Filed pursuant to Rule 424(b)(3)
File No. 333-17865
[LOGO] HARVEST STATES
HARVEST STATES COOPERATIVES
EQUITY PARTICIPATION UNITS
26,800,000 UNITS (MILLING)
15,300,000 UNITS (PROCESSING AND REFINING)
Harvest States Cooperatives (the "Company") is offering Equity Participation
Units ("Units") in its Wheat Milling Defined Business Unit ("Milling Business
Unit") and its Oilseed Processing and Refining Defined Business Unit
("Processing and Refining Business Unit"), each of which has been designated
as a Defined Business Unit by the Company's Board of Directors. Each
subscriber for Units in a Business Unit is required to also enter into a
Member Marketing Agreement ("Agreement") by which such holder has the right
and obligation to deliver annually the number of bushels of wheat or soybeans
equal to the number of Units held. Pursuant to the Agreement and the
Company's Articles of Incorporation and Bylaws, subscribers for Units will
participate in the net patronage sourced income (see "EQUITY PARTICIPATION
UNITS -- Taxation") from operations of the applicable Business Unit as
patronage refunds. (See "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL --
Introduction"). Net patronage sourced income from a Business Unit will be
allocated on the basis of wheat or soybeans delivered pursuant to the
Agreement.
The Units in the Milling Business Unit offered hereby are expected to
represent 50% of the milling capacity if all are sold (giving effect to
construction of additional capacity now in process and anticipated). The
Units in the Processing and Refining Business Unit offered hereby are
expected to represent 50% of the soybean crushing capacity if all are sold.
Any person wishing to purchase Units must execute a Subscription Agreement in
the form of Exhibit A and an Agreement in the form of Exhibit B and send
them, accompanied by payment, to the Company at 1667 North Snelling, P.O. Box
64594, St. Paul, Minnesota 55164. Such Subscription Agreement and Agreement
are subject to acceptance by the Company in its sole discretion. The
Subscription Agreement and the Agreement must both be accepted if either is
accepted. Pending acceptance, all payments will be deposited in a segregated
bank account. A subscriber will receive interest income at the rate borne by
the segregated account if the subscriber's subscription is not accepted.
Subscriptions not accepted will be promptly returned upon rejection.
The offering of Units pertaining to a particular Business Unit will continue
through May 31, 1997, unless earlier terminated by the Company, which may
occur when all such Units have been sold by the Company or for any other
reason without the sale of any Units. If by the close of business on May 31,
1997, all Units pertaining to a particular Business Unit have not been
subscribed, the Company may (i) terminate the offering as to those Units,
(ii) accept subscriptions submitted for those Units and terminate the
offering for the remaining Units or (iii) accept subscriptions submitted for
those Units and continue the offering for the remaining Units. The offering
will not be continued beyond November 30, 1997. Upon acceptance, Agreements
will become effective as of June 1, 1997. The Company reserves the right to
offer Units where the subscriber has defaulted in payment. The Units are
being offered by the Company on a best efforts, continuous basis with no
minimum amount of subscriptions required to close.
(CONTINUED ON INSIDE COVER)
SEE "RISK FACTORS" COMMENCING ON PAGE 6. FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
UNITS OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is February 14, 1997.
(CONTINUED FROM PREVIOUS PAGE)
No producer may subscribe for Units representing more than anticipated 1997
production, and the Subscription Agreement will require a representation to
that effect. No subscription for less than 3,000 bushels of wheat or 1,500
bushels of soybeans will be accepted. Thereafter, subscriptions must be in
multiples of 1,000 bushels of wheat or 500 bushels of soybeans. No one
Defined Member may own more than 1% of the outstanding capacity of any one
Business Unit. Upon any transfer of Units, the transferee will be required to
certify as to eligibility and then current anticipated annual production and
to sign an Agreement. In approving any transfer, the Board of Directors will
require that such certificate show that the number of Units transferred does
not exceed anticipated annual production of the transferee, that any
transferee does not own more than 1% of the outstanding capacity of any one
Business Unit, and that the Units held by each transferor retaining Units and
transferee represent at least 3,000 bushels of wheat or 1,500 bushels of
soybeans.
If on April 15, 1997, the Units of either Business Unit have been
oversubscribed, subscriptions will be accepted, subject to approval of the
Board of Directors, on a prorata basis (except that subscriptions for the
minimum amount will not be prorated) based on subscriptions actually received
by the Company through the close of business on that date.
A member may elect to use outstanding Capital Equity Certificates (see
"MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL") for the payment of up to
one-sixth of the purchase price. In addition, patrons of Affiliated
Associations (see "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL") who
wish to subscribe, if authorized by an Affiliated Association, generally may
elect to use outstanding patrons' equities of such Affiliated Association for
the payment of up to one-sixth the purchase price if the Affiliated
Association agrees that such patrons' equities will be redeemed
simultaneously with Capital Equity Certificates of the Company held by such
Affiliated Association. Pending such authorization, cash payment will be
required for the full purchase price for the Units. Upon such authorization,
prior to May 31, 1998 and simultaneous redemption, cash equal to the patron's
equities of such Association so authorized will be refunded.
============================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO THE
PRICE COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------
Milling
Per Unit $ 2.00 $ - $ 2.00
Total $53,600,000 $ - $53,600,000
- ----------------------------------------------------------------------------
Processing and Refining
Per Unit $ 4.00 $ - $ 4.00
Total $61,200,000 $ - $61,200,000
============================================================================
(1) Units are being offered by the Company, and no discounts or commissions will
be paid.
(2) Assumes all Units are sold for cash; before deduction of expenses estimated
to be $850,000.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
PAGE
----
Prospectus Summary 4
Risk Factors 6
Use of Proceeds 8
Dividend Policy 8
Capitalization 9
Business 10
Grain Merchandising 17
Processing and Refining Division 23
Ventura Foods 31
Milling Division 32
Farm Marketing and Supply 41
Feed 42
Services 43
Management 44
Certain Transactions 51
Membership in the Company and Authorized Capital 52
Equity Participation Units 56
Trading of Units 61
Plan of Distribution 62
Validity of Units 62
Experts 62
Additional Information 62
Index to Financial Statements F-1
Exhibits
Subscription Agreement Exhibit A
Member Marketing Agreement Exhibit B
Until March 11, 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Units offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
The Company intends to furnish holders of the Units with annual reports
containing financial statements audited by its independent public
accountants, but does not intend to furnish interim reports. The Company will
make publicly available the information required by Section 13(a) of the
Securities Exchange Act of 1934, as amended, on the electronic bulletin board
described under "TRADING OF UNITS."
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE
IN THIS PROSPECTUS.
THE COMPANY
Harvest States Cooperatives (the "Company") is an agricultural cooperative.
Its primary business is merchandising grain, which involves purchase of
various grains from its Individual Members, Affiliated Associations and
others, sale of the grain to users, exporters and other intermediaries and
arranging for transportation and storage of purchased grain for delivery to
buyers. The Company also sells feed and other farm supplies to its Individual
Members and others, offers services to its Individual Members and Affiliated
Associations, crushes and refines soybeans, through a joint venture
participates in the food processing and packaging business and mills wheat.
THE PROCESSING AND REFINING DIVISION
At its integrated crushing and refining facility in Mankato, Minnesota, the
Oilseed Processing and Refining Division (also known as Honeymead Products
Company) ("Processing and Refining Division") processes soybeans into soybean
meal, soyflour and crude soybean oil. The crude soybean oil, with additional
purchased crude oil, is refined. During the year ended May 31, 1996, the
Processing and Refining Division processed 30,445,475 bushels of soybeans and
920,492,402 pounds of crude oil and had revenues of $400,706,709 and net
earnings of $22,985,880. At May 31, 1996, it had total equity of $53,390,998.
See "BUSINESS -- PROCESSING AND REFINING DIVISION."
THE MILLING DIVISION
The Wheat Milling Division (also known as Amber Milling Company) ("Milling
Division") mills durum wheat into flour and semolina and, to a lesser extent,
mills spring and winter (hard) wheats into bread flour. While the Milling
Division had historically concentrated on durum wheat milling and is the
largest miller of durum wheat in the United States, with the opening of a new
mill in 1995 and the scheduled opening of another mill in March 1997, the
Division has broadened its markets to include bakery flour and significantly
increased its capacity from 18,300,000 bushels per year to 41,700,000 bushels
per year.
During the year ended May 31, 1996, the Milling Division milled 19,376,000
bushels of durum and 3,013,000 bushels of spring wheat, had sales of
$173,315,613 and net earnings of $2,892,823. At May 31, 1996, it had total
equity of $27,797,072. See "BUSINESS -- MILLING DIVISION."
THE OFFERING
Through this Prospectus, the Company is offering an opportunity to
participate in the patronage sourced income from its Processing and Refining
Division and its Milling Division. While the Processing and Refining Division
and the Milling Division will remain part of the Company, patronage earnings
from the businesses operated by those Divisions will inure to the purchasers
of the Units based on the number of bushels of wheat or soybeans delivered by
holders of the Units relative to the total number of bushels of wheat or
soybeans processed by the respective Business Unit.
The Company is offering Equity Participation Units in its Milling Business
Unit and its Processing and Refining Business Unit, each of which has been
designated as a Defined Business Unit by the Company's Board of Directors.
Each subscriber for Units in a Business Unit is required to also enter into a
Member Marketing Agreement ("Agreement") by which such holder has the right
and obligation to deliver annually the number of bushels of wheat or soybeans
equal to the number of Units held. Pursuant to the Agreement, subscribers for
Units will participate in the net patronage sourced income from operations of
the applicable Business Unit as patronage refunds. Net patronage sourced
income from a Business Unit will be allocated on the basis of wheat or
soybeans delivered pursuant to the Agreement.
RISK FACTORS
Certain material factors should be considered in connection with an investment
in the Units offered hereby. See "RISK FACTORS."
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED
MAY 31,
------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Sales:
Grain $2,858,358,055 $2,793,407,187 $3,086,531,429 $4,191,665,535 $7,127,223,407
Processed grain 460,088,193 501,297,427 593,116,553 708,219,307 819,863,541
Feed and farm supplies 118,788,291 138,103,158 165,925,459 156,699,068 207,252,696
3,437,234,539 3,432,807,772 3,845,573,441 5,056,583,910 8,154,339,644
-------------- -------------- -------------- -------------- --------------
Patronage dividends 4,476,323 7,781,622 6,609,602 6,512,481 13,278,997
Other revenues 39,803,692 41,671,562 45,895,922 57,556,984 68,339,523
-------------- -------------- -------------- -------------- --------------
3,481,514,554 3,482,260,956 3,898,078,965 5,120,653,375 8,235,958,164
Costs and expenses:
Cost of goods sold 3,384,418,840 3,384,637,000 3,786,336,764 4,981,820,272 8,076,073,326
Marketing, general, and
administrative 48,266,596 52,545,022 60,847,099 69,509,491 70,054,248
Interest 12,842,991 8,964,230 10,250,765 19,268,575 31,921,936
-------------- -------------- -------------- -------------- --------------
3,445,488,427 3,446,146,252 3,857,434,628 5,070,598,338 8,178,049,510
-------------- -------------- -------------- -------------- --------------
Earnings before income taxes 36,026,127 36,114,704 40,644,337 50,055,037 57,908,654
Income taxes 5,000,000 3,725,000 5,500,000 5,100,000 6,900,000
-------------- -------------- -------------- -------------- --------------
Net earnings $ 31,026,127 $ 32,389,704 $ 35,144,337 $ 44,955,037 $ 51,008,654
============== ============== ============== ============== ==============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
SIX MONTHS ENDED
NOVEMBER 30,
-------------------------------
1995 1996
-------------- ---------------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues
Sales:
Grain $3,329,958,581 $3,548,642,198
Processed grain 403,716,340 396,378,362
Feed and farm supplies 85,665,267 113,824,347
3,819,340,188 4,058,844,907
-------------- --------------
Patronage dividends 1,891,024 4,727,294
Other revenues 35,821,618 33,809,212
-------------- --------------
3,857,052,830 4,097,381,413
Costs and expenses:
Cost of goods sold 3,779,651,094 4,029,924,953
Marketing, general, and
administrative 39,251,639 36,927,696
Interest 13,896,619 8,418,249
-------------- --------------
3,832,799,352 4,075,270,898
-------------- --------------
Earnings before income taxes 24,253,478 22,110,515
Income taxes 3,050,000 2,600,000
-------------- --------------
Net earnings $ 21,203,478 $ 19,510,515
============== ==============
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
---------------------------------------------------------------------- ------------------------------
1992 1993 1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital $ 66,880,378 $ 69,550,702 $ 69,409,621 $ 66,904,085 $ 95,874,938 $ 83,527,483 $ 102,383,180
Net property, plant
and equipment 137,919,139 146,223,870 156,311,551 205,837,690 232,145,401 221,675,866 219,946,105
Total assets 523,018,883 612,261,778 734,655,223 924,533,569 1,228,772,684 1,385,843,222 1,094,190,953
Long-term debt, including
current maturities 49,196,060 44,479,207 39,135,097 84,816,525 132,629,176 106,690,515 135,688,007
Total equity 222,126,239 246,797,147 270,761,017 299,487,893 337,252,119 317,902,245 352,895,051
</TABLE>
THE UNITS
Holders of the Units will have the right to participate in the patronage
sourced income from the operations of the respective Business Units. The
portion of patronage refunds to be paid in cash and the retirement policy
with respect to the portion to be paid as Patrons' Equities is within the
discretion the Board of Directors. Except in limited circumstances, holders
of the Units do not have voting rights with respect to the Units, but will
have voting rights as a Defined Member of the Company. Holders of Units do
not have any right to cause the Company to redeem the Unit or exchange it for
any other security. See "EQUITY PARTICIPATION UNITS."
PLAN OF DISTRIBUTION; TRADING
The Units are being offered by the Company on a best efforts, continuous
basis with no minimum amount of subscriptions required to close. Any person
wishing to purchase Units must execute a Subscription Agreement in the form
of Exhibit A and an Agreement in the form of Exhibit B and send them,
accompanied by payment, to the Company. The manner and circumstances under
which such agreements will be accepted is shown on the cover of this
Prospectus.
The Company intends to create an electronic bulletin board to facilitate the
purchase and sale of Units among Members. Any sale and purchase of Units will
be subject to negotiation of price and other terms of purchase. The Company
does not expect that a trading market will develop for the Units. The price
at which a holder of Units will be able to resell is uncertain. See "TRADING
OF UNITS."
RISK FACTORS
COMPANY SUBJECT TO SUPPLY AND DEMAND FORCES. The Company may be adversely
affected by supply and demand relationships, both domestic and international.
Supply is affected by weather conditions, disease, insect damage, acreage
planted, government regulation and policies and commodity price levels. The
business is also affected by transportation conditions, including rail, vessel,
barge and truck. Demand may be affected by foreign governments and their
programs, relationships of foreign countries with the United States, the
affluence of foreign countries, acts of war, currency exchange fluctuations and
substitution of commodities. Demand may also be affected by changes in eating
habits, by population growth and increased or decreased per capita consumption
of some products.
RECENT PRICE DECLINES AND FALL IN DEMAND. Rising grain and oilseed prices in the
1995 growing and harvesting season, which continued into 1996, tended to reduce
inventories of stored grain, but prompted producers in Europe, Canada,
Argentina, Australia and other countries to plant additional grain. Prices for
most grains have fallen substantially in recent months. According to a report
dated January 10, 1997, published by the Foreign Agricultural Service (FAS)
Division of the United States Department of Agriculture, worldwide wheat
production for the year ended May 31, 1996, was 536.89 million metric tons and
worldwide wheat production for the year ending May 31, 1997, is projected to be
579.59 million metric tons. According to the same report, exports for the year
ended May 31, 1996, were 108.32 million metric tons and exports for the year
ending May 31, 1997, are projected to be 102.97 million metric tons.
The Freedom to Farm Act of 1996, enacted in April 1996, may affect crop
production in several ways. The Act more narrowly defines what will qualify as
environmentally sensitive acreage for purposes of the conservation reduction
program, with the result that 3 to 4 million acres may be put back into
agricultural production in the future from a present enrollment of 36.4 million
acres. The Act also removes restrictions on the type of crops planted (other
than fruit and vegetables), allowing farmers to plant crops having favorable
prices and thereby increasing the production of those crops. Increased
production may lower prices of certain crops but increase the amount available
for export. However, the Act also reduces Export Enhancement Program subsidies,
which may adversely affect the ability of U.S. exports to compete with those of
other countries. However, the Company's operations depend more on the volume of
grain handled than prices. Availability of grain and price should have little
effect on either the Milling or the Processing and Refining Business Units,
which are more dependent on manufacturing margins.
COMPANY SUBJECT TO PRICE RISKS. Upon purchase, the Company has risks of carrying
grain, including price changes and performance risks (including delivery,
quality, quantity and shipment period), depending upon the type of purchase
contract entered into. The Company is exposed to risk of loss in the market
value of positions held, consisting of grain inventory and purchase contracts at
a fixed or partially fixed price, in the event market prices decrease. The
Company is also exposed to risk of loss on its fixed price or partially fixed
price sales contracts in the event market prices increase.
To reduce the price change risks associated with holding fixed price positions,
the Company generally takes opposite and offsetting positions by entering into
grain commodity futures contracts (either a straight futures contract or an
options futures contract) on regulated commodity futures exchanges. While
hedging activities reduce the risk of loss from changing market values of grain,
such activities also limit the gain potential which otherwise could result from
changes in market prices of grain. Hedging arrangements do not protect against
nonperformance of a contract. The Company's policy is to generally maintain
hedged positions in grain which is hedgeable, but the Company can be long or
short at any time. The Company's profitability is primarily derived from margins
on grain merchandised and processed, not from hedging transactions. Hedging
activities have not in the past had a significant impact on operating results,
and management does not anticipate that its hedging activities will have a
significant impact on operating results or liquidity of the Company or any
Business Unit in the future. See "BUSINESS -- GRAIN MARKETING -- Price Risk and
Hedging" and Note 1 to the Company's Consolidated Financial Statements.
At any one time the Company's inventory and purchase contracts for delivery to
the Company may be substantial.
PROCESSING AND REFINING BUSINESS COMPETITION. Competition in the soybean
processing and refining business is driven by price, transportation costs,
service and product quality. The industry is highly competitive. Competitors are
adding new plants and expanding capacity of existing plants. Media newsletters
and other publications indicate that new crush plants and refinery operations
are being constructed or under strong consideration. Should those facilities be
constructed, the Company estimates that domestic crush capacity would increase
from 10 to 15% and domestic refining capacity would increase from 20 to 30%.
Unless exports increase or existing refineries are closed, this extra capacity
is likely to put additional pressure on prices and erode margins, adversely
affecting the profitability of the Processing and Refining Business Unit.
Several competitors operate over various market segments and may be suppliers to
or customers of other competitors.
MILLING BUSINESS COMPETITION. The Company's Milling Division has under
construction a flour mill in Houston, Texas, which is not yet operational, and
plans to construct semolina and flour and bread flour mills in Pocono,
Pennsylvania, but final approvals by local and state authorities have not been
received. There can be no assurance that these new mills, if completed, will be
competitively or operationally successful. There can be no assurance that the
necessary approvals for the Pocono facility will be obtained.
TAXATION OF COOPERATIVES COULD CHANGE. Although under Subchapter T of the
Internal Revenue Code patronage refunds are excluded in determining taxable
income of a cooperative and patronage refunds are taxable to the recipient,
current income tax laws, regulations and interpretations pertaining to the
receipt of patronage refunds could be changed. See "MEMBERSHIP IN THE COMPANY
AND AUTHORIZED CAPITAL -- Taxation" and "EQUITY PARTICIPATION UNITS --
Taxation."
LACK OF TRADING MARKET. The Company does not expect that a trading market
will develop for the Units. The price at which a holder of Units will be able
to resell is uncertain. See "TRADING OF UNITS."
MANAGEMENT'S BROAD DISCRETION IN USE OF PROCEEDS FROM OFFERING. Except for
approximately $38,800,000, which will be used for the construction of the
Milling Division's proposed Pocono facility, proceeds of the offering will
not inure to the benefit of either the Milling Division or the Refining and
Processing Division, but instead will be used for other purposes by the
Company. Management will have broad discretion in the use of the unallocated
portion of the proceeds from this offering. See "USE OF PROCEEDS."
RETAINED RIGHTS OF BOARD OF DIRECTORS. Except for allocations, the Board of
Directors has reserved the right to amend the resolutions creating the
Business Units and the Units. See "EQUITY PARTICIPATION UNITS -- Amendment of
Board Resolutions." The portion of patronage refunds to be paid in cash and
the retirement policy with respect to the portion to be paid as Patrons'
Equities is within the discretion of the Board of Directors. Deferrals in the
payment of patronage refunds would decrease the prospective return on the
Units. See "DIVIDEND POLICY." The Board of Directors may reallocate any asset
from a Business Unit to the Company or another Business Unit at fair market
value.
DEPENDENCE ON CERTAIN CUSTOMERS. Each of the Milling Division and the
Processing and Refining Division has certain major customers (See "BUSINESS
- -- MILLING DIVISION -- Customers" and "BUSINESS -- REFINING AND PROCESSING
DIVISION -- Customers," respectively). Loss of or a decline in the business
done with one or more of these customers could have a material adverse effect
on the operations of the affected Division. The Milling Division would be
adversely affected by a decline in pasta production in the United States.
USE OF PROCEEDS
The net proceeds from the sale of the Units offered hereby, if all are sold,
are estimated to be $94,800,000, assuming that each subscriber uses Capital
Equity Certificates to the full extent allowed in payment of the purchase
price, and after deducting the estimated offering expenses.
Assuming net proceeds of the offering of $94,800,000, $38,800,000 will be
used for construction of the proposed Pocono Mill (see "BUSINESS -- MILLING
DIVISION -- Facilities"), approximately $35,000,000 will be used for the
redemption of Patrons' Equities (see "DIVIDEND POLICY") and the balance will
be used as working capital (which will reduce the overall level of borrowings
required by the Company for its operations). If the proceeds of the offering
are less than $94,800,000, the proceeds will be used for the Pocono facility,
then to the redemption of Patrons' Equities and working capital. Except for
construction of the Pocono Mill, the proceeds will not inure to the benefit
of either Business Unit. Until used for the stated purpose such proceeds will
be used temporarily to reduce short-term borrowings or will be temporarily
invested.
DIVIDEND POLICY
The Company distributes net patronage earnings on an annual basis in the form of
patronage refunds which are distributed as a combination of cash and Patrons'
Equities. Patrons' Equities do not accrue interest, do not bear dividends, are
not transferable without the consent of the Board of Directors and will not
appreciate in value. Patrons' Equities are retired in accordance with policies
established by the Board of Directors. The Board of Directors has authorized the
redemption of Patrons' Equities held by patrons who are 72 years of age and
those held by estates of deceased patrons. Through the additional capital
achieved by the sale of the Units, the Board of Directors intends, over a period
of years, to provide for the redemption of Patrons' Equities as low as age 65.
However, the Company does not have demographic information on all of its members
and cannot be certain as to the amount of Patrons' Equities held by those age 65
and over. Further, the Company's ability to reduce the age will depend on the
amount of proceeds realized from the offering. Cash payments of dividends and
redemption of Patrons' Equities are restricted by the Company's banking
agreements. See "CAPITALIZATION."
Holders of the Units will not be entitled to the payment of dividends by
virtue of holding such Units. However, holders of the Units will be entitled
to receive patronage refunds attributable to the patronage sourced income
from operations of the applicable Business Unit on the basis of wheat or
soybeans delivered pursuant to the Agreement. The Board of Directors' goal is
to distribute patronage refunds attributable to the Units in the form of 75%
cash and 25% Patrons' Equities, and to retire Patrons' Equities on a
revolving basis seven years after declaration. However, the decision as to
the percentage of cash patronage will be made each fiscal year by the Board
of Directors and will depend upon the cash and capital needs of the
respective Business Units and is subject to the discretion of the Board of
Directors. The redemption policy will also be subject to change in the
discretion of the Board of Directors.
The Company's Articles of Incorporation provide that the gains or losses from
Defined Business Units shall not be netted against gains or losses from other
divisions, functions or operations of the Company. If the overall operations
of the Company generate a net loss so that no patronage refunds would be
declared at the Company level, the Company expects to nevertheless distribute
net patronage earnings, if any, of a particular Business Unit and to use
available cash and borrowing capacity if necessary for that purpose.
The right to receive patronage refunds either payable in cash or in Patrons'
Equities is subject to the claims of general creditors of the Company.
The obligation of the Company to pay any portion of patronage refunds payable
as Patrons' Equities will be reflected by an entry on the Company's books.
Holders of the Units will be notified annually of the amount allocated to
their accounts.
The Company is not authorized to issue capital stock and accordingly does not
pay dividends on capital stock. The Board of Directors is authorized to
establish the rights, preferences and privileges of equity securities, which
could include the payment of dividends, but no such equity securities are
presently outstanding.
CAPITALIZATION
The following table sets forth the capitalization of the Company at November
30, 1996, as adjusted to give effect to the issuance and sale by the Company
of the Units offered hereby and the application of the estimated proceeds
therefrom (including temporary use of proceeds, for construction of the
proposed Pocono mill) prior to costs of issuance.
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
----------------------------
OUTSTANDING AS ADJUSTED
----------- -----------
<S> <C> <C>
Short-term debt: $88,000,000(1) $27,333,333
=========== ===========
Long-term debt:
St. Paul Bank for Cooperatives, with fixed and variable
interest rates from 6.24% to 7.51%, due in installments
through 2007 $69,675,333 $69,675,333
CoBank, ACB (formerly National Bank for Cooperatives), with
fixed and variable interest rates from 6.24% to 7.51%, due in
installments through 2007 56,083,333 56,083,333
Industrial development revenues bonds, payable through July
2005, interest rate 7.4% 2,100,000 2,100,000
Capitalized lease obligations, with fixed and variable rates
from 8.0% to 8.90%. 5,979,743 5,979,743
Mortgages payable and other 1,849,598 1,849,598
------------ ------------
135,688,007 135,688,007
------------ ------------
Equity:
Equity Participation Units -- 114,800,000
Capital Equity Certificates 273,609,733 219,476,400(2)
Non-Patronage Certificates 9,691,677 9,691,677
Capital reserve 54,683,126 54,683,126
Patronage dividends payable in cash (4,600,000) (4,600,000)
Net earnings 19,510,515 19,510,515
------------ ------------
352,895,051 413,561,718
------------ ------------
Total capitalization. $488,583,058 $549,249,725
============ ============
</TABLE>
- -------------------------------
(1) As of January 31, 1997.
(2) Gives effect to the use of Capital Equity Certificates in payment of the
purchase price and the redemption of Capital Equity Certificates with a
portion of the proceeds of the offering.
The Company has a $550,000,000 Revolving Credit Facility (the "Facility")
provided by CoBank, ACB, St. Paul Bank for Cooperatives and other lenders
which will remain in place until October 31, 1997, subject to extension. The
Company may select a method of calculating interest based on a base rate,
LIBOR or a bid rate. The Facility prohibits the payment of cash patronage
refunds that exceed 20% of the Company's consolidated net patronage income
for the fiscal year preceding that in which the payment would be made, the
redemption of equity and the cash distributions in respect of its equity
unless no Event of Default or Default (as those terms are defined in the
Facility) exists and after giving effect to such payment no Event of Default
or Default would exist.
Long-term debt is held by the St. Paul Bank for Cooperatives and CoBank, ACB,
pursuant to the terms of an Amended and Restated Master Syndicated Loan
Agreement ("Loan Agreement") dated as of October 28, 1996. The Loan Agreement
prohibits the payment of cash patronage refunds that exceed 20% of the
Company's Consolidated Net Patronage Income (as defined) for the fiscal year
preceding that in which the payment would be made and the redemption of
equity, unless no Event of Default or Potential Default (as those terms are
defined in the Loan Agreement) exists and after giving effect to such payment
no Event of Default or Potential Default would exist.
BUSINESS
Harvest States Cooperatives (the "Company") is an agricultural cooperative.
Its primary business is merchandising grain, which involves purchase of
various grains from its Individual Members, Affiliated Associations and
others, sale of the grain to users, exporters and other intermediaries and
arranging for transportation and storage of purchased grain for delivery to
buyers. The Company also sells feed and other farm supplies to its Individual
Members and others, offers services to its Individual Members and Affiliated
Associations, crushes and refines soybeans, through a joint venture
participates in the food processing and packaging business and mills wheat.
Through this Prospectus, the Company is offering an opportunity to
participate in the patronage sourced income from its Oilseed Processing and
Refining Division (also known as Honeymead Products Company) ("Processing and
Refining Division") and its Wheat Milling Division (also known as Amber
Milling Company) ("Milling Division"). While the Processing and Refining
Division and the Milling Division will remain part of the Company, the
patronage earnings from the businesses operated by those Divisions will inure
in part to the purchasers of the Units based on the number of bushels of
wheat or soybeans delivered by holders of the Units relative to the total
number of bushels of wheat or soybeans processed by the respective Business
Unit.
Information is presented in this Prospectus on the historical operations of
the Company, including the Processing and Refining Division and the Milling
Division. Audited consolidated financial statements of the Company, the
Milling Division and the Processing and Refining Division for the years ended
May 31, 1994, 1995 and 1996 and unaudited consolidated financial statements
for the six months ended November 30, 1995 and 1996, are included in this
Prospectus. In the future, the Company intends to furnish holders of the
Units with annual reports containing financial statements of the Company and
the Business Units audited by its independent public accountants. The Company
does not intend to furnish interim reports.
