994 by non-
deductible legal and advisory expenses incurred in conjunction with the
change in control, the increase in the federal statutory income tax rate
enacted on August 10, 1993 and the adjustment of the valuation allowance
previously recorded.
CHANGES FROM FISCAL 1992 TO FISCAL 1993
Results of Operations
Pretax earnings before dividing with Pro-Fac decreased $62.2 million from
the prior year. The major elements of this change are:
(Millions)
----------
Restructuring $(61.0)
Operations disposed in fiscal 1993 (Lucca and beverage) .2
Operations disposed in fiscal 1994 (Hiland, meat snacks,
and oats businesses) (6.7)
Operations to be disposed in fiscal 1995 (Nalley's U.S.
chips and snacks) (.8)
Major product line changes from ongoing businesses 7.4
Other (1.3)
------
$(62.2)
------
------
Excluding the restructuring charges recorded in fiscal 1993, the Company was
slightly less profitable in 1993 in comparison to the prior year, but
results of operations comprised many increases to product line earnings that
were offset by significant losses incurred in the meat snacks, Hiland snack
food, Nalley's U.S. Chips and Snacks, and vegetable businesses.
The Company benefited from strong performances from some of its regional
brands and from its can-making operations. The major changes from the prior
year for product line earnings (before dividing with Pro-Fac and before
taxes), excluding operations sold or to be sold are as follows:
25
Increase/(Decrease)
-------------------
Amount %
(Millions) Change
--------- ------
Fruits $ 2.0 19.9%
Entrees 2.0 45.0
Condiments and specialty sauces (.6) (3.0)
Vegetables (1.1) 135.6
Snack foods (.2) 111.7
Other (includes aseptic, can making,
and miscellaneous 5.3 171.5
-----
$ 7.4
-----
-----
Price increases instituted in the fourth quarter of fiscal 1992 were
maintained in fiscal 1993 in the can making operation and improved margins
from the prior year. The increased profits from the fruit filling category
were primarily due to reduced raw product costs that improved margins for
that category.
The entree category also achieved higher margins as a result of moving the
production for the Lucca canned operation to the Nalley's Fine Foods
Division. As previously discussed, the Hiland and meat snacks operations
were placed for sale as part of the restructuring program to divest
unprofitable or declining businesses. The decrease in earnings relative to
the snack operations other than Hiland, meat snacks and Nalley's U.S. Chips
and Snacks is due to the continuing competitive pressures in the snack
industry that prevent the implementation of price increases that would
improve margins without the incurrence of a loss of market share.
During fiscal 1993 the Company continued to experience pressure on earnings
from the depressed commodity vegetable business.
The following sets forth the major changes in the consolidated statement of
income from the prior year.
Net sales for the year ended June 26, 1993 decreased $18.3 million or 2.0
percent from the prior year. This decrease is comprised of the following:
Variance in Millions of Dollars
Due to Due to Due to Total
Disposition Other Volume Price/Mix Variance
----------- ------------ --------- --------
Beverages $(14.1) $ -- $ -- $(14.1)
Vegetables -- 4.4 .2 4.6
Condiments and specialty
products -- (4.2) (2.2) (6.4)
Snack foods -- .9 (2.6) (1.7)
Fruits -- 5.6 (8.8) (3.2)
Entrees (3.6) 3.7 (1.3) (1.2)
Other (includes aseptic,
can making and cereals) -- 5.4 (1.7) 3.7
------ ----- ------ ------
$(17.7) $15.8 $(16.4) $(18.3)
------ ----- ------ ------
------ ----- ------ ------
The disposition of the soft drink bottling business in July 1992 and Lucca
frozen entrees in December 1992 reduced sales by $17.7 million as shown
above.
The volume decrease for condiments and specialty products resulted from
lower cheese sauce and ketchup sales. Sales volume for cheese sauce
decreased in the first part of the fiscal year due to a loss of business
partially reinstated later in the year. The ketchup decrease in sales was
due to the discontinuation of the private label business for that product.
The variance due to price and mix in the fruit category resulted from a
decreased raw product purchase price for cherries which was passed along in
part to customers.
Cost of sales decreased $19.7 million. As a percent of sales, costs
decreased to 72.0 percent from 72.7 percent. Gross profit increased $1.4
26
million or .6 percent. These changes resulted primarily from increases in
volume partially offset by effects of price and product mix changes.
