Prospectus
PRO-FAC COOPERATIVE, INC.
1,156,630 Shares of Class A Common Stock
$7,545,000 Retains
We are a New York agricultural cooperative corporation formed in 1960
to process and market crops grown by our members. Membership in Pro-Fac is
limited to persons or entities who are actively engaged in the growing of
agricultural products, such as cherries, apples, corn and peas. Growers who wish
to become members of Pro-Fac are required to purchase shares of our common
stock.
We are registering shares of our Class A common stock, retains and
shares of our Class A cumulative preferred stock. Our Class A common stock is
being offered to growers who are currently members, or who wish to become
members, who deliver raw product for sale and processing by Agrilink Foods,
Inc., which is our wholly owned subsidiary. Retains represent that portion of
patronage proceeds payable to our members but retained by us. Our retains may be
redeemed for cash or shares of our Class A cumulative preferred stock. Our Class
A cumulative preferred stock is traded on the Nasdaq National Market under the
symbol "PFACP."
<TABLE>
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Issuer (2)
---------------- --------------- --------------
<S> <C> <C> <C> <C>
Class A common stock Per Share $5.00 0.0 $5.00
Total: $5,783,150 $5,783,150
Retains Per Unit: 100% 0.0 100%
Total: $7,545,000 $7,545,000
<FN>
(1) The securities described in this Prospectus are to be offered and
distributed directly through officers of Pro-Fac, without the use of any
underwriter or dealer, and no discounts, commissions or other compensation
are to be allowed or paid.
(2) Before deducting expenses estimated at $28,890.
</FN>
</TABLE>
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
RELATING TO THIS OFFERING.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or as passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus is accompanied by a copy of Pro-Fac Cooperative, Inc.'s Annual
Report on Form 10-K/A-1 for the year ended June 26, 1999 and Pro-Fac Cooperative
Inc.'s Form 10-Q for the fiscal quarter ended September 25, 1999.
This prospectus is dated November 5, 1999
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary....................................................3
Risk Factors..........................................................7
Ratio of Earnings to Fixed Charges and Preferred Dividends...........11
Where You Can Find More Information..................................12
Forward-Looking Information..........................................13
Use of Proceeds......................................................13
Determination of Offering Price......................................13
Plan of Distribution.................................................14
Business of Pro-Fac..................................................14
Description of Pro-Fac Securities....................................21
Experts..............................................................25
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus or incorporated by reference in this
prospectus. We are not making offers to sell the securities covered by this
prospectus or soliciting offers to purchase the securities covered by this
prospectus in any jurisdiction in which such an offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation. The information in this prospectus is accurate as of the date on
the front cover. You should not assume that the information contained in this
prospectus is accurate as of any other date.
Unless otherwise indicated, references in this prospectus to "Pro-Fac,"
"we," "our," and "us" refer to Pro-Fac Cooperative, Inc., a New York
agricultural cooperative formed in 1960, together with its subsidiaries Agrilink
Foods, Inc. and PF Acquisition II, Inc., which conducts business under the name
AgriFrozen Foods. References in this prospectus to our fiscal year refer to the
12-month period ended the last Saturday of June of that year.
This prospectus includes trademarks, trade names and service marks of
Pro-Fac.
Our principal executive offices are located at 90 Linden Oaks,
Rochester, New York 14625. Our telephone number is 716-383-1850.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Pro-Fac and the securities being sold in this offering and
our audited consolidated financial statements incorporated by reference in this
prospectus.
Pro-Fac
As an agricultural cooperative, we process and market crops grown by
our members. Our crops include fruits, such as cherries, apples, blueberries,
peaches and plums, vegetables, such as snap beans, beets, cucumbers, peas, sweet
corn, carrots, cabbage, squash, asparagus, potatoes, turnip roots and leafy
greens, and popcorn. Only growers of crops marketed through us, or associations
of such growers, can become members. Growers become members of Pro-Fac by
purchasing shares of our common stock. You cannot be a member unless you own
shares of our common stock.
We have two subsidiaries, Agrilink and AgriFrozen. Our membership is
divided into two separate classes. Members who own shares of our Class A common
stock are our Class A members, and members who own shares of our Class B common
stock are our Class B members.
Our Class A members are our current members who deliver raw product for
processing and sale at the facilities of Agrilink Foods, Inc., which is our
wholly owned subsidiary. We currently have approximately 645 Class A members
consisting of individual growers or of associations of growers, located
principally in the states of New York, Delaware, Pennsylvania, Illinois,
Michigan, Washington, Oregon, Iowa, Nebraska, Florida, and Georgia.
We do not currently have any Class B members. It is anticipated that
our Class B members will be those who deliver raw product for processing and
sale by AgriFrozen Foods.
Agrilink.
Agrilink is a producer and marketer of processed food products.
Agrilink has four primary product lines including vegetables, fruit, snacks and
canned meals. The vegetable product line consists of canned and frozen
vegetables, chili beans, pickles, and various other products. Branded products
within the vegetable category include Birds Eye, Birds Eye Voila!, Freshlike,
Veg-All, McKenzies, Brooks Chili Beans, Farman's, and Nalley. The fruit product
line consists of canned and frozen fruits including fruit fillings and toppings.
Branded products within the fruit category include Comstock and Wilderness. The
snack product line consists of potato chips, popcorn and other corn-based snack
items. Branded products within the snack category include Tim's Cascade Chips,
Snyder of Berlin, Husman, La Restaurante, Erin's, Beehive, Pops-Rite, and Super
Pop. The canned meal product line includes products such as chilies, stews,
soups, and various other ready-to-eat prepared meals. Branded products within
the canned meal category include Nalley. All other product lines primarily
represent salad dressings. Brand products within this category include
Bernstein's and Nalley. Agrilink also sells its products to supermarkets,
warehouse clubs and mass merchandisers under private labels and to food service
institutions such as restaurants, caterers, bakeries and schools. Agrilink
operates 28 processing facilities located throughout the United States and one
facility in Mexico. These processing facilities provide Agrilink with access to
diverse sources of raw agricultural products. Agrilink distributes its finished
products to over 13,000 customer distribution points through a nationwide
network of distribution centers and food brokers.
In 1994, we entered into a marketing and facilitation agreement with
Agrilink. Under that agreement, we supply Agrilink with crops and provide
additional financing to Agrilink, Agrilink provides us with marketing and
management services and we share in Agrilink's profits or losses.
<PAGE>
The Acquisition of Dean Foods Vegetable Company
On September 24, 1998, Agrilink acquired the frozen and canned
vegetable business of Dean Foods Company, by acquiring from Dean Foods all the
outstanding capital stock of Dean Foods Vegetable Company and Birds Eye de
Mexico SA de CV. DFVC was a vegetable processor selling its products under brand
names, such as Birds Eye, Freshlike and Veg-All, and various private labels. In
connection with the acquisition of DFVC, Agrilink sold its aseptic business to
Dean Foods. The aseptic business produced primarily dairy-based products, such
as puddings and cheese sauces. In addition to selling its aseptic business,
Agrilink paid Dean Foods $360.0 million in cash and issued to Dean Foods a $30.0
million unsecured subordinated promissory note due November 22, 2008, as
consideration for the acquisition of DFVC. In connection with the acquisition of
DFVC, Agrilink reserved the right to require Dean Foods, in consideration for
the payment of an additional $13.2 million, to treat the acquisition of DFVC as
an asset sale for tax purposes under Section 338(h)(10) of the Internal Revenue
Code. Agrilink exercised that right on April 15, 1999 and paid Dean Foods $13.2
million.
Immediately following the acquisition, DFVC was merged into Agrilink.
We believe that the acquisition of DFVC strengthens Agrilink's competitive
position by enhancing its brand recognition and market position, providing
opportunities for cost savings and operating efficiencies, and increasing
Agrilink's product and geographic diversification.
The Refinancing
Concurrently with the acquisition of DFVC, Agrilink refinanced its
then-existing indebtedness, which included $160.0 million of its senior
subordinated notes having an interest rate of 12-1/4% per year and maturing in
the year 2005, which we refer to as Agrilink's old notes, and its then-existing
bank debt. As part of its refinancing, Agrilink purchased substantially all its
old notes for an aggregate amount of approximately $184.0 million, including
accrued interest of $2.9 million, terminated its old credit facility and repaid
$176.5 million of indebtedness that had been outstanding under that facility.