The Company has authorized three classes of membership: Individual Members
("Individual Members"), Affiliated Associations ("Affiliated Associations")
and Defined Members ("Defined Members"). Individual Members are producers of
agricultural products who have done business with the Company during its last
fiscal year and have consented to take patronage into account as contemplated
by Section 1388 of the Internal Revenue Code. In the patronage consent filed
with the Company, the producer agrees to include both the cash and noncash
portion of any patronage refund in taxable income for federal income tax
purposes. Affiliated Associations are associations of producers of
agricultural products complying with certain federal requirements which have
done at least $100,000 of business with the Company during its last fiscal
year and have consented to take patronage into account for tax purposes.
Defined Members are persons otherwise eligible for membership who hold Equity
Participation Units. Currently, there are no Defined Members. As of June 1,
1996, the Company had 35,915 Individual Members and 503 Affiliated
Associations.
The Company's principal executive offices are located at 1667 North Snelling
Avenue, St. Paul, Minnesota 55108 (612-646-9433). As of November 30, 1996,
the Company employed 1,954 full and part-time regular employees.
Individual Members, Defined Members and Affiliated Associations who sell
grain to the Company, and Individual Members, Defined Members, Affiliated
Associations and consenting patrons who purchase goods and services from the
Company are entitled to receive patronage refunds from the Company, which are
declared on an annual basis. The Company may also allocate non-member-sourced
income to its Members and Non-Member Consenting Patrons in proportion to
patronage. See "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL."
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected financial information presented below has been derived from the
Company's consolidated financial statements. The consolidated financial
statements for the years ended May 31, 1992, 1993, 1994, 1995 and 1996, have
been audited by Deloitte & Touche LLP, independent auditors. The consolidated
financial statements for the six-month periods ended November 30, 1995 and
1996, are unaudited. In management's opinion, the unaudited financial
statements for the six-month periods include all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of the
Company's financial condition and results of operations for such periods. The
results for the six-month period ended November 30, 1996, are not necessarily
indicative of the results expected for the full year. The selected
consolidated financial information should be read in conjunction with the
Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES
Sales:
Grain $2,858,358,055 $2,793,407,187 $3,086,531,429 $4,191,665,535 $7,127,223,407
Processed grain 460,088,193 501,297,427 593,116,553 708,219,307 819,863,541
Feed and farm supplies 118,788,291 138,103,158 165,925,459 156,699,068 207,252,696
-------------- -------------- -------------- -------------- --------------
3,437,234,539 3,432,807,772 3,845,573,441 5,056,583,910 8,154,339,644
Patronage dividends 4,476,323 7,781,622 6,609,602 6,512,481 13,278,997
Other revenues 39,803,692 41,671,562 45,895,922 57,556,984 68,339,523
-------------- -------------- -------------- -------------- --------------
3,481,514,554 3,482,260,956 3,898,078,965 5,120,653,375 8,235,958,164
Costs and expenses:
Cost of goods sold 3,384,418,840 3,384,637,000 3,786,336,764 4,981,820,272 8,076,073,326
Marketing, general, and
administrative 48,266,596 52,545,022 60,847,099 69,509,491 70,054,248
Interest 12,842,991 8,964,230 10,250,765 19,268,575 31,921,936
-------------- -------------- -------------- -------------- --------------
3,445,488,427 3,446,146,252 3,857,434,628 5,070,598,338 8,178,049,510
-------------- -------------- -------------- -------------- --------------
Earnings before income taxes 36,026,127 36,114,704 40,644,337 50,055,037 57,908,654
Income taxes 5,000,000 3,725,000 5,500,000 5,100,000 6,900,000
-------------- -------------- -------------- -------------- --------------
Net earnings $ 31,026,127 $ 32,389,704 $ 35,144,337 $ 44,955,037 $ 51,008,654
============== ============== ============== ============== ==============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
SIX MONTHS ENDED
NOVEMBER 30,
-------------------------------
1995 1996
-------------- --------------
(UNAUDITED)
REVENUES
Sales:
Grain $3,329,958,581 $3,548,642,198
Processed grain 403,716,340 396,378,362
Feed and farm supplies 85,665,267 113,824,347
-------------- --------------
3,819,340,188 4,058,844,907
Patronage dividends 1,891,024 4,727,294
Other revenues 35,821,618 33,809,212
-------------- --------------
3,857,052,830 4,097,381,413
Costs and expenses:
Cost of goods sold 3,779,651,094 4,029,924,953
Marketing, general, and
administrative 39,251,639 36,927,696
Interest 13,896,619 8,418,249
-------------- --------------
3,832,799,352 4,075,270,898
-------------- --------------
Earnings before income taxes 24,253,478 22,110,515
Income taxes 3,050,000 2,600,000
-------------- --------------
Net earnings $ 21,203,478 $ 19,510,515
============== ==============
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
---------------------------------------------------------------------- ------------------------------
1992 1993 1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital $ 66,880,378 $ 69,550,702 $ 69,409,621 $ 66,904,085 $ 95,874,938 $ 83,527,483 $ 102,383,180
Net property, plant and
equipment 137,919,139 146,223,870 156,311,551 205,837,690 232,145,401 221,675,866 219,946,105
Total assets 523,018,883 612,261,778 734,655,223 924,533,569 1,228,772,684 1,385,843,222 1,094,190,953
Long-term debt,
including current
maturities 49,196,060 44,479,207 39,135,097 84,816,525 132,629,176 106,690,515 135,688,007
Total equity 222,126,239 246,797,147 270,761,017 299,487,893 337,252,119 317,902,245 352,895,051
</TABLE>
PRO FORMA INFORMATION
The table below shows the pro forma allocation of the Company's net income
assuming that Equity Participation Units had comprised one-half of the bushel
volume for the Processing and Refining and the Milling Business Units in each
of the periods indicated. The Equity Participation Units offered hereby
represent 50% of the estimated processing capacity of each Business Unit
giving effect to the construction of additional capacity now in process and
anticipated. Accordingly, if the Company is able to sell all Units in each
Business Unit offered hereby, it expects that holders of Units would
represent 50% of the wheat milled or soybeans crushed. The actual percentage
milled or crushed will depend on production capacity, demand for products and
the amount of grain delivered by Defined Members, and there can be no
assurance that this assumption will be true.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Patronage refunds to members other than
Defined Members $24,975,363 $24,870,500 $33,013,187 $14,199,144 $10,952,844
Patronage refunds--Milling 1,063,366 522,758 1,504,171 665,085 1,860,786
Patronage refunds--Processing and Refining 7,094,307 11,217,558 9,801,641 3,558,467 4,138,131
Nonpatronage earnings, net of income taxes 2,011,301 8,344,221 6,689,655 2,780,782 2,558,754
Net earnings $35,144,337 $44,955,037 $51,008,654 $21,203,478 $19,510,515
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED NOVEMBER 30, 1996 WITH 1995
The Company's consolidated net earnings for the six-month period ended
November 30, 1996 of $19,500,000 declined $1,700,000 compared to 1995 due to
a decline in grain volume at both its country and export facilities,
partially offset by increases in both volume and gross margins from the
Company's grain processing activities.
Consolidated net sales of $4,059,000,000 increased by $240,000,000 (6%)
during the six months ended November 30, 1996 compared to the same period in
1995. This increase is primarily attributable to an increase in the weighted
average of all commodities sold of $5.03 per bushel compared to $3.86 per
bushel in 1995. This increase in price per bushel was partially offset by a
volume decline of 170,000,000 bushels, and a reduction in sales of
$83,000,000 from the Company's consumer products packaging division which was
transferred to a nonconsolidated joint venture on August 30, 1996.
Patronage dividends received increased $2,800,000 (147%) for the six-month
period ended November 30, 1996 compared to 1995 as a result of higher patronage
earnings distributed by cooperative customers and suppliers.
Other revenues decreased by $2,000,000 (6%) through November 30, 1996 compared
to 1995 primarily due to a decrease in interest income of $2,800,000 and a
decrease in storage income of $800,000, partially offset by an increase in
service income of $800,000 and an increase in commission income of $700,000.
Cost of goods sold of $4,030,000,000 for the six-month period ended November 30,
1996 increased $250,000,000 (7%) from the same period of 1995. This increase is
attributable primarily to an increase in the weighted average cost per bushel of
commodities of $4.99 in 1996 from $3.82 in 1995. This price increase per bushel
was partially offset by a decline in volume from 867,000,000 bushels in 1995 to
695,000,000 in 1996, and a reduction in such cost of $77,500,000 incurred by the
Company's consumer products packaging division which was transferred to a
nonconsolidated joint venture on August 30, 1996.
Marketing and administrative expenses declined by $2,400,000 (6%) through
November 30, 1996 compared to the same period of 1995. This decrease in expense
is attributable primarily to the transfer of the Company's consumer products
packaging division into a nonconsolidated joint venture on August 30, 1996,
which resulted in a $3,800,000 reduction, partially offset by expense increases
in the Milling Division of $800,000 and Farm Marketing and Supply of $800,000.
The Milling Division's increase is attributable to the operation of the Kenosha
mill, which commenced operations in November 1995; Farm Marketing and Supply's
increase is primarily attributable to an increase of approximately 25 facilities
operated in 1996 compared to the same period in 1995. Other areas of the Company
maintained approximately the same level of marketing and administrative expenses
for the two periods.
Interest expense decreased $5,500,000 (40%) for the 1996 period from 1995
attributable to a decline in working capital requirements.
Income tax expense declined $450,000 for the six-month period ended November 30,
1996 which is reflective of slightly lower pretax earnings with effective tax
rates of 11.8% and 12.6% for 1996 and 1995 respectively.
COMPARISON OF YEAR ENDED MAY 31, 1996 WITH 1995
Consolidated net earnings of approximately $51,000,000 for the year ended May
31, 1996 is a $6,100,000 increase from 1995. This increase is attributed
primarily to increased volumes of grain handled and increased returns on
investments.
Consolidated net sales of $8,154,000,000 in 1996 increased by $3,097,000,000
(61%) in 1996. This increase was due principally to grain volume of 1.7 billion
bushels in 1996, an increase of 550 million bushels over 1995 and an increase in
grain price as a weighted average of all commodities sold which was $4.21 for
1996, 56 cents per bushel greater than 1995.
Patronage dividends increased $6,800,000 (105%) in 1996 compared to 1995
resulting from higher patronage earnings distributed by cooperative customers
and suppliers.
Other revenues of $68,300,000 increased $10,700,000 (19%) in 1996. This net
increase was due primarily to an increase of $4,600,000 in service revenues,
from the Company's export facilities, and an increase in joint venture income of
$8,500,000, primarily from those joint ventures involved in the exporting of
grain, net of a $2,400,000 decrease in all other categories of other revenues,
including the write-down of investments totaling $1,100,000.
Cost of goods sold of $8,076,000,000 increased $3,094,000,000 (62%) in 1996.
This increase is attributable primarily to an increase in the weighted average
cost of commodities of $4.16 in 1996 from $3.59 in 1995.
Marketing and administrative expenses were essentially flat compared to 1995. An
expansion of the relative size of the Company's operations, which increased
costs in certain areas, was offset by a decrease in pension costs of $4,000,000,
principally caused by a settlement adjustment recognized in 1995.
Interest expense of $31,900,000 increased $12,600,000 (65%) in 1996. This
increase is substantially attributable to a $10,300,000 increase in interest on
short-term debt incurred to finance increased volumes at higher prices and an
increase of $3,200,000 in interest on long-term debt incurred primarily for the
expansion of property, plant, and equipment.
Income tax expense of $6,900,000 and $5,100,000 for 1996 and 1995, respectively,
results in effective tax rates of 11.9% and 10.2%. The increase in the effective
tax rate is primarily attributable to an increase in non-patronage income during
1996.
COMPARISON OF YEAR ENDED MAY 31, 1995 WITH 1994
The Company's consolidated net earnings of approximately $45,000,000 for 1995
was a $9,900,000 increase from 1994 primarily attributed to increased grain
handled at margins per bushel equal to that of the prior year, along with
increased joint venture and export terminal service revenues.
Consolidated net sales of $5,057,000,000 increased by $1,211,000,000 (31%) in
1995. This increase was due principally to grain volume of 1.15 billion bushels
in 1995 compared to 816 million bushels in 1994, an increase of 334 million
bushels (41%), offset by price as a weighted average of all commodities sold of
$3.65 for 1995 compared to $3.78 for 1994, a decrease of 13 cents per bushel.
Other revenues of $57,600,000 increased $11,700,000 (25%) from 1994. This net
increase was due primarily to an increase of $2,200,000 in service revenues,
for the most part at the Company's export facilities, an increase in joint
venture income of $4,300,000, primarily from those joint ventures involved in
the exporting of grain, and an increase of $3,500,000 in interest income
primarily generated from short-term loans to local Affiliated Associations of
the Company.
Cost of goods sold of $4,982,000,000 increased $1,196,000,000 (32%). This
increase is primarily attributed to higher volumes of grain handled offset to
some extent by lower grain prices. The weighted average cost of commodities was
$3.59 in 1995, down from $3.72 in 1994.
Marketing and administrative expenses of $69,500,000 increased $8,700,000 (14%)
in 1995. This increase was due to an expansion of the relative size of the
Company's operations which increased costs in certain areas, and an increase in
pension costs of $4,000,000 principally caused by a benefit plan settlement
adjustment recognized in 1995.
Interest expense of $19,300,000 increased $9,000,000 (87%) in 1995. This
increase is substantially attributed to increased volumes of business and an
increase of $3,000,000 in interest on long-term debt incurred primarily for the
expansion of property, plant and equipment.
Income tax expense of $5,100,000 and $5,500,000 for 1995 and 1994, respectively,
results in effective tax rates of 10.2% and 13.5%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company provided cash of $422,700,000 during the six
months ended November 30, 1996, while operating activities used $157,700,000 of
cash for the same period in 1995. Net cash provided and used for operations
during these periods is primarily attributable to the changes in working capital
requirements with such balances declining and therefore contributing working
capital of $396,700,000 in 1996. Working capital requirements increased and
therefore used cash in the net amount of $183,000,000 in 1995.
Net cash used for the Company's operating activities totaled $105,700,000,
$49,700,000 and $33,200,000, respectively, for the years ended 1996, 1995 and
1994. The increase in net cash used in operations in 1996, compared to 1995 and
1994, resulted primarily from increases in grain inventories and receivables due
to higher volumes of grain processed.
CASH FLOWS FROM INVESTING
Net cash used for the Company's investing activities were $11,900,000 and
$22,100,000 for the six months ended November 30, 1996 and 1995, respectively.
Acquisitions of property, plant and equipment comprised the principal use of
this cash in each of the periods. Such expenditures totaled approximately
$25,300,000 and $24,000,000 for the six month periods ended November 30, 1996
and 1995 respectively.
During the six months ended November 30, 1996 the Company received cash
totalling approximately $5,900,000 as proceeds for the redemption of
investments.
On August 30, 1996 the Company formed a joint venture with a regional consumer
products packaging company, and contributed substantially all of the net assets
of its Holsum Foods division as its capital investment in the joint venture. In
return for these net assets, the Company received a 40% interest in the joint
venture and the joint venture assumed debt of approximately $33,000,000.
For the years ended 1996, 1995 and 1994, net cash flows used in the Company's
investing activities totaled $37,600,000, $71,400,000 and $24,300,000,
respectively. The acquisition of property, plant and equipment comprised the
primary use of cash in each of these three years, totaling $40,500,000,
$69,300,000 and $28,000,000 in 1996, 1995 and 1994, respectively.
CASH FLOWS FROM FINANCING
The Company finances its working capital needs through short-term lines of
credit with the banks for cooperatives and commercial banks. As of May 31, 1996
the Company had short-term lines of credit totaling $570,000,000, of which
$550,000,000 was committed and $324,000,000 was outstanding.
The Company decreased its outstanding net short term borrowings by $324,000,000
during the six months ended November 30, 1996 and increased such borrowings by
$167,500,000 during that period in 1995.
The Company borrowed on a long term basis $10,000,000 and $25,000,000 during the
six-month periods ended November 30, 1996 and 1995, respectively.
For the years ended May 31, 1996, 1995 and 1994, the Company increased its
outstanding net short-term borrowings by $124,000,000, $87,000,000 and
$79,500,000, respectively, in order to fund the working capital needs caused by
the increase in grain volumes.
The Company has financed its long-term capital needs, primarily the acquisition
of property, plant, and equipment, with long-term agreements through the banks
for cooperatives with maturities through the year 2007. Total indebtedness of
these agreements totaled $120,700,000 and $70,300,000 on May 31, 1996 and 1995,
respectively. The Company also had long-term debt in the form of capital leases,
industrial development revenue bonds and miscellaneous notes payable totaling
$11,900,000 and $14,500,000 on May 31, 1996 and 1995, respectively.
The Company borrowed on a long-term basis $10,000,000 and $25,000,000 during the
six months ended November 30, 1996 and 1995, respectively and repaid long-term
debt in the amounts of $6,900,000 and $3,800,000 for the same period of 1996 and
1995.
The Company borrowed on a long-term basis $58,000,000, $51,000,000 and
$1,200,000 and repaid long-term debt in the amounts of $11,300,000, $5,900,000
and $6,500,000 in 1996, 1995 and 1994, respectively.
The Company anticipates further short-term financing needs to fund increases in
the volume of grain handled and further long-term needs to fund acquisitions of
grain facilities and for expansion and development of existing value-added
businesses. Management believes such needs can be financed with a combination of
debt and the proceeds of this offering.
In accordance with the bylaws and by action of the Board of Directors, annual
net earnings from patronage sources are distributed to consenting patrons
following the close of each year and are based on amounts reportable for federal
income tax purposes as adjusted in accordance with the bylaws. The cash portion
of this distribution, deemed by the Board of Directors to be 30% of such
earnings for 1996, 1995 and 1994, respectively, totaled $11,000,000, $10,000,000
and $6,800,000.
The Board of Directors authorized the redemption of patronage certificates held
by patrons who were 72 years of age and those held by estates of deceased
patrons during the six months ended November 30, 1996 and 1995. These amounts
totaled $3,200,000 and $3,100,000, respectively.
The Board of Directors authorized the redemption of patronage certificates held
by patrons who were 72 years of age and those held by estates of deceased
patrons during the years ended May 31, 1996, 1995 and 1994. These amounts
totaled $6,600,000, $5,700,000 and $5,500,000, respectively.
PRICE RISK AND HEDGING
To reduce the price change risks associated with holding fixed price commodity
positions, the Company generally takes opposite and offsetting positions by
entering into commodity futures contracts (either a straight futures contract or
an options futures contract) on regulated commodity futures exchanges. Most of
the grain volume handled by the Company can be hedged. Some grains cannot be
hedged because there are no futures for certain commodities. For those
commodities, risk is managed through the use of forward sales and different
pricing arrangements and to some extent cross-commodity futures hedging. While
hedging activities reduce the risk of loss from changing market values of grain,
such activities also limit the gain potential which otherwise could result from
changes in market prices of grain. The Company's policy is to generally maintain
hedged positions in grain which is hedgeable, but the Company can be long or
short at any time. The Company's profitability is primarily derived from margins
on grain merchandised and processed, not from hedging transactions. Hedging
arrangements do not protect against nonperformance of a contract. Management
does not anticipate that its hedging activity will have a significant impact on
future operating results or liquidity.
At any one time the Company inventory and purchase contracts for delivery to the
Company may be substantial. The Company has a risk management policy and
procedures that includes net position limits. It is defined by commodity and
includes both trader and management limits. This policy and computerized
procedure triggers a review by management when any trader is outside of position
limits and also triggers review by management if the Company is outside of its
position limits. The position limits are reviewed at least annually by
management of the Company. The Company monitors current market conditions and
may expand or reduce the purchasing program in response to changes in those
conditions. In addition, certain purchase and sale contracts are subject to
credit approvals and appropriate terms and conditions.
GRAIN MERCHANDISING
INDUSTRY OVERVIEW
Grain and oilseed merchandising involves the sale and distribution of grain and
oilseeds from producer to processor, to be processed for human and animal
consumption and other uses. These commodities are produced and consumed
throughout the world. Increased worldwide demand is generated through population
growth and, for certain regions, increased per capita food consumption supported
by growing affluence. Demand for these commodities is satisfied by worldwide
production, which is in part determined by prevailing prices.
In recent years, a significant portion of high demand grains (wheat, corn and
soybeans) grown domestically has been exported. United States production
competes with production in numerous other countries to supply worldwide demand
for these grains. The ability of producers in particular countries to compete on
a worldwide basis may be enhanced by governmental support and protection, which
may vary from time to time. Demand for grain and perceptions about prevailing
supplies and future production affect prices for grain, which can be erratic.
Wheat and corn exports are expected to decline in the years ending May 31, 1997
and 1998, and August 31, 1997 and 1998, respectively, partially offset by an
increase in soybean exports. Wheat exports have averaged 34.1 million metric
tons in the past two years ending May 31, 1996, and are projected to decline to
25.9 million metric tons for the year ending May 31, 1997, and 26.1 metric tons
for the year ending May 31, 1998. The U.S. is experiencing major competition
from Canada, Australia, Argentina and the European Union (EU). Collectively,
these countries are projected to increase their wheat exports 9.4 million metric
tons from the year ended May 31, 1995, to the year ending May 31, 1997, due to
increased production in Australia and Argentina and the use of export subsidies
of $4 to 20 per ton by the EU. Soybean exports have averaged 23 million metric
tons for the two years ended August 31, 1996 and are projected to increase
slightly the next two years to an average of 24.6 million metric tons. The U.S.
experiences competition mainly from Argentina and Brazil with exports varying
from 6 to 9 million metric tons per year. Corn exports averaged 56.8 million
metric tons for the two years ended August 31, 1996, with each of the years
ending August 31, 1997 and 1998 projected at 50.5 million metric tons. This
projected decrease is the result of increased competition from Argentina and
substitution of other grains for feed usage due to price relationships.
Argentina corn exports are projected to increase 2.5 million metric tons over
the two years ended August 31, 1996 to 9 million metric tons per year. The
Company expects that its export business will decline consistent with the
decline of U.S. exports. Historical information and projections for the 1997
crop year are from information published by the United States Department of
Agriculture. Projections for the 1998 crop year are based on industry sources
that the Company believes to be reliable.
Imports of grains into the U.S. consist mainly of wheat, oats and barley. The
amounts imported do not have a material effect on grain merchandising.
In the United States, grain merchandising involves the purchase of grain, sale
for export or further domestic use and storage and transportation to export
facilities or to users.
Grain merchandising may be adversely affected by supply and demand
relationships, both domestic and international. Supply is affected by weather
conditions, disease, insect damage, acreage planted, government regulation and
policies and commodity price levels. The business is also affected by
transportation conditions, including rail, vessel, barge and truck. Demand may
be affected by foreign governments and their programs, relationships of foreign
countries with the United States, the affluence of foreign countries, acts of
war, currency exchange fluctuations and substitution of commodities. Demand may
also be affected by changes in eating habits, by population growth and increased
or decreased per capita consumption of some products.
RECENT DEVELOPMENTS. Rising grain prices in the 1995 growing and harvesting
season, which continued into 1996, tended to reduce inventories of stored grain,
but prompted producers in Europe, Canada, Argentina, Australia and other
countries to plant additional grain. Prices for most grains have fallen
substantially in recent months. The following table shows the cash prices for
certain grains on June 1, 1996 and January 31, 1997:
JUNE 1, JANUARY 31,
GRAIN 1996 1997
- ----- ---- ----
Wheats $6.49 $4.24
Corn 4.69 2.50
Soybeans 7.51 7.14
Because the profitability of the Company is primarily determined by margins
and the Company does not speculate, changes in grain prices do not directly
impact the Company's income. However, grain prices may be reflective of the
demand for grain (particularly grain to be exported) and to that extent a
drop in the demand for grain would directly affect revenues of the Company.
Worldwide wheat production is reported to be up, and United States exports of
wheat are expected to be down, in the year ending May 31, 1997.
Demand for corn has been supported domestically by its use in feeding cattle.
United States exports of meat have continued to increase.
The Freedom to Farm Act of 1996, enacted in April 1996, may affect crop
production in several ways. The Act more narrowly defines what will qualify as
environmentally sensitive acreage for purposes of the conservation reduction
program, with the result that 3 to 4 million acres may be put back into
agricultural production in the future from a present enrollment of 36.4 million
acres. The Act also removes restrictions on the type of crops planted (other
than fruit and vegetables), allowing farmers to plant crops having favorable
prices and thereby increasing the production of those crops. Increased
production may lower prices of certain crops but increase the amount available
for export. However, the Act also reduces Export Enhancement Program subsidies,
which may adversely affect the ability of U.S. exports to compete with those of
other countries. However, the Company's operations depend more on the volume of
grain handled than prices. Availability of grain and price should have little
effect on either the Milling or the Processing and Refining Business Units,
which are more dependent on manufacturing margins.
INTRODUCTION
The Company buys grain through its Grain Marketing Division from Affiliated
Associations (typically a cooperative organization of local producers), directly
from Individual Members (to a limited extent) and from third parties (such as
grain dealers, non-Member producers, marketing associations or marketing pools,
elevators and other grain merchandising companies) and through its Agri-Service
Centers, which are country elevators owned by the Company, directly from
Individual Members. See "-- FARM MARKETING AND SUPPLY." Grain purchased by
Agri-Service Centers is usually sold to the Grain Marketing Division for resale.
A small portion of grain is handled on a consignment basis.
Grain is sold by the Company for future delivery at a specified location. Grain
sold by a producer is typically trucked to a local elevator for sale. From local
elevators, grain may be transported in a variety of ways to the purchaser. The
Company arranges transportation to delivery locations using truck, rail and
barge transportation. Grain intended for export may be shipped by rail to an
export terminal or to a barge loading facility to be shipped by barge to an
export terminal, where it is loaded on an ocean-going vessel. Grain intended for
domestic use may be shipped by truck or rail to various locations throughout the
United States. Because of its facilities (see " -- Grain Handling and
Transportation"), the Company has significant capacity to sell grain for export.
PURCHASES. The number of bushels of grain purchased from Individual Members and
Affiliated Associations, the total grain purchased and the percentage
relationship for each of the years ended May 31, are set forth below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
----------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Member purchases 525,715,235 720,024,458 959,166,596 555,934,749 387,313,447
Total purchases 816,421,362 1,148,952,019 1,692,438,700 867,063,438 695,605,636
Percentage 64.4% 62.7% 56.7% 64.1% 55.7%
</TABLE>
Substantially all of the grain purchased by the Company is grown in the Midwest,
Great Plains and Pacific Northwest. The Company also purchases grain grown in
other parts of the United States and other countries.
GRAINS HANDLED. The primary grains merchandised by the Company are corn, wheat
and soybeans. The Company also merchandises barley, milo, sunflowers and oats as
well as smaller quantities of canola, flax, rye, millet and others.
The number of bushels of grain purchased by the Company for the periods
indicated is set forth below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
----------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Wheat 445,201,610 457,684,648 505,606,729 266,072,324 262,969,628
Corn 185,121,268 342,832,256 777,631,466 409,022,684 240,568,803
Soybeans 68,325,522 172,025,373 234,930,247 111,064,987 123,043,665
Barley 82,842,737 93,699,078 75,225,773 36,546,744 31,489,811
Milo 5,953,433 36,663,822 48,199,610 23,064,532 23,847,513
Sunflowers 12,322,105 28,929,026 25,952,855 4,142,697 1,746,406
Oats 14,097,310 13,423,696 20,008,442 10,629,428 9,040,445
All other 2,557,377 3,694,120 4,883,578 6,520,042 2,899,365
----------- ------------- ------------- ----------- -----------
816,421,362 1,148,952,019 1,692,438,700 867,063,438 695,605,636
=========== ============= ============= =========== ===========
</TABLE>
The amounts above include grain sold to the Milling Division and the Processing
and Refining Division and for use in feeds.
Sales of grain by the Company for each of the years ended May 31 are set forth
below:
1994 1995 1996
-------------- -------------- --------------
Wheat $1,973,640,146 $1,890,923,540 $2,631,202,689
Corn 488,542,201 954,570,208 2,518,939,007
Soybeans 304,681,449 880,627,929 1,431,485,630
All other 319,667,633 465,543,859 545,596,081
-------------- -------------- --------------
TOTAL $3,086,531,429 $4,191,665,535 $7,127,223,407
============== ============== ==============
RECENT DEVELOPMENTS. In recent years, sales of grain have been substantially
dependent on exports. During the year ended May 31, 1996, approximately 40% of
the Company's grain sales were domestic and approximately 60% were exports. See
Note 1 of Notes to Financial Statements.
Because of a decline of grain prices and anticipation of increased worldwide
supplies of grain, the Company expects that United States exports of grains will
decline in the current year. It believes that many producers will store current
production, allowing domestic supplies, which have been at historically low
levels, to be replenished. As a result, the Company expects that its own grain
sales in the current year will decline materially from the record level for the
year ended May 31, 1996. The Company expects sales volume (measured in bushels)
to be down 25 to 30% in the year ending May 31, 1997, over the prior year.
MERCHANDISING
The Company buys and sells grain through offices of its Grain Marketing Division
located in Portland, Oregon; Great Falls, Montana; Lincoln, Nebraska; Kansas
City, Kansas; St. Paul, Minnesota; Winona, Minnesota; Davenport, Iowa; and
Lewiston, Idaho; and at its Agri-Service Centers.