Selling, administrative and general expenses increased $5.8 million or 2.9
percent. This variance includes an $8.6 million increase in trade
promotions, a $1.9 million decrease in advertising and selling costs, a $3.3
million benefit due to operational changes in the Company's salaried
vacation policy, and a $2.4 million increase in other administrative costs.
The increase in trade promotions directly contributed to the increased sales
volume and increased margins discussed above.
Interest expense decreased $3.3 million or 14.4 percent resulting from a $.9
million decrease due to a reduction in debt and a $2.4 million reduction due
to lower interest rates.
Pro-Fac's share of the Company's profits decreased $31.3 million, of which
$30.5 million was due to the restructuring charges.
Income before taxes decreased $30.9 million, primarily due to the
restructuring charges discussed above.
Taxes on income decreased $.9 million or 18.3 percent. The Company's
effective tax rate was significantly impacted by the writedown of goodwill
and other intangibles having a lower tax basis than book value.
Net income decreased $30 million, almost entirely due to the restructuring
program (after allocating to Pro-Fac its share of the loss) and the
Company's effective tax rate as previously discussed.
Liquidity and Capital Resources
Substantially all cash not distributed by Pro-Fac to its members or security
holders is either invested in assets leased to Curtice Burns or loaned to
Curtice Burns to finance its operations. In order to gauge the working
capital and other resources available to the companies, the combined pro
forma condensed financial statements should be used. The relationship with
Pro-Fac and the combined financial statements are shown in Notes 4 and 5 to
the 'Notes to the Consolidated Financial Statements.' Such financial
statements should not be used as a basis for determining shareholders'
interest in Curtice Burns, but only as a measure of the total financial
resources available to Curtice Burns and Pro-Fac.
Certain borrowing agreements require that the companies maintain specified
levels with regard to working capital, current ratio, ratio of net worth to
assets, ratio of long-term debt to net worth, tangible net worth, net
income, coverage of interest and fixed charges and the incurrence of
additional debt. The companies are in compliance with, or have obtained
waivers for, restrictions and requirements under the terms of the borrowing
agreements. The revolving lines of credit under such agreements have been
renewed through November of 1994. Such agreements provide for adjustments
in interest rates and covenants and grant to both short-term and long-term
lenders, or entitle such lenders to obtain, liens on substantially all
assets of the Company and Pro-Fac as collateral for borrowings under such
agreements.
Should the resolution of the potential change in control of Curtice Burns
result in the Company exercising its option to purchase from Pro-Fac the
property and equipment and certain other assets used by the Company in its
business, the Company believes that the amount required to accomplish this
(including the repayment of debt) would be approximately $267.7 million (as
measured at the book value on June 25, 1994). Of this amount, $101.5
million represents short- and long-term debt, $24.9 million relates to
intangible assets and $141.3 million relates to leased fixed assets. This
$267.7 million at June 25, 1994 compares to $303.8 million at June 26, 1993,
which was comprised of $103.8 million of short- and long-term debt, $26.5
million relating to intangible assets and $173.5 million relates to leased
fixed assets. The decrease in leased assets during fiscal 1994 of $32.2
million is primarily the result of the reduction of leased assets due to the
sale of businesses and depreciation of assets exceeding additions. However,
27
in the pending arbitration proceedings between Curtice Burns and Pro-Fac,
Pro-Fac has asserted, among other matters, (1) that Pro-Fac is entitled to
a 50 percent share of the profits from the consummation of the pending
acquisition proposal from Dean Foods, which share Pro-Fac calculates to be
greater than $5.75 per share of Curtice Burns' common stock; and (2) that
the book value of Pro-Fac's assets for the purposes of determining the
buyout price under the Integrated Agreement should not take into account
specified writedowns by Curtice Burns of those assets. See 'Legal
Proceedings' above and Note 2 to the 'Notes to the Consolidated Financial
Statements.'
There are currently two offers for all the outstanding common stock of
Curtice Burns. See Note 2 of the 'Notes to Consolidated Financial
Statements.'
Cash flows from operating activities are generally the cash effects of
transactions and other events that enter into the determination of net
income. In the fiscal year, net cash provided by operating activities of
the combined companies of $39.0 million reflects net income of $10.1 million
for Curtice Burns and $24.5 million for Pro-Fac. Amortization of assets
amounted to $25.7 million. Inventories decreased $.3 million and accounts
receivable decreased $5.7 million. Changes in other assets and liabilities
amounted to $27.3 million.
Cash flows from investing activities include the acquisition and disposition
of property, plant and equipment and other assets held for or used in the
production of goods. Net cash provided by investing activities of $22.4
million in the period was comprised of $42.1 million received from
disposals, $19.6 million paid for purchases of property, plant and
equipment, $1.3 million received for disposals of fixed assets, and a $1.4
million increase in the investment of Springfield Bank for Cooperatives.