In order to finance the acquisition of DFVC, the subsequent merger of
DFVC into Agrilink, the refinancing of Agrilink's then-existing indebtedness,
and pay related fees and expenses, Agrilink:
entered into and borrowed from a new credit facility, consisting
of a $455.0 million term loan facility and a $200.0 million
revolving credit facility;
entered into and borrowed from a $200.0 million bridge loan
facility; and
issued the $30.0 million subordinated promissory note to Dean
Foods.
Agrilink repaid the $200.0 million bridge loan facility on November 18,
1998 with the proceeds of an offering of $200.0 million of new senior
subordinated notes having an interest rate of 11-7/8% per year and maturing in
the year 2008. These "initial" notes were later exchanged for notes that were
substantially identical to the initial notes, except that the new notes are
freely transferable. We refer to the notes issued in exchange for all of the
initial notes as the "new notes."
We have guaranteed Agrilink's obligations under the new credit
facility, the subordinated promissory note to Dean Foods Company and its new
notes.
AgriFrozen.
AgriFrozen is a producer and marketer of primarily frozen vegetables.
AgriFrozen's products include frozen green peas, sugar-snap peas, cob corn and
whole kernel corn, green beans, carrots, and lima beans. Although AgriFrozen
does have branded products, including Chef Du Jour, Perfect Sense, Sweet
Jubilee, Jack and the Beanstalk and Oregon's Finest, most of its frozen
vegetable products are packaged and sold under
<PAGE>
private labels. Under trademark licensing agreements with Ore-Ida Foods, Inc.,
AgriFrozen distributes some of its frozen cob corn products under the Ore-Ida
and Mini-Gold trademarks, certain of its frozen breaded vegetable products,
including okra, mushrooms, zucchini and corn nuggets are sold under the
Tendekrisp and Ore-Ida trademarks and some of its frozen stew vegetable products
are marketed and distributed under the Ore-Ida trademark. In addition, under its
co-packing agreement with Agrilink, AgriFrozen processes and packages a variety
of frozen vegetables under Agrilink's Birds Eye trademark. Sales of finished
product sold to Agrilink for distribution under the Birds Eye brand constitute
approximately $30.0 million of AgriFrozen's total net sales for the 1999 fiscal
year.
On February 23, 1999, AgriFrozen acquired substantially all of the
frozen vegetable processing assets of Agripac, Inc., an Oregon cooperative in
bankruptcy. In order to finance the acquisition AgriFrozen obtained financing
from CoBank, ACB under the credit facilities. The CoBank financing consists of:
a credit facility consisting of a term loan facility of $30.0
million and a revolving credit facility of $55.0 million for
fiscal 2000 and $50.0 million for each year thereafter, and
a $12.0 million subordinated promissory note.
The net purchase price for the frozen vegetable processing business was
$80.5 million, including expenditures of $7.8 million consisting of cash
payments of approximately $6.4 million to obtain grower contracts from former
Agripac member-growers, and transaction expenses and miscellaneous costs
totaling $1.4 million. AgriFrozen also expects to pay severance costs of
approximately $1.2 million.
In order to pay the total acquisition price, AgriFrozen:
borrowed $30.0 million under the term loan facility,
borrowed a total of $36.9 million under the revolving credit
facility, and
issued the $12.0 million subordinated promissory note.
The balance of the total acquisition price, $8.0 million, was paid by
AgriFrozen from the sale of shares of its preferred stock to PFA Northwest
Growers Cooperative, Inc. In addition, $6.4 million borrowed under the revolving
credit facility was held in escrow until the final purchase price was agreed to.
These funds were returned to AgriFrozen in July 1999 and applied to the
revolving credit facility.
AgriFrozen granted a security interest in substantially all of its
assets as security for the CoBank credit facility and the subordinated
promissory note. Neither we nor Agrilink guaranteed the debts of AgriFrozen or
otherwise pledged any of our respective properties as security for the CoBank
financing. In fact, all of AgriFrozen's indebtedness is expressly without
recourse to us and Agrilink.
We have entered into a marketing and facilitation agreement with
AgriFrozen. Under this agreement, we expect to sell the crops of our Class B
members to AgriFrozen at their commercial market value ("CMV") for earnings or
processing and distribution by AgriFrozen. AgriFrozen has agreed to pay us the
CMV of those crops, less any earnings or losses incurred on products processed
using our Class B members' crops. We will distribute to our Class B members
payments received from AgriFrozen for our Class B members' crops. The commercial
market value of a crop or its CMV is the weighted average of the prices paid by
other commercial processors for similar crops used for similar or related
purposes sold under pre-season contracts or in the open market in the same or
similar market areas.
AgriFrozen has also entered into an administrative services agreement
with Agrilink, pursuant to which Agrilink provides AgriFrozen with certain
management consulting and administrative services.
<PAGE>
Recent Developments.
On September 16, 1999, Agrilink and Seneca Foods Corporation announced
that they are currently negotiating the purchase by Seneca of Agrilink's Midwest
private label canned vegetable business. The proposed assets to be acquired by
Seneca will include Agrilink's Cambria, Wisconsin and Arlington, Minnesota
facilities. The transaction will also include reciprocal co-packing agreements.
The parties are working toward finalizing the agreement by early November,
subject to further due diligence and board and regulatory approval. This
transaction does not include Agrilink's branded canned vegetables, Veg-All and
Freshlike.
<PAGE>
RISK FACTORS
Before you invest in our securities, you should be aware that there are
various risks, including those described below. You should carefully consider
these risks together with all of the other information included in this
prospectus, incorporated by reference in this prospectus, and filed as exhibits
to our registration statement before you decide to purchase shares of our Class
A common stock.
Patronage income distributed to our Class A members will be derived
exclusively from Agrilink's operations.
Our members participate in two separate and distinct pools: (a) the
Class A member pool, which is limited to Class A members and (b) the Class B
member pool, which is limited to Class B members. A Class A member is a producer
and supplier of raw products to us for processing by Agrilink. A Class B member
is a producer and supplier of raw products to us for processing at facilities of
AgriFrozen. A member's share of patronage proceeds will be determined within the
particular membership pool the member is assigned. All income from patronage
sources and related expenses will be allocated to either the Class A member pool
or the Class B member pool. Members in the Class A member pool will not have any
right to participate in patronage income generated by growers in the Class B
member pool. Similarly, members in the Class B member pool will not have any
right to participate in patronage income generated by growers in the Class A
member pool. See "Business of Pro-Fac."
A member's share of proceeds may be less than CMV.
Payment for crops is based upon the CMV of the crops supplied to us by
our members. There is no relationship, however, between the CMV of crops and the
cost of producing such crops, since CMV is determined by supply and demand in
the marketplace. Under our marketing and facilitation agreement with Agrilink,
if Agrilink experiences a loss on products processed from crops supplied by our
Class A members, this loss will be deducted from the CMV Agrilink would
otherwise pay to us for distribution to our Class A members. Agrilink's ability
to pay us the CMV of crops supplied by our Class A members will depend in large
part on the overall profitability of Agrilink. There can be no assurance that
Agrilink will be able to pay the CMV of our Class A members' crops.
Holders of our common stock receive only one vote regardless of the
number of shares owned.
Each of our members has one vote, regardless of the number of shares of
common stock held. If two or more members are joined in a single farming
enterprise, the participating members receive only a single vote. Therefore,
even a member with substantial holdings of common stock will have relatively
little control over the election of directors or other matters on which our
members may vote. See "Description of Pro-Fac Securities."
Possible discontinuance of crops.
We continuously review the ability of our members to produce
high-quality crops. Based on our evaluations, we may determine to stop
marketing, in whole or in part, a particular crop and terminate or reduce the
crops deliverable under the crop delivery agreements of our members producing
that crop for sale through us. The members affected would be required to sell
all of their shares of common stock supporting that portion of the crop to us
for cash at its par value, which is $5.00 per share, plus any declared but
unpaid dividends.
We may also adjust the quantity of a crop to be marketed for our
members. This adjustment may be temporary or permanent. Permanent increases in
the quantity of a crop to be marketed would involve the purchase of additional
shares of common stock, and permanent decreases would involve the sale of shares
of common stock by members.