Grain purchased through Agri-Service Centers is purchased on a cash and futures
basis. Grain purchased through the Grain Marketing Division is usually purchased
for future delivery.
Grain is sold for future delivery at a specified location, with the Company
usually responsible for arranging necessary transportation to that location.
Purchasers include millers, malters, exporters and foreign buyers as well as the
soybean, wheat and feed operations of the Company. The Company is not dependent
on any one customer. The Company has supply relationships calling for delivery
of grain at prevailing market prices. Grain users store varying amounts of grain
for their own use.
The Company's ability to arrange transportation is a significant part of the
service it offers to its customers. The Company's loading capabilities onto unit
trains, ocean going vessels and barges is a component of the selling price of
grain handled by the Company. Rail transportation is through independent
railroads, although approximately 30% for the year ended May 31, 1996, of rail
movement for Grain Merchandising was carried out through leased railcars (either
directly or by use of pools in which such leased railcars participate). Vessel
and truck transporation is carried out exclusively by third parties. Barge
transportation is carried out by third parties, but the Company is a party to
long-term affreightment agreements for approximately 20% of current needs.
Virtually all grain sold domestically is sold by employees while approximately
half of grain exported is sold by brokers or agents and the balance by
employees. The Company has a small ownership position in Intrade, a company
which owns part of a Germany-based marketing organization involved in trading
grain and feedstuffs in Germany and international markets. The Company also has
relationships with agents, brokers and marketing companies in other countries to
assist it in export sales.
COMPETITION
The Company competes for both the purchase and sale of grain. Competition is
intense and margins are low. Some of the Company's competitors are integrated
food producers, which may also be customers. Many competitors have substantially
greater financial resources than the Company.
In the purchase of grain from producers, location of a delivery facility is a
prime consideration but producers are willing to truck grain for sale over
increasingly longer distances. Grain prices are affected by reported trading
prices on national markets, shipping costs and storage capabilities. Price is
affected by the capabilities of the facility. For example, if it is cheaper to
deliver to a customer by unit train than by truck, a facility with unit train
capability provides a price advantage. The Company believes that its
relationship with Individual Members serviced by local Agri-Service Centers and
with Affiliated Associations gives it a broad origination capability.
The Company competes in the sale of grain based on price and its ability to
provide quantity and quality of grains required and its ability to deliver.
Location of facilities is a major factor in ability to compete. Major grain
merchandising companies in addition to the Company include
Archer-Daniels-Midland, Cargill, Continental, ConAgra, Bunge and Louis Dreyfus,
each of which handles grain volumes of more than one billion bushels annually.
The Company estimates it would be among the smaller merchandisers among these
seven. The Company also competes with numerous other grain merchandisers with
annual volumes of less than one billion bushels.
Since the Company's facilities are located primarily in the Midwest, Great
Plains and Pacific Northwest, with a terminal in the Gulf, the Company primarily
competes with the companies whose facilities are in these areas. The Company's
export facilities in three major areas allow it to ship to anyplace in the
world.
GRAIN HANDLING AND TRANSPORTATION
The Company owns export terminals, river terminals and other elevators involved
in the handling of grain. All such facilities can receive inbound truck and
rail. Export facilities on river systems can receive grain by barge. In
addition, the Company owns 144 Agri-Service Centers, which are country elevators
which receive grain from producers.
The Company operates river terminals at Kansas City, Missouri (two); St. Paul,
Savage and Winona, Minnesota; and Davenport, Iowa (two), which are used to load
grain onto barges for shipment to both domestic and export customers via the
Mississippi River system, on trucks for domestic markets and on rail for both
domestic and export markets. The Company owns and operates a terminal at
Kennewick, Washington, on the Columbia River. The Company has interests in three
river terminals located on the Snake River: Lewis and Clark Terminal
Association's facility located at Lewiston, Idaho, Central Ferry Terminal
Association's facility located at Central Ferry, Washington and Co-Grain
Elevator Company's facilities located at Upper Monumental and Burbank,
Washington. Much of the grain from these terminals is loaded onto barges for
shipment to Pacific Northwest export terminals.
The Company's export terminal at Superior, Wisconsin, provides access to the
Great Lakes and St. Lawrence Seaway, and the Company's export terminal at
Myrtle Grove, Louisiana, serves the Gulf market. An export terminal at
Kalama, Washington, leased by the Company and an export terminal at
Vancouver, Washington, owned by a joint venture partner, serve the Pacific
market. A partnership between the Company and Continental Grain Company
operates an export terminal at Tacoma, Washington, for feed grain and oil
seed shipments to Pacific Rim customers. A facility in Spokane, Washington,
is used for storage and transloading. An elevator in Petersburg, North
Dakota, is used to standardize barley for a particular customer.
The Division leases a fleet of covered hopper cars and enters into various
contracts for covered grain barges. In addition, at various times the Company
may charter vessels.
PRICE RISK AND HEDGING
Upon purchase, the Company has risks of carrying grain, including price changes
and performance risks (including delivery, quality, quantity and shipment
period), depending upon the type of purchase contract entered into. These
contracts include flat price, basis fixed, delayed price, deferred payment,
hedge to arrive and futures fixed. The Company is exposed to risk of loss in the
market value of positions held, consisting of grain inventory and purchase
contracts at a fixed or partially fixed price, in the event market prices
decrease. The Company is also exposed to risk of loss on its fixed price or
partially fixed price sales contracts in the event market prices increase.
To reduce the price change risks associated with holding fixed price positions,
the Company generally takes opposite and offsetting positions by entering into
grain commodity futures contracts (either a straight futures contract or an
options futures contract) on regulated commodity futures exchanges. Most of the
grain volume handled by the Company can be hedged. Some grains cannot be hedged
because there are no futures for certain commodities. For those commodities,
risk is managed through the use of forward sales and different pricing
arrangements and to some extent cross-commodity futures hedging. While hedging
activities reduce the risk of loss from changing market values of grain, such
activities also limit the gain potential which otherwise could result from
changes in market prices of grain. The Company's policy is to generally maintain
hedged positions in grain which is hedgeable, but the Company can be long or
short at any time. The Grain Marketing Division's profitability is primarily
derived from margins on grain merchandised and revenues generated from other
merchandising activities with its customers, not from hedging transactions.
Hedging arrangements do not protect against nonperformance of a contract.
When a futures contract is entered into, an initial margin deposit must be sent
to the applicable exchange. The amount of the deposit is set by the exchange and
varies by commodity. If the market price of a short futures contract increases,
then an additional margin deposit (maintenance margin) would be required.
Similarly, if the price of a long futures contract decreases, a maintenance
margin deposit would be required to be sent to the applicable exchange.
Subsequent price changes could require additional maintenance margins or could
result in the return of maintenance margins.
At any one time the Grain Marketing Division's inventory and purchase contracts
for delivery to the Company may be substantial. The Grain Marketing Group has a
risk management policy and procedures that includes net position limits. It is
defined by commodity and includes both trader and management limits. This policy
and computerized procedure triggers a review by management of the Grain
Marketing Division when any trader is outside of position limits and also
triggers review by management of the Company if the Grain Marketing Division is
outside of its position limits. The position limits are reviewed at least
annually with management of the Company. The Company monitors current market
conditions and may expand or reduce the purchasing program in response to
changes in those conditions. In addition, certain purchase and sale contracts
are subject to credit approvals and appropriate terms and conditions.
SEASONALITY
Harvest for most crops occurs in the summer and fall, and the Company purchases
more grain during that period. Because of the Company's geographic location and
the fact that it is further from its export facilities, grain tends to be sold
later than in other parts of the country. Because many producers have
significant on-farm storage capacity and because of the Company's own storage
capacity, grain is bought and moved throughout the year.
WORKING CAPITAL
Due to the amount of grain purchased and held in inventory, the Company has
significant working capital needs at various times of the year. The amount of
borrowings for this purpose and the interest rate charged on such borrowings
directly affect the profitability of the grain merchandising operations. See
"CAPITALIZATION."
EMPLOYEES
As of November 30, 1996, the Grain Marketing Division had 520 employees, of
which 82 were traders, 300 production staff, 14 management and 124 support
staff. See "-- FARM MARKETING AND SUPPLY" with respect to employment by
Agri-Service Centers. Of these employees, 149 at five locations are subject to
collective bargaining agreements expiring at various times through 1999.
PROCESSING AND REFINING DIVISION
INDUSTRY OVERVIEW
The soybean crushing industry converts soybeans into meal used for feeding
animals, soy flour used for specialty food and other purposes and crude soybean
oil. The soybean refining industry refines the crude oil for use in processed
foods, such as margarine, salad dressings and baked goods, and to a more limited
extent industrial uses. Soybean production is concentrated in the central United
States, Brazil, China and Argentina. Crushing plants are generally located in
proximity to sources of soybeans and usage of meal often arises in proximity to
crushing plants. Refineries are generally located next to the crushing plants.
Oil is shipped throughout the United States and for export.
Per capita domestic consumption of soybean oil has declined slightly in recent
years. Exports of soybean oil are variable but generally a minor portion of
total production. In recent years, exports have varied widely, which
dramatically influenced margins in both crushing and refining.
Usage of meal is dependent on the amount of livestock being raised, which has
increased in recent years. While per capita domestic consumption of meat has
been stable in recent years, demand for meal has increased due to an increase in
the domestic consumption of white meat and an increase in meat exports. Soybean
meal provides a ready source of protein with a 44% or higher protein content,
compared to corn at 9%, wheat at 9.5% and barley at 11.5%
Major competitors in the industry include the Company, Archer-Daniels-Midland
(ADM), Cargill, Ag Processing, Inc. ("AGP"), Central Soya and Bunge. Competition
is driven by price, transportation costs, service and product quality. The
industry is highly competitive. These and other competitors are adding new
plants and expanding capacity of existing plants. Unless exports increase or
existing refineries are closed, this extra capacity is likely to put additional
pressure on prices and erode margins. Several competitors operate over various
market segments and may be suppliers to or customers of other competitors.
Historically, in the Company's trade area there has been an adequate supply of
soybeans, even in years when there has been a substantial amount of soybeans
exported. While the price of soybeans has fluctuated substantially, the prices
of meal and oil have followed, so that margins have been maintained. The amount
of carryover soybeans domestically at the end of the 1996 harvest season was at
the lowest level since the 1988/1989 crop year.
BUSINESS
At its integrated crushing and refining facility in Mankato, Minnesota, the
Processing and Refining Division processes soybeans into soybean meal, soyflour
and crude soybean oil. The crude soybean oil, with additional purchased crude
oil, is refined.
SELECTED FINANCIAL AND OPERATING DATA
The selected financial information presented below has been derived from the
Processing and Refining Division's financial statements. The financial
statements for the years ended May 31, 1994, 1995 and 1996, were audited by
Deloitte & Touche LLP. The financial statements for the six-month periods ended
November 30, 1995 and 1996 are unaudited. In management's opinion, the unaudited
financial statements for the six-month periods include all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the Division's financial condition and results of operations for such
periods. The results for the six-month period ended November 30, 1996, are not
necessarily indicative of the results expected for the full year. The selected
financial information should be read in conjunction with the Division's
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
---------------------------------------------- -----------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Processed Oilseed Sales $358,372,039 $398,095,108 $399,271,001 $197,863,256 $209,352,293
Other revenues 1,349,484 1,162,518 1,435,708 1,399,030 576,487
------------ ------------ ------------ ------------ ------------
359,721,523 399,257,626 400,706,709 199,262,286 209,928,780
Costs and expenses
Cost of goods sold 334,968,474 366,407,451 371,424,566 186,027,862 195,305,454
Marketing and administrative 4,722,900 5,137,663 4,544,763 2,445,721 2,441,463
Interest 164,300 0 151,500 -- 35,500
------------ ------------ ------------ ------------ ------------
339,855,674 371,545,114 376,120,829 188,473,583 197,782,417
------------ ------------ ------------ ------------ ------------
Earnings before income taxes 19,865,849 27,712,512 24,585,880 10,788,703 12,146,363
Income taxes 1,650,000 1,500,000 1,600,000 1,200,000 1,200,000
------------ ------------ ------------ ------------ ------------
Net earnings $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 9,588,703 $ 10,946,363
============ ============ ============ ============ ============
Operating Data:
Quantities processed
Soybeans (bu.) 24,136,364 30,807,933 30,446,475 15,042,678 15,983,653
Crude oil (lb.) 860,221,089 894,970,248 920,492,402 475,278,218 492,121,066
Production
Meal (tons) 588,873 741,190 728,435 386,765 368,245
Flour (tons) 31,614 40,614 39,914 21,979 16,322
Refined oil (lbs.) 799,908,000 835,396,000 858,240,000 460,708,555 484,111,157
Balance Sheet Data (at end of
period):
Working capital $ 33,813,064 $ 32,980,590 $ 28,619,585 $ 30,668,911 $ 22,263,134
Net property, plant and equipment 19,577,934 20,410,408 24,771,413 22,722,087 31,127,864
Total assets 74,191,110 63,672,994 74,112,937 70,027,078 96,994,316
Long-term debt, including current
maturities -- -- -- --
Total equity 53,390,998 53,390,998 53,390,998 53,390,998 53,390,998
Other Data(1):
Pretax earnings $ 19,865,849 $ 27,712,512 $ 24,585,880 $ 10,788,703 $ 12,146,363
Earnings from purchased oil (4,511,979) (4,680,813) (3,557,406) (2,315,669) (3,298,357)
Non-patronage joint venture income (1,300,427) (990,191) (1,353,708) (1,356,101) (571,744)
Book to tax differences 135,170 393,608 (71,485)
------------ ------------ ------------
Tax basis soybean earnings $ 14,188,613 $ 22,435,116 $ 19,603,281 $ 7,116,932 $ 8,276,262
============ ============ ============ ============ ============
Bushels processed 22,630,472 30,807,933 30,466,475 15,042,678 15,983,653
Earnings per bushel $ 0.63 $ 0.73 $ 0.64 $ 0.47 $ 0.52
</TABLE>
PRO FORMA INFORMATION(2)
YEAR ENDED SIX MONTHS ENDED
MAY 31, 1996 NOVEMBER 30, 1996
------------ -----------------
Equity Participation Units (bushels) 15,233,238 7,991,827
Patronage rate $ 0.64 $ 0.52
----------- ----------
Earnings to holders $ 9,801,641 $4,138,131
=========== ==========
- -----------------------------
(1) Because patronage dividends attributable to the Units will be allocated
based on the number of bushels of soybeans delivered, information on
earnings per bushel is believed by the Company to be the most relevant
indicator of performance of the Processing and Refining Division.
(2) Assuming that one-half of the bushels processed in each of the periods shown
above had been attributable to Equity Participation Units, the earnings of
the Processing and Refining Business Unit which would have been allocated to
the Equity Participation Units are shown above under the caption "Pro Forma
Information." The Equity Participation Units offered hereby represent 50% of
the estimated crushing capacity of the Processing and Refining Business
Unit. Accordingly, if the Company is able to sell all Units in the
Processing and Refining Business Unit offered hereby, it expects that
holders of Units would represent 50% of the soybeans crushed. The actual
percentage crushed will depend on production capacity, demand for meal and
oil and the amount of soybeans delivered by Defined Members, and there can
be no assurance that this assumption will be true.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Certain operating information pertaining to the Processing and Refining Division
is set forth below, as a percentage of sales, except processing margins.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
-------------------------- ---------------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross margin percentage 6.91% 8.25% 7.33% 6.69% 6.98%
Marketing and administrative 1.32% 1.29% 1.14% 1.24% 1.16%
Interest 0.05% -- 0.04% --
Processing margins
Crushing/bu $ .50 $ .59 $ .60 $ .46 $ .51
Refining/lb $.0132 $.0149 $.0154 $.0101 $.0121
</TABLE>
Because of the volatility of commodity prices, the Company believes that
processing margins are a better measure of the Division's performance than gross
margin percentages.
COMPARISON OF SIX MONTHS ENDED NOVEMBER 30, 1996 WITH 1995
The Processing and Refining Division's net earnings of $10,900,000 for the six
months ended November 30, 1996 represent a $1,300,000 increase compared to the
same period in 1995. This increase in net earnings is primarily attributable to
improved gross margins on processed soybean products, along with slightly
greater production quantities of both soymeal and refined oil, partially offset
by a decrease in earnings from an oilseed joint venture, compared to the same
period in 1995.
Net sales of $209,400,000 for the six-month period ended November 30, 1996
increased by $11,500,000 (6%) compared to the same period in 1995. Volume
increases of processed soybean products, primarily soymeal and soyflour,
contributed $3,300,000 to sales and increased volumes of refined oil contributed
$4,900,000. Increased sale prices for soymeal and soyflour contributed
$29,000,000 to sales, offset by a decline in the average sales price for refined
oils, which reduced sales by $25,700,000.
Other revenues of $600,000 decreased $800,000 (57%) from the 1995 period due
primarily to income from an oilseed joint venture in 1995.
Cost of goods sold for the 1996 period of $195,300,000 increased $9,300,000 (5%)
from 1995. Of this increase $5,700,000 is attributable to additional soybean
processing volume (16,000,000 bushels in 1996 compared with 15,000,000 bushels
in 1995) and $23,800,000 is the result of higher average cost per bushel. These
costs were partially offset by a decline in the volume of purchased crude oil
which reduced costs $2,300,000, as well as a decline in the average cost per
pound of purchased crude oil, which reduced costs by $17,600,000. Plant expenses
declined approximately $300,000.
Marketing and administrative expenses were unchanged for the 1996 period
compared to the 1995 period.
Interest expense was essentially unchanged for the six-month period ended
November 30, 1996 compared to the same period in 1995.
Income tax expense of $1,200,000 for the six-month period ended November 30,
1996 results in an effective tax rate of 9.9%. Income tax expense of $1,200,000
for the same period in 1995 resulted in an effective tax rate of 11.1%. The
decrease in the effective tax rate is the result of a slightly higher percentage
of patronage income in 1996 to total income, compared with the same situation in
1995.
COMPARISON OF YEAR ENDED MAY 31, 1996 WITH 1995
The Processing and Refining Division's net earnings of $23,000,000 for the year
ended May 31, 1996 is a $3,200,000 decrease in net earnings from the prior year.
This decrease in net earnings is attributable to an increase in cost of goods
sold which could not entirely be passed on to the customer due to competitive
industry conditions.
Net sales of $399,300,000 increased by $1,200,000 in 1996 compared to 1995.
Product volume increases, particularly refined oil, contributed $6,800,000 in
additional sales, offset by a decline in overall average sale prices which
decreased net sales by $5,600,000.
Other revenues of $1,400,000 increased $200,000 (17%) compared to 1995. This net
increase was primarily attributed to an increase in income from an oilseed joint
venture.
Cost of goods sold of $371,400,000 in 1996 increased $5,000,000 (1.4%) compared
to 1995. Of this increase, $2,700,000 is due to increased volume of production
and $2,500,000 is due to increased prices of soybeans and crude soybean oil.
Plant expenses decreased by $200,000.
While the cost of raw materials (soybeans and soybean crude oil) increased
during the year on a per unit basis, the average sales price for products
declined because of an overall increase in production in the industry. The
increase in raw material costs could not be passed on in the form of higher
sales prices because of this competitive environment and is the primary cause
for the decline in gross margins and net earnings in 1996 when compared to 1995.
Marketing and administrative expenses declined by $600,000 in 1996. This
decrease largely results from additional pension expense of $600,000 in 1995
related to a benefit plan settlement adjustment which was allocated to all
Harvest States divisions.
The Division incurred interest expense of $152,000 in 1996 while in 1995 it
incurred no such expense. This increase is attributable to increased working
capital requirements caused primarily by comparatively higher inventory values
caused by higher soybean and soybean oil prices and fixed asset additions of
$6,000,000 in 1996 which were partially financed by borrowings.
Income tax expense of $1,600,000 and $1,500,000 for 1996 and 1995, respectively,
results in effective tax rates of 6.5% and 5.4%. The increase in the effective
tax rate is the result of a higher percentage of divisional nonpatronage income
in 1996.
COMPARISON OF YEAR ENDED MAY 31, 1995 WITH 1994
The Processing and Refining Division's net earnings of $26,200,000 for 1995
improved $8,000,000 over 1994 due primarily to increased unit sales of soybean
meal and oil.
Net sales of $398,100,000 increased by $39,700,000 (11%) over 1994. This
increase was due primarily to expansion of the facility's soybean crushing
capacity and production time lost in the 1994 season due to an extended
construction project. Soybeans crushed totaled 30,808,000 bushels in 1995
compared to 24,136,000 bushels in 1994, an increase of 28%. This increase
contributed approximately $41,000,000 in additional sales. A slight decline in
the average sales price of products reduced sales by approximately $1,300,000.
Other revenues of $1,200,000 decreased $200,000 (14%) compared to 1994. This net
decrease was due primarily to a decrease in income from the supply contract
assigned to another processor of $300,000, offset by an increase in interest
income of $100,000.
Cost of goods sold of $366,400,000 increased $31,400,000 (9.4%) from 1994.
Increased volume, particularly soybeans purchased and crushed, produced
approximately $49,400,000 in additional costs. This volume increase was
partially offset by a decline in the per unit cost of soybeans and soybean oil,
which produced a favorable variance compared to the prior year of approximately
$18,700,000. Plant expense increased approximately $700,000 in 1995 due to the
additional operating time related to the volume increases.
Marketing and administrative expenses increased $400,000 (8.5%) over 1994
primarily attributed to an increase in pension costs arising from a benefit plan
settlement adjustment recognized in 1995 partially offset with a decrease of
$200,000 in other marketing and administrative expenses.
The Division incurred no interest expense in 1995 compared with interest expense
of $164,000 in 1994, primarily because of lower working capital requirements in
1995. Working capital requirements, primarily attributed to inventories,
declined $16,900,000 between May 31, 1994 and May 31, 1995.
Income tax expenses of $1,500,000 and $1,650,000 for 1995 and 1994,
respectively, result in effective tax rates of 5.4% and 8.3%. This decrease was
the result of a lower percentage of divisional nonpatronage income to total
divisional pretax income in 1995 versus 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Processing and Refining Division's cash requirements result from capital
improvements and from a need to finance additional inventories and receivables
based on increased raw material costs or levels. These cash needs are expected
to be fulfilled by the Company.
CASH FLOWS FROM OPERATIONS
Operating activities for the six months ended November 30, 1996 and 1995,
respectively, provided cash of $4,600,000 and $2,000,000 due to net earnings of
$10,900,000 and $9,600,000, partially offset by increases in working capital
requirements of $7,100,000 and $8,400,000.
For the years ended May 31, 1996, 1995 and 1994, the Processing and Refining
Division's operating activities generated net cash of $14,400,000,
$44,900,000 and $9,100,000, respectively. Net earnings of $23,000,000,
$26,200,000 and $18,200,000 in 1996, 1995 and 1994, respectively, were offset
by an increase in working capital requirements in 1996 of $10,200,000, in
1994 of $11,100,000, while a decrease in working capital requirements in 1995
added $16,900,000.
CASH FLOWS USED FOR INVESTING
The Division used $7,200,000 and $3,000,000 during the six months ended
November 30, 1996 and 1995, respectively, for the purchase of property, plant
and equipment.
Net cash flows used in the Division's investing activities for the years
ended 1996, 1995 and 1994 were $6,000,000, $2,600,000 and $6,300,000,
respectively. Essentially all of these cash usages were for the acquisition
of property, plant and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES
The Division's financing activities are coordinated through the Company's cash
management department. Cash from all of the Company's operations is deposited
with the Company's cash management department and disbursements are made
centrally. As a result, the Division has a zero cash position. Financing is
available from the Company to the extent of the Company's working capital
position and corporate loan agreements with various banks, and cash requirements
of all other Company operations.
Working capital requirements for each Division of the Company are reviewed on a
periodic basis, and could potentially be restricted based upon management's
evaluation of the prevailing business conditions and availability of funds.
The Division had debt of $23,000,000 on November 30, 1996, an increase of
$13,500,000 from May 31, 1996, which reflects working capital and fixed asset
financing requirements.
Debt outstanding and payable to the Company as of May 31, 1996 and 1994 was
$9,500,000 and $11,000,000, respectively, whereas the Division had a receivable
from the Company of $5,100,000 on May 31, 1995. These interest bearing balances
reflect working capital and fixed asset financing requirements of the respective
years.
To reduce the price change risks associated with holding fixed price commodity
positions, the Company generally takes opposite and offsetting positions by
entering into commodity futures contracts (either a straight futures contract or
an options futures contract) on regulated commodity futures exchanges. While
hedging activities reduce the risk of loss from changing market values of
oilseed, such activities also limit the gain potential which otherwise could
result from changes in market prices of oilseeds. The Company's policy is to
generally maintain hedged positions, but the Company can be long or short at any
time. The Division's profitability is primarily derived from margins on oilseeds
processed, not from hedging transactions. Management does not anticipate that
its hedging activity will have a significant impact on future operating results
or liquidity. Hedging arrangements do not protect against nonperformance of a
contract.
At any one time the Division's inventory and purchase contracts for delivery to
the Division may be substantial. The Division has a risk management policy and
procedures that includes net position limits. It is defined by commodity and
includes both trader and management limits. This policy and computerized
procedure triggers a review by management of the Division when any trader is
outside of position limits and also triggers review by management of the Company
if the Division is outside of its position limits. The position limits are
reviewed at least annually with management of the Company. The Division monitors
current market conditions and may expand or reduce the purchasing program in
response to changes in those conditions. In addition, certain purchase and sale
contracts are subject to credit approvals and appropriate terms and conditions.
SUPPLY
The Processing and Refining Division purchases virtually all of the soybeans
processed by it from Members. The balance is purchased in the commercial
marketplace. Because the Processing and Refining Division has not had long-term
contracts with customers, it does not obligate itself to purchase soybeans based
on orders received from customers but instead on its contemplation of future
production. The Processing and Refining Division does not hold significant
inventories of raw beans; capacity for raw bean storage is approximately three
to four weeks of production. At any one time, inventories of beans and contracts
for future delivery represent two to ten weeks of requirements. Inventories of
raw beans and contracted purchases for future delivery are substantially hedged.
The Processing and Refining Division also purchases crude soybean oil for
processing at its refinery. Approximately 40% of the crude oil refined is
produced by the Processing and Refining Division, and the balance is purchased.
Major suppliers have been AGP and ADM. Because ADM is opening a refinery early
in 1997 in Minnesota, it will no longer be a major supplier of crude oil.
However, there are several producers of crude oil, and the Company believes it
will be able to replace this supply source. The refining facility has storage
capacity for approximately 10 days' supply of crude oil, so it depends on a
steady supply of crude oil to supplement its own output of crude oil to maintain
constant production. It typically commits for several months' supply, to be
priced prior to delivery.
As with other agricultural commodities, the availability and price of soybeans
fluctuate with forces of supply and demand. The Processing and Refining Division
has never experienced a supply shortage of soybeans.
CUSTOMERS
REFINED OILS. The Processing and Refining Division sells refined oil throughout
most of the United States although it concentrates on customers located in
Minnesota, Wisconsin, North Dakota, South Dakota, northern Iowa and northern
Illinois, which can be reached by truck rather than rail and are therefore
slightly more profitable. Customers in these states accounted for more than 50%
of refined oil sales in the year ended May 31, 1996. The Company estimates that
of oil sold, 25% is used for margarine, 15 to 20% for salad dressing and smaller
percentages for snack foods, bakeries, imitation cheese manufacturers, processed
potato manufacturers and others. Approximately 5% of oil sales are for
industrial use. During the year ended May 31, 1996, the Processing and Refining
Division had over 100 customers, the largest of which was Ventura Foods and its
predecessor operations described in the next paragraph. One other customer was
responsible for over 10% of refined oil sales by the Division. Sales of refined
oil are made by Division employees and to a lesser extent by brokers.
The Company has a long-term supply agreement with Ventura Foods, LLC. (see " --
VENTURA FOODS") which commences January 1, 1997 and continues for 15 years or
longer if the Company continues to hold at least a 25.5% interest in Ventura
Foods. The Company has agreed to supply and Ventura has agreed to purchase a
minimum quantity of soybean salad oil, hydrogenated soybean oil and other edible
oils which the Company may refine during the term of the agreement. The Company
has agreed to sell to Ventura Foods, and Ventura Foods has agreed to purchase
from the Company, during each calendar year at least 430,000,000 pounds of
products or 50% of its requirements if greater, but not more than 100% of its
requirements. The price for the products sold to Ventura Foods is a formula
adjusted annually to be competitive with alternative sources.
SOYBEAN MEAL. Soybean meal sold by the Processing and Refining Division is used
for feeding animals. During the year ended May 31, 1996, the Division sold meal
to over 500 customers, primarily feed lots and feed mills. During the year ended
May 31, 1996, ten customers accounted for approximately 55% of meal sold, and
two customers, which would be difficult to replace, accounted for approximately
34% of meal sold. For the year ended May 31, 1996, 55% of meal was sold in
Minnesota, 25% in Wisconsin, 13% in Canada and the balance in Iowa, North
Dakota, South Dakota and Montana. These sales could be adversely affected by a
decline in the livestock or turkey industries in these areas. Substantially all
meal sales are made directly by employees of the Division.
SOYFLOUR. Soyflour is used in the baking industry, as milk replacers in animal
feed and in industrial applications. Sales of soyflour have not been significant
relative to sales of meal.
DEPENDENCE ON CUSTOMERS. Other than Ventura Foods (see "-- VENTURA FOODS"), no
customer accounted for more than 10% of the Processing and Refining Division's
sales in the year ended May 31, 1996.