During the period, the $42.1 million received from the disposition of the
oats portion of the National Oats business and the Hiland Potato Chip
business was generally applied to reduce debt.
Net cash used in financing activities of $65.1 million in the period was
comprised of payments on short-term debt of $.5 million, payments on long-
term debt of $50.2 million, payments on capital leases of $2.1 million,
issuance of capital stock of $.7 million, less repurchases of $3.2 million,
and dividends paid of $9.9 million.
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. The 1993
floods in the Midwest and the drought in the South increased finished goods
pricing, even though the crops in the Company's growing areas were at normal
levels. It is difficult to assess the 1994 crop yields and resulting impact
on fiscal 1995 profitability until late fall of 1994 when national supplies
of the fruit and vegetable commodities are known.
Seasonal lines of credit of $100.0 million were available to the Company and
Pro-Fac up to September 1993, $86 million after that date, and the maximum
borrowing on those lines was $81.0 million. The balance outstanding at June
25, 1994 was $11.5 million.
There are no current plans for the acquisition of businesses. Capital
expenditures are expected to approximate $20.0 million in the next year.
28
Scheduled payments on long-term debt will approximate $15 million in the
coming year. Net cash provided from operations and the cash proceeds from
the planned sales of excess facilities should be sufficient to cover the
scheduled payments on long-term debt and planned capital expenditures as
well as anticipated dividends of approximately $10 million in the coming
year. Proceeds from the sale of business units, if any, will be applied to
reduce debt.
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.
Other Matters
In November 1992, the Financial Accounting Standard Board issued Statement
of Accounting Standards No. 112, 'Employers' Accounting for Postemployment
Benefits.' This statement establishes accounting standards for employers
who provide benefits to former or inactive employees after employment but
before retirement. Postemployment benefits are all types of benefits
provided to former or inactive employees, their beneficiaries, and covered
dependents.
This statement is effective for fiscal years beginning after December 15,
1993. Management believes that any changes caused by this Statement will
not be material.
Statement of Position ('SOP') 93-7, 'Reporting on Advertising Costs,' was
issued in December 1993 and has not yet been adopted by the Company. The
Statement provides guidance on financial reporting on advertising costs.
The Company plans to adopt the Statement in fiscal 1995, and believes that
the effect on the results of operations will not be material.
29
Note 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Pages
Curtice Burns Foods and Consolidated Subsidiaries:
Independent Accountants' Reports . . . . . . . . . . . . . . . 31
Management's Responsibility for Financial Statements . . . . . 32
Consolidated Statements of Operations and Retained
Earnings for the Fiscal Years Ended June 25, 1994,
June 26, 1993, and June 26, 1992 . . . . . . . . . . . . . . 33
Consolidated Balance Sheets, June 25, 1994 and June 26, 1993 . . 34
Consolidated Cash Flow Statements for the Fiscal Years Ended
June 25, 1994, June 26, 1993, and June 26, 1992 . . . . . . . 35
Notes to Consolidated Financial Statements. . . . . . . . . . . 36
Selected Quarterly Financial Data . . . . . . . . . . . . . . . 55
The following additional financial data are submitted as part of Item 14 -
Exhibits, Financial Statement Schedules, and Reports on Form 8-K of this
report:
Schedule V -Property, Plant and Equipment
Schedule VI -Accumulated Depreciation of Property, Plant and
Equipment
Schedule VIII -Valuation and Qualifying Accounts
Schedule IX -Short-Term Borrowings
Schedule X -Supplementary Income Statement Information
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.
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Curtice-Burns Foods, 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 Curtice Burns Foods, Inc. and its subsidiaries at June 25, 1994
and June 26, 1993, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended June 25, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Notes 2 and 4 to the consolidated financial statements,
several disputes currently exist between Pro-Fac Cooperative, Inc. and the
Company. The Company has requested arbitration to resolve the disputes with
Pro-Fac Cooperative, Inc. Additionally, two competing offers to acquire the
outstanding common stock the Company have been made.
Our audits of the consolidated financial statements also included an audit
of the financial statement schedules listed in the accompanying index and
appearing under Item 14 of this Form 10-K. In our opinion, these financial
statement schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICE WATERHOUSE LLP
Rochester, New York
August 10, 1994
(Except as to Note 3, which is
as of September 22, 1994).