<PAGE>
We are the guarantor of Agrilink's indebtedness.
We do not have any independent operations or any significant assets
other than the capital stock of Agrilink and AgriFrozen. We are dependent upon
the receipt of payments under our marketing and facilitation agreements with
Agrilink and AgriFrozen, and upon the receipt of dividends or other
distributions from Agrilink to fund our obligations, including our obligations
under our guarantees with respect to Agrilink's indebtedness under its new
credit facility, the Dean Foods subordinated promissory note and Agrilink's new
notes.
Agrilink's substantial leverage and debt service requirements could
adversely affect our operating flexibility and place us at a competitive
disadvantage.
Agrilink is highly leveraged and has significant debt service
requirements. At June 26, 1999, Agrilink had $677 million of indebtedness
outstanding, not including borrowings under its $200 million revolving credit
facility. At June 26, 1999, Agrilink had $18.9 million of indebtedness
outstanding under its revolving credit facility, representing seasonal working
capital borrowings, and it had issued $16.2 million of letters of credit under
its revolving credit facility.
Agrilink's credit facility contains covenants imposing a number of
significant operating and financing restrictions on our business, as well as
Agrilink's business. These covenants, among other things, limit our ability to:
incur additional indebtedness;
incur or maintain liens;
pay dividends or other distributions;
redeem our capital stock;
make other restricted payments;
enter into transactions with affiliates;
sell or dispose of assets; and
merge, consolidate or sell all or substantially all of our
assets.
In addition, we are required under Agrilink's credit facility to
maintain specified levels with regard to EBITDA, interest coverage, fixed
charges coverage, leverage and net worth. These provisions could negatively
affect our ability to react to changes in market conditions or to take advantage
of business opportunities we believe to be desirable.
Our or Agrilink's failure to comply with these provisions in Agrilink's
credit facility would result in a default thereunder.
In addition, a substantial portion of Agrilink's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness, reducing funds available to Agrilink for operations, capital
expenditures, or other purposes. For example:
Agrilink must make interest payments on its new notes in the
amount of approximately $23.8 million each year;
Agrilink is required to make interest payments under the new
credit facility of approximately $40.4 million each year
under the term loan facility and approximately $81,000 per
$1 million borrowed under the revolving credit facility,
assuming its interest rates do not change;
<PAGE>
Agrilink is required to make annual principal repayments
under the new credit facility in amounts of: $8.3 million in
fiscal 2000, $10.8 million in each of fiscal 2001, 2002, and
2003, $11.1 million in fiscal 2004, $195.3 million in fiscal
2005 and $199.5 million in fiscal 2006. Agrilink would not
presently be able to make the payments due in fiscal 2005 or
2006 out of its current cash flow and may be unable to pay
these principal amounts when they become due unless Agrilink
is able to refinance indebtedness; and
Certain of Agrilink's loans under the new credit facility
have variable or floating interest rates. Of the $446.6
million principal amount of loans outstanding at June 26,
1999 under Agrilink's term loan facility, Agrilink has
effectively fixed the applicable interest rates for $250
million of such loans for three years through interest rate
hedges. Accordingly, Agrilink remains vulnerable to
increases in interest rates, and correspondingly, increases
in its interest costs, for the unfixed portion of the
interest due for this floating rate debt.
A default under Agrilink's credit facility would allow the lenders to
terminate their loan commitments under Agrilink's revolving credit facility. In
addition, Agrilink's creditors under its credit facility could require
acceleration of the payment of principal and interest on those loans upon the
occurrence of a default, causing all amounts owed under Agrilink's credit
facility to be immediately due and payable. If Agrilink is unable to repay its
indebtedness under it's credit facility, the lenders could enforce our guaranty
and require us to pay Agrilink's indebtedness. Because we have no independent
operations, it is unlikely that we would be able to pay such debt. In addition,
because of Agrilink's indebtedness, we are more highly leveraged than several of
our competitors. As a result, our ability to react to changing market conditions
may be limited, our ability to withstand competitive pressures may be inhibited
and we may be more vulnerable to a downturn in general economic conditions in
our business.
Delayed payments for crops.
Our members receive delayed payment of a portion of the purchase price
for their crops. This delay may exceed the industry average in some instances.
For instance, we have historically paid the final 25% of CMV by July 15 of the
year immediately following the year of delivery. See "Business of Pro-Fac."
Our members must include as taxable income proceeds for which they have
not received any cash payment.
A member of Pro-Fac must include in his taxable income for federal
income tax purposes his share of the net proceeds of Pro-Fac realized from
patronage business, which is member related business, paid to him in cash and
allocated to his account as qualified retains. As a result, a member is required
to declare as income the value of the qualified retains allocated to him even
though he has not received an actual cash payment of that amount. Non-qualified
retains are included in a member's taxable income only when they are redeemed.
See "Business of Pro-Fac."
Transferability of our Class A common stock is limited and you may have
limited liquidity.
The Class A common stock may only be transferred to us or other Class A
members. You may not be able to readily sell your Class A common stock in the
event you are in an immediate need of a source of cash.
The non-qualified retains are not transferable and you have limited
liquidity.
Non-qualified retains are non-transferable. They do not bear interest
and have no dividend rights. You may not be able to readily sell your
non-qualified retains for cash, or pledge your non-qualified retains as
collateral for loans.
<PAGE>
We have the ability to change our treatment of retains.
Every year our board of directors determines whether to redeem our
retains, and, if so, the amount of retains that should be redeemed.
Historically, we have redeemed our qualified retains for shares of our Class A
cumulative preferred stock, and our non-qualified retains for our Class A
Cumulative preferred stock and cash.
Historically, our board of directors has redeem retains, qualified and
non-qualified, five years after issuance. This policy is subject to change in
the discretion of our board of directors. Our board could, for example, increase
the number of years the retains must be held before they are redeemed or our
board could decide to redeem the retains for cash only, for shares of our Class
A cumulative preferred stock or shares of some other authorized class of our
capital stock, some other form of consideration, or for some combination of cash
and securities.
Shortages or oversupplies of raw product due to seasonality and other
factors could result in reduced profitability.
We and our members are subject to all the risks generally associated
with the production and marketing of agricultural commodities. The production of
agricultural products is predominantly seasonal. The vegetable business can be
positively or negatively affected by national weather conditions because of the
weather's effect on crop yields. Favorable weather conditions can produce high
crop yields and an oversupply situation in a given year. Oversupply typically
will result in depressed selling prices and reduced profitability on products
produced from that year's crops. Excessive rain or drought conditions can
produce low crop yields and a shortage situation. Shortages typically result in
higher selling prices and increased profitability for products. Although the
overall national supply situation controls pricing, the supply can differ
regionally because of variations in weather.
Risks of the food industry, including changes in consumer preferences
and distribution channels could adversely affect our business.
Food processors are subject to risks of:
adverse changes in general economic conditions;
evolving consumer preferences and nutritional and health
related concerns;
changes in food distribution channels and increasing buying
power of large supermarket chains, warehouse clubs, mass
merchandisers, super centers and other retail outlets that
tend to resist price increases and have stringent inventory
and management requirements;
federal, state and local food processing controls;
consumer product liability claims; and
risks of product tampering.
Product liability claims or product recalls could adversely affect our
business.
The packaging, marketing and distribution of food products entails an
inherent risk of product liability and product recall and resultant adverse
publicity. We may be subject to significant liability if the consumption of any
of our products causes injury, illness or death. We could be required to recall
certain of our products in the event of contamination or damage. There can be no
assurances that product liability claims will not be asserted against us in the
future, or that any claims that are made will not create adverse publicity that
will have a material adverse effect on our ability to successfully market our
products and on our business, financial condition, and results of operations.
<PAGE>
Proceeds Not Committed to Specific Purposes.
The securities offered are issued on a continuing basis as part of
normal operations and not to raise funds for any specific purpose. Our
management will determine the allocation of the net proceeds from the sale of
our Class A common stock. As a result, members will be relying upon our
management's judgment as to the use and investment of the net proceeds.
Environmental risks; compliance with environmental laws.
We are subject to various federal, state and local laws and regulations
relating to the protection of the environment. These environmental laws and
regulations govern the disposal of solid and liquid waste material, which
results from the preparation and processing of foods, and emissions into the
atmosphere, including odors inherent in the heating of foods during preparation.