COMPETITION
The Company believes that the Processing and Refining Division has 6 to 8% of
the refined soybean oil market and less than 3% of the soybean crushing
capacity. See "Industry Overview."
PROCESSING
Soybeans arriving by truck or rail are sampled, weighed, dumped and unloaded
into bean storage. When brought out of storage, beans are cleaned, dehulled,
cracked and conditioned and are compressed into flakes. Oil is removed from the
flakes through a solvent process. Flakes are then further processed into
soyflour or soymeal. Soymeal can be made into animal feed at various protein
levels.
Crude oil is filtered to remove remaining meal particles and centrifuged to
separate out trace constituents. The oil can be sold as an industrial product
used in plastics, inks and paints. Further processing prepares the oil for food
use, by bleaching with a special clay to remove trace metals, chlorophyll and
other impurities to make salad oil. By adding hydrogen under pressure to
bleached oil, the Company makes partially hydrogenated soybean oil which may be
used in products such as shortenings or margarines. To remove unwanted odors,
flavors and mild color constituents, bleached or hydrogenated oil is heated
under vacuum. The result is a product that is flavorless, odorless, tasteless
and virtually clear.
While the Processing and Refining Division runs at between 80 to 100% of
capacity throughout the year, volume is typically higher at harvest time since
soybean supplies are more abundant in the fall. Producer and cooperative
elevator storage capabilities allow suppliers to sell for delivery throughout
the year.
FACILITIES
The Processing and Refining Division has one facility located in Mankato,
Minnesota, comprised of a crushing plant, a refinery, a soyflour plant and self
contained utilities. A quality control lab with technically sophisticated
equipment assures high quality standards.
The Division expects to expend approximately $26 to $36 million over the three
years ending May 31, 1999, to expand the capacity of its crushing plant, to
increase processing efficiency and to meet environmental requirements. The
Company expects that such construction will be financed from long-term
borrowings.
EMPLOYEES
The Processing and Refining Division currently employs 202 employees, 34 in the
office in administration, sales and support service and 168 in the plant.
Certain production workers are subject to collective bargaining agreements with
the American Federation of Grain Millers (131) expiring in 1998 and the
Pipefitters' Union (2) expiring in 1997.
VENTURA FOODS
On August 30, 1996, the Company and Wilsey Foods, Inc. combined the assets and
certain liabilities of the Company's Holsum Foods consumer products packaging
division with the assets and liabilities of Wilsey Foods, Inc. as Ventura Foods,
LLC ("Ventura Foods"). A joint venture owned by Wilsey Foods, Inc. and the
Company which operated a manufacturing facility in Chambersburg, Pennsylvania,
was merged into Ventura Foods. The Company owns 40% and Wilsey Foods owns 60% of
the equity and rights to distribution of profits of Ventura Foods. The Company's
total net investment in Ventura Foods was $27,000,000 as of August 30, 1996.
Sales by the Processing and Refining Division to Ventura Foods and its
predecessors in interest are shown below:
<TABLE>
<CAPTION>
HONEYMEAD'S SALES TO HOLSUM, WILSEY & VENTURA
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
-------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales ($) $80,425,000 $99,150,000 $111,650,000 $58,897,400 $60,341,000
Percentage of total refinery sales 31% 35% 40% 42% 51%
</TABLE>
Ventura Foods is in the business of manufacturing and/or packaging and selling
food products, including salad dressings, mayonnaise, margarine, salad oils,
jams, jellies, olives, syrups, soup bases and sauces. Its customers are
national. Ventura Foods is governed by a committee, and each of the Company and
Wilsey Foods appoints half the committee members. Neither the Company nor Wilsey
Foods may transfer any part of its interest in Ventura Foods until September 1,
1999. Thereafter a transferring party must retain at least a 25.5% interest in
Ventura Foods. Ventura Foods will be dissolved if it has cumulative losses in
excess of $25 million or is unable to discharge its liabilities as they become
due.
MILLING DIVISION
INDUSTRY OVERVIEW
The Company's Milling Division mills durum wheat into flour and semolina and, to
a lesser extent, mills spring and winter (hard) wheats into bread flour. The
Milling Division is the largest miller of durum wheat in the United States. The
Milling Division had historically concentrated on durum wheat milling at its
Rush City and Huron facilities. With the opening of its Kenosha mill in late
1995, which can produce durum and bakery flours, and its Houston facility,
scheduled to open in March 1997, which will produce primarily bakery flour, the
Division has broadened its markets and significantly increased its capacity.
SEMOLINA AND DURUM FLOUR. Durum wheat millers process durum wheat into semolina
and durum flours. Semolina and high grade durum flours are the chief ingredient
in pasta; low grade durum flour is used for pet food. Durum is grown in arid
regions of the United States, such as North Dakota and certain areas of the
Southwest, as well as in other countries. Most of the quality durum is grown in
the Midwest, particularly North Dakota. Durum milling plants are generally
located in proximity to customers; wheat is shipped to the mill for milling.
Sale of semolina and durum flour is entirely dependent on pasta production. Per
capita consumption of pasta has continued to increase in recent years, and the
number of consumers continues to grow with population growth. Pasta in its many
forms is sold at retail, for restaurants and institutional use and for use in
other processed food products.
Imported pasta accounted for approximately 11% of the domestic market in the
year ended May 31, 1996. The International Trade Commission in July 1996
determined that certain Italian and Turkish companies benefitted unfairly from
subsidies and had sold product in the United States at less than fair value and
imposed countervailing and anti-dumping duties. However, the Company does not
believe the amount of imports has decreased significantly.
Major competitors in the industry (and estimates by the Company of their
respective market shares) include the Company (30%), Italgrani (20%) and Miller
Milling (10%). Competition is driven by price, service and product quality. Some
competitors have developed long-term relationships with customers by locating
plants adjacent to pasta manufacturing plants.
BAKERY FLOUR. Bakery flour milled from spring and hard winter wheat is used in
breads, cookies, pizza crusts, tortillas and other products. The baking industry
is highly fragmented, with the largest participant being no more than four
percent of the market.
Demand for bakery flour has been stable, although per capita consumption fell
slightly in the year ended May 31, 1996. New dietary guidelines established by
the United States Department of Agriculture emphasize cereal grains in the food
pyramid. The Company believes that demand for bakery flour will increase based
on population growth. Imports and exports of bakery flour do not significantly
affect the domestic business.
SELECTED FINANCIAL AND OPERATING DATA
The selected financial information presented below has been derived from the
Milling Division's financial statements. The financial statements for the years
ended May 31, 1994, 1995 and 1996, were audited by Deloitte & Touche LLP. The
financial statements for the six-month periods ended November 30, 1995 and 1996,
are unaudited. In management's opinion, the unaudited financial statements for
the six-month periods include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the Division's
financial condition and results of operations for such periods. The results for
the six-month period ended November 30, 1996, are not necessarily indicative of
the results expected for the full year. The selected financial information
should be read in conjunction with the Division's financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31, SIX MONTHS ENDED NOVEMBER 30,
---------------------------------------------- -----------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales $103,716,012 $119,725,183 $173,315,613 $ 71,811,039 $111,426,460
Costs and expenses
Cost of goods sold 97,206,374 112,690,679 161,293,430 66,979,513 102,375,248
Marketing and administrative 2,415,155 3,834,289 4,471,563 1,655,748 2,503,655
Interest 1,832,037 2,278,544 4,457,797 1,845,608 2,825,979
------------ ------------ ------------ ------------ ------------
101,453,566 118,803,512 170,222,790 70,480,869 107,704,882
------------ ------------ ------------ ------------ ------------
Earnings before income:
Taxes 2,262,446 921,671 3,092,823 1,330,170 3,721,578
Income taxes 150,000 125,000 200,000 125,000 250,000
------------ ------------ ------------ ------------ ------------
Net earnings $ 2,112,446 $ 796,671 $ 2,892,823 $ 1,205,170 $ 3,471,578
============ ============ ============ ============ ============
Operating Data:
Wheat used (bu.)
Durum 15,763,000 16,058,000 19,376,000 8,723,941 11,393,680
Spring 1,167,000 1,638,000 3,013,000 704,546 3,310,715
Shipments (cwt)
Semolina/flour 8,088,000 8,718,000 10,085,000 4,679,000 5,909,502
Baking flour -- -- 634,000 -- 1,254,917
Balance Sheet Data
(at end of period):
Working capital $ (4,703,152) $ 1,604,146 $ 3,338,206 $ 4,552,291 $ (14,671)
Net property and equipment 19,739,029 43,395,670 59,233,046 55,042,615 66,861,556
Total assets 55,031,562 82,606,055 125,321,564 108,158,367 128,654,161
Long-term debt, including
current
maturities 19,000,000 33,750,000 54,000,000 49,200,000 60,727,708
Total equity 27,797,072 27,797,072 27,797,072 27,797,072 27,797,072
Other Data(1):
Pretax earnings $ 2,262,446 $ 921,671 $ 3,092,823 $ 1,330,170 $ 3,721,578
Book to tax differences (135,715) 123,844 (84,481)
------------ ------------ ------------
Tax basis earnings $ 2,126,731 $ 1,045,515 $ 3,008,342 $ 1,330,170 $ 3,721,578
============ ============ ============ ============ ============
Bushels milled 16,930,702 17,696,689 22,390,011 9,428,487 14,704,395
Earnings per bushel $ 0.13 $ 0.06 $ 0.13 $ 0.14 $ 0.25
</TABLE>
PRO FORMA INFORMATION(2)
SIX MONTHS
YEAR ENDED ENDED
MAY 31, NOVEMBER 30,
1996 1996
----------- ----------
Equity Participation Units (bushels) 11,195,006 7,352,198
Patronage rate $ 0.13 $ 0.25
----------- ----------
Earnings to holders $ 1,504,171 $1,860,789
=========== ==========
- ----------------------------
(1) Because patronage dividends attributable to the Units will be allocated
based on the number of bushels of wheat delivered, information on
earnings per bushel is believed by the Company to be the most relevant
indicator of performance of the Milling Division.
(2) Assuming that one-half of the bushels milled in each of the periods shown
above had been attributable to Equity Participation Units, the earnings
of the Milling Business Unit which would have been allocated to the
Equity Participation Units are shown above under the caption "Pro Forma
Information". The Equity Participation Units offered hereby represent 50%
of the estimated processing capacity of the Milling Business Unit giving
effect to the construction of additional capacity now in process and
anticipated. Accordingly, if the Company is able to sell all Units in the
Milling Business Unit offered hereby, it expects that holders of Units
would represent 50% of the wheat milled. The actual percentage milled
will depend on production capacity, demand for flour and the amount of
wheat delivered by Defined Members, and there can be no assurance that
this assumption will be true.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Certain operating information pertaining to the Division is set forth below, as
a percentage of sales, except for margins/cwt.
SIX MONTHS ENDED
YEARS ENDED MAY 31, NOVEMBER 30,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
Gross margin percentage 6.28% 5.88% 6.94% 6.73% 8.12%
Marketing and administrative 2.33% 3.20% 2.58% 2.31% 2.25%
Interest 1.80% 1.90% 2.57% 2.57% 2.53%
Margins/cwt $ .80 $ .81 $1.12 $ .94 $1.28
Because of the volatility of commodity prices, the Company believes that margins
per hundred weight (manufacturing margins) are a better measure of the
Division's performance than gross margin percentages.
COMPARISON OF SIX MONTHS ENDED NOVEMBER 30, 1996 AND 1995
The Division's net earnings of $3,500,00 for the six months ended November 30,
1996 represents a $2,300,000 increase from the same period in 1995 due to an
increase in gross margins per hundred weight milled and an increase in volume of
production.
Net sales of $111,400,000 for the six months ended November 30, 1996 increased
by $39,600,000 (55%) from the same period in 1995 due to an increase in
shipments from 4,679,000 cwts to 7,165,000 cwts as the division's Kenosha mill
came on line in late 1995, offset slightly by a decrease in average price per
cwt from $14.51 to $14.11.
Cost of goods sold of $102,400,000 for the six months ended November 30, 1996
increased by $35,400,000 (53%) from the same period in 1995. Raw material costs
increased by $32,900,000 due to an increase in bushels milled (9,500,000 bushels
in the 1995 period and 14,700,000 bushels in the 1996 period). The impact of
this volume increase was offset partially by a decline in the average cost per
bushel, from $6.55 in the 1995 period to $6.44 in the 1996 period. Plant
expenses increased $2,500,000 in the 1996 period, all of which is attributable
to the Kenosha mill, which commenced operations in November 1995.
Marketing and administrative expenses were $2,500,000 for the six-month period
ended November 30, 1996, compared to $1,700,000 for the same period in 1995.
This increase is attributable to an increase in staff and system expansion to
handle the additional volumes generated by the Kenosha mill.
Interest expense of $2,800,000 for the 1996 period increased by $1,000,000
compared to the same period in 1995. This increase is attributable to additional
short-term borrowings necessary to carry increased inventories and receivables,
resulting primarily from the production at the Kenosha mill, and additional
interest expense on the debt used to finance the construction of the Kenosha
mill.
COMPARISON OF YEAR ENDED MAY 31, 1996 WITH 1995
The Division's net earnings of $2,900,000 for the year ended May 31, 1996
increased $2,100,000 over 1995. This increase in net earnings is attributable to
higher volumes, largely the result of increased processing capacity generated by
the opening of the Kenosha milling facility during the fiscal year 1996, and
higher sales prices.
Net sales of the Division of $173,300,000 increased by $53,600,000 (45%) from
1995, due to an increase in shipments of semolina and flour from 8,720,000 cwt
to 10,720,000 cwt and an increase in the average price per cwt from $11.03 in
1995 to $12.64 in 1996.
Cost of goods sold of $161,300,000 increased $48,600,000 (43%) from 1995. Raw
material costs increased $46,000,000 due to an average increase of 83 cents per
bushel for durum and wheat and a 38% increase in bushels sold of 6.7 million
bushels, from 17.7 million bushels in 1995 to 24.4 million bushels in 1996.
Plant expenses increased $2,600,000 in 1996, essentially all due to operations
of the Kenosha mill, which did not begin milling until late 1995.
Marketing and administrative expenses were $4,500,000 in 1996, an increase of
$700,000 from 1995. This increase is attributable primarily to an increase of
$900,000 due to staffing and system expansion to handle the additional volumes
generated by the Kenosha mill, offset by a decrease of approximately $200,000 in
pension expense related to a benefit plan settlement adjustment in 1995.
The Division incurred interest expense of $4,500,000 in 1996 compared with
$2,300,000 in 1995. This increase was attributable to increased short-term
borrowings used to finance higher inventories and receivables primarily the
result of production from the Kenosha mill and increased long-term debt used to
finance construction of the Kenosha mill.
COMPARISON OF YEAR ENDED MAY 31, 1995 WITH 1994
The Division's net earnings of $800,000 for the year ended May 31, 1995
decreased $1,300,000 from 1994. The decrease is attributable to increases in
marketing and administrative expenses and interest expense which were only
partially offset by a small increase in gross margins.
Net sales of $119,700,000 increased $16,000,000 (15%) from 1994 despite a 6.4%
increase in shipments, due primarily to an increase in average sales price from
$10.18 per cwt in 1994 to $11.03 per cwt in 1995.
Cost of goods sold of $112,700,000 in 1995 increased $15,500,000 (16%) from
1994. The primary cause for this increase was a 750,000 bushel increase in raw
material input, from 16,950,000 bushels in 1994 to 17,700,000 bushels in 1995.
Cost per bushel and plant expenses remained relatively unchanged between 1994
and 1995.
Marketing and administrative expenses of $3,800,000 increased $1,400,000 (58%)
from 1994. This increase was due partially to an increase in pension cost
relative to a benefit plan settlement adjustment reflected in 1995 and an
increase of $1,200,000 for all other marketing and administrative expenses,
primarily for staffing and system expansion relative to the Kenosha mill which
was under construction in 1995.
The Division incurred interest expense of $2,300,000 in 1995 increased from
$1,800,000 in 1994. Increased short-term borrowings to support higher inventory
and receivable balances caused additional interest expense of $300,000 in 1995.
Borrowings for additions to property, plant and equipment in 1995 contributed an
increase in interest expense of $200,000 over 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Division's cash needs are primarily the result of continued capital
additions. The Division's Kenosha plant, which began operations in late 1995,
represented an investment of $39,000,000. The Division's Houston plant, which is
expected to begin operations in March 1997, is expected to represent an
investment of $15,400,000. In addition, if the Pocono facility is constructed
(see " -- Facilities"), the Division expects capital additions of $38,800,000.
The Division expects capital additions to all its facilities.
Commencement of operations at a particular facility involves increased working
capital to fund required inventories and receivables related to increased sales.
In addition, increased carrying value of inventories and receivables because of
higher prices, increased receivables because of slow collections or increased
inventories above historical levels requires additional financing.
All of the Division's financing needs are expected to be met by the Company.
CASH FLOWS FROM OPERATIONS
Operating activities for the six months ended November 30, 1996 provided net
cash of $10,800,000 due to net earnings of $3,500,000, a decrease in working
capital requirements of $5,300,000 and non-cash expenses such as depreciation
and amortization of $2,000,000. For the same period in 1995, operating
activities used net cash of $7,800,000 due to increased working capital
requirements of $10,400,000, offset by net earnings of $1,200,000 and non-cash
expenses of $1,400,000.
Operating activities used net cash of $16,200,000 in the year ended May 31,
1996, provided $7,800,000 in 1995, and used $8,500,000 in 1994, generally
attributable to working capital needs, namely an increase in working capital
requirements in 1996 of $22,400,000, a decrease in working capital requirements
of $4,500,000 in 1995, and an increase in working capital requirements in 1994
of $12,800,000. Cash requirements were offset by net earnings of $2,900,000,
$800,000 and $2,100,000 in 1996, 1995 and 1994, respectively, and depreciation
and amortization of $3,300,000, $2,500,000 and $2,200,000 in 1996, 1995 and
1994, respectively.
CASH FLOWS USED FROM INVESTING
Cash expended for the acquisition of property, plant and equipment during the
six months ended November 30, 1996 and 1995 totaled $9,100,000 and $12,600,000
respectively.
Net cash flows used in the Company's investing activities for the years ended
1996, 1995 and 1994 were $18,100,000, $25,100,000 and $800,000, respectively.
All of these cash usages were for the acquisition of property, plant and
equipment. The Division also acquired intangibles of $476,000 and $5,600,000 in
1996 and 1995, respectively, related to the elimination of a minority interest
effective June 1, 1994.
CASH FLOWS FROM FINANCING ACTIVITIES
The Division's financing activities are coordinated through the Company's cash
management department. Cash from all of the Company's operations is deposited
with the Company's cash management department and disbursements are made
centrally. As a result, the Division has a zero cash position. Financing is
available from the Company to the extent of the Company's working capital
position and corporate loan agreements with various banks and cash requirements
of all other Company operations.
Working capital requirements for each division of the Company are reviewed on a
periodic basis, and could potentially be restricted based upon management's
evaluation of the prevailing business conditions and availability of funds.
The Division had short-term debt of $26,100,000 on November 30, 1996, a decrease
of $4,900,000 from May 31, 1996, primarily resulting from the decline in working
capital requirements of $5,300,000.
The Division incurred additional long-term debt during the six-month period
ended November 30, 1996 in the amount of $10,000,000 to finance the construction
of the Houston mill through that point in time.
Short-term debt outstanding and payable to the Company as of May 31, 1996 and
1995 was $31,000,000 and $13,600,000, respectively. These interest bearing
balances reflect working capital and fixed asset financing requirements of the
respective years.
On May 31, 1996 and 1995 the Division's long-term debt was $54,000,000 and
$33,750,000, respectively. This debt was incurred by the Division to retire debt
assumed with the acquisition of the Huron facility in 1990, to expand the Huron
facility in 1990 and 1991, and to construct Kenosha in the 1995 and 1996 fiscal
years.
PRICE RISK AND HEDGING
To reduce the price change risks associated with holding fixed price commodity
positions, the Company generally takes opposite and offsetting positions by
entering into commodity futures contracts (either a straight futures contract or
an options futures contract) on regulated commodity futures exchanges. Most of
the grain volume handled by the Company can be hedged. Some grains, such as
durum, cannot be hedged because there are no futures for certain commodities.
For those commodities, risk is managed through the use of forward sales and
different pricing arrangements and to some extent cross-commodity futures
hedging. While hedging activities reduce the risk of loss from changing market
values of grain, such activities also limit the gain potential which otherwise
could result from changes in market prices of grain. The Division's policy is to
generally maintain hedged positions in grain which is hedgeable, but the Company
can be long or short at any time. The Division's profitability is primarily
derived from margins on grain processed, not from hedging transactions.
Management does not anticipate that its hedging activity will have a significant
impact on future operating results or liquidity. Hedging arrangements do not
protect against nonperformance of a contract.
At any one time the Division's inventory and purchase contracts for delivery to
the Division may be substantial. The Division has a risk management policy and
procedures that include net position limits. It is defined by commodity and
includes both trader and management limits. This policy and computerized
procedure triggers a review by management of the Division when any trader is
outside of position limits and also triggers review by management of the Company
if the Division is outside of its position limits. The position limits are
reviewed at least annually with management of the Company. The Division monitors
current market conditions and may expand or reduce the purchasing program in
response to changes in those conditions. In addition, certain purchase and sale
contracts are subject to credit approvals and appropriate terms and conditions.
SUPPLY
Most of the durum, spring and winter wheats processed by the Milling Division is
purchased from Members. Some grain is purchased from Canada and a small
percentage is purchased from the Southwest.
Semolina and durum flour sales are hedged to a significant extent by buying
durum at the time of pricing the semolina or flour. To minimize the price
volatility for winter and spring wheats, the Milling Division usually hedges by
purchasing wheat futures at the time of pricing the flour. There is no futures
market for durum, and except for limited cross hedging using other commodities
the Milling Division does not hedge durum.
The availability, price and quality of durum and spring and winter wheat affect
the operations and profitability of the Milling Division. The Milling Division
has never experienced a supply shortage of durum, but shortages have affected
prices.
CUSTOMERS
SEMOLINA & DURUM FLOUR. The Milling Division sells semolina and durum flour to
eight major customers and approximately 50 smaller customers, which are large
and mid-size pasta manufacturers in the United States. In the year ended May 31,
1996, over 38% of the Milling Division's total production was sold to its two
largest customers, Borden (represents 23.8% of sales) and Hershey (represents
15.0% of sales), which are estimated by the Company to represent approximately
60% of the country's pasta production. The Milling Division would be adversely
affected by the loss of either of these customers or a decline in the market
share of either customer.
The Milling Division would be adversely affected by a decline in pasta
production in the United States.
Most of the Milling Division's products are marketed by employees of the Milling
Division. The Milling Division uses outside agents and distributors for the
balance of its production.
BREAD FLOUR. The baking industry is composed of many companies. No one customer
buys more than 10% of the Milling Division's bread flour production. The Company
believes because of the large number of potential customers and the fact that
the Milling Division is not dependent on any customer, it would not have
substantial difficulty in replacing an existing customer.
The Milling Division's first hard wheat milling unit (Kenosha) began production
in late 1995. In October 1996, the Milling Division expanded hard wheat capacity
with the addition of a swing mill at Kenosha capable of milling either durum or
hard wheat flour. A plant in Houston, expected to open in March 1997, will add
additional hard wheat capacity. The Company believes that there is a substantial
customer base available in the Houston area. The area serves a sizeable
population base and there are no other milling facilities within the area.
COMPETITION
DURUM MILLING. The Milling Division's largest competitors in durum milling are
Italgrani and Miller Milling Company.
Dakota Growers has expanded its Carrington, North Dakota, milling facility and
has begun expansion of its pasta production capacity. Philadelphia Macaroni has
announced plans to build a semolina mill in Minot, North Dakota. General Mills
has announced a plant expansion in Great Falls, Montana.
BREAD FLOUR. Competitors include ConAgra, ADM, Cargill, Bay State Milling,
Cereal Foods and General Mills. All of these competitors have multiple milling
facilities with larger bakery flour production capacity than the Milling
Division. Capacity for hard wheat milling has been expanding faster than
consumption. This additional capacity may put pressure on margins.
PROCESSING
The Division mills wheat into flour using standard industry processes. More
recently manufactured equipment has reduced the labor component of wheat
milling. The Company believes that its facilities are, on average, newer than
its competitors. Operations are somewhat seasonal in anticipation of reduced
demand for pasta in summer months.
FACILITIES
The Milling Division has four milling facilities in operation; production in
Houston is scheduled to begin in March 1997. Each facility includes a milling
plant as well as an elevator to store grain. Information on the four mills plus
the planned Pocono mill described below is set forth below:
LOCATION GRAIN MILLED CAPACITY
- -------- ------------ --------
Rush City, MN Primarily durum 10,000 cwts/day
Huron, OH Primarily durum 14,500 cwts/day
Kenosha, WI Durum 11,000 cwts/day
Spring and winter wheat 10,000 cwts/day
Houston, TX Spring and winter wheat 13,000 cwts/day
Pocono, PA Durum 4,000 cwts/day
Spring and winter wheat 14,000 cwts/day
Total 76,500 cwts/day
The Rush City and Kenosha facilities are owned entirely by the Company.
At Houston, the milling plant is constructed on property leased from the Port of
Houston on a long-term basis and the elevator is owned by the Port of Houston,
but is subject to a put through agreement with the Company. The Huron facility
is leased on a long-term basis, but the equipment is owned.
Because transportation costs for durum, spring and winter wheats are cheaper
than for the milled products, it is a strategic advantage for a mill to be
located close to a large customer base rather than close to the producer. Each
of the Huron, Kenosha and Houston mills are in proximity to a large customer
base. The Company's Rush City mill is in an area close to one customer that
currently takes, under contract, most or all of the production. However, there
is no large customer base in proximity to the Rush City Plant.
Approximately 85% of the Milling Division's current milling capacity uses
equipment that is less than 10 years old. This newer equipment generates cost
advantages in labor, energy, improved yields and better and more consistent
products. In the last few years, some competitors have closed less efficient
mills in less strategic locations.
The Milling Division plans to construct semolina and flour and bread flour mills
in Pocono, Pennsylvania, but has not received final approval of the plans by the
local and state authorities. If it is unable to secure necessary approvals, it
intends to seek an alternative location. Construction of the Pocono mill is
expected to be financed from the proceeds of this offering. If such proceeds are
insufficient, the Company expects to finance any deficiency through long-term
borrowings.
For the year ended May 31, 1996 the Milling Division facilities ran at 97% of
capacity based upon a year of 307 operating days being 100%.
EMPLOYEES
As of November 30, 1996 the Milling Division employed the following full time
equivalents: production (97), plant management (15) and headquarters (20). Of
these, 40 production workers at the Rush City Mill are subject to a collective
bargaining agreement with the American Federation of Grain Millers expiring in
1998.
FARM MARKETING AND SUPPLY
The Farm Marketing and Supply Division owns and operates Agri-Service Centers at
144 locations in Minnesota, North Dakota, South Dakota, Montana, Idaho and
Washington. Agri-Service Centers sell farm supplies, including fertilizer, feed,
seed and crop protection products, and other related services and have grain
elevator operations that buy grain. Some Centers have only grain operations or
grain and feed operations, while some have only supply operations. Locations are
grouped together into 47 units for operational purposes. A small number of
Centers are grouped into seven regionalizations, which have their own producer
board and participate in separate patronage pools.
Agri-Service Centers purchase grain from member and nonmember producers and
others, such as other elevators and grain dealers. Of these facilities, 55 have
the capability of loading unit trains, while other facilities can load only
single cars or are truck stations. Most of the grain purchased is sold through
the Company's Grain Marketing division, with the balance going to local feed and
grain processors.
The supplies and services offered vary from location to location. Agronomy
supplies and services are sold at approximately 70 locations to member and
non-member producers. Feed is sold at approximately 75 locations. Agronomy and
feed sales are considered district operations involving different expertise and
sales forces.
Most feed sold is purchased from the Feed Division. Fertilizer is obtained from
co-op sources and other suppliers. Crop protection products are bought through
co-op programs and directly from industry sources. Other goods are obtained
through commercial channels.
The Company has increased the number of Agri-Service Centers in recent years.
The number, the number of bushels of grain purchased and sales of Centers for
the years ended May 31 are shown below:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
No. of centers 107 105 115 121 144
No. of op. units 42 42 43 43 47
Grain purchased (bu) 175,773,000 175,492,000 141,238,000 159,891,000 214,085,000
Sales $636,266,516 $651,697,000 $613,151,000 $679,200,000 $1,126,600,000
</TABLE>
Competitors for the purchase of grain include other elevators and large grain
marketing companies. Competitors for the sale of agronomy supplies and feed
include a variety of cooperative and privately owned facilities. The Company
competes on the basis of service and patronage.
On November 30, 1996, the Division had over 1,000 full time employees and over
300 temporary employees.
FIN-AG, INC.
Fin-Ag, Inc. is a wholly owned subsidiary of the Company located in Sioux Falls,
South Dakota. It provides seasonal cattle feeding and swine financing loans,
facility financing loans and crop production loans for producers. It also
provides consulting services to member cooperatives. Its competitors are other
financial institutions. Most whole loans are sold to the St. Paul Bank for
Cooperatives, on which the Company bears a 15% residual exposure. The Company's
exposure at November 30, 1996, was approximately $7,500,000. Under the Company's
borrowing arrangements (see "CAPITALIZATION") the maximum amount of the loans
outstanding at any one time may not exceed $35,000,000.