31
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the financial
statements and related notes which appear on pages 33 through 54. 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 page 31.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of non-
management board members. The independent accountants and internal auditors
of the Company have full and free access to the Audit Committee. The Audit
Committee periodically meets with the independent accountants and the
internal auditors, and with management present to discuss accounting,
auditing and financial reporting matters.
J. William Petty
President and
Chief Executive Officer
William D. Rice
Senior Vice President and
Chief Financial Officer
September 23, 1994 32
Curtice Burns Foods, Inc.
Consolidated Statement of Operations and Retained Earnings
Dollars in Thousands Except Share Data
Fiscal Years Ended
-------------------------
1994 1993 1992
-------- ------- -------
Net sales $829,116 $878,627 $896,931
-------- -------- --------
Costs and expenses:
Cost of sales 592,621 632,663 652,347
Restructuring including net (gain)/loss
from division disposals (7,768) 61,037 --
Change in control expenses 3,500 -- --
Other selling, administrative and general
expenses 186,934 207,119 201,327
Interest expense:
Interest expense on Pro-Fac
related borrowings 15,617 16,515 19,869
Interest expense on other debt 2,667 3,047 3,558
Less capitalized interest (79) (12) (592)
------- ------- -------
Total interest expense 18,205 19,550 22,835
------- ------- -------
Total costs and expenses 793,492 920,369 876,509
------- ------- -------
Pretax earnings/(loss) before dividing
with Pro-Fac 35,624 (41,742) 20,422
Pro-Fac share of (earnings)/loss (16,849) 21,800 (9,505)
------- ------- -------
Income/(loss) before taxes 18,775 (19,942) 10,917
Provision for taxes (8,665) (3,895) (4,769)
------- ------- -------
Net income/(loss) 10,110 (23,837) 6,148
Retained earnings at beginning of period 53,541 82,882 80,849
Less cash dividends declared
($.64, $.64, and $.48 per share, (5,530) (5,504) (4,115)
respectively) ------- ------- -------
Retained earnings at end of period $ 58,121 $ 53,541 $ 82,882
------- -------- --------
------- -------- --------
Net income/(loss) per share $ 1.17 $ (2.77) $ .71
------- -------- --------
------- -------- --------
The accompanying notes are an integral part of these financial statements.
33
Curtice Burns Foods, Inc.
Consolidated Balance Sheet
Dollars in Thousands Except Share Data June 25, 1994 June 26, 1993
------------- --------------
ASSETS
Current Assets:
Cash $ 2,928 $ 6,516
Accounts receivable trade, less allowances for
bad debts of $1,066 and $801, respectively 57,640 63,160
Accounts receivable, other 8,460 8,151
Income taxes refundable 237
Current deferred taxes receivable 10,487 7,561
Inventories -
Finished goods 108,538 110,772
Raw materials and supplies 46,721 58,704
-------- --------
Total inventories 155,259 169,476
-------- --------
Prepaid manufacturing expense 8,190 7,164
Prepaid expenses and other current assets 4,305 4,920
-------- --------
Total current assets 247,506 266,948
Net property, plant and equipment leased 141,322 173,513
from Pro-Fac
Other property, plant and equipment, net 26,194 18,939
Goodwill and other intangibles, less amounts
financed and accumulated amortization of
$10,335 and $8,650, respectively 24,909 26,546
Other assets 7,007 7,783
-------- --------
Total assets $446,938 $493,729
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 62,335 $ 64,663
Due to Pro-Fac 9,447 9,113
Accrued employee compensation 11,482 11,843
Other accrued expenses 26,947 30,334
Income taxes payable 9,046
Current portion of obligations under
Pro-Fac capital leases 17,645 21,184
Current portion of obligations under
other capital leases 785 1,687
Current portion of Pro-Fac long-term debt 14,000 16,000
Current portion of other long-term debt 816 2,656
-------- --------
Total current liabilities 143,457 166,526
Long-term debt due Pro-Fac 78,040 78,648
Long-term debt due others 1,021 6,389
Obligations under Pro-Fac capital leases 123,677 152,329
Obligations under other capital leases 1,296 1,773
Deferred income taxes 14,958 9,362
Other non-current liabilities 3,591 3,027
-------- --------
Total liabilities 366,040 418,054
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Class A common - $.99 par value;
10,125,000 shares authorized;
6,628,430 and 6,568,518 outstanding, respectively 6,562 6,503
Class B common - $.99 par value;
4,050,000 shares authorized;
2,056,876 and 2,060,702 outstanding, respectively 2,0