These environmental 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,
as well as for the construction, operation and closure of waste treatment and
related facilities. We cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or whether new environmental
conditions may be found to exist. Enactment of more stringent laws or
regulations, more strict interpretation of existing laws and regulations or
identification of new conditions may require additional expenditures by us.
Year 2000 technology problems could cause business interruptions.
Many currently installed computer systems and software products
worldwide are coded to accept only two-digit entries to identify a year in the
date code field. Consequently, on January 1, 2000, many of these systems could
fail or malfunction because they are not able to distinguish between the year
1900 and the year 2000. Accordingly, many companies, including Pro-Fac and our
customers and suppliers, may need to upgrade their systems to comply with
applicable year 2000 requirements.
Because we, our customers and suppliers depend, to a very substantial
degree, upon the proper functioning of computer systems, a failure of these
systems to correctly recognize dates beyond January 1, 2000 could disrupt
operations. Any disruptions could have a material adverse effect on our
business, financial condition or results of operations.
<TABLE>
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS
Fiscal Years Ended
June 24, June 29, June 28, June 27, June 26,
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
and preferred dividends 1.5 (A) 1.1 1.4 1.6
Pro forma ratio of earnings to fixed
charges and preferred dividends 1.3 (B) (B) 1.2 1.5
<FN>
(A) In the fiscal year ended June 29, 1996, the earnings were inadequate by
$37,048,000 to cover the amount of fixed charges and pre-tax preferred
dividends.
(B) In the fiscal years ended June 29, 1996 and June 28, 1997, the earnings
were inadequate by $43,748,000 and $2,028,000, respectively, to cover the
amount of fixed charges and pre-tax preferred dividends which would have
been declared and paid if all retained earnings allocated to members'
"retains" at the end of each fiscal period had been converted to preferred
stock at the beginning of the period at the maximum dividend permitted by
law.
</FN>
</TABLE>
<PAGE>
For purposes of computing the ratio of earnings to fixed charges and
preferred dividends, earnings consist of net proceeds before
equity in the undistributed earnings of CoBank, ACB;
fixed charges;
income taxes; and
dividends on common and preferred stock.
Fixed charges represent total interest expense. For purposes of this
computation, preferred dividends are adjusted to a pre-tax basis. Dividends
represent amounts deducted to determine net proceeds in each fiscal year.
The pro forma ratios of earnings to fixed charges and preferred
dividends were computed by further increasing combined fixed charges and such
dividends, adjusted to a pre-tax basis, by the amount of pre-tax preferred
dividends which would have been declared and paid if all retained earnings
allocated to members at the end of each fiscal period had been converted to
preferred stock at the beginning of the respective periods and the maximum
dividend permitted by law of 12 percent of par value was declared and paid
thereon.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-2 under
the Securities Act registering, the Class A common stock, retains and Class A
cumulative preferred stock. This prospectus, which is part of the registration
statement, does not contain all of the information included in the registration
statement. Also, any statement made in this prospectus concerning the contents
of any contract, agreement or other document is not necessarily complete. If we
have filed any contract, agreement or other document as an exhibit to the
registration statement, you should read the exhibit for a more complete
understanding of the document or matter involved.
We are required to file periodic reports and other information with the
SEC under the Securities Exchange Act. Accordingly, we file reports and other
information with the Commission.
You may read and copy the registration statement, including the
attached exhibits, and any reports, statements or other information that we may
file, at the SEC's public reference room at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549-1004, and at the SEC`s Midwest Regional Office located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and its Northeast Regional Office located at 7 World Trade Center,
Suite 1300, New York, New York 10048. You can request copies of these documents,
upon payment of the duplicating fee, by writing to the SEC at its principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549-1004. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our and Agrilink's SEC filings are also available to the public
on the SEC's Internet site (http://www.sec.gov).
The SEC allows us to "incorporate by reference" information we have
filed with it, which means that we can disclose important information to you by
referring you to those previously filed documents. These incorporated documents
contain important business and financial information about us that is not
included in or delivered with this prospectus, and later information filed with
the SEC will update and supersede this information. The information incorporated
by reference is considered to be part of this prospectus. We incorporate by
reference the documents listed below.
Our Annual Report on Form 10-K/A-1 for the year ended June 26,
1999.
Our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 25, 1999.
<PAGE>
A copy of our Annual Report on Form 10-K/A-1 for the fiscal year ended
June 26, 1999 and a copy of our Quarterly Report on Form 10-Q for the first
fiscal quarter ended September 25, 1999 are being delivered with this
prospectus. The above filings are also available at the SEC's offices and
Internet site described above. You may request a copy of the filing by writing
or telephoning us at the following address: Pro-Fac Cooperative, Inc., 90 Linden
Oaks, P.O. Box 682, Rochester, New York 14603, Attention:
Vice-President-Communications; telephone: (716) 383-1850.
FORWARD-LOOKING INFORMATION
This prospectus, together with the annual report on Form 10-K/A-1 and
the quarterly report on Form 10-Q incorporated into this prospectus, contain
forward-looking statements, which are not statements of historical facts. We
have based these forward-looking statements on our current expectations and
projections about future events, based on the information currently available to
us. The forward-looking statements include, among other things, our expectations
and estimates about business operations, strategies and future financial
performance.
The forward-looking statements are subject to risks, uncertainties and
assumptions about us, and about the future, and could prove to be wrong.
Important factors that could cause actual results to differ materially from our
expectations are discussed in this prospectus, including the forward-looking
statements included in this prospectus and under "Risk Factors." Among the
factors that could impact our ability to achieve our goals are:
the impact of strong competition in the food industry;
the impact of weather on the volume and quality of raw products;
the inherent risks in the marketplace associated with new product
introductions, including uncertainties about trade and consumer
acceptance;
our success in integrating operations (including whether the
anticipated cost savings in connection with acquisitions will be
realized and the timing of any such realization) and the
availability of acquisition and alliance opportunities;
our ability to achieve gains in productivity, and improvements in
capacity utilization; and
our ability to service debt.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus may not occur.
USE OF PROCEEDS
The securities offered are issued on a continuing basis as part of our
normal operations and are not offered to raise funds for any specific purpose.
Our Class A common stock is sold from time to time to new members or to members
who increase the quantity of crops marketed through us for sale and processing
at Agrilink's facilities. Retains are issued annually to represent net proceeds
from patronage business retained by us and are used for general corporate
purposes, such as the financing of fixed assets and the reduction of short or
long-term borrowings, as determined by the board of directors at the time of
receipt. We receive no cash proceeds from the issuance of our shares of Class A
cumulative preferred stock.
DETERMINATION OF OFFERING PRICE
Our Class A common stock issued by us is at its $5.00 par value to
Class A members or to growers who wish to become Class A members and meet our
standards for membership. The amount of patronage proceeds
<PAGE>
issued to our members in the form of retains is determined annually by our board
of directors. One share of our Class A cumulative preferred stock is issued for
each $25 worth of retains redeemed by us.
PLAN OF DISTRIBUTION
The Offering.
We are offering shares of our Class A common stock to our current Class
A members and to growers who wish to become Class A members and meet our
standards. Shares of our Class A common stock will be sold based upon the
quantity and types of crops to be marketed through us by the grower-offeree.
The Distribution.
The offering will be implemented through our Agricultural Services
Department. Members of the Agricultural Services Department will provide
assistance in this offering, which may consist of: (i) assisting in the mailing
of this prospectus; (ii) responding to phone inquiries from potential
grower-offerees with regard to matters of an administrative nature; (iii)
maintaining records of all subscriptions; and (iv) attending informational
meetings for potential grower-offerees and communicating with them by telephone
concerning the information contained in this prospectus.
None of the members of our Agricultural Services Department are
registered with the SEC as a broker-dealer. No member of our Agricultural
Services Department will receive any compensation or other remuneration, either
directly or indirectly, for his or her assistance in this offering. Any time
spent by the members of our Agricultural Services Department to assist in this
offering will be incidental to his or her regular duties at Pro-Fac.
Subscription Procedure.
Subscriptions for the Class A common stock can be made by completing
and signing the subscription agreement provided with this prospectus and mailing
it to Pro-Fac Cooperative, Inc., 90 Linden Oaks, P.O. Box 682, Rochester, New
York 14603, Attention: Kevin M. Murphy, Vice President Member Relations -
Agricultural Services Department.