FEED
The Company manufactures and sells feed products and sells feed ingredients,
supplements and animal health products under several brand names, including GTA
Feeds(R), Norco Feeds, CC Bar Feeds, Let'er Buck Feeds(R) and Pantec(tm). In
addition, it provides livestock production services, including customized ration
planning, feedstuffs analysis, profit projections, livestock nutritional
management, recordkeeping, animal health and environmental engineering and
facility management. Sales are made at retail through five retail stores and
through Agri-Service Centers and at wholesale to cooperatives (both Affiliated
Associations and otherwise) and to other retail farm supply businesses located
in Minnesota, North Dakota, South Dakota, Nebraska, Montana, Wyoming, Idaho,
Washington and Oregon.
Sales of feed for the years ended May 31 is set forth below:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Manufactured feed (tons) 262,000 301,000 306,000 333,000 351,000
</TABLE>
The Company has been able to increase sales and production capacity through
several joint venture arrangements entered into in recent years.
The Company owns nine manufacturing facilities located in Sioux Falls, South
Dakota; Great Falls, Montana; Hardin, Montana; Dickinson, North Dakota; Minot,
North Dakota; Edgeley, North Dakota; Willmar, Minnesota; Gettysburg, South
Dakota; and Norfolk, Nebraska. The Company also has an interest in three joint
ventures with facilities in Hermiston, Oregon; Tillamook, Oregon; and Owatonna,
Minnesota. The administrative office for the feed business is located in Sioux
Falls, South Dakota.
The Feed Division's operations reflect the condition of the livestock business.
Recent increases in poultry and swine production have been driven by increased
exports. The transition from individual producers to more integrated producers
has affected the demand for and composition of the Division's products.
At November 30, 1996, the Division had 265 full time and 9 part time employees.
Competitors in the feed business are other cooperatives and private companies.
The Company is a part of the Cooperative Research Farms, a research partnership
of 12 regional cooperatives in the United States, Canada and France. This
partnership provides the Company with production research.
SERVICES
The Company's Country Services Division provides certain services to Individual
Members and Affiliated Associations.
COUNTRY HEDGING, INC.
Country Hedging, Inc. offers full service commodity futures and options
brokerage. For the year ended May 31, 1996, 60% of revenues were from Affiliated
Associations, 30% from Individual Members and 10% from others. This separate
subsidiary of the Company is a registered futures commission merchant and a
clearing member of both the Minneapolis Grain Exchange and the Kansas City Board
of Trade. On November 30, 1996, it had 38 employees operating primarily out of
St. Paul, Minnesota.
Competitors include international brokerage firms, national brokerage firms,
regional brokerage firms (both co-op and non-co-op) as well as local introducing
brokers. Competition is driven by price and service.
AG STATES AGENCY, LLC
Ag States Agency, LLC, 50% owned by the Company, is an independent insurance
agency which sells insurance primarily to local cooperatives, including group
benefits, property and casualty, and bonding programs. For the year ended May
31, 1996, substantially all of its revenues were from local cooperatives. Ag
States Agency, LLC competes with other insurance agencies.
FINANCIAL SERVICES DEPARTMENT
The Financial Services Department provides business planning consulting and
financing to Affiliated Associations. It offers open account financing,
involving the discretionary extension of credit, and term and seasonal loans.
Most of the term and seasonal loans are participated up to 90% to National Bank
for Cooperatives (CoBank). Participation by CoBank is subject to credit approval
on a loan-by-loan basis by CoBank subject to an overall limit of participation
of $150,000,000. In addition to financing, the open account between the Company
and an Affiliated Association is used as a clearing account for settlement of
grain purchases and as a cash management tool. Open account financing has been
provided to more than 200 Affiliated Associations in the past year.
During the year ended May 31, 1996, average aggregate loan balances outstanding
were $106,581,000 (of which CoBank's participation was $59,836,000) and the
highest aggregate loan balance outstanding at any one time was $177,939,000 (of
which CoBank's participation was $78,287,000). The Company's borrowing
arrangements limit loan balances outstanding to not more than $150,000,000 at
any one time. See "CAPITALIZATION."
Pursuant to its agreement with CoBank, the Company has additional credit risk on
CoBank participations to 10% of total loan commitments.
A wholly owned subsidiary of the Company provides certain types of financing to
members. See "-- FARM MARKETING AND SUPPLY."
AFFILIATED ACCOUNTING DEPARTMENT
The Affiliated Accounting Department offers computerized country elevator
accounting systems and a full complement of accounting support systems for local
cooperatives, including tax and patronage allocation services, dividend ledger
services and payroll services. For the year ended May 31, 1996, substantially
all of its revenues were from local cooperatives.
FIELD SERVICES DEPARTMENT
The Field Service Department acts as a liaison between Affiliated Associations
and the Company, providing consulting services in marketing, management,
operations, accounting, tax, finance and government regulations.
MEMBER RELATIONS DEPARTMENT
The Member Relations Department conducts cooperative education programs for
Affiliated Associations and assists in planning meetings and organizing visits
to Company facilities.
MANAGEMENT
BOARD OF DIRECTORS
The table below lists the current directors of the Company, consisting of four
members from District One (comprised of the states of Minnesota, Illinois, Iowa
and Wisconsin), four members from District Two (comprised of the state of North
Dakota), two members from District Three (comprised of the states of South
Dakota, Kansas and Nebraska), two members from District Four (comprised of the
states of Montana and Wyoming) and two members from District Five (comprised of
the states of Washington, Oregon, Utah and Idaho). Each director must be an
agricultural producer and an active patron of the Company (either directly or
through an Affiliated Association) for a period of five years at the time of the
director's election, must be less than 68 years of age at the time of election
and cannot be an employee of the Company or of an Affiliated Association. The
directors have been elected for staggered three-year terms, expiring in November
of the years listed in the table below. Each director has been an agriculture
producer for the past five years.
TERM
DIRECTOR EXPIRES
NAME AND ADDRESS AGE DISTRICT SINCE IN NOV.
- ---------------- --- -------- ----- -------
Steven Burnet 56 5 1983 1998
94699 Monkland Lane
Moro, OR 97039-9705
Steve Carney 45 4 1988 1997
P.O. Box 1122
Scobey, MT 59263-1122
Edward Ellison 61 1 1978 1999
RR 1, Box 46
Elbow Lake, MN 56531-9740
Sheldon Haaland 58 1 1984 1997
RR 2, Box 55
Hanley Falls, MN 56245-9731
Jerry Hasnedl 50 1 1995 1998
RR 1, Box 39
St. Hilaire, MN 56754
Edward Hereford 57 5 1983 1997
RR 1, Box 53
Thornton, WA 99176-9710
Gerald Kuster 61 2 1979 1997
RR 1, Box 46
Reynolds, ND 58275-9742
Leonard Larsen 60 2 1993 1999
RR 1, Box 88
Granville, ND 58741
Tyrone Moos 58 3 1991 1997
HCR 1, Box 1
Phillip, SD 57567-9601
Duane Risan 60 2 1989 1998
RR 1, Box 4
Parshall, ND 58770-9703
Duane Stenzel 50 1 1993 1999
RR 2, Box 173
Wells, MN 56097
Russell Twedt 47 4 1993 1999
P.O. Box 296
Rudyard, MT 59540-0296
Merlin Van Walleghen 60 3 1993 1999
RR 1, Box 188
Letcher, SD 57359
William Zarak 61 2 1983 1998
3711 124th Ave. S.W.
South Heart, ND 58655-9767
Approximately one-third of the directors are elected annually by members acting
through delegates. See "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL --
Voting Rights."
STEVEN BURNET. Mr. Burnet has been a director since 1983 and currently serves as
Chairman of the Board. He grows dryland wheat and barley and supports a cow/calf
and yearling operation. Mr. Burnet is a member of the Oregon Wheat Growers
League and the Oregon Cattlemen's Association. He also serves as a director on
the Agricultural Co-op Council of Oregon.
STEVE CARNEY. Mr. Carney has been a director since 1988 and currently serves as
Secretary Treasurer. Mr. Carney operates a spring wheat and durum farm with his
wife and brother. He is a former president of Farmers Union Grain Company
(Peerless) and Farmers Union Grain Terminal of Daniels County. He is also a
member of several local cooperatives.
EDWARD ELLISON. Mr. Ellison has been a director since 1978. Together with his
sons, he raises wheat, soybeans and corn on his Grant County, Minnesota, farm.
Mr. Ellison is on the board of the Minnesota Association for Cooperatives and an
alternate to the Agricultural Cooperative Development International (ACDI) board
of directors. He also serves as a member of the Farmland Insurance and the Ag
Utilization Research Institute (AURI) boards of directors.
SHELDON HAALAND. Mr. Haaland has been a director since 1984 and currently serves
as Assistant Secretary and Treasurer. He and his family farm 550 acres of corn,
soybeans and wheat. Mr. Haaland is a member of several cooperatives and has
previously served on the boards of Cottonwood Co-op Oil Company and Western
Transport Co-op and as an advisory board member of the Southwest State
University Co-op Program.
JERRY HASNEDL. Mr. Hasnedl has been a director since 1995. He farms wheat,
barley, sunflowers, corn, alfalfa and registered seed for MCIA. Mr. Hasnedl is a
member of several cooperatives as well as the Minnesota Crop Improvement
Association and Minnesota Farmers Union. He also is a farmer/dealer for Northrup
King Seeds.
EDWARD HEREFORD. Mr. Hereford has been a director since 1983. He and his two
sons produce wheat, barley, peas and lentils on his dryland farm. Mr. Hereford
is a director of the Idaho Co-op Council, a board member of the ACDI and a
member of the Thornton Grange, the Washington Association of Wheat Growers and
the Washington Association of Peas and Lentils Growers.
GERALD KUSTER. Mr. Kuster has been a director since 1979. He and his sons
operate a 3,000-acre farm. Mr. Kuster is President of Agri City Cooperative
Services in Grand Forks, North Dakota, and Central Valley Bean Cooperative in
Buxton, North Dakota. He also serves as president of Reynolds United
Cooperative.
LEONARD LARSEN. Mr. Larsen has been a director since 1993. He farms a 1,440-acre
grain and sunflower operation and is vice president of the Granville area
Development Corp. Mr. Larsen is also a member of Dakota Growers Pasta Company.
TYRONE MOOS. Mr. Moos has been a director since 1991 and currently serves as
Second Vice Chairman. He and his wife, together with their son and son-in-law,
operate a combination farm and ranch raising winter wheat, barley and millet as
well as managing cow/calf and hog finishing operations. Mr. Moos is a former
member of the local co-op elevator board.
DUANE RISAN. Mr. Risan has been a director since 1989. He raises durum, spring
wheat and barley and, as a former educator, has a degree in mathematics and
education from Jamestown College. He is a member of Dakota Growers Pasta Company
and a patron of Dakota Quality Grain Co-op.
DUANE STENZEL. Mr. Stenzel has been a director since 1993. He raises 620 acres
of sweet corn, corn and soybeans on his south central Minnesota farm. Mr.
Stenzel is a board member of Grainland Cooperative and past president of the
Wells Farmer Elevator.
RUSSELL TWEDT. Mr. Twedt has been a director since 1993. He is a
third-generation Hill County farmer and rancher, and he and his family raise
wheat and barley, with a cow/calf operation. He is a member of the Montana
Grain Growers Association and Montana Farmers Union.
MERLIN VAN WALLEGHEN. Mr. Van Walleghen has been a director since 1993. He and
his son raise corn and soybeans and operate a livestock finishing operation. He
is a past Board president of the Mitchell Farmers Cooperative Elevator
Association and past member of Mitchell Technical Institutes Agricultural
Advisory Board. He is also Chairman of the Sanborn County Development Board.
WILLIAM ZARAK. Mr. Zarak has been a director since 1983 and currently serves as
First Vice Chairman. He owns and operates a 2,000-acre farm with his wife and
two sons where they raise small grains, corn, beef cows and hogs and also
backgrounds calves. Mr. Zarak is also a member of Dakota Growers Pasta Company.
DIRECTORS' COMPENSATION
The Board of Directors meets monthly. The Company provides its directors with
annual compensation of $24,000, paid in twelve monthly payments, with the
Chairman of the Board receiving an additional annual compensation of $2,400,
paid in twelve monthly payments, a per diem payment of $122.50 plus travel
allowance for actual days away from home while attending Board Meetings, a per
diem of $200 plus actual expenses and travel allowance for each day spent on
other Company business, life insurance, and an annuity plan providing for
benefits to become payable monthly when a director reaches age 62.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors does not have any standing committees. The Board appoints
ad hoc committees from time to time to review certain matters and make reports
and recommendations to the full Board of Directors for action. The entire Board
of Directors determines the salary and incentive compensation of the Chief
Executive Officer and reviews the results and scope of the audit and other
services provided by the Company's independent auditors, as well as the
Company's accounting principles and its system of internal controls.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the Company's Board of Directors does not have a Compensation
Committee. The entire Board of Directors determines the compensation of the
Chief Executive Officer and the terms of the employment agreement with the Chief
Executive Officer. The Chief Executive Officer determines the compensation for
all other executive officers.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of directors in
their capacity as directors to the full extent permitted by Minnesota law. As
permitted by Minnesota law, the Company's Articles of Incorporation provide that
a director shall not be personally liable to the Company or its members for
monetary damages for breach of fiduciary duty as a director, except for
liability for a breach of the director's duty of loyalty to the Company or its
members, for acts of omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, for a transaction from which the
director derived an improper personal benefit or for an act or omission
occurring prior to the date when such provisions became effective.
The provision of the Articles of Incorporation limits only the liability of
directors, not officers. These provisions do not affect the availability of
equitable remedies, such as an action to enjoin or rescind a transaction
involving a breach of fiduciary duty, although, as a practical matter, equitable
relief may not be available. The above provisions also do not limit liability of
the directors for violations of, or relieve them from the necessity of complying
with, the federal securities laws.
The Bylaws of the Company require the Company to indemnify each director,
officer, manager, employee or agent of the Company, and any person serving at
the request of the Company as a director, officer, manager, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred to the fullest extent permitted
under the laws of Minnesota.
EXECUTIVE OFFICERS
The table below lists the executive officers of the Company, none of whom holds
any equity in the Company. Officers are elected annually by the Board of
Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John D. Johnson 48 President and Chief Executive Officer
Thomas F. Baker 54 Group Vice President -- Finance
Michael H. Bergeland 52 Group Vice President -- Grain & Agri Services
Garry A. Pistoria 55 Group Vice President -- Wheat Milling
James Tibbetts 46 Group Vice President -- Oilseed Processing and Packaging
</TABLE>
JOHN D. JOHNSON. Mr. Johnson was appointed President and Chief Executive Officer
on January 1, 1995. Prior to his appointment to that position he held positions
as Group Vice President of Farm Marketing & Supply, GTA Feeds Division General
Manager, Director of Sales and Marketing for the GTA Feeds Division, Regional
Sales Manager for GTA Feeds Division, and Feed Consultant GTA Feeds Division. He
has 20 years total experience with the Company. Mr. Johnson graduated in 1970
from Black Hills State University at Spearfish, South Dakota, with a degree in
Business Administration and Economics. He also serves on the Board of Directors
of the National Council of Farmer Cooperatives (NCFC) and A. C. Toepfer Intrade
Grain Companies, and is Chairman of the NCFC Agriculture, Trade & Credit
Committee. Mr. Johnson also serves on the Management Committee for Ventura
Foods, LLC.
THOMAS F. BAKER. Mr. Baker joined the Company in 1982 as Vice President of
Finance. In 1992 he was appointed Group Vice President of Finance and holds that
position at the present time. Mr. Baker obtained a Bachelor's Degree in
accounting from the College of St. Thomas, did graduate work at the University
of Minnesota, and obtained his CPA in the State of Minnesota. Mr. Baker serves
on the Board of Governors for Ag States Agency, LLC and on the Management
Committee for Ventura Foods, LLC. He is also a member of Minnesota Certified
Public Accountants and Financial Executives Institute.
MICHAEL H. BERGELAND. Mr. Bergeland, Group Vice President of Grain and
Agri-Services, joined the Company in 1967. He is a native of Minnesota and
attended Moorhead State College. Mr. Bergeland also serves as a board member of
the Minneapolis Grain Exchange, Chairman of the Grain Committee for the National
Council of Farmer Cooperatives, and a Committee Member and alternate director
for A.C. Toepfer Intrade Grain.
GARRY A. PISTORIA. Mr. Pistoria has been Group Vice President of Wheat Milling
since 1985 and has been with the Company since 1961. Mr. Pistoria attended
Montana State University and the College of Great Falls. He is a member of the
National Pasta Association, the American Bakers Association and the Minneapolis
Grain Exchange.
JAMES TIBBETTS. On January 1, 1997, Mr. Tibbetts was appointed to the position
of Group Vice President of the Oilseed Processing and Refining Division. From
November of 1995 (when he joined the Company) through 1996, Mr. Tibbetts was
Senior Vice President for the former Consumer Products Packaging Division
(Holsum Foods Division). From 1977 to 1995, Mr. Tibbetts was a Senior Vice
President for Farm Credit Leasing in Minneapolis, Minnesota. Mr. Tibbetts
received a Bachelor of Science Degree in Business Administration in 1972 from
Northern State University in Aberdeen, South Dakota. He serves on the Management
Committee for Ventura Foods, LLC.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth the cash and noncash
compensation earned by the Chief Executive Officer and each of the four most
highly compensated executive officers of the Company (other than the Chief
Executive Officer) whose total salary and bonus or similar incentive payment
earned during the year ended May 31, 1996, exceeded $100,000 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------------
YEAR ENDED OTHER ANNUAL ALL OTHER
MAY 31, SALARY(1) BONUS(1) COMPENSATION(2) COMPENSATION(3)
------- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
John D. Johnson 1996 $450,000 $162,500 $3,659 $7,508
President and Chief
Executive Officer
Thomas F. Baker 1996 225,300 127,500 7,400 7,908
Group Vice President -- Finance
Michael H. Bergeland 1996 215,000 129,000 3,970 9,216
Group Vice President -- Grain
and Agri-Services
Garry A. Pistoria 1996 166,500 78,000 7,361 4,138
Group Vice President -- Wheat
Milling
James Tibbetts(4) 1996 87,500 70,000 510 29
Group Vice President -- Oilseed
Processing and Refining Division
</TABLE>
- -------------------------------
(1) Amounts shown include amounts deferred at the employee's election under
the Company's Deferred Compensation Program.
(2) Amounts shown include personal use of a Company vehicle.
(3) Other compensation includes the Company's matching contributions under
the Company's 401(k) Plan and the portion of group term life insurance
premiums paid by the Company.
(4) Information for Mr. Tibbetts is from November 1, 1995, the beginning of
his employment with the Company.
On January 23, 1997, the Company entered into an Employment Agreement with
John D. Johnson. The Employment Agreement provides for a rolling three-year
period of employment commencing on January 23, 1997, at an initial base or
fixed salary of at least $500,000, subject to annual review. Mr. Johnson's
employment may be terminated by either party on at least 30 days' written
notice, subject to the rights and obligations set forth in the Employment
Agreement. The Company is obligated to pay Mr. Johnson a severance allowance
for three years equal to Mr. Johnson's base or fixed salary and to continue
family health insurance coverage for at least one year in the event Mr.
Johnson's employment is terminated for any reason other than for cause (as
such term is defined in the Employment Agreement), death, disability or
voluntary termination. The Employment Agreement also contains covenants by
Mr. Johnson not to compete with the Company and not to solicit the Company's
customers or employees during the period that Mr. Johnson accepts the
severance allowance. The Company and Mr. Johnson have also agreed that in the
event of Mr. Johnson's voluntary termination the Company will not owe Mr.
Johnson any severance allowance and Mr. Johnson will not compete against the
Company for a period of three years. Either party may terminate the
Employment Agreement and all of the rights and obligations of the parties
thereunder, upon at least three years' written notice to the other party.
MANAGEMENT COMPENSATION INCENTIVE PROGRAM
Each Named Executive Officer is eligible to participate in the Management
Compensation Incentive Program (the "Incentive Program") for the year ending May
31, 1997. The Incentive Program is based on Company and group or division
performance. The criteria for measurement consists of Economic Value Added
(EVA), earnings and Member Value Index; a subjective evaluation of value
provided to members and customers. These amounts will be paid after May 31,
1997. The maximum incentive is 60% of base compensation.
RETIREMENT PLAN
Each of the Named Executive Officers is entitled to receive benefits under the
Harvest States Cooperatives Cash Balance Retirement Plan (the "Retirement
Plan"). An employee's benefit under the Retirement Plan depends on credits to
the employee's account, which are based on the employee's total salary each year
the employee works for the Company, the length of service with the Company and
the rate of interest credited to the employee's account balance each year.
Credits are made to the employee's account from Pay Credits, Special Career
Credits and Investment Credits.
The amount of Pay Credits added to an employee's account each year is a
percentage of the employee's gross salary, including overtime pay,
commissions, severance pay, bonuses, any compensation reduction pursuant to
the 401(K) Plan and any pretax contribution to any of the Company's welfare
benefit plans, paid vacations, paid leaves of absence and pay received if
away from work due to a sickness or injury. The Pay Credits percentage
received is determined on a yearly basis, based on the years of Benefit
Service completed as of January 1 of each year. An employee receives one year
of Benefit Service for every calendar year of employment in which the
employee completed at least 1,000 hours of service.
Effective January 1, 1997, Pay Credits are earned according to the following
schedule:
YEARS OF BENEFIT SERVICE: PAY CREDIT EQUALS:
- ------------------------- ------------------
1 to 7 years 4% of total salary
8 to 11 years 5% of total salary
12 years and more 6% of total salary
Special Career Credits were designed to supplement the benefits of mid-career
employees affected by the change from the former plan to the current Retirement
Plan. Employees qualify for Special Career Credits only if they were employed by
the Company and met certain age and service requirements (as defined by the
Retirement Plan) on January 1, 1988. The following table shows the credits for
those who qualify:
TOTAL OF AGE AND
BENEFIT SERVICE ON
JANUARY 1, 1988: SPECIAL CAREER CREDITS:
---------------- -----------------------
50 to 54 1% of total salary
55 to 59 2% of total salary
60 to 64 3% of total salary
65 to 69 4% of total salary
70 or more 5% of total salary
Special Career Credits continue at the percentage rate determined from the
employee's status on January 1, 1988, for as long as the employee is with the
Company.
The Company credits an employee's account at the end of the year with an
Investment Credit based on the balance at the beginning of the year. The
Investment Credit is based on the average return for one-year U.S. Treasury
Bills for the preceding 12-month period. The maximum Investment Credit will not
exceed 12% for any year.
As of December 31, 1996, the dollar value of the account of each of the Named
Executive Officers was:
John D. Johnson $180,334
Thomas F. Baker 215,878
Michael H. Bergeland 379,744
Garry A. Pistoria 455,071
James Tibbetts 2,258
DEFERRED COMPENSATION PLAN
Effective April 1, 1994, the Company established the Harvest Sates Cooperatives
Deferred Compensation Plan (the "Deferred Compensation Plan"). Participants in
the Deferred Compensation Plan are select management or highly compensated
employees of the Company who have been designated as eligible by the President
of the Company to participate in such plan. Under the Deferred Compensation
Plan, a participant may elect to have an amount of deferred compensation
credited to the participant's account for the applicable Plan Year (as defined
in the Deferred Compensation Plan). The compensation actually earned during the
Plan Year by a participant who elects deferred compensation is reduced by the
percentage or amount so elected. A participant may elect to contribute no more
than 30% of each payment of base compensation, provided that the percentage
selected is expected to result in annual contributions totaling at least $1,000.
Also, the participant may elect to contribute either a percentage or a specific
dollar amount of any bonus or similar incentive payment that may become payable
during the Plan Year, provided the contribution will not be less than the
smaller of $1,000 or 100% of the bonus payable. The deferred compensation
credited under the Deferred Compensation Plan is allocated to the account of the
participant as of the date that the compensation would otherwise have been paid
to the Participant in cash. Income is credited to each account each Plan Year at
an annual rate equal to 1% over the five-year U.S. Treasury Bond rate as of
October 1 of the year preceding the Plan Year, as adjusted as appropriate to
reflect contributions to and distributions from the account during the Plan
Year.
A participant's credits to his or her account are unsecured obligations of the
Company to pay the participant the actual amount of the credits upon
distribution pursuant to the Deferred Compensation Plan. Each participant or
beneficiary is only a general creditor of the Company with respect to his or her
account. Accounts are maintained for recordkeeping purposes only. Obligations of
the Company to pay benefits under the Deferred Compensation Plan may be
satisfied by distributions from a grantor trust created by the Company in its
sole discretion for such purpose. The Company has not created any such trust.
Amounts credited to a participant's account are distributed on a predetermined
date, such as the date of retirement or the date the participant attains a
particular age, in either a lump sum or in installments pursuant to the
participant's prior irrevocable election. The Deferred Compensation Plan also
provides for distribution upon the participant's death or disability, for
unforeseeable emergencies and upon termination of the plan.
The President of the Company may at any time amend the Plan in whole or in part
for any reason. No amendment may decrease the benefits under the Plan which have
accrued prior to the date of such amendment, but any amendment may modify the
interest rate to be used for future deferrals and for the balance in each
account on the date the amendment was adopted. The Company, by action of the
President, may at any time terminate the Plan.
401(k) PLAN
Each Named Executive Officer is eligible to participate in the Harvest States
Cooperatives Savings Plan (the "401(k) Plan"). All employees of the Company who
are eligible for the Retirement Plan and who are not production employees and
who are not covered by a collective bargaining agreement are eligible to
participate in the 401(k) Plan. Effective January 1, 1997 participants may
contribute between 1% and 15% (not to exceed 8% in the case of "highly
compensated" employees) of their pay on a pre-tax basis. Each of the Named
Executive Officers is a "highly compensated" employee. The Company matches 50%
of the first 6% of pay contributed each year. The Company's Board of Directors
may elect to reduce or eliminate matching contributions for any year or any
portion thereof. Participants are 100% vested in their own contributions and in
any Company matching contribution made on the participant's behalf.
DEFERRED COMPENSATION SUPPLEMENTAL RETIREMENT PLAN
Each of the Named Executive Officers may participate in the Harvest Sates
Cooperatives Deferred Compensation Supplemental Retirement Plan (the
"Supplemental Plan"). Participants in the Supplemental Plan are select
management or highly compensated employees of the Company who have been
designated as eligible by the President of the Company to participate in such
plan. Compensation deferred under the Deferred Compensation Plan is not eligible
for Pay Credits or Special Career Credits under the Cash Balance Retirement Plan
or matching contributions under the 401(k) Plan. The Supplemental Plan is
intended to replace the benefits lost under those plans due to Section 415 of
the Internal Revenue Code of 1986, as amended (the "Code") which cannot be
considered for purposes of benefits due to Section 401(a)(17) of the Code under
the qualified plans that the Company offers. The Supplemental Plan is not funded
or qualified for special tax treatment under the Code. As of December 31, 1996,
the dollar value of the account of each of the Named Executive Officers will be
approximately:
John D. Johnson $ 94,772
Thomas F. Baker 62,161
Michael H. Bergeland 556,251
Garry A. Pistoria --
James Tibbetts --
CERTAIN TRANSACTIONS
Because directors must be active patrons of the Company or an Affiliated
Association, transactions between the Company and directors are customary and
expected. Transactions include the sale of commodities to the Company and the
purchase of products and services from the Company. During each of the three
years ended May 31, 1996, the value of those transactions between a particular
director (and members of such directors' immediate family, which includes such
director's spouse; parents; children; siblings; mothers and fathers-in-law; sons
and daughters-in-law; and brothers and sisters-in-law) and the Company that
exceeded $60,000 are shown below. The transactions relate predominately to the
sale of grain to the Company, but also indicate purchases of feed, farm supplies
and services from the Company. All sales and purchases were at prevailing market
prices.
YEAR ENDED MAY 31,
---------------------------------
NAME 1994 1995 1996
- ---- ---- ---- ----
William Zarak $153,218 $ 72,863 $303,125
Russell Twedt 46,673 94,704 121,257
Steve Carney 319,228 466,933 746,263
MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL
INTRODUCTION
The Company is a membership cooperative organized to manufacture, process,
market, purchase, handle, deal in and sell the agricultural products of its
members, non-member patrons and others, including the processing and exporting
of grain and other agricultural products; to procure supplies and equipment and
to perform any and all services for its members, non-member patrons and others;
and to engage in any other activity for which cooperative associations may be
lawfully organized under Minnesota law. All net savings from member patronage of
the Company shall be distributed to members on the basis of patronage. These net
savings, when distributed, are referred to as "patronage dividends," regardless
of whether distributed in cash or in Patrons' Equities. All net savings from
non-member patronage of the purchasing operations and from "Non-Member
Consenting Patron" patronage of marketing operations shall be distributed to
such patrons on the basis of patronage. The determination of net savings may be
made by divisions or units representing separate or different operations of the
Company, as determined by the Board of Directors. Patronage refunds may be
distributed in cash, written evidences of equity or book credits, or any
combination thereof. Any non-cash allocations are redeemable only in the
discretion of the Board of Directors.
The net earnings (after provision for income taxes) of the Company, as reported
in its financial statements for the year, less patronage dividends paid with
respect to the fiscal year may be distributed in the discretion of the Board of
Directors to member patrons and to non-member "consenting patrons" (defined as
cooperative associations meeting all requirements for membership in this
Association other than transacting the minimum amount of business) on the basis
of their patronage. Distributions may be in cash, property, Non-Patronage
Earnings Certificates or any combination thereof designated by the Board of
Directors. To date, the Board of Directors has always used Non-Patronage
Earnings Certificates for distributions, and the current redemption policy is to
redeem to estates.
In making any such non-member/non-patronage distributions, the Board of
Directors may use any method of allocating the earnings on the basis of
patronage to member patrons and Non-Member Consenting Patrons as shall be
reasonable and equitable in the judgment of the Board of Directors.
The method of allocation for the non-member/non-patronage earnings of the
Company for the fiscal year ended May 31, 1996 was based on bushels of the grain
marketing/processing activity and dollars on the purchasing and other activity.
This method is subject to change, in the discretion of the Board of Directors.
GOVERNANCE
The business and affairs of the Company are managed by a Board of Directors of
not less than 13 persons (currently set at 14), elected by the members at the
Company's annual meeting. Various rights and obligations of members are
contained in its Articles of Incorporation and Bylaws (together, the "governing
documents"), each of which was amended and restated in November 1996. The
governing documents may only be amended upon approval of a majority of the votes
cast at an annual or special meeting of the members, except for the higher vote
described under " -- Certain Antitakeover Effects."
MEMBERSHIP
Membership in the Company is limited to individuals or entities actually engaged
in the production of agricultural products and associations of agricultural
producers organized and operating under the provisions of the Agricultural
Marketing Act and the Capper-Volstead Act. In addition, only those persons that
are "currently active patrons" (defined as agricultural producers and
associations of agricultural producers that have patronized the Company during
the year for which such status is being determined in a minimum amount
established by the Board of Directors) may be members of the Company.
Under the Company's governing documents, the Company has several classes of
membership and has authority to issue a variety of debt and equity instruments
to members. As a membership cooperative, the Company is not authorized to issue
capital stock. Under the Minnesota Cooperative Law, under which the Company is
organized, a cooperative may be organized on a membership basis or a capital
stock basis. A cooperative is organized on a capital stock basis if holding
shares of common stock entitles the holder to vote. Membership is transferable
only with the consent and approval of the Board of Directors. The Company may
issue equity or debt securities, on a patronage basis or otherwise, but unless
authorized in, or by the Board of Directors, pursuant to the Company's Bylaws,
such securities shall not entitle the holders thereof to any voting, membership
or other rights to participate in the affairs of the Company and are not
transferrable without the prior consent of the Board of Directors.
The Company's governing documents establish three classes of membership:
Individual Members are individuals or entities actually engaged in the
production of agricultural products. Such Individual Members include both
natural persons as well as any legal entity owned or controlled by individual
farmers or their families, such as joint ventures, corporations, partnerships,
limited liability companies and other entities.
Affiliated Associations are associations of agricultural producers that have
transacted at least $100,000 of business with the Company during the preceding
fiscal year. Affiliated Associations must be cooperatives or other associations
of agricultural producers organized and operating under the provisions of the
Agricultural Marketing Act and the Capper-Volstead Act.
Defined Members are either persons actually engaged in the production of
agricultural products or associations of producers of agricultural products that
are holders of Equity Participation Units. See " -- Defined Members" below.
Membership in the Company will be terminated by the Board of Directors if a
member has become ineligible for membership (for example, by the cessation of
agricultural production activities). The Board of Directors has the discretion
to terminate membership for a variety of reasons, including repeated violations
of the Company's Bylaws, failure to patronize the Company for a period of 12
consecutive months and breach of any contract with the Company. In addition, any
member's membership in the Company is terminated when that member either dies or
is legally dissolved. Upon termination of membership, a former member loses any
and all voting rights in the Company. A former member has no right to require
immediate repayment of patronage.
VOTING RIGHTS
Affiliated Associations are entitled to a number of delegates based on the
dollar volume of business done with the Company during the last full fiscal year
ending prior to the date of the meeting at which the voting power is to be
exercised. The number of delegates ranges from one delegate for any Affiliated
Association with business from $100,000 up to $1,500,000 during the prior year
to 15 delegates for any Affiliated Association with business in excess of
$45,000,000 during the prior year. Each delegate from an Affiliated Association
is entitled to cast 200 votes on any matter presented to the members for a vote.
The dollar volume of business delivered by a Defined Member to an Affiliated
Association for handling on behalf of the Company and Defined Member will be
included in calculating the dollar volume of an Affiliated Association for
purposes of voting.
Individual Members and Defined Members are entitled to one vote. Individual
Members and Defined Members may directly cast their votes on matters presented
to the members of the Company only if, for Defined Members, they have provided
notice of such intention to the Company, and, for Individual Members, if they
have obtained a certificate signed by a manager of the Company facility
patronized by such Individual Member. Any such certificate or notice must be
provided to the Company at least 10 days before the meeting at which the voting
rights are to be exercised.
Individual Members and Defined Members may exercise their voting power through
the designation of a "patrons' association." A patrons' association is an
association of the Individual Members associated with a grain elevator, feed
mill, seed plant or any other Company facility or an association of Defined
Members, as designated and recognized by the Board of Directors. The membership
of a patrons' association may include both Individual Members and Defined
Members. The Individual Members and Defined Members that are identified with a
particular patrons' association may, at an annual meeting of the patrons'
association, elect delegates and alternates for the patrons' association on the
basis of one vote per member. Each patrons' association is entitled to a number
of delegates based on the dollar volume of business activities of the patrons'
association's currently active patrons and Defined Members with 200 votes per
delegate, reduced by the number of individual votes personally voted.
Members may cast their votes, if the Board of Directors so elects, by mail
voting in certain situations. At least 50 members of the Company represented in
person, by delegates or by mail votes constitutes a quorum for business at any
meeting, unless the Company has fewer than 500 members, in which case a quorum
is comprised of 10% of the total number of members.
DEFINED MEMBERS
Each Defined Member will be affiliated with a "Defined Business Unit" and will
hold Equity Participation Units in that Defined Business Unit. Holders of Equity
Participation Units will have delivery rights and obligations for farm products
pursuant to a member marketing agreement between such Defined Member and the
Company.
Each Defined Business Unit will be represented by a Defined Member Board,
comprised of between five and ten individuals. The members of a Defined Member
Board must be either Defined Members or representatives of Defined Members and
in good standing and in full compliance with all delivery obligations with
respect to the applicable Defined Business Unit, provided, however, no employee
of the Company may serve as a member of the Defined Member Board. The initial
Defined Member Board of each Defined Business Unit will be elected by the
Company's Board of Directors. Thereafter the Defined Member Board of a Defined
Business Unit will be elected by the Defined Members associated with a
particular Defined Business Unit on a one Defined Member/one vote basis. The
Chairperson shall be selected by and from the Company's Board of Directors.
Individuals serving on a Defined Member Board shall serve staggered three-year
terms. Each Defined Member Board shall meet at least quarterly and shall be
charged with reflecting Defined Member concerns and providing a direct
communication mechanism to the Company's Board of Directors. The Defined Member
Board has no other powers.
While the Board of Directors has no present intention of doing so, the Company
is authorized to retain a portion of the payments otherwise due to Defined
Members for purchases of products from them. Such retention is referred to as a
"unit retain." Unit retains would only be established by the Board of Directors
to provide a source of cash for its immediate needs and would be limited to a
small percentage of the payments due for purchase of products pursuant to the
Agreement (see "EQUITY PARTICIPATION UNITS -- Individual Member Marketing
Agreement"). The imposition of unit retains would adversely affect a member's
cash income and cash position. The Company has the option to treat any such unit
retains as taxable to the Company or to treat the unit retains as nontaxable by
declaring the unit retains as "qualified." Qualified unit retains are taxable to
the Defined Member in the tax year when the Defined Member receives notification
that a unit retain has been established. When a qualified unit retain is
reimbursed or redeemed, the Defined Member reports no additional income. Unit
retains may be called for payout at the lesser of their stated or book value at
the discretion of the Board of Directors. The Company intends to establish a
redemption schedule if it authorizes unit retains.
DEBT AND EQUITY INSTRUMENTS
The Company is authorized to issue a variety of debt and equity instruments to
its current members, patrons and to persons who are neither members nor patrons.
The Company's outstanding capital (see "CAPITALIZATION") is represented by
Capital Equity Certificates, non-patronage certificates and certain capital
reserves.
The Company's Bylaws provide the following securities may be issued to current
or former members or patrons:
EQUITY PARTICIPATION UNITS. Equity Participation Units may be held only by
Defined Members and have no voting rights. Defined Members have voting rights to
elect a Defined Member Board.
CAPITAL EQUITY CERTIFICATES. Capital Equity Certificates may be issued by the
Company in partial or complete distribution of patronage refunds. Capital Equity
Certificates do not bear any interest or carry any dividends. They do not have a
specified maturity date unless established by the Company's Board of Directors.
CERTIFICATES OF INDEBTEDNESS. The Board of Directors may issue Certificates of
Indebtedness from time to time. Such Certificates will carry such terms and
conditions as the Board of Directors establishes in its discretion. The Board
may also establish the conditions upon which such Certificates of Indebtedness
may be called for payment by the Company.
NON-PATRONAGE EARNINGS CERTIFICATES. The Board of Directors may issue
Non-Patronage Earnings Certificates. Such certificates will not have a maturity
date and will not bear interest or annual dividends. They will be issued and
distributed only to member patrons and to Non-Member Consenting Patrons as part
of a non-member/non-patronage distribution. (Non-Member Consenting Patrons
include Affiliated Associations that meet all of the requirements of membership
as an Affiliated Association except that they do not transact at least $100,000
of business with the Company during the preceding fiscal year.)
PREFERRED CAPITAL CERTIFICATES. The Board of Directors may establish and
designate the designation, preferences and relative rights of one or more series
of Preferred Capital Certificates. Preferred Capital Certificates will not carry
any voting rights.
OTHER. The Board of Directors may issue other debt or equity instruments. The
Bylaws contain no restrictions on the issuance or the terms of such other debt
or equity instruments.
Voting rights arise by virtue of membership in the Company, not because of
holding any instrument. The Board of Directors may issue "Preferred Equities"
and other debt or equity instruments to individuals who are not members or
patrons of the Company. The Board of Directors has the discretion to establish
and designate one or more series of Preferred Equities and to fix the relative
rights, preferences and privileges of such Preferred Equities. Any Preferred
Equities will not carry voting rights. No such Preferred Equities are presently
outstanding, and the Board of Directors has no present plan or intent to issue
Preferred Equities. However, if it were to do so, it could establish rights,
preferences and privileges relative to the holders of the Units and other
securities of the Company. Such preferences could include provisions for
priority in payment. The Board of Directors may authorize the issuance of
Preferred Capital Certificates pertaining to a particular Defined Business Unit.
If such Certificates were issued, they could have a preference in payment over
patronage refunds of a particular Business Unit.
TRANSFER OF PATRONS' EQUITIES. Debt or equity instruments held by the Company's
members and patrons, including Equity Participation Units, Capital Equity
Certificates, Certificates of Indebtedness, Non-Patronage Earning Certificates
and Preferred Capital Certificates, may be transferred only with the consent and
approval of the Company's Board of Directors. The Company may require the
execution of appropriate transfer documentation, as well as representations and
warranties from the proposed transferee indicating that he or she is eligible to
be the holder of the instrument proposed to be transferred.
REDEMPTION OR RETIREMENT OF PATRONS' EQUITIES AND ALLOCATED RESERVE. Redemption
or retirement of Patrons' Equities is solely within the discretion of and on the
terms as determined by the Board of Directors. The Board of Directors has
authorized the redemption of Capital Equity Certificates held by patrons who are
72 years of age, as well as Capital Equity Certificates held by estates of
deceased patrons. The Board of Directors intends to change its redemption policy
following the completion of this offering. See "DIVIDEND POLICY." There can be
no assurance that the Company's Board of Directors will not elect to modify its
policy regarding the redemption of Capital Equity Certificates. The Board is
under no restriction in modifying such policy, other than legal agreements to
which the Company may be a party to from time to time. Members are not required
to approve a change in such policy. The Board of Directors will establish a
redemption policy for Patrons' Equities arising from Defined Business Units. See
"DIVIDEND POLICY."
DISTRIBUTION OF ASSETS UPON DISSOLUTION
Upon dissolution, liquidation or winding up of the Company, all debts and
liabilities of the Company will be paid in accordance with their respective
priorities. All equity capital will then be allocated among the various holders
of the equity instruments in accordance with the following priorities: first,
the assets held by any Defined Business Unit will be used to redeem the Equity
Participation Units and Preferred Capital Certificates of such Defined Business
Unit, on a pro rata basis; next, all Equity Participation Units and Preferred
Capital Certificates will be paid to the extent of their face amount or par
value; next all Capital Equity Certificates and other outstanding equities
(other than Non-Patronage Earnings Certificates) will be paid in the amount of
the par value or face amount of such instruments; next, payment will be made in
the face amount of any issued and outstanding Non-Patronage Earnings
Certificates. Any remaining assets of the Company will be distributed on an
allocation unit basis among the members of the Company in proportion to their
patronage.
CERTAIN ANTITAKEOVER EFFECTS
The governing documents may be amended upon the approval of a majority of the
votes cast at an annual or special meeting. However, in the event that the Board
of Directors declares, by resolution adopted by a majority of the Board of
Directors present and voting, that the amendment involves or is related to a
hostile takeover, the proposed amendment must be adopted by the approval of 80%
of the total voting power of the members of the Company. It is within the sole
determination of the Board of Directors to declare that a transaction involves a
"hostile takeover," which term is not further defined in the Minnesota
cooperative law or the governing documents.
TAX TREATMENT
Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment
of cooperatives and applies to both cooperatives exempt from taxation under
Section 521 of the Internal Revenue Code and to nonexempt corporations operating
on a cooperative basis. The Company is a nonexempt cooperative.
As a cooperative, the Company is not taxed on amounts withheld from its members
in the form of qualified unit retains or patronage dividends, or in the amount
distributed in the form of patronage payments. Consequently, such amounts are
taxed only at the patron level. However, the amounts of any non-qualified unit
retains or patronage dividends are taxable to the Company when allocated. Upon
redemption of any such non-qualified unit retains or patronage dividends, the
amount is deductible to the Company and taxable at the member level.
Income derived by the Company from non-patronage sources is not entitled to the
"single tax" benefit of Subchapter T and is taxed to the Company at corporate
income tax rates.
EQUITY PARTICIPATION UNITS
Equity Participation Units may be held only by Defined Members. Defined Members
are either persons actually engaged in the production of agricultural products
or associations of producers of agricultural products. Each Defined Member will
be affiliated with a Defined Business Unit and will hold Equity Participation
Units in that Defined Business Unit. Holders of Equity Participation Units will
have delivery rights and obligations for farm products pursuant to the
Agreements between such Defined Member and the Company. See " -- Member
Marketing Agreement" below.
Certain rights and limitations pertaining to all Equity Participation Units,
including those being offered by this Prospectus, are described in "MEMBERSHIP
IN THE COMPANY AND AUTHORIZED CAPITAL." Additional rights and limitations
established by the Board of Directors in creating the Equity Participation Units
offered hereby are described below.
In determining the offering price of the Units, the Board of Directors has
considered the historic and expected operations of, the risks associated with
and an appropriate rate of return for each Business Unit.
Each Business Unit and the respective Equity Participation Units were created by
resolutions (the "Resolutions") of the Board of Directors, acting pursuant to
the governing documents, on January 11, 1997. The terms of the Units are
governed by the governing documents (as discussed under "MEMBERSHIP IN THE
COMPANY AND AUTHORIZED CAPITAL") and the Resolutions (which are more fully
discussed below). The Resolutions may be amended by the Board of Directors,
except in certain respects, without a vote of holders of the Units. See "--
Amendment of Board Resolutions" below. Holders of the Units have the rights and
remedies provided by the Minnesota Cooperative Law.
MILLING BUSINESS UNIT
The Board of Directors has created the Milling Business Unit for the purpose of
purchasing wheat (including durum) and the processing and sale thereof into
flour and various byproducts, effective at the close of business on May 31,
1997, to carry on the operations of the Milling Division. On that date there
will be allocated to the Milling Business Unit the assets and liabilities,
including commitments, contingencies and obligations, appropriately belonging to
the Division. In connection with the organization of the Milling Business Unit
the Company will contribute additional capital so that the construction of the
Pocono facility can be financed from equity capital.
Holders of Equity Participation Units in the Milling Business Unit have a right
to participate in the patronage sourced income from the operations of the
Milling Business Unit. Prior to the sale of any Unit to any person, such person
shall enter into an Agreement which gives the right and obligation to such
person to deliver the number of bushels of wheat as shall equal the number of
Units to be purchased by such Member. The delivery obligation and right under
the Agreement for the Milling Business Unit will become fully effective for the
fiscal year in which the Pocono facility begins operating. Defined Members will
be notified. Initially and until the Agreement becomes fully effective, it will
represent a right and obligation to deliver 78% of the wheat set forth therein.
For information on earnings per bushel of the Milling Division, see "BUSINESS --
MILLING DIVISION -- Selected Financial and Operating Data." Allocations of
overhead and interest expense to the Milling Business Unit by the Company will
vary from the allocations to the Milling Division. See Note 15 to the Milling
Division financial statements.
Patronage sourced income from the operations of the Milling Business Unit will
be allocated by the Company as patronage refunds based on the total amount of
wheat processed. For example, if the Milling Business Unit were to process
50,000,000 bushels of wheat and holders of Equity Participation Units had
delivered 20,000,000 bushels, 40% of the net patronage sourced income would be
allocated to holders of Equity Participation Units. As between the holders of
Equity Participation Units, patronage sourced income will be allocated to each
Defined Member proportionate to the wheat delivered pursuant to the Agreement.
While Defined Members will be entitled to the allocation of patronage refunds
originating from the Milling Business Unit, they may also receive, upon
allocation by the Board of Directors, nonpatronage income from operations of the
Company, including operations of the Milling Business Unit generating
nonpatronage income.
The initial Defined Member Board of the Milling Business Unit shall consist of
five persons, designated by the Board of Directors, to hold such office until
the Company's November, 1997 Annual Meeting and until their successors are duly
elected and qualified, after the completion of the offering. See "MEMBERSHIP IN
THE COMPANY AND AUTHORIZED CAPITAL" with respect to the Defined Members to elect
successor directors, who will serve for staggered three-year terms.
PROCESSING AND REFINING BUSINESS UNIT
The Board of Directors has created the Processing and Refining Business Unit for
the purpose of purchasing soybeans and crude soybean oil and the processing and
sale thereof into meal, flour, oil and various byproducts, effective at the
close of business on May 31, 1997, to carry on the operations of the Processing
and Refining Division. On that date there will be allocated to the Processing
and Refining Business Unit the assets and liabilities, including commitments,
contingencies and obligations, appropriately belonging to the Division. In
connection with the organization of the Processing and Refining Business Unit,
the Company will withdraw an amount sufficient to bring its net worth to
$53,400,000, which was its net worth on May 31, 1996.
Holders of Equity Participation Units in the Processing and Refining Business
Unit have a right to participate in the patronage sourced income from the
operations of the Processing and Refining Business Unit. Prior to the sale of
any Unit to any person, such person shall enter into an Agreement which gives
the right and obligation to such person to deliver the number of bushels of
soybeans as shall equal the number of Units to be purchased by such Member.
For information on earnings per bushel of the Processing and Refining Division,
see "BUSINESS -- PROCESSING AND REFINING DIVISION -- Selected Financial and
Operating Data." Allocations of overhead and interest income to the Processing
and Refining Business Unit by the Company will vary from the allocations to the
Processing and Refining Division. See Note 14 to the Processing and Refining
Division financial statements.
Patronage sourced income from the operations of the Processing and Refining
Business Unit, excluding patronage sourced income from the refining of crude oil
purchased from others and excluding patronage sourced income from Ventura Foods,
will be allocated by the Company as patronage refunds based on the total amount
of soybeans processed, giving effect to Units held and Units deemed to be held
by the Company. For example, if the Processing and Refining Business Unit were
to process 25,000,000 bushels of soybeans and holders of Equity Participation
Units had delivered 10,000,000 bushels, 40% of the patronage sourced income
would be allocated to holders of Equity Participation Units. As between the
holders of Equity Participation Units, patronage sourced income will be
allocated to each Defined Member proportionate to the soybeans delivered
pursuant to the Agreement.
While Defined Members will be entitled to the allocation of patronage refunds
originating from the Processing and Refining Business Unit, they may also
receive, upon allocation by the Board of Directors, nonpatronage income from
operations of the Company, including operations of the Processing and Refining
Business Unit generating nonpatronage income.
The operations of Ventura Foods are not included in the Processing and Refining
Business Unit. Should the Company create an additional Business Unit pertaining
to those operations, it may offer participation in that Business Unit to holders
of Equity Participation Units in the Processing and Refining Business Unit.
The initial Defined Member Board of the Processing and Refining Business Unit
shall consist of five persons, designated by the Board of Directors, to hold
such office until the Company's November, 1997 Annual Meeting and until their
successors are duly elected and qualified, after the completion of the offering.
See "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL" with respect to the
Defined Members to elect successor directors, who will serve for staggered
three-year terms.
ALLOCATIONS RELATING TO BUSINESS UNITS
Revenues from the sale of products of a Business Unit shall be credited to the
Business Unit, and all direct expenses incurred by a Business Unit shall be
charged against the Business Unit. Corporate, general and administrative
expenses of the Company shall be allocated to each Business Unit in a reasonable
manner based on the utilization by such Business Unit. Intracompany accounts
shall be established for the advancements to, and the loan of funds by, each
Business Unit, with interest thereon imputed at prevailing rates. Income taxes
shall be allocated to each Business Unit as if it were a separate taxpayer. Each
Business Unit shall perform and be responsible for commitments, contingencies
and obligations allocated to such Business Unit.
Patronage sourced income from the operations of a Business Unit (except as set
forth above with respect to the Processing and Refining Business Unit) will be
allocated by the Company as patronage refunds based on the total amount of grain
processed, giving effect to Units held and Units deemed to be held by the
Company. As between holders of the Units, patronage sourced income will be
allocated to each Defined Member proportionate to the number of bushels of grain
delivered pursuant to the Agreement. Defined Members may also receive, upon
allocation by the Board of Directors, nonpatronage income from operations of the
Company, including operations of a Business Unit generating nonpatronage income.
With respect to each year, the total net income from a Business Unit will be
withdrawn by the Company from the Business Unit, except to the extent that
patronage dividends are not paid in cash and are retained in the Business Unit
as equity. The Company will be responsible for the allocation of net income
arising from operations of a Business Unit between Defined Members of any one or
more Business Units and the remainder of the Company's operations.
Upon the acquisition by the Company from a third party of any assets (whether by
means of an acquisition of assets or stock, merger, consolidation or otherwise)
reasonably related to a Business Unit, such assets and related liabilities,
including commitments, contingencies and obligations, shall be allocated to that
Business Unit and the aggregate cost or fair market value of such assets and
liabilities shall be paid by the Business Unit. Such allocation and
determination of fair market value may be made by the Board of Directors taking
into account such matters as it and its advisers, if any, deem relevant, and any
such allocation and determination of fair market value shall be final and
binding for all purposes whatsoever.
Upon any sale, transfer, assignment or other disposition by the Company of any
or all assets of a Business Unit (whether by means of a disposition of assets,
merger, consolidation, liquidation or otherwise), all proceeds (including
non-cash consideration received) or the fair market value from such disposition
shall be allocated to the Business Unit. If an asset is allocated to more than
one Business Unit, the proceeds or the fair market value of the disposition
shall be allocated among all Business Units, based upon their respective
interests in such assets. Such allocation and determination of fair market value
shall be made by the Board of Directors taking into account such matters as the
Board of Directors and its advisers, if any, deem relevant, and any such
allocation and determination of fair market value shall be final and binding for
all purposes whatsoever.
The Board of Directors may from time to time reallocate any asset from one
Business Unit to the Company or any other Business Unit of the Company at fair
market value. Such determination of fair market value shall be made by the Board
of Directors taking into account such matters as the Board of Directors and its
advisers, if any, deem relevant, and any such allocation and determination of
fair market value shall be final and binding for all purposes whatsoever.
The Company shall not enter into any agreement by which the net patronage
sourced earnings of a Business Unit shall be allocated to any person except to a
person who owns or is deemed to own Units proportionate to the patronage being
so allocated.
ADDITIONAL EQUITY PARTICIPATION UNITS; SALE
The Board of Directors from time to time may authorize the sale by the Company
of Units deemed owned by the Company for the account of the Company provided
that sales shall be at a price determined by the Board of Directors taking into
account such matters as the Board of Directors and its financial advisers, if
any, deem relevant.
The Board of Directors may authorize the creation, issuance and sale of
additional Equity Participation Units from time to time on such terms and for
such consideration as it shall deem appropriate. Any proceeds from the sale of
such additional Equity Participation Units shall be allocated to the applicable
Business Unit.
There are no limitations on the issuance or sale of additional Units in the
governing documents or in any loan agreements or other agreements or instruments
to which the Company is a party.
Holders of Units shall have no preemptive rights to subscribe for or purchase
additional Units or any other securities issued by a Business Unit or the
Company. The Company intends to provide an opportunity for existing holders to
subscribe for additional Equity Participation Units.
The Company may, if authorized by the Board of Directors, purchase Units at such
price as it shall determine from time to time for its own account, or for the
account of a Business Unit.
MERGER, CONSOLIDATION OR SALE
In connection with the merger, consolidation, liquidation or sale of all or
substantially all of the assets of the Company as an entirety or upon the sale
of all or substantially all of the assets of a Business Unit, all, but not less
than all, Units of such Business Unit shall be redeemed by the Company at their
original purchase price shown on the cover of this Prospectus, provided that the
Preferred Capital Certificates or unit retains of such Business Unit not
previously paid are also redeemed in connection therewith; that such payments
include any prorata profit (or loss) associated with disposition of the assets
of the Business Unit as though the assets, subject to the liabilities, of the
Business Unit had been sold in connection with such event at their fair market
value; and that provision is made for the allocations of patronage sourced
income arising prior to such transaction. Any determination of fair market value
shall be made by the Board of Directors taking into account such matters as the
Board of Directors and its advisers, if any, deem relevant. A sale of more than
75% of the assets or earning power will be deemed "all or substantially all" of
the assets of the Company or a Business Unit. Upon any such redemption of Units,
the Company will comply with all applicable federal securities laws.
OPERATIONS
The operations of a Business Unit shall be carried out by the Company through
the Board of Directors, officers and management of the Company. The capital
assets of a Business Unit may be disposed of in the ordinary course of business
and the disposition of any substantial portion of the assets of a Business Unit
as an entirety may be authorized by the Board of Directors. The Board of
Directors may determine to sell the assets and operations of a Business Unit or
to abandon or shut down the operations of a Business Unit. Abandonment or
shutting down the operations of a Business Unit (other than on a temporary
basis) will be considered sale of all of the assets of the Business Unit and
will have the effect described under " -- Merger, Consolidation or Sale."
AMENDMENT OF BOARD RESOLUTIONS
The resolutions adopted by the Board of Directors establishing the Milling
Business Unit and the Processing and Refining Business Unit may be amended from
time to time by the Board of Directors of the Company, except for those matters
described under "Allocations Relating to Business Units" and "Merger,
Consolidation or Sale," which may be amended only with the approval of a
majority of Defined Members owning Units not held or deemed held by the Company.
MEMBER MARKETING AGREEMENT
A Defined Member will be obligated to deliver during each delivery year one
bushel of wheat or soybeans which is of merchantible quality, according to
industry standards, to the Company for each applicable Unit held, subject to
adjustment as described below, at delivery points designated by the Company;
provided, however that, until the Pocono facility commences operation, a Defined
Member contracting to deliver wheat shall only have the right and obligation to
deliver 78% of the contracted bushels. Wheat or soybeans that do not meet
applicable standards may either be rejected or accepted with such discounts as
may be established by the Company or agents. Deliveries may be made at any time
from June 1 through May 31. The Company expects that certain Affiliated
Associations will contract with the Company to act as an agent for handling
required deliveries (and will receive funds for that service), and that the
Company will designate some or all of its owned and operated elevators as
delivery points. The Board of Directors may establish annual "tolerance ranges"
allowing a Defined Member the option to deliver more or less wheat or soybeans
in any given year. Upon transfer of Units, the remaining obligations under the
Agreement must also be assumed by the transferee of the Units. The Agreement may
be terminated by an Individual Member effective on May 31 of any year upon
written notice of termination. In addition, the Agreement may be terminated
following a breach of the Agreement by either party, upon thirty days' written
notice from the party not in breach. The Agreement may be terminated by the
Company upon sale, liquidation, dissolution or winding up of the applicable
Defined Business Unit in accordance with the Company's Bylaws.
The Company is obligated to take and pay for deliveries in accordance with the
Agreement. The price to be paid is based on the prevailing price at the point of
delivery agreed to between the Defined Member and the Company or its agent at
the time of sale. The final settlement price must be established prior to the
end of the processing year. In case of fire, explosions, interruption of power,
strikes or other labor disturbances, lack of transportation facilities, shortage
of labor or supplies, floods, action of the elements, riot, interference of
civil or military authorities, enactment of legislation or any unavoidable
casualty or cause beyond the control of the Company affecting the conduct of the
Company's business to the extent of preventing or unreasonably restricting the
receiving, handling, production, marketing or other operations, the Company
shall be excused from performance during the period that the Company's business
or operations are so affected. The Defined Member shall not be liable for
failure or delay in performance of the Agreement to the extent such failure or
delay is caused by a crop failure due to an Act of God, such as drought or
flood.