The execution and delivery of the subscription agreement will obligate
the subscriber to irrevocably and unconditionally acquire the number of shares
of Class A common stock subscribed for in the subscription agreement if we
accept the subscription. We reserve the right to accept or reject any
subscription in whole or in part in our sole and complete discretion.
By executing the subscription agreement, each grower-subscriber
expressly grants to us the right to repurchase his shares of Class A common
stock for a total consideration of $5.00 for each share.
Prospective growers-subscribers are referred to the subscription
agreement provided with this prospectus for the full text of the representations
and warranties and other agreements and obligations he will make to or with
Pro-Fac.
BUSINESS OF PRO-FAC
We are an agricultural cooperative formed under New York State law to
process and market crops grown by our members. Only growers of crops marketed
through Pro-Fac, or associations of such growers, can become members of Pro-Fac.
<PAGE>
Membership.
Membership in Pro-Fac is evidenced by the ownership of our common
stock. Our common stock is divided into two classes -- Class A common stock and
Class B common stock. Holders of Class A common stock are "Class A members."
Holders of our Class B common stock are "Class B members." We do not currently
have any Class B members. Crops supplied to us by our Class A members are sold
to Agrilink for processing, and crops supplied by our Class B members will be
sold to AgriFrozen for processing. See "Description of Pro-Fac Securities -
Common Stock".
Growers desiring to become members of Pro-Fac are required to file an
application for membership. In the application a grower agrees to, among other
things, purchase the required number and class of shares of our common stock, as
determined by our board of directors based upon the quantity and type of crops
to be marketed through Pro-Fac by the member-applicant.
We currently have approximately 645 Class A members located principally
in New York, Delaware, Pennsylvania, Illinois, Michigan, Washington, Oregon,
Iowa, Nebraska, Florida, and Georgia. Crops grown by our members and purchased
by us include:
fruits, such as cherries, apples, blueberries, peaches and plums,
vegetables, such as snap beans, beets, cucumbers, dry beans,
spinach, lima beans, peas, sweet corn, carrots, cabbage, squash,
asparagus, potatoes, turnip roots and leafy greens, and
popcorn.
Regional Representation.
The business of Pro-Fac is conducted pursuant to policies established
by our board of directors. The territorial area in which Pro-Fac operates has
been divided into geographic regions based on natural divisions of product and
location. In addition, some regions have been further divided into districts.
The members within each region or district are represented on Pro-Fac's board of
directors by at least one director. In an effort to insure a reasonably balanced
representation of members from various geographic regions on our board of
directors, our board of directors designates the number of directors to be
elected from each region or district based on the value of raw product delivered
by the members from the particular geographic region. Presently, Pro-Fac's
operations are conducted in five regions. Those regions, as well as the number
of directors elected from each of those regions, are identified in the table
below.
Present Number
Region Area of Directors
I (Dist. 1) Western Upstate New York 2
(Dist. 2) Eastern Upstate New York 2
(Dist. 3) Pennsylvania and Delaware 1
II (Dist. 1) Michigan 3
(Dist. 2) Illinois 1
III Iowa and Nebraska 1
IV Washington and Oregon 1
V Georgia and Florida 1
The members in each region elect the director or directors for that
region. In the case of a region that is divided into districts, the members in
each district elect the directors for that district. There are currently 12
directors on our board of directors even though our bylaws permit us to have up
to 18 directors. Although our
<PAGE>
bylaws authorize our board of directors to appoint up to one-fifth of the total
number of directors, our members have historically elected all our directors.
Commodity Committees.
Commodity committees have been established for each of the major crops
marketed through us. Each committee member is a member of Pro-Fac who grows the
crop or crops with which his committee represents. The committees are charged
with the responsibility of counseling and advising our board of directors, our
officers and management of matters generally associated with the specific crop
or crops the committee members represent.
Under our current policy, if a particular crop is produced in different
geographic areas, commodity committees are established either for the separate
geographic areas or for a combination of the geographic areas. Members of each
commodity committee are elected by the members of Pro-Fac in the region or
regions for which the particular commodity committee serves.
Our commodity committees have been active in advising our board of
directors on numerous matters affecting Pro-Fac crops, particularly with regard
to the determination of CMV and the content of the annual crop delivery
agreements, which specify, among other things, the terms under which crops will
be grown, harvested and delivered.
Marketing of Members' Crops.
General Marketing Agreement. Each member of Pro-Fac enters into a
general marketing agreement with Pro-Fac. In the general marketing agreement the
member appoints Pro-Fac as his exclusive agent for processing and marketing the
portion of his crop committed under the general marketing agreement, and under
the crop delivery agreements executed between Pro-Fac and the members each year
for the then up-coming growing season. In the general marketing agreement
Pro-Fac agrees to make available, through its marketing and facilitation
agreements with Agrilink and AgriFrozen, facilities for receiving and processing
the crops delivered by its members to Agrilink or AgriFrozen, as the case may
be.
Passage of Title to Crops. Upon a member's delivery of crops to us, we
take title to the crops and have the right to transfer, process or encumber the
crops as we see fit, subject to the provisions of the general marketing
agreement. A member delivering crops to Pro-Fac has no control over those crops
following delivery. Prior to delivery to Pro-Fac, each member bears all risk of
loss or damage to his crops.
Quantity of Crops Marketed. The quantity of a crop to be delivered
by a member in any year is the quantity established in the annual crop delivery
agreements which are supplements to the general marketing agreements. Members
are required to purchase additional shares of common stock if they undertake to:
increase their delivery to Pro-Fac of a particular crop or
grow a new type of crop to be marketed through Pro-Fac.
A member's common stock ownership is dependent upon the quantity and
type of raw product to be delivered by the member.
If we determine that additional quantities of a crop are required,
additional shares of common stock will be offered to growers of the crop.
Qualified current members of Pro-Fac in the area where the crop is needed will
be given the first opportunity to purchase the stock. If a reduction in the
quantity of a crop is required, the common stock holdings of all Pro-Fac members
delivering that crop will be proportionately reduced. The opportunity to grow
additional crops and the requirement to reduce crop production will be given and
made by our board of directors.
<PAGE>
If a change in total crop requirement is determined to be only
temporary, adjustments of common stock holdings will not be required. If
additional quantities are temporarily required, we will offer our members
currently growing the crop the opportunity to deliver the additional quantities,
on a pro rata basis, without regard to membership class. If a temporary
reduction in a crop is required, we may temporarily pro-rate downward the
quantity of the crop delivered by all members supplying it, without regard to
membership class.
If the deliveries of a crop are temporarily pro-rated downward, the
members affected may, with the approval of our board of directors, be offered
the opportunity to sell their excess common stock to Pro-Fac.
A member choosing to sell a portion of his shares of common stock would
permanently reduce, by a corresponding amount, the amount of crop he is entitled
to deliver to Pro-Fac.
The quantity of a particular crop to be delivered to Pro-Fac may be
based on:
the actual number of acres the member agrees to plant and harvest
for delivery to Pro-Fac, or
a specified tonnage.
For example, growers of sweet corn and snap beans typically agree to
plant and harvest a specified number of acres of those crops, while growers of
squash, carrots and asparagus typically agree to supply a specified tonnage of
those crops.
Agent Growers. If a member is temporarily unable to fulfill his crop
production obligations to Pro-Fac, either in whole or in part, he may, on a
temporary basis, contract with another grower or growers, who may, but need not
be, a member, to fulfill all or a part of the member's obligations to deliver
crops to Pro-Fac. In the event a member contracts with another member to fulfill
his crop production obligations, the member must be of the same class. In other
words, Class A members may only contract with other Class A members and Class B
members may only contract with other Class B members. All payments, including
the allocation of retains, made by Pro-Fac for crops delivered by an agent
grower will be made directly to the agent grower. A member may not utilize an
agent grower to fulfill his production obligations to Pro-Fac more frequently
than once in any two consecutive years without subjecting himself to a mandatory
transfer of his excess common stock.
Payment for Members' Crops.
Commercial Market Value. Our marketing and facilitation agreements with
Agrilink and AgriFrozen provide, generally, that we will be paid the CMV of the
crops purchased from us.