The Company will pay to each Defined Member an annual patronage refund equal to
the portion arising from the net savings of the applicable Business Unit
attributable to such Defined Member's patronage of the Business Unit.
Each Agreement is subject to amendment upon the approval of the Company and the
majority vote of the voting power of the applicable Business Unit. As a result,
in the event that Defined Members holding the majority of the voting power of
the applicable Business Unit approve an amendment to the Agreement which has
been approved by the Company, those Defined Members who voted against or oppose
the amendment will be bound to performance of the Agreement as amended.
Upon the termination of the operations of a Defined Business Unit, the Marketing
Agreement will automatically terminate. See " -- Operations."
The Company is authorized to retain a portion of the payments otherwise due to
Defined Members for purchases of products from them. Such retention is referred
to as a "unit retain." The Company has the option to treat any such unit retains
as taxable to the Company or to treat the unit retains as nontaxable by
declaring the unit retains as "qualified." Qualified unit retains are taxable to
the Defined Member in the tax year when the Defined Member receives notification
that a unit retain has been established. When a qualified unit retain is
reimbursed or redeemed, the Defined Member reports no additional income. Unit
retains may be called for payout at the lesser of their stated or book value at
the discretion of the Board of Directors.
TAXATION
Patronage dividends arising under the Agreements with respect to the Units will
have the same tax treatment as patronage currently payable to members. See
"MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL -- Tax Treatment."
TRANSFER OF EQUITY PARTICIPATION UNITS
Upon any transfer of Units, the transferee will be required to certify as to
eligibility and then current anticipated annual production and to sign an
Agreement. In approving any transfer, the Board of Directors will require that
such certificate show that the number of Units transferred does not exceed
anticipated annual production, that any transferee does not own more than 1% of
the outstanding capacity of any one Business Unit and that the Units held by
each transferor retaining units and transferee represent at least 3,000 bushels
of wheat or 1,500 bushels of soybeans.
TRADING OF UNITS
The Company intends to create an electronic bulletin board to facilitate the
purchase and sale of Units among Members, although Members are free to make
other arrangements for the purchase and sale of Units. A seller may post the
seller's name, telephone number, address, number of Units offered and the asking
price per Unit. A buyer may post the buyer's name, telephone number, address,
number of Units sought and the bid price per Unit. Any sale and purchase of
Units will be subject to negotiation of price and other terms of purchase. The
Company will not act as a broker or dealer in connection with any such sale and
will not receive any commission or other fee.
The Company also intends to publish information on transfers of Units, including
date, the number of Units transferred and, in the case of a sale, the sale price
per Unit.
PLAN OF DISTRIBUTION
The Units are being offered by the Company on a best efforts, continuous basis
with no minimum amount of subscriptions required to close. Any person wishing to
purchase Units must execute a Subscription Agreement in the form of Exhibit A
and an Agreement in the form of Exhibit B and send them, accompanied by payment,
to the Company. The manner and circumstances under which such agreements will be
accepted is shown on the cover of this Prospectus.
The Company intends to offer the Units through a series of informational
meetings conducted by officers or directors of the Company. Those meetings will
be announced through newspapers and other publications. At the meetings, a copy
of this Prospectus and a blank subscription agreement and Agreement will be
provided to each attendee. Attendees will be asked to leave their name, address
and telephone number, and employees of the Company will inquire, at a later
time, whether the attendee has any interest in the investment and answer any
questions the attendee may have. Employees of the Company will not receive any
special compensation for assistance in the offering.
VALIDITY OF UNITS
The validity of the securities offered hereby will be passed upon for the
Company by Dorsey & Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of Harvest States Cooperatives and the
financial statements of the Milling Division and the Processing and Refining
Division as of May 31, 1995 and 1996, and for each of the three years in the
period ended May 31, 1996, included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports thereon
appearing herein and have been so included in reliance upon such reports given
upon the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto, relating to
the Units offered hereby has been filed with the Securities and Exchange
Commission (the "Commission"). This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete, and
in each instance reference is made to the copy of such contract or documents
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Units offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, including exhibits and schedules thereto, may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C. and copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of certain fees prescribed by the Commission.
INDEX TO FINANCIAL STATEMENTS
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Harvest States Cooperatives
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of May 31, 1995 and 1996 and
November 30, 1996 (unaudited) F-3
Consolidated Statements of Earnings for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-4
Consolidated Statements of Capital for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1996 (unaudited) F-5
Consolidated Statements of Cash Flows for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-6
Notes to Consolidated Financial Statements for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-7
Wheat Milling Division (A Division of Harvest States Cooperatives)
Independent Auditors' Report F-16
Financial Statements:
Balance Sheets as of May 31, 1995 and 1996 and November 30, 1996 (unaudited) F-17
Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996
and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-18
Statements of Divisional Equity for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1996 (unaudited) F-19
Statements of Cash Flows for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-20
Notes to Financial Statements for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-21
Oilseed Processing And Refining Division (A Division of Harvest States Cooperatives)
Independent Auditors' Report F-28
Financial Statements:
Balance Sheets as of May 31, 1995 and 1996 and November 30, 1996 (unaudited) F-29
Statements of Earnings for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-30
Statements of Divisional Equity for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1996 (unaudited) F-31
Statements of Cash Flows for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-32
Notes to Financial Statements for the Years Ended May 31, 1994, 1995,
and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-33
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F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the consolidated balance sheets of Harvest States Cooperatives
and subsidiaries (the Company) as of May 31, 1995 and 1996 and the related
consolidated statements of earnings, capital, and cash flows for each of the
three years in the period ended May 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at May 31, 1995 and
1996 and the results of its operations and its cash flows for each of the three
years in the period ended May 31, 1996, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
August 19, 1996
F-2
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MAY 31, NOVEMBER 30,
1995 1996 1996
------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 11,656,677 $ 21,426,227 $ 94,766,678
Receivables (Note 2) 334,241,233 367,244,539 374,044,069
Inventories (Note 3) 247,538,620 434,507,118 220,531,059
Prepaid expenses and deposits 19,252,023 41,825,850 32,410,434
------------ -------------- --------------
Total current assets 612,688,553 865,003,734 721,752,240
OTHER ASSETS:
Investments (Note 4) 57,523,420 83,269,566 117,650,022
Other (Note 5) 48,483,906 48,353,983 34,842,586
------------ -------------- --------------
Total other assets 106,007,326 131,623,549 152,492,608
PROPERTY, PLANT, AND EQUIPMENT
(Notes 6 and 7) 205,837,690 232,145,401 219,946,105
------------ -------------- --------------
$924,533,569 $1,228,772,684 $1,094,190,953
============ ============== ==============
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Notes payable (Note 7) $200,000,000 $ 324,000,000 $ --
Patron credit balances 59,490,643 29,007,419 129,887,572
Advances received on grain sales 123,421,988 201,825,190 259,721,905
Drafts outstanding 17,581,091 23,837,715 30,599,660
Accounts payable and accrued expenses 127,569,277 163,435,268 176,354,870
Patronage dividends payable 11,000,000 13,100,000 4,600,000
Current portion of long-term debt (Note 7) 6,721,469 13,923,204 18,205,053
------------ -------------- --------------
Total current liabilities 545,784,468 769,128,796 619,369,060
LONG-TERM DEBT (Note 7) 78,095,056 118,705,972 117,482,954
OTHER LIABILITIES 1,166,152 3,685,797 4,443,888
COMMITMENTS AND CONTINGENCIES
(Notes 8 and 13)
CAPITAL (Note 8) 299,487,893 337,252,119 352,895,051
------------ -------------- --------------
$924,533,569 $1,228,772,684 $1,094,190,953
============ ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-3
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED NOVEMBER 30,
------------------------------------------------- -------------------------------
1994 1995 1996 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales:
Grain and oilseed $3,086,531,429 $4,191,665,535 $7,127,223,407 $3,329,958,581 $3,548,642,198
Processed grain and oilseed 593,116,553 708,219,307 819,863,541 403,716,340 396,378,362
Feed and farm supplies 165,925,459 156,699,068 207,252,696 85,665,267 113,824,347
-------------- -------------- -------------- -------------- --------------
3,845,573,441 5,056,583,910 8,154,339,644 3,819,340,188 4,058,844,907
Patronage dividends 6,609,602 6,512,481 13,278,997 1,891,024 4,727,294
Other revenues (Note 12) 45,895,922 57,556,984 68,339,523 35,821,618 33,809,212
-------------- -------------- -------------- -------------- --------------
3,898,078,965 5,120,653,375 8,235,958,164 3,857,052,830 4,097,381,413
COSTS AND EXPENSES:
Cost of goods sold 3,786,336,764 4,981,820,272 8,076,073,326 3,779,651,094 4,029,924,953
Marketing, general, and
administrative 60,847,099 69,509,491 70,054,248 39,251,639 36,927,696
Interest 10,250,765 19,268,575 31,921,936 13,896,619 8,418,249
-------------- -------------- -------------- -------------- --------------
3,857,434,628 5,070,598,338 8,178,049,510 3,832,799,352 4,075,270,898
-------------- -------------- -------------- -------------- --------------
EARNINGS BEFORE INCOME TAXES 40,644,337 50,055,037 57,908,654 24,253,478 22,110,515
INCOME TAXES (Note 11) 5,500,000 5,100,000 6,900,000 3,050,000 2,600,000
-------------- -------------- -------------- -------------- --------------
NET EARNINGS $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 21,203,478 $ 19,510,515
============== ============== ============== ============== ==============
DISTRIBUTION OF NET
EARNINGS
Cash to patrons $ 9,945,967 $ 10,992,918 $ 13,295,713
Patronage certificates 23,187,069 25,617,898 31,023,286
Nonpatronage certificates 1,832,136 7,912,297 6,175,689
Capital reserve 179,165 431,924 513,966
-------------- -------------- --------------
Net earnings $ 35,144,337 $ 44,955,037 $ 51,008,654
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-4
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL
<TABLE>
<CAPTION>
PATRONAGE NONPATRONAGE PATRONAGE CAPITAL
TOTAL CERTIFICATES CERTIFICATES PAYABLE RESERVE
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1993:
Stated as capital $246,797,147 $184,835,249 $ 16,100,000 $45,861,898
Stated as current liability 6,900,000 6,900,000
------------ ------------ ------------ -----------
253,697,147 184,835,249 23,000,000 45,861,898
Distribution of patronage dividends payable for
preceding year, including cash payment of
$6,833,455 (6,833,455) 15,819,222 (23,000,000) 347,323
Redemption of capital equity certificates (5,484,613) (5,484,613)
Equities issued 3,249,624 3,249,624
Other 387,977 (262,036) 650,013
Net earnings 35,144,337 31,300,000 3,844,337
Patronage dividends payable in cash, stated as a
current liability (9,400,000) (9,400,000)
------------ ------------ ------------ -----------
BALANCE AT MAY 31, 1994:
Stated as capital 270,761,017 198,157,446 21,900,000 50,703,571
Stated as current liability 9,400,000 9,400,000
------------ ------------ ------------ -----------
280,161,017 198,157,446 31,300,000 50,703,571
Distribution of patronage dividends payable for
preceding year, including cash payment of
$9,945,967 (9,945,967) 23,187,069 $1,832,136 (31,300,000) (3,665,172)
Redemption of capital equity certificates (5,728,997) (5,728,997)
Other 1,046,803 150,004 896,799
Net earnings 44,955,037 36,700,000 8,255,037
Patronage dividends payable in cash, stated as a
current liability (11,000,000) (11,000,000)
------------ ------------ ---------- ------------ -----------
BALANCE AT MAY 31, 1995:
Stated as capital 299,487,893 215,765,522 1,832,136 25,700,000 56,190,235
Stated as current liability 11,000,000 11,000,000
------------ ------------ ---------- ------------ -----------
310,487,893 215,765,522 1,832,136 36,700,000 56,190,235
Distribution of patronage dividends payable for
preceding year, including cash payment of
$10,992,918 (10,992,918) 25,617,898 7,912,297 (36,700,000) (7,823,113)
Redemption of capital equity certificates (6,554,160) (6,547,372) (6,788)
Equities issued 8,721,542 8,721,542
Other (2,318,892) (2,041,438) 2,350 (279,804)
Net earnings 51,008,654 43,700,000 7,308,654
Patronage dividends payable in cash, stated as a
current liability (13,100,000) (13,100,000)
------------ ------------ ---------- ------------ -----------
BALANCE AT MAY 31, 1996 stated as capital 337,252,119 241,516,152 9,739,995 30,600,000 55,395,972
Stated as current liability (unaudited) 13,100,000 13,100,000
Distribution of patronage dividends payable for
preceding year including cash payment of
$13,295,173 (unaudited) (13,295,713) 31,023,286 (43,700,000) (618,999)
Redemption of capital equity certificates
(unaudited) (3,242,136) (3,193,664) (48,472)
Equities issued (unaudited) 4,193,985 4,193,985
Other (unaudited) (23,719) 69,974 154 (93,847)
Net earnings (unaudited) 19,510,515 15,400,000 4,110,515
Patronage dividends payable in cash, stated as a
current liability (unaudited) (4,600,000) (4,600,000)
------------ ------------ ---------- ------------ -----------
BALANCE AT NOVEMBER 30, 1996 (Unaudited) $352,895,051 $273,609,733 $9,691,677 $ 10,800,000 $58,793,641
============ ============ ========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------- -------------------------------
1994 1995 1996 1995 1996
------------ ------------- ------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 21,203,478 $ 19,510,515
Adjustments to reconcile net earnings
to net cash flows:
Depreciation and amortization 17,705,185 18,907,903 20,421,425 10,177,780 13,775,558
Noncash expense (income) from
joint venture 277,340 (4,025,854) (12,517,993) (4,612,524) (4,306,933)
Noncash portion of patronage
dividends received (4,598,180) (4,622,221) (9,607,657) (1,505,559) (3,205,478)
Loss (gain) on sale of property, plant,
and equipment 273,843 (1,196,717) (853,024) 96,311 188,574
Change in assets and liabilities:
Receivables (57,084,091) (103,580,123) (33,013,948) (216,781,596) (6,914,154)
Inventories (36,647,598) (19,046,875) (186,968,498) (196,992,652) 213,976,059
Patron credit balances 8,493,415 23,282,391 (30,483,224) 4,606,224 100,880,153
Advances received on grain and oilseed
sales (2,184,948) (1,264,842) 78,403,202 181,684,147 57,896,714
Accounts payable, accrued expenses, and
drafts outstanding 16,534,719 4,852,493 43,477,378 74,330,938 20,595,349
Prepaid expenses, deposits, and other (11,119,894) (7,973,268) (25,590,317) (29,890,478) 10,306,262
------------ ------------- ------------- ------------- --------------
Total adjustments (68,350,209) (94,667,113) (156,732,656) (178,887,409) 403,192,104
------------ ------------- ------------- ------------- --------------
Net cash (used in) provided by
operating activities (33,205,872) (49,712,076) (105,724,002) (157,683,931) 422,702,619
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from disposition of property,
plant, and equipment 1,174,196 3,351,119 3,729,810 693,905 1,005,267
Investments redeemed 7,028,580 3,662,026 2,518,863 833,753 5,900,025
Acquisition of property, plant, and
equipment (28,035,021) (69,314,689) (40,501,980) (23,956,766) (25,347,024)
Payments on notes receivable 682,313 391,412 398,851 302,543 213,701
Investments (2,008,822) (1,843,097) (1,274,069) -- (1,252,156)
Investments in joint ventures (6,650,000) (727,266) -- 7,215,059
Other (3,157,854) (1,004,755) (1,778,678) (14,770) 381,976
------------ ------------- ------------- ------------- --------------
Net cash used in investing activities (24,316,608) (71,407,984) (37,634,469) (22,141,335) (11,883,152)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayments) under
line of credit agreements 79,500,000 87,000,000 124,000,000 167,500,000 (324,000,000)
Long-term debt borrowings 1,160,000 51,000,000 57,961,058 25,361,058 10,000,000
Principal payments on long-term debt (5,869,940) (5,215,106) (10,546,075) (3,395,935) (6,398,286)
Principal payments under capital
lease obligations (634,170) (680,901) (739,884) (364,197) (542,881)
Redemption of capital equity certificates (5,484,613) (5,728,997) (6,554,160) (3,145,246) (3,242,136)
Cash patronage dividends paid (6,833,455) (9,945,967) (10,992,918) (10,934,809) (13,295,713)
------------ ------------- ------------- ------------- --------------
Net cash provided by (used in)
financing activities 61,837,822 116,429,029 153,128,021 175,020,871 (337,479,016)
------------ ------------- ------------- ------------- --------------
INCREASE (DECREASE) IN CASH 4,315,342 (4,691,031) 9,769,550 (4,804,395) 73,340,451
CASH AT BEGINNING OF PERIOD 12,032,366 16,347,708 11,656,677 11,656,677 21,426,227
------------ ------------- ------------- ------------- --------------
CASH AT END OF PERIOD $ 16,347,708 $ 11,656,677 $ 21,426,227 $ 6,852,282 $ 94,766,678
============ ============= ============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
F-6
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND SIX MONTHS
ENDED NOVEMBER 30, 1995 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Harvest States Cooperatives is a producer-owned
agricultural cooperative organized for the mutual benefit of its members.
Membership extends from the Midwest to the Pacific Northwest. The Cooperative's
primary activities are grain marketing, milling, and oilseed processing.
Members' grain is marketed through a network of inland and export elevators.
Sales are both domestic and international.
UNAUDITED INTERIM FINANCIAL STATEMENTS -- Harvest States Cooperatives and its
majority-owned subsidiaries' (the Company) consolidated balance sheet as of
November 30, 1996, consolidated statements of earnings and cash flows for the
six months ended November 30, 1995 and 1996, consolidated statement of capital
for the six months ended November 30, 1996, and the interim information in the
notes to consolidated financial statements as of November 30, 1996 and for the
six months ended November 30, 1995 and 1996 are unaudited. In the opinion of
management, such unaudited consolidated financial statements include all
adjustments (consisting of only normal, recurring accruals) necessary for a fair
presentation thereof. The results of operations for any interim period are not
necessarily indicative of the results for the year.
CONSOLIDATION -- The consolidated financial statements include the accounts of
Harvest States Cooperatives and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
INVENTORIES -- Grain and oilseed and processed grain and oilseed products are
stated at market, including adjustment for open purchase, sales, and futures
contracts. Feed and farm supply inventories are priced at the lower of cost
(first-in, first-out method) or market.
The Company follows the general policy of hedging its grain and oilseed
inventories and unfilled orders for grain and oilseed products to the extent
considered practicable for minimizing risk from market price fluctuations.
Futures contracts used for hedging are purchased and sold through regulated
commodity exchanges. Inventories, however, are not completely hedged, due in
part to the absence of satisfactory hedging facilities for certain commodities
and geographical areas and in part to the Company's appraisal of its exposure
from expected price fluctuations. Noncommodity exchange purchase and sale
contracts may expose the Company to risk in the event that a counterparty to a
transaction is unable to fulfill its contractual obligation. The Company manages
its risk by entering into purchase contracts with preapproved producers and
establishing appropriate limits for individual suppliers. Sales contracts are
entered into with organizations of acceptable creditworthiness, as internally
evaluated.
INVESTMENTS -- Investments in cooperatives are stated at cost including
allocated equity and retainings. Patronage dividends are recorded at the time
written notices of allocation are received. Joint ventures and other significant
equity investments are accounted for under the equity method. Under the equity
method, the Company recognizes its proportionate share of earnings or loss of
the investee. Investments in other debt and equity securities are considered
available for sale and are stated at market value, with unrealized amounts
included in other equity.
PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are stated at
cost, less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
INTANGIBLE ASSETS -- Leasehold rights and other intangible assets are amortized
using the straight-line method over 3 to 40 years.
F-7
GRAIN AND OILSEED SALES -- Grain and oilseed sales are recorded at time of
shipment. Export sales, including those through joint ventures, for the years
ended May 31, 1994, 1995, and 1996, were as follows:
1994 1995 1996
------------ -------------- --------------
Africa 140,000,000 170,000,000 195,000,000
Asia 680,000,000 1,080,000,000 2,150,000,000
Europe 23,000,000 220,000,000 465,000,000
North America 12,000,000 85,000,000 205,000,000
South America 45,000,000 45,000,000 85,000,000
------------ -------------- --------------
$900,000,000 $1,600,000,000 $3,100,000,000
============ ============== ==============
INCOME TAXES -- Deferred income taxes are provided on temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements. Due to the high proportion of patronage earnings, deferred
taxes resulting from temporary differences are not significant.
ASSET IMPAIRMENT -- Effective June 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The adoption of
this statement had no material impact on the Company's financial statements.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1994 and
1995 consolidated financial statements to conform to the 1996 presentation.
These reclassifications have no effect on the operating results of those years,
as previously reported.
2. RECEIVABLES
MAY 31, NOVEMBER 30,
1995 1996 1996
------------ ------------ ------------
Trade $222,522,967 $297,112,614 $329,005,765
Elevator accounts 100,849,459 59,163,181 36,326,652
Other 15,293,807 18,003,744 15,923,543
------------ ------------ ------------
338,666,233 374,279,539 381,255,960
Less allowance for losses (4,425,000) (7,035,000) (7,211,891)
------------ ------------ ------------
$334,241,233 $367,244,539 $374,044,069
============ ============ ============
3. INVENTORIES
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Grain and oilseed $166,797,308 $351,504,342 $168,949,449
Processed grain and oilseed products 42,294,295 52,555,945 39,505,338
Feed and farm supplies 38,447,017 30,446,831 12,076,272
------------ ------------ ------------
$247,538,620 $434,507,118 $220,531,059
============ ============ ============
</TABLE>
F-8
4. INVESTMENTS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cooperatives:
St. Paul Bank for Cooperatives $ 7,358,124 $ 8,180,068 $ 8,180,068
National Bank for Cooperatives 1,385,580 2,855,489 2,818,571
Cenex 8,534,259 12,361,642 12,671,323
Central Ferry Terminal Association 1,279,674 1,222,283 1,222,415
Pro Fac Cooperative 2,816,625 1,769,656 1,769,656
Land O' Lakes, Inc. 2,056,032 3,460,903 6,646,239
Ag Processing, Inc. 9,969,001 14,044,556 14,034,306
Intrade Corporation 886,543 1,869,073 1,869,073
Farmland Industries 628,500 891,625 891,268
Lewis-Clark Terminal, Inc. 484,027 1,003,433 1,208,339
Joint Ventures:
HSPV, L.L.C. 2,341,263 6,408,265 --
Tacoma Export Marketing Company 2,583,904 9,330,337 11,593,988
Ventura Foods, L.L.C. 4,152,815 4,651,933 39,595,682
Harvest States -- Farmland Specialty
Feed 1,007,139 954,678 933,351
Ag States Agency, L.L.C. 3,925,310 4,963,174 4,141,130
Farmland -- Harvest States L.L.C. -- -- 1,140,000
Archer Daniels Midland Common Stock 5,213,400 5,770,031 5,770,031
International Malting Company 700,000 700,000 700,000
Other 2,201,224 2,832,420 2,464,582
----------- ----------- ------------
$57,523,420 $83,269,566 $117,650,022
=========== =========== ============
</TABLE>
5. OTHER ASSETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold rights and other intangibles, less
accumulated amortization of $6,307,759, $7,145,101,
and $6,207,027, respectively $26,770,619 $24,908,896 $15,798,448
Notes receivable 1,245,992 1,780,474 1,681,399
Prepaid expenses and other assets 20,467,295 21,664,613 17,362,739
----------- ----------- -----------
$48,483,906 $48,353,983 $34,842,586
=========== =========== ===========
</TABLE>
F-9
6. PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE MAY 31, NOVEMBER 30,
IN YEARS 1995 1996 1996
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Grain terminals and country
elevators 3 to 50 $ 195,019,102 $ 207,814,058 $ 211,313,639
Grain and oilseed processing plants 3 to 40 144,261,776 187,325,113 135,118,597
Feed plants 3 to 40 24,837,506 23,045,048 23,453,595
Corporate office facilities 3 to 40 11,031,357 11,510,344 12,046,342
Construction in progress 29,105,235 14,510,634 37,108,200
------------- ------------- -------------
404,254,976 444,205,197 419,040,373
Less accumulated depreciation (198,417,286) (212,059,796) (199,094,268)
------------- ------------- -------------
$ 205,837,690 $ 232,145,401 $ 219,946,105
============= ============= =============
</TABLE>
During the years ended May 31, 1994, 1995, and 1996 the Company capitalized
interest of $0, $587,637 and $739,101, respectively.
7. BORROWINGS
NOTES PAYABLE:
The Company had a seasonal loan agreement of $200,000,000 committed with St.
Paul Bank for Cooperatives, $65,000,000 and $128,250,000 of which were
outstanding on May 31, 1995 and 1996, respectively. The Company has a seasonal
loan agreement of $200,000,000 committed with National Bank for Cooperatives,
$55,000,000 and $95,750,000 of which were outstanding on May 31, 1995 and 1996,
respectively. The Company also has seasonal loan agreements of $170,000,000 of
which $150,000,000 is committed with commercial banks, $80,000,000 and
$100,000,000 of which were outstanding on May 31, 1995 and 1996, respectively.
The average weighted interest rates as of May 31, 1995 and 1996 were 6.07% and
6.05%, respectively. Major conditions of the loan agreements provide that (1)
the aggregate principal outstanding under the agreements shall not exceed
$650,000,000; (2) the Company will not change its patronage dividend payment
policy or equity redemption policy without the consent of the banks; and (3) the
Company will maintain working capital of $85,000,000. The total unused seasonal
loan commitment at May 31, 1996 was $226,000,000.
The Company has entered into a seasonal loan agreement of $550,000,000 that is
effective as of November 11, 1996 which replaces the above agreements. The
agreement is provided by the National Bank for Cooperatives, St. Paul Bank for
Cooperatives, and a group of commercial banks, and is committed through October
31, 1997. This agreement can be extended in one year increments through October
29, 1999, if mutually agreed to. No amounts are outstanding as of November 30,
1996.
Major financial covenants of the new seasonal loan agreement provide that (1)
the Company will maintain a working capital amount of not less than
$100,000,000; (2) the Company shall have consolidated members and patrons'
equity of not less than $275,000,000; and (3) the Company shall not have
consolidated funded debt to consolidated members and patrons' equity in excess
of .80 to 1.00. The Company is also required to maintain investments in the St.
Paul Bank for Cooperatives and the National Bank for Cooperatives based upon
borrowing levels. Patronage allocations to the Company are used to maintain such
required level of investment. No direct cash investment is required.
F-10
LONG-TERM DEBT:
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ------------ ------------
<S> <C> <C> <C>
St. Paul Bank for Cooperatives, with fixed and
variable interest rates from 6.24% to 8.50%, due in
installments through 2007 $44,792,000 $ 68,192,000 $ 69,675,333
National Bank for Cooperatives, with fixed and
variable interest rates from 6.24% to 7.51%, due in
installments through 2007 25,500,000 52,500,000 56,083,333
Industrial Development Revenue Bonds, payable
through July 2005, interest rate of 7.4% 4,750,000 3,300,000 2,100,000
Capitalized lease obligations with fixed and variable
rates, 8.0% to 8.90% 7,262,508 6,522,624 5,979,743
Mortgages payable and other 2,512,017 2,114,552 1,849,598
----------- ------------ ------------
84,816,525 132,629,176 135,688,007
Less current portion (6,721,469) (13,923,204) (18,205,053)
----------- ------------ ------------
$78,095,056 $118,705,972 $117,482,954
=========== ============ ============
</TABLE>
The principal maturities of outstanding long-term indebtedness outstanding at
May 31, 1996 are as follows:
Year ending May 31:
1997 $13,923,204
1998 19,385,645
1999 15,061,743
2000 15,981,172
2001 11,638,564
2002 and
thereafter 56,638,848
8. PATRONS' EQUITY
In accordance with the bylaws and by action of the Board of Directors, annual
net earnings from patronage sources are distributed to consenting patrons
following the close of each year and are based on amounts reportable for federal
income tax purposes as adjusted in accordance with the bylaws. The cash portion
of this distribution is determined annually by the Board of Directors, with the
balance issued in the form of Patronage Certificates.
Annual net earnings from sources other than patronage may be added to the
Capital Reserve or, upon action by the Board of Directors, allocated to members
in the form of Nonpatronage Certificates.
The Board of Directors has authorized the redemption of Patronage Certificates
held by patrons who are 72 years of age and those held by estates of deceased
patrons. The Board of Directors has also authorized the redemption of
Nonpatronage Certificates held by estates of deceased patrons.
9. RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all salaried and full-time hourly employees. The retirement plan
benefits for salaried employees are based on years of service and the
participants' total compensation. Benefits for hourly employees are based on
various monthly amounts for each year of credited service. The plans are funded
by annual contributions to tax-exempt trusts in accordance with federal law and
regulations. Plan assets consist principally of corporate obligations, U.S.
Government bonds, money market funds, and immediate participation guarantee
contracts.
F-11
During the year ended May 31, 1995 several participants in a nonqualified
supplemental defined benefit plan retired which resulted in an actuarial loss of
a magnitude which required a settlement adjustment to be recorded.