Acting upon the recommendation of a joint committee, our board of
directors, together with the board of directors of Agrilink, will determine the
CMV of our Class A members' crops; and our board of directors, together with the
board of directors of AgriFrozen, will determine the CMV of our Class B members'
crops. The joint committee is comprised of the chief executive officer of
Agrilink and an equal number of Pro-Fac directors and disinterested directors.
In making its determination, the joint committee will consider data
supplied by Agrilink and AgriFrozen concerning pre-season contracts and open
market purchases for various crops. The joint committee will also give
considerable weight to the advice of the commodity committees representing the
various crops marketed through Pro-Fac.
Pools. Our membership is divided into two separate and distinct pools:
(a) our Class A member pool, which is limited to Class A members and (b) the
Class B member pool, which is limited to Class B members.
<PAGE>
Patronage Proceeds.
Our patronage proceeds are equal to our gross receipts, which are
derived from sources that under law qualify as patronage income, including
income from the sale of raw products and all income from other patronage
sources, less our operating expenses attributable to the production of our
patronage income. Our operating expenses include overhead, interest, dividends
on capital stock, maintenance, depreciation, obsolescence, bad debts, taxes and
other proper costs, all as determined by our board of directors. Gains and
losses are distributed based on the nature of the business disposed of, but in
any event such gains and losses are to be distributed to the members of the
particular pool affected.
Members' Share of Patronage Proceeds.
A member's share of patronage proceeds is determined within the
particular pool to which the member is assigned. Within each pool, each member's
and each agent grower's pro rata share of the patronage proceeds is determined
annually based upon each member's share of the year's total CMV within the pool.
In any year in which patronage proceeds of a particular pool exceed the
CMV of the pool, the members within that pool will be paid or allocated their
pro rata portion of the excess patronage proceeds. Similarly, if in any year the
patronage proceeds of a particular pool are less than CMV of the pool then the
CMV paid to each member and agent grower as the purchase price for his crop
shall be reduced by his share of the loss of the pool for the year.
Payment of Patronage Proceeds. Our bylaws require us to pay or allocate
to each member or agent grower his pro rata share of patronage proceeds within 8
1/2 months after the end of our fiscal year.
Retention of Patronage Proceeds. A portion of the patronage proceeds
payable to our members may be retained by us for use as working capital or for
other general corporate purposes. Retained patronage proceeds are characterized
as either qualified retains or non-qualified retains. The portion of the
patronage proceeds of a particular pool that are retained will be allocated
among the members and agent growers within the pool.
Under the Internal Revenue Code, we are permitted to deduct, for
federal income tax purposes, the entire amount of retained patronage proceeds
allocated (but not yet distributed) to our members, provided,
we give our members a "qualified written notice of allocation,"
which discloses to the member the stated dollar amount allocated
to him as retained patronage income;
each member consents to include in his gross income for the
taxable year the stated dollar amount of the allocation, as well
as the amount of percentage income actually distributed to him;
and
at least 20% of each member's retained patronage income is paid
in cash.
If all of these requirements are met, the retained patronage income
constitutes a qualified retain. Retained patronage income not meeting the above
requirements is a non-qualified retain.
Our bylaws require us to pay or account annually to our members for
their crops, on a cooperative basis, in cash and through the allocation of
retains - qualified or non-qualified - as our board of directors determines. In
four out of the past five years we have paid our Class A members the full CMV of
all of their products marketed through us. Patronage proceeds in excess of CMV,
after payment of dividends on our capital stock, have been paid partially in
cash to our members and partially in the form of retains. In fiscal 1996, Class
A members' cash payments for CMV were reduced by 10%.
The percentages of CMV paid in cash or allocated to our Class A members
as retains over the last five fiscal years are as follows:
<PAGE>
<TABLE>
Fiscal Years Ended June
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Paid in cash 102.6% 90.0% 101.7% 102.6% 100.0%
Allocated as qualified retains 10.6 0.0 5.2 7.9 0.0
Allocated as non-qualified retains 0.5 0.0 0.0 0.0 0.0
----- ---- ----- ----- ------
Total 113.7% 90.0% 106.9% 110.5% 100.0%
===== ==== ===== ===== =====
</TABLE>
Timing of Payments for Crops. Both Agrilink and AgriFrozen are
required, under their respective marketing and facilitation agreements with us,
to pay us the purchase price for crops purchased from us on a date or dates that
coincide with the time of payment for crops by us to our members. The actual CMV
of a crop cannot ordinarily be determined until well after the harvest, so
initial payments are generally based upon the final CMV established for the crop
in the prior year, unless the board of directors determines that average
industry prices have changed significantly since that time.
Recognizing the costs involved in harvesting and delivering a crop, we
have adopted a policy of offering harvest time cash advances to our members. The
terms and conditions governing these advances are specified in the annual crop
delivery agreements. The harvest time payment is usually due approximately one
week after delivery of a crop, and the total amount of the advance may not
exceed 50% of the crops estimated CMV. The harvest time advance is repaid by
deducting the amount of the advance from the first CMV payment otherwise due the
member for the crop.
Once payments for particular crops are received from Agrilink or
AgriFrozen, we will pay the funds received over to the members of the Class A
pool or the Class B pool, as the case may be, who delivered those crops. Subject
to minor variations, we have historically paid our members the purchase price
for their crops in accordance with the following schedule:
50% of estimated CMV is paid not later than 30 days after
completion of delivery of a particular crop;
another 25% of estimated or actual CMV is paid not later than 120
days after the average date of final delivery for each crop; and
the balance of CMV is paid not later than the immediately
following July 15.
Any payments in addition to CMV are made as soon as possible, but in
any event within 8 1/2 months following the end of our fiscal year.
For example, if a member delivers crops to us with a CMV of $10,000 on
September 1, 1999 and a total of $1,050 in patronage proceeds in excess of CMV
is earned for the year and allocated to him, he will be paid or allocated a
total of $11,050 for his crops. Of this amount, he will be paid $10,000 (CMV) in
cash, in three installments based on the following schedule of payments from
Agrilink or AgriFrozen, as the case may be:
$5,000 by October 1, 1999, less any harvest time advance;
$2,500 by February 1, 2000, assuming this member's date of final
delivery coincides with the average date of final delivery for
the same crop, and
$2,500 by July 15, 2000.
In addition, as soon as the necessary computations can be made and
final payment is received from Agrilink or AgriFrozen, as the case may be, but
before March 15, 2001, the $1,050 of excess patronage proceeds will be paid or
allocated to the member in the form of cash or retains. A minimum of 20% of the
<PAGE>
excess over CMV, in the above example $210, must be distributed in cash and the
balance may be distributed in the form of retains. See "Description of Pro-Fac
Securities."
Tax Matters.
As a cooperative, we are taxed under Subchapter T of the Internal
Revenue Code. Subchapter T imposes regular corporate income tax rates on
cooperatives, but at the same time allows cooperatives to deduct from taxable
income, for federal income tax purposes, certain deductions which are not
available to other business corporations. In particular, under Subchapter T a
cooperative may deduct from its taxable income all amounts which are paid to its
members and other patrons as patronage dividends (either in cash or through the
allocation of amounts retained by the cooperative and represented by qualified
written notices of allocation) with respect to patronage occurring during the
taxable year. Non-patronage-sourced income of a cooperative is subject to
federal income tax at the cooperative level.
In general, the payments from earnings of a cooperative to its members
in the form of cash and qualified retains constitute patronage dividends within
the meaning of Subchapter T. Members and other patrons of a cooperative must
agree to include in their taxable income in the year received all amounts of
patronage dividends paid in cash or allocated to their accounts as qualified
retains. Patronage income allocated by a cooperative to its members in the form
of non-qualified retains is taxable at the cooperative level when such retains
are issued. In the year in which non-qualified retains are redeemed by a
cooperative, the cooperative receives a tax deduction in the amount of the
retains which are redeemed. Members and other patrons of the cooperative must
agree to include in their taxable income in the year of redemption any
non-qualified retains redeemed by the cooperative.
Under our marketing and facilitation agreement with Agrilink, payments
are made by Agrilink for the crops of our members. Such payments, in part, are
based upon the earnings of Agrilink derived from products processed from the
crops supplied by our Class A members. These payments are classified and
reported by us, for federal income tax purposes, as patronage-sourced income.
Because there are few guidelines in this area of law, such classification and
reporting has in the past led to audit disputes with the Internal Revenue
Service. The IRS clarified its position in a technical advice memorandum to us
on September 23, 1991. Although changes have occurred in our relationship with
Agrilink since the issuance of the technical advice memorandum, the contractual
relationship requiring the payments based upon the earnings of Agrilink, remains
substantively the same as when the technical advice memorandum was issued.
Accordingly, we have continued to treat payments based upon the earnings of
Agrilink as patronage-sourced income. In January 1995, Agrilink's and our board
of directors approved appropriate amendments to Agrilink's bylaws to allow
Agrilink to qualify as a cooperative under Subchapter T of the Code. On August
24, 1995, we received a favorable ruling from the IRS approving the change in
tax treatment effective for fiscal 1996. This ruling also confirmed that the
change in Agrilink's tax status would have no effect on our ongoing treatment as
a cooperative under Subchapter T of the Code. Based on the foregoing, Harris
Beach & Wilcox, LLP is of the opinion that payments to members of Pro-Fac based
upon earnings of Agrilink continue to constitute patronage-sourced income
pursuant to Subchapter T of the Code. In the event, however, the IRS changes our
classification as a cooperative and/or the reporting of patronage-sourced income
by us, additional income taxes and interest could be assessed as a result of the
reclassification of income reported as patronage-sourced income to
non-patronage-sourced income.
Our marketing and facilitation agreement with AgriFrozen is
substantially the same as the one we have with Agrilink. In reliance upon the
technical advice memorandum discussed above, we believe that, so long as
AgriFrozen's relationship with us is substantially similar to Agrilink's
relationship with us, that payments to our Class B members based upon earnings
of AgriFrozen derived from products processed from the crops supplied by our
Class B members will constitute patronage-sourced income pursuant to Subchapter
T of the Code.
From time to time various proposals have been made and bills introduced
in Congress which would have the effect of modifying or eliminating the present
provisions of the Code pursuant to which cooperatives are taxed and could
subject cooperatives to greater federal income tax liability. It is not possible
to predict whether
<PAGE>
any such proposal may be adopted, or if adopted what effect it might have on our
federal income tax liability and the federal income liability of our members.
In addition, from time to time the IRS issues revenue rulings, revenue
procedures, and other official statements, which may be either prospective or
retrospective in application, by which it seeks to interpret and administer the
provisions of the Code applicable to cooperatives. It is also impossible to
predict the effect any administrative interpretations which may be adopted in
the future would have on our federal tax liability or that of our members.
Tax Treatment of Amounts Paid or Allocated to Members.
Under the federal income tax laws, our members must currently include
in their taxable income calculation the purchase price for their crops,
including all cash payments and allocations of qualified retains. Non-qualified
retains are not subject to current taxation to our members and are taxable to
members only if and when redeemed by us.
DESCRIPTION OF PRO-FAC SECURITIES
This description summarizes some of the provisions of our restated
certificate of incorporation, a copy of which has been included as an exhibit to
the registration statement. If you want more complete information, you should
read the provisions of our restated certificate of incorporation.
Our authorized capital stock consists of 5,000,000 shares of Class A
common stock, 2,000,000 shares of Class B common stock and 55,000,000 shares of
preferred stock. We are also authorized to issue up to $15,000,000 of special
membership interests.
As of August 28, 1999, we had outstanding 2,040,568 shares of Class A
common stock, 39,635 shares of non-cumulative preferred stock with a par value
of $25 per share, 3,694,495 shares of Class A cumulative preferred stock with a
par value of $1.00 per share and 26,061 shares of Class B, series 1 10%
cumulative preferred stock with a par value of $1.00 per share.
Common Stock.
Rights to dividends and on liquidation. Any outstanding retains and
preferred stock would rank senior to the common stock in respect of liquidation
rights and dividend rights.
Under present law, dividends on our common stock may not exceed 12% of
its par value per year. Members who purchase shares of common stock in
installments are entitled to receive dividends only on those shares of common
stock actually issued to them.
Voting. All voting power is vested exclusively in the holders of common
stock. However, each member is entitled to one vote regardless of the number of
shares held. When two or more holders of common stock are joined in an
agricultural venture, our board of directors will determine whether the venture
is a single enterprise, entitling the participating holders to a single vote, or
multiple enterprises, entitling the holders to more than one vote.
Preemptive rights. Holders of our common stock do not have any right to
purchase additional shares of common stock or any of our capital stock if we
sell shares to others.
Conversion rights. Our common stock is not convertible into any other
security of Pro-Fac.
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Required disposition and redemption of common stock.
In the event a member is no longer a producer of agricultural
products marketed through us then the member is required to
dispose of his shares of common stock.
Upon the death of an individual member, the estate of the
deceased member will continue as a member for the purposes of
winding up the affairs of the deceased member until all of the
obligations of the deceased member to us have been performed,
including those under any then current crop delivery agreement.
After fulfillment of the deceased member's obligations to us, the
deceased member's estate is required to dispose of the member's
common stock.
In the event we discontinue a crop, then all members whose
ownership of common stock is based upon their marketing of the
discontinued crop through us will be required to sell their
common stock to us for cash at the par value, plus any declared
but unpaid dividends.
In the event a member desires or is required by us to permanently
reduce the quantity of a crop which he sells to us, then the
member will be required to dispose of the number of shares of his
common stock as is necessary to bring his ownership of shares of
common stock into proper relationship to the quantity and type of
crops which he markets through us.
A member who voluntarily wishes to sell his common stock or who is
required to sell his shares of common stock must make a reasonable effort to
find another grower within the disposing member's pool, that is, a Class A
member must use reasonable efforts to find another grower in the Class A member
pool and a Class B member must use reasonable efforts to find another grower in
the Class B member pool, who is willing to purchase the member's common stock
and assume all of his obligations to us and who meets all requirements for
membership in Pro-Fac. We will give a disposing member a reasonable period of
time within which to find another grower.
We may assist the disposing member in finding another grower by
advising him of the price another qualified grower in the appropriate class,
that is a Class A membership or Class B membership, acceptable to us, is willing
to pay for the stock. Historically, these prices have varied widely by commodity
and the region in which the crop associated with the common stock is to be
grown. Sales are often at a price exceeding the $5.00 par value at which the
common stock was originally issued. Historically, there has usually been
sufficient demand for common stock offered for sale by members.
In the event the disposing member is unable to find a qualified grower
within a reasonable period of time, the member must sell his common stock to us
for cash at par value plus any declared and unpaid dividends.
Liability to further assessment. Shares of our common stock are not
subject to further call or assessment. Under the New York Cooperative
Corporations Law, however, each member of a cooperative corporation, as well as
each director, may be personally liable for certain amounts due to employees for
services rendered to the cooperative.
Transfer agent. We function as our own transfer agent for our common
stock.
Transferability. Our common stock is issued only to growers of
agricultural products marketed through us, or to associations of growers, and
may be transferred only to another grower who meets our membership standards. A
member holding shares of Class A common stock may only transfer his shares to
another member owning shares of Class A common stock or to a grower eligible for
membership in Pro-Fac and eligible to own shares of Class A common stock.
Similarly, a member holding shares of Class B common stock may only transfer
shares to another member owning shares of Class B common stock or to a grower
eligible for membership in Pro-Fac and eligible to own shares of Class B common
stock.
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Non-Cumulative Preferred Stock, Class A Cumulative Preferred Stock and
Class B, Series 1 Cumulative Preferred Stock.
General. Our non-cumulative preferred stock, Class A cumulative
preferred stock and Class B, series 1 cumulative preferred stock are not
convertible into any other securities. We are not obligated to redeem or retire
these securities.
Our Class A cumulative preferred stock is listed on The Nasdaq National
Market under the symbol "PFACP." There is currently no active trading market for
either our non-cumulative preferred stock or our Class B, series 1 preferred
stock. We do maintain an ongoing exchange program to allow holders of
non-cumulative preferred stock to exchange their shares for Class A cumulative
preferred stock on a share-for-share basis. A "blackout" period exists between
the dividend qualifying date for the non-cumulative preferred stock and October
16 each year when such exchanges cannot be made. This prevents a holder from
collecting the annual dividend on the non-cumulative preferred stock and
immediately becoming eligible to collect the quarterly dividend on the Class A
cumulative preferred stock.
Our Class B, series 1 preferred stock is issuable to employees of
Agrilink pursuant to an employee stock purchase plan. Under the plan employees
of Agrilink can purchase shares of Class B, series 1 cumulative preferred stock
at a price of $10.00 per share.
Ranking. The non-cumulative preferred stock, Class A cumulative
preferred stock and Class B, series 1 cumulative preferred stock rank senior to
the common stock and are on parity with each other with respect to dividends and
upon liquidation.
Generally, this means that we cannot pay dividends on our common stock
unless we have paid the full amount of the dividends on the non-cumulative
preferred stock, Class A cumulative preferred stock and Class B, series 1
cumulative preferred stock that are due and owing at the time. Also, if we are
dissolved or liquidated, holders of the non-cumulative preferred stock, Class A
cumulative preferred stock and Class B, series 1 cumulative preferred stock are
required to be paid the full amount of their liquidation preferences before any
assets can be distributed to holders of common stock. The liquidation preference
of the non-cumulative preferred stock is $25 per share plus declared and unpaid
dividends. The liquidation preference of the Class A cumulative preferred stock
is $25 per share plus all accrued and unpaid dividends. The liquidation
preference of the Class B, series 1 cumulative preferred stock is $10 per share
plus all accrued and unpaid dividends.
So long as shares of non-cumulative preferred stock remain outstanding,
we cannot create any class of stock that would rank senior to the non-cumulative
preferred stock with respect to liquidation and dividend rights without the
consent of at least 2/3 of the outstanding shares of non-cumulative preferred
stock.
Dividends. Holders of non-cumulative preferred stock are entitled to
receive, when and as declared by our board of directors, non-cumulative cash
dividends at the rate per annum of not less than 6% per share of the par value
of such shares.
Holders of Class A cumulative preferred stock are entitled to receive,
when and as declared by our board of directors, cumulative cash dividends at a
quarterly rate equal to $.43 per share, or an annual rate of approximately 6.88%
of the liquidation preference of $25 per share. We pay dividends on the Class A
cumulative preferred stock quarterly in arrears on April 30, July 31, October
31, and January 31 of each year.
Holders of Class B, series 1 cumulative preferred stock are entitled to
receive, when and as declared by our board of directors, cumulative cash
dividends at the rate per annum of $1 per share.
Redemption. We can redeem our non-cumulative preferred stock at any
time upon 90 days written notice. If we decide to redeem, we can redeem all of
the outstanding shares at once, or we can redeem some of the shares at different
times. The redemption price is $25 per share, plus an amount equal to all
declared and unpaid dividends.
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We can redeem the Class A cumulative preferred stock at any time upon
written notice not less than 30 days and not more than 60 days prior to the date
fixed for redemption. If we decide to redeem less than all of the outstanding
shares at once, the shares to be redeemed can be selected pro-rata or by lot,
except that we have the right to first redeem all of the shares of Class A
cumulative preferred stock held by any holder who owns 100 or less shares. The
redemption price is $25 per share, plus an amount equal to accrued and unpaid
dividends.
The Class B, series 1 cumulative preferred stock can be redeemed by us
at any time upon not less than 30 days and not more than 60 days written notice
before the date fixed for redemption. The redemption price is $10 per share,
plus an amount equal to accrued and unpaid dividends.
Voting rights. The only voting rights the holders of shares of
non-cumulative preferred stock, Class A preferred stock and Class B, series 1
preferred stock have are those required by law.
Generally, this means that if we want to change our restated
certificate of incorporation in a way that would materially and adversely affect
these holders of the shares, then we must get the approval of holders of at
least 2/3 of the outstanding shares of non-cumulative preferred stock, Class A
cumulative preferred stock and Class B, series 1 cumulative preferred stock.
Restriction on stock acquisitions. We are prohibited from repurchasing
or otherwise redeeming our stock, other than to repurchase our common stock from
departing members, unless full dividends have been paid or are contemporaneously
declared on the non-cumulative preferred stock, Class A cumulative preferred
stock and Class B, series 1 cumulative preferred stock.
Transfer agent: The transfer agent, dividend agent and redemption agent
for the Class A cumulative preferred stock is Harris Trust Company. We act as
our own transfer agent for our non-cumulative preferred stock and Class B,
series 1 cumulative preferred stock.
Retains.
Annual allocation. Retains, if any, must be allocated to the accounts
of our members within 8 1/2 months of the close of our fiscal year. Our fiscal
year ends on the last Saturday of June. It has been, and continues to be, our
policy to allocate retains to our members on or about September 15 of each year.
Each member is typically advised of the allocation of qualified retains and
non-qualified retains to his account by means of an investment summary which is
mailed to him each year on or about September 15. There were no allocations of
retains for fiscal 1996 or fiscal 1999.
Qualified retains. Qualified retains bear no interest, but five years
after issuance they generally mature into shares of our Class A cumulative
preferred stock at the discretion of our board of directors. One share of Class
A cumulative preferred stock for each $25 of qualified retains is ordinarily
issued to holders of qualified retains on or about December 31 following the
completion of the fifth year after allocation of the qualified retains. If our
board determines, qualified retains issued prior to fiscal 1996 may be redeemed
for shares of our Class A cumulative preferred stock, unless the holder
specifically requests non-cumulative preferred stock.
Redemption of non-qualified retains. It is the present intention of our
board of directors that non-qualified retains will be redeemed, through partial
payment in cash and the issuance of Class A cumulative preferred stock,
approximately five years after their issuance.
Adjustment of amount of non-qualified retains. It is possible that the
allocation of proceeds made immediately following the close of a fiscal year may
not be final and may require modification because of some event that could occur
after the close of the fiscal year. Should such an event require a reduction in
the proceeds paid or allocated to our members in a prior year, our board of
directors may, in its discretion, reduce the amount of the non-qualified retains
allocated to the accounts of those members for the year in question.
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Transferability of retains; absence of market. Non-qualified retains
are not transferable, except to the heirs or personal representative of a member
in the event of the member's death. Qualified retains are freely transferable.
Although there are several broker-dealers making a market in our qualified
retains, there can be no assurance that any such market will be established.
Historically, sales of qualified retains have been at prices substantially less
than their face amount. If a market for our qualified retains is established,
the increased leverage of Pro-Fac as a result of the acquisition in fiscal 1999,
and the limits on our ability to repurchase our preferred stock pursuant to
Agrilink's new credit facility and the indenture covering its notes, are likely
to decrease the prices at which our qualified retains are traded.
Rights to dividends and on liquidation. All retains are junior and
subordinate to our indebtedness. In the event of our liquidation, holders of our
retains would rank senior to our preferred stock and our common stock. No
dividends are payable on our retains.
Restrictions on dividends and other distributions to members and
investors
As guarantors of Agrilink's indebtedness we are limited as to the
aggregate dollar amounts we can pay or distribute in the form of dividends or
other distributions for the purchase or redemption of shares of our common stock
and preferred stock each fiscal year. Further, because Agrilink and its lenders
are the principal sources of cash used by us to pay dividends, the restrictions
on payments from Agrilink to us under its new credit facility may also limit our
ability to pay dividends on our common and preferred stock.
Certificates for securities
Except with respect to our Class A cumulative preferred stock, we
ordinarily do not issue certificates representing shares of either our common or
preferred stock or our members' interests in retains, except upon specific
request. In lieu of certificates, we distribute to our members and our
non-member security holders periodic computerized statements referred to as
"investment summaries." The investment summaries detail the investment of each
member or security holder in our securities by type of security, number of
shares, or dollar amount, and date of issue. In the case of qualified retains,
the summaries also indicate the date upon which they are anticipated to be
replaced by corresponding par value dollar amounts of preferred stock.
Additionally, the investment summaries detail each member's crop commitments to
us.
EXPERTS
The consolidated financial statements of Pro-Fac incorporated by
reference into this prospectus from Pro-Fac's Annual Report on Form 10-K/A-1 for
the year ended June 26, 1999, have been incorporated in reliance upon the report
of PricewaterhouseCoopers, LLP, independent accountants, given on the authority
of that firm as experts in auditing and accounting.