Net pension expense for the years ended May 31 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Service cost -- benefits earned during the
period $ 2,334,299 $ 2,564,115 $ 2,496,711
Interest cost on projected benefit obligation 6,161,068 6,376,612 5,587,377
Actual return on plan assets (7,256,145) (7,329,046) (6,860,278)
Net amortization and deferral 1,029,260 1,165,499 555,130
Benefit plan settlement adjustment 3,020,077
----------- ----------- -----------
$ 2,268,482 $ 5,797,257 $ 1,778,940
=========== =========== ===========
</TABLE>
The funded status of the plans and the amount recognized on the consolidated
balance sheets as of May 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $67,539,069 and $74,406,137, respectively $69,898,635 $77,127,866
=========== ===========
Projected benefit obligation for service rendered to
date $73,686,670 $81,036,131
Plan assets at fair value 70,122,276 75,743,570
----------- -----------
Plan assets less than projected benefit obligation (3,564,394) (5,292,561)
Unrecognized net loss 19,551,900 25,449,810
Unrecognized transition gain at June 1, 1985 being
recognized over 13 years (3,614,924) (2,517,627)
Unrecognized prior service cost 1,606,315 1,520,901
Additional minimum liability (1,098,275)
----------- -----------
Prepaid pension cost $13,978,897 $18,062,248
=========== ===========
</TABLE>
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 8.25% in 1994 and
1995 and 7.75% in 1996 and a rate of increase in future compensation of 5% in
1994, 1995, and 1996. The expected long-term rate of return on plan assets was
8.5% in 1994 and 1995 and 8% in 1996.
10. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Company provides certain health care benefits for retired employees.
Employees become eligible for these benefits if they meet minimum age and
service requirements and are eligible for retirement benefits.
F-12
The accrued postretirement medical and other benefits costs that are not
funded were as follows at May 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ 5,991,309 $ 2,993,307
Fully eligible active plan participants 1,041,742 1,019,071
Other active plan participants 2,730,508 3,624,620
----------- -----------
Total APBO 9,763,559 7,636,998
Unrecognized transition obligation (9,984,815) (9,430,105)
Unrecognized net gains 2,000,094 4,059,863
----------- -----------
Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756
=========== ===========
</TABLE>
The components of the net periodic cost are as follows for the years ended May
31:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Service cost -- benefits earned during the
year $ 299,000 $ 312,814 $ 337,182
Interest cost on projected benefit obligation 866,000 739,055 548,997
Amortization of unrecognized gains (41,435) (228,025)
Amortization of transition obligation 566,000 554,710 554,710
---------- ---------- ----------
Net periodic postretirement cost $1,731,000 $1,565,144 $1,212,864
========== ========== ==========
</TABLE>
The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996 and a
health care cost trend rate of 10% in 1996, declining to 6% in 2004. If the
health care cost trend rate increased by 1%, the APBO would increase by 8.7% and
the service cost and interest cost components would increase by 10%.
11. PROVISION FOR INCOME TAXES
The provision for income taxes for each of the three years ended May 31 was as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current provision $5,900,000 $5,400,000 $7,100,000
Deferred -- principally
federal (400,000) (300,000) (200,000)
---------- ---------- ----------
Total provision $5,500,000 $5,100,000 $6,900,000
========== ========== ==========
</TABLE>
Deferred income taxes, which are not significant, relate principally to
allowances and accruals.
A reconciliation of the statutory federal tax rate to the effective rate for
each of the three years ended May 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3
Patronage earnings (27.0) (27.6) (29.6)
Other 2.9 .2 2.2
---- ---- ----
Effective rate 13.5% 10.2% 11.9%
==== ==== ====
</TABLE>
F-13
12. OTHER REVENUES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS ENDED
MAY 31, NOVEMBER 30,
------------------------------------------ --------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Storage and handling $ 8,665,157 $ 9,168,022 $ 8,722,537 $ 4,202,610 $ 3,432,000
Service revenues 13,695,050 15,942,394 20,572,679 12,802,646 13,627,860
Commission 8,023,254 6,722,261 6,837,272 3,727,785 4,383,449
Joint venture (loss) income (277,340) 4,025,854 12,517,993 4,612,521 4,306,937
(Loss) gain on sale of property,
plant, and equipment (211,081) 1,196,717 853,024 (96,311) (188,574)
Interest income 7,935,682 11,471,627 11,581,221 6,367,772 3,587,400
Other 8,065,200 9,030,109 7,254,797 4,204,595 4,660,140
----------- ----------- ----------- ----------- -----------
$45,895,922 $57,556,984 $68,339,523 $35,821,618 $33,809,212
=========== =========== =========== =========== ===========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
At May 31, 1995 and 1996, the Company stored grain and oilseed and processed
grain and oilseed products for others totaling $30,700,000 and $37,900,000,
respectively. Such stored commodities and products are not the property of the
Company and therefore are not included in the Company's inventory.
The Company is a guarantor for lines of credit for related companies totaling
$100,000,000, of which $30,300,000 was outstanding as of May 31, 1996. All
outstanding loans are current with respective creditors as of May 31, 1996.
The Company leases approximately 3,400 rail cars with remaining lease terms of
one to ten years. In addition, the Company leases vehicles and various
manufacturing equipment.
Minimum rental payments due under these operating leases at May 31, 1996, are as
follows:
<TABLE>
<CAPTION>
RAIL CARS VEHICLES OTHER TOTAL
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Years ending May 31:
1997 $17,940,667 $ 4,823,359 $ 2,128,587 $ 24,892,613
1998 17,450,431 3,795,690 1,753,844 22,999,965
1999 15,807,151 2,771,987 1,398,045 19,977,183
2000 11,938,430 1,675,650 1,056,157 14,670,237
2001 6,906,800 789,227 861,043 8,557,070
2002 and thereafter 13,599,870 648,190 4,186,672 18,434,732
----------- ----------- ----------- ------------
$83,643,349 $14,504,103 $11,384,348 $109,531,800
=========== =========== =========== ============
</TABLE>
Total rent expense, net of rail car mileage credits received from the railroad
and subleases, was approximately $10,196,000, $11,378,000, and $12,454,000 for
the years ended May 31, 1994, 1995, and 1996, respectively. Mileage credits and
sublease income were $3,437,000, $5,126,000, and $7,257,000 for the years ended
May 31, 1994, 1995, and 1996, respectively.
The Company is a party to various lawsuits and administrative proceedings
incidental to its business. It is impossible, at this time, to estimate what the
ultimate legal and financial liability of the Company will be; nevertheless,
management believes, based on the information available to date and the
resolution of prior proceedings, that the ultimate liability of all litigation
and proceedings will not have a material impact on the financial statements of
the Company taken as a whole.
F-14
14. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS ENDED
MAY 31, NOVEMBER 30,
------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net cash paid for:
Interest $10,149,452 $17,741,969 $31,836,722 $12,658,726 $10,626,889
Income taxes 5,610,503 7,054,563 3,934,688 3,897,074 2,256,355
Significant noncash transactions:
Noncash patronage refunds issued
from prior year's earnings $15,819,222 $23,187,069 $25,617,898
Noncash non-patronage
certificates issued from prior
year's earnings $ 1,832,136 $ 7,912,297
Capital Equity Certificates
issued in exchange for elevator
properties $ 3,249,624 $ 8,721,542
</TABLE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires
disclosure of the fair value of all financial instruments to which the
Company is a party. All financial instruments are carried at amounts that
approximate estimated fair value, except for investments in cooperatives, for
which it is not practicable to provide fair-value information.
F-15
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the balance sheets of the Wheat Milling Division, formerly known
as Amber Milling Company, a division of Harvest States Cooperatives (HSC), as of
May 31, 1995 and 1996 and the related statements of earnings, divisional equity
and cash flows for each of the three years in the period ended May 31, 1996.
These financial statements are the responsibility of the Division's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Wheat Milling Division at May 31, 1995
and 1996 and the results of its operations and its cash flows for each of the
three years in the period ended May 31, 1996, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
December 11, 1996
F-16
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Receivables (Note 2) $18,633,076 $ 43,749,134 $ 39,015,349
Inventories (Note 3) 7,006,187 9,308,275 10,178,201
Prepaid expenses and deposits 98,866 149,873 251,160
----------- ------------ ------------
Total current assets 25,738,129 53,207,282 49,444,710
OTHER ASSETS (Note 4) 13,472,256 12,881,236 12,347,895
PROPERTY, PLANT, AND EQUIPMENT (Note 5) 43,395,670 59,233,046 66,861,556
----------- ------------ ------------
$82,606,055 $125,321,564 $128,654,161
=========== ============ ============
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Due to HSC (Note 6) $13,642,180 $ 31,044,150 $ 26,125,338
Accounts payable and accrued expenses 7,416,803 12,480,342 14,004,043
Current portion of long-term debt (Note 6) 3,075,000 6,344,584 9,330,000
----------- ------------ ------------
Total current liabilities 24,133,983 49,869,076 49,459,381
LONG-TERM DEBT (Note 6) 30,675,000 47,655,416 51,397,708
COMMITMENTS AND CONTINGENCIES
(Note 11)
DIVISIONAL EQUITY (Note 7) 27,797,072 27,797,072 27,797,072
----------- ------------ ------------
$82,606,055 $125,321,564 $128,654,161
=========== ============ ============
</TABLE>
See notes to financial statements.
F-17
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Processed grain sales $103,716,012 $119,725,183 $173,315,613 $71,811,039 $111,426,460
COSTS AND EXPENSES:
Cost of goods sold 97,206,374 112,690,679 161,293,430 66,979,513 102,375,248
Marketing, general, and
administrative 2,415,155 3,834,289 4,471,563 1,655,748 2,503,655
Interest 1,832,037 2,278,544 4,457,797 1,845,608 2,825,979
------------ ------------ ------------ ----------- ------------
101,453,566 118,803,512 170,222,790 70,480,869 107,704,882
------------ ------------ ------------ ----------- ------------
EARNINGS BEFORE INCOME
TAXES 2,262,446 921,671 3,092,823 1,330,170 3,721,578
INCOME TAXES (Note 10) 150,000 125,000 200,000 125,000 250,000
------------ ------------ ------------ ----------- ------------
NET EARNINGS $ 2,112,446 $ 796,671 $ 2,892,823 $ 1,205,170 $ 3,471,578
============ ============ ============ =========== ============
</TABLE>
See notes to financial statements.
F-18
WHEAT MILLING DIVISION
(A DIVISON OF HARVEST STATES COOPERATIVES)
STATEMENTS OF DIVISIONAL EQUITY
BALANCE AT MAY 31, 1993 $27,797,072
Net earnings 2,112,446
Divisional equity distributed (2,112,446)
-----------
BALANCE AT MAY 31, 1994 27,797,072
Net earnings 796,671
Divisional equity distributed (796,671)
-----------
BALANCE AT MAY 31, 1995 27,797,072
Net earnings 2,892,823
Divisional equity distributed (2,892,823)
-----------
BALANCE AT MAY 31, 1996 27,797,072
Net earnings (unaudited) 3,471,578
Divisional equity distributed (unaudited) (3,471,578)
-----------
BALANCE AT NOVEMBER 30, 1996 (UNAUDITED) $27,797,072
===========
See notes to financial statements.
F-19
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 2,112,446 $ 796,671 $ 2,892,823 $ 1,205,170 $ 3,471,578
Adjustments to reconcile net
earnings to net cash flows:
Depreciation and amortization 2,185,697 2,512,430 3,309,307 1,423,085 2,027,064
Change in assets and liabilities:
Receivables (4,884,658) (3,781,655) (25,116,058) (5,406,322) 4,733,785
Inventories (8,459,257) 4,387,100 (2,302,088) (8,920,899) (869,926)
Prepaid expenses, deposits, and
other 82,151 55,168 (51,007) (95,628) (101,287)
Accounts payable and accrued
expenses 443,220 3,854,638 5,063,539 3,987,400 1,523,701
------------ ------------ ------------ ------------ -----------
Total adjustments (10,632,847) 7,027,681 (19,096,307) (9,012,364) 7,313,337
------------ ------------ ------------ ------------ -----------
Net cash (used in) provided by
operating activities (8,520,401) 7,824,352 (16,203,484) (7,807,194) 10,784,915
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of additional
intangibles (5,624,405) (475,654)
Acquisition of property, plant, and
equipment (803,647) (25,123,131) (18,080,009) (12,552,548) (9,122,234)
------------ ------------ ------------ ------------ -----------
Net cash used in investing
activities (803,647) (30,747,536) (18,555,663) (12,552,548) (9,122,234)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings from (repayments to)
HSC 12,136,494 8,969,855 17,401,970 6,114,912 (4,918,811)
Long-term debt borrowings 14,750,000 20,250,000 17,087,500 10,000,000
Principal payments on long-term debt (700,000) (1,637,500) (3,272,292)
Divisional equity distributed (2,112,446) (796,671) (2,892,823) (1,205,170) (3,471,578)
------------ ------------ ------------ ------------ -----------
Net cash provided by (used in)
financing activities 9,324,048 22,923,184 34,759,147 20,359,742 (1,662,681)
------------ ------------ ------------ ------------ -----------
INCREASE (DECREASE) IN CASH -- -- -- -- --
CASH AT BEGINNING OF PERIOD -- -- -- -- --
------------ ------------ ------------ ------------ -----------
CASH AT END OF PERIOD $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ===========
</TABLE>
See notes to financial statements.
F-20
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND SIX
MONTHS ENDED NOVEMBER 30, 1995 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS -- Harvest States Cooperatives Wheat Milling
Division (the Division), formerly known as Amber Milling Company, is a division
of Harvest States Cooperatives (HSC) and is not organized as a separate legal
entity. These Division's financial statements should be read in connection with
the consolidated financial statements of HSC. In the year ended May 31, 1994,
the Division was operated as a joint venture in which HSC owned a 70% interest.
Effective June 1, 1994, HSC purchased the minority interest. The Division
operates commercial bakery and semolina flour milling facilities in Rush City,
Minnesota; Huron, Ohio; and Kenosha, Wisconsin. These mills produce semolina and
durum flour, which are the primary ingredients in pasta products and wheat flour
in the bakery industry. The Division serves customers throughout the United
States.
UNAUDITED INTERIM FINANCIAL STATEMENTS -- The Division's balance sheet as of
November 30, 1996, statements of earnings and cash flows for the six months
ended November 30, 1995 and 1996, statement of divisional equity for the six
months ended November 30, 1996, and the interim information in the notes to
financial statements as of November 30, 1996 and for the six months ended
November 30, 1995 and 1996 are unaudited. In the opinion of management, such
unaudited financial statements include all adjustments (consisting of only
normal, recurring accruals) necessary for a fair presentation thereof. The
results of operations for any interim period are not necessarily indicative of
the results for the year.
SALES -- Sales of Processed Grains are recognized upon shipment to customers,
net of freight charges.
CASH MANAGEMENT -- The Division draws all of its cash requirements from and
deposits all cash generated with a centralized HSC cash management system.
INVENTORIES -- Grain and processed grain products are stated at market,
including adjustment for open purchase, sales, and futures contracts and
deferral of normal profit on processed grain products.
The Division follows the general policy of hedging its grain inventories and
unfilled orders for grain products to the extent considered practicable for
minimizing risk from market price fluctuations. Futures contracts used for
hedging are purchased and sold through regulated commodity exchanges.
Inventories, purchase commitments, and sales commitments, however, are not
completely hedged, due in part to the absence of satisfactory hedging facilities
for certain commodities and geographical areas and in part to the Division's
appraisal of its exposure from expected price fluctuations. Noncommodity
exchange purchase and sale contracts may expose the Division to risk in the
event that a counterparty to a transaction is unable to fulfill its contractual
obligation. The Division manages its risk by entering into purchase contracts
with preapproved producers and companies and by establishing appropriate limits
for individual suppliers. Sales contracts are entered into with organizations of
acceptable creditworthiness, as internally evaluated.
PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are stated at
cost, less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
OTHER ASSETS -- Leasehold rights and other intangible assets are amortized using
the straight-line method over 15 to 18 years.
IMPAIRMENT OF LONG-LIVED ASSETS -- Management periodically reviews the carrying
value of property and equipment for potential impairment by comparing its
carrying value to the estimated undiscounted future cash flows expected to
result from the use of these assets. Should the sum of the related, expected
future net cash flows be less than the carrying value, an impairment loss would
be
F-21
recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset.
INCOME TAXES -- Earnings generated on grain purchased by the Division from
nonmembers is characterized as nonpatronage and taxable. Earnings generated on
grain purchased from HSC are considered to be patronage to the extent of HSC's
patronage purchase percentage of that particular commodity; the other portion of
those earnings is considered taxable. Due to the high proportion of patronage
earnings, deferred taxes resulting from temporary differences are not
significant.
REVENUE FROM SIGNIFICANT CUSTOMERS -- Sales to individual customers in excess of
5% of total sales were approximately $68,800,000 to six customers, $90,500,000
to nine customers, and $116,200,000 to seven customers for the years ended May
31, 1994, 1995, and 1996.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
2. RECEIVABLES
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ----------- -----------
Trade $18,504,796 $43,530,542 $39,120,449
Other 257,468 459,530 199,838
Less allowance for losses (129,188) (240,938) (304,938)
----------- ----------- -----------
$18,633,076 $43,749,134 $39,015,349
=========== =========== ===========
3. INVENTORIES
MAY 31, NOVEMBER 30,
1995 1996 1996
---------- ---------- -----------
Grain $6,799,010 $8,327,021 $ 3,990,528
Processed grain products (75,951) 629,647 5,854,163
Other 283,128 351,607 333,510
---------- ---------- -----------
$7,006,187 $9,308,275 $10,178,201
========== ========== ===========
4. OTHER ASSETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Goodwill, less accumulated amortization of
$374,960, $781,635, and $984,975 respectively $ 5,249,445 $ 5,318,424 $ 5,115,084
Leasehold rights and other intangibles, less
accumulated amortization of $3,788,723,
$4,484,723, and $4,735,602 respectively 8,222,811 7,562,812 7,232,811
----------- ----------- -----------
$13,472,256 $12,881,236 $12,347,895
=========== =========== ===========
</TABLE>
F-22
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE MAY 31, NOVEMBER 30,
IN YEARS 1995 1996 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Land $ 142,060 $ 181,420 $ 181,420
Grain processing plants 15 to 45 7,435,649 30,835,636 30,835,640
Machinery and equipment 5 to 20 23,431,415 35,520,073 35,520,071
------------ ------------ ------------
31,009,124 66,537,129 66,537,131
Less accumulated depreciation (12,387,180) (14,677,871) (16,171,595)
------------ ------------ ------------
18,621,944 51,859,258 50,365,536
Construction-in-progress 24,773,726 7,373,788 16,496,020
------------ ------------ ------------
$ 43,395,670 $ 59,233,046 $ 66,861,556
============ ============ ============
</TABLE>
During the years ended May 31, 1994, 1995, and 1996 the Division capitalized
interest of $0, $587,637, and $739,101, respectively.
6. BORROWINGS
DUE TO HSC:
The Division satisfies its working capital needs through borrowings, both long
and short term, from HSC to the extent HSC's borrowing capacity permits.
Short-term borrowings of $13,642,180 and $31,044,150 were outstanding on May 31,
1995 and 1996, respectively. Interest on short-term borrowings from HSC is
charged to the Division and all other HSC divisions based upon a ratable
allocation of consolidated HSC interest expense related to short term borrowings
based upon working capital employed by each division. This results in an
effective borrowing rate that may be less than what the Division could obtain on
an independent basis.
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Harvest States Cooperatives, with fixed and
variable interest rates from 6.24% to 8.50%,
due in installments through 2005 $31,250,000 $51,700,000 $58,627,708
Industrial Development and Public Grain
Elevator Revenue Bonds, payable through July
2004, with an interest rate of 7.375% 2,500,000 2,300,000 2,100,000
----------- ----------- -----------
33,750,000 54,000,000 60,727,708
Less current portion (3,075,000) (6,344,584) (9,330,000)
----------- ----------- -----------
$30,675,000 $47,655,416 $51,397,708
=========== =========== ===========
</TABLE>
F-23
The principal maturities of outstanding long-term indebtedness outstanding at
May 13, 1996 are as follows:
Year ending May 31:
1997 $ 6,344,584
1998 8,026,875
1999 8,026,875
2000 8,026,875
2001 6,151,875
2002 and
thereafter 17,422,916
7. DIVISIONAL EQUITY
The Division's earnings are distributed to HSC at the end of each quarter. All
patronage-related liability and capital accounts are maintained at HSC's
consolidated level.
8. RETIREMENT PLANS
The Division, through HSC, has noncontributory defined benefit retirement plans
covering substantially all salaried and full-time hourly employees. The
retirement plan benefits for salaried employees are based on years of service
and the participants' total compensation. Benefits for hourly employees are
based on various monthly amounts for each year of credited service. The plans
are funded by annual contributions to tax-exempt trusts in accordance with
federal law and regulations. Plan assets consist principally of corporate
obligations, U.S. Government bonds, money market funds, and immediate
participation guarantee contracts. Pension costs billed to the Division for
1994, 1995, and 1996 were approximately $52,000, $101,000, and $46,000,
respectively. The Division's portion of the actuarial present value or
accumulated benefit obligations and net pension assets available for benefits
has not been determined. Selected information at May 31 for HSC's plans are as
follows:
1995 1996
----------- -----------
Accumulated benefit obligation, including vested
benefits
of $67,539,069 and $74,406,137, respectively $69,898,635 $77,127,866
Projected benefit obligation for services
rendered to date 73,686,670 81,036,131
Plan assets at fair value 70,122,276 75,743,570
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 8.25% in 1994 and
1995 and 7.75% in 1996 and a rate of increase in future compensation of 5% in
1994, 1995, and 1996. The expected long-term rate of return on plan assets was
8.5% in 1994 and 1995 and 8% in 1996.
F-24
9. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Division, through HSC, provides certain health care benefits for retired
employees. Employees become eligible for these benefits if they meet minimum age
and service requirements and are eligible for retirement benefits.
The accrued postretirement medical and other benefits costs of HSC that are not
funded were as follows at May 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ 5,991,309 $ 2,993,307
Fully eligible active plan participants 1,041,742 1,019,071
Other active plan participants 2,730,508 3,624,620
----------- -----------
Total APBO 9,763,559 7,636,998
Unrecognized transition obligation (9,984,815) (9,430,105)
Unrecognized net gains 2,000,094 4,059,863
----------- -----------
Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756
=========== ===========
</TABLE>
The net periodic costs billed to the Division for 1994, 1995, and 1996 were
approximately $30,000, $44,000, and $42,000, respectively.
The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996 and a
health care cost trend rate of 10% in 1996, declining to 6% in 2004. If the
health care cost trend rate increased by 1%, the APBO would increase by 8.7% and
the service cost and interest cost components would increase by 10%.
10. PROVISION FOR INCOME TAXES
HSC and its divisions, including the Wheat Milling Division, file consolidated
federal income tax returns. HSC has a policy that provides for the payment of
taxes on an individual company basis for each of its divisions.
No significant deferred income tax provision was recorded by the Division.
A reconciliation of the statutory federal tax rate to the effective rate for the
years ended May 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3
Patronage earnings (33.9) (24.2) (31.9)
Other 2.9 .2 2.2
----- ----- -----
Effective rate 6.6% 13.6% 9.6%
===== ===== =====
</TABLE>
F-25
11. COMMITMENTS AND CONTINGENCIES
The Division leases approximately 242 rail cars with remaining lease terms of
one to ten years. In addition, the Division leases a milling facility, vehicles,
and various manufacturing equipment.
Minimum rental payments due under these operating leases at May 31, 1996 are
as follows:
MILLING
RAIL CARS FACILITY OTHER TOTAL
---------- ---------- ------- ----------
Year ending May 31:
1997 $1,423,200 $ 399,996 $ 5,844 $1,829,040
1998 1,001,475 426,668 5,844 1,433,987
1999 825,125 440,004 2,435 1,267,564
2000 815,630 440,004 1,255,634
2001 610,300 440,004 1,050,304
2002 and thereafter 52,850 2,986,672 3,039,522
---------- ---------- ------- ----------
$4,728,580 $5,133,348 $14,123 $9,876,051
========== ========== ======= ==========
Total rent expense, net of rail car mileage credits received from the railroad
and subleases, was approximately $1,190,606, $1,180,836, and $1,624,576 for the
years ended May 31, 1994, 1995, and 1996, respectively. Mileage credits and
sublease income were $273,384, $321,909, and $338,700 for the years ended May
31, 1994, 1995, and 1996, respectively.
The Division is a party to various lawsuits and administrative proceedings
incidental to its business. It is impossible, at this time, to estimate what the
ultimate legal and financial liability of the Division will be; nevertheless,
management believes, based on the information available to date and the
resolution of prior proceedings, that the ultimate liability of all litigation
and proceedings will not have a material impact on the financial statements of
the Division taken as a whole.
At May 31, 1996, the Division had outstanding grain purchase contracts of
approximately 7,800,000 bushels at prices for durum ranging from $5.93 per
bushel to $7.50 per bushel and prices for spring wheat ranging from $5.03 per
bushel to $7.54 per bushel. In addition, the Division had outstanding sales
contracts of both semolina and commercial baking flour totaling approximately
$59,800,000.
12. RELATED-PARTY TRANSACTIONS
Net sales for the year ended May 31, 1994, 1995, and 1996 included $870,000,
$321,768, and $647,416, respectively, to related parties.
The Division purchases substantially all of its durum and wheat from HSC, a
related party. Included in cost of goods sold for the years ended May 31, 1994,
1995, and 1996 were $58,900,000, $69,900,000, and $122,900,000, respectively, of
these purchases.
All sales and purchases with related parties are made at prices which management
believes represent market value.
Additionally, HSC performs various direct management services and incurs certain
costs for its operating divisions. Such costs, including data processing, office
services, and insurance, are charged directly to the divisions. Indirect
expenses, such as publications, board expense, executive management, legal,
finance, and human resources, are allocated to the divisions based on
approximate usage. Management believes that these charges represent a reasonable
allocation of such expenses.
F-26
13. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:
1994 1995 1996
---------- ---------- ----------
Net cash paid during year for:
Interest $1,832,037 $2,278,544 $4,457,797
Income taxes 350,000 150,000 125,000
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS, requires disclosure of the fair value of all financial
instruments to which the Division is a party. All financial instruments are
carried at amounts that approximate estimated fair value.
15. SUBSEQUENT EVENT
HSC has announced a plan to offer Equity Participation Units (EPUs) to its
members. Each EPU will represent the rights and obligation to deliver a
specified quantity of wheat to HSC. Holders of EPUs will be entitled to receive
patronage earnings related to the Division's milling of wheat delivered by the
holder to HSC, as well as a ratable share of consolidated HSC non-patronage
earnings based upon total member deliveries to HSC by members of all
commodities. The portion of patronage dividends payable in cash and the portion
payable in Patrons' Equities will be at the discretion of HSC's Board of
Directors. EPU's will represent an equity interest in HSC and will not represent
an ownership interest in any assets of the Division.
In conjunction with the offering of EPUs, HSC announced its intention to begin
charging the Division interest on its daily average of short-term borrowings at
a rate equivalent to the weighted average interest rate on short-term borrowings
of HSC. On May 31,1996, the weighted average borrowing rate of EPUs short-term
borrowings was 6.05%. Amounts due from HSC will accrue interest in the same
manner at the same rate.
F-27
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the balance sheets of the Oilseed Processing and Refining
Division, formerly known as Honeymead Products Company, a division of Harvest
States Cooperatives (HSC) as of May 31, 1995 and 1996 and the related statements
of earnings, divisional equity, and cash flows for each of the three years in
the period ended May 31, 1996. These financial statements are the responsibility
of the Division's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Oilseed Processing and Refining Division
at May 31, 1995 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended May 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
December 10, 1996
F-28
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Receivables (Note 2) $20,387,921 $22,795,612 $33,928,343
Inventories (Note 3) 17,255,215 26,235,220 30,042,344
Prepaid expenses and deposits 524,151 310,692 1,895,765
Due from HSC 5,095,299 - -
----------- ----------- -----------
Total current assets 43,262,586 49,341,524 65,866,452
PROPERTY, PLANT, AND EQUIPMENT (Note 4) 20,410,408 24,771,413 31,127,864
----------- ----------- -----------
$63,672,994 $74,112,937 $96,994,316
=========== =========== ===========
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Due to HSC (Note 5) $ 9,482,351 $22,980,616
Accounts payable and accrued expenses $10,281,996 11,239,588 20,622,702
Total current liabilities 10,281,996 20,721,939 43,603,318
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
DIVISIONAL EQUITY (Note 6) 53,390,998 53,390,998 53,390,998
----------- ----------- -----------
$63,672,994 $74,112,937 $96,994,316
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-29
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------- -----------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Processed oilseed
sales $358,372,039 $398,095,108 $399,271,001 $197,863,256 $209,352,293
Other revenue 1,349,484 1,162,518 1,435,708 1,399,030 576,487
------------ ------------ ------------ ------------ ------------
359,721,523 399,257,626 400,706,709 199,262,286 209,928,780
COSTS AND EXPENSES:
Cost of goods sold 334,968,474 366,407,451 371,424,566 186,027,862 195,305,454
Marketing, general,
and administrative 4,722,900 5,137,663 4,544,763 2,445,721 2,441,463
Interest 164,300 151,500 - 35,500
------------ ------------ ------------ ------------ ------------
339,855,674 371,545,114 376,120,829 188,473,583 197,782,417
------------ ------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME
TAXES 19,865,849 27,712,512 24,585,880 10,788,703 12,146,363
INCOME TAXES (Note 9) 1,650,000 1,500,000 1,600,000 1,200,000 1,200,000
------------ ------------ ------------ ------------ ------------
NET EARNINGS $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 9,588,703 $ 10,946,363
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-30
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF DIVISIONAL EQUITY
<TABLE>
<CAPTION>
<S> <C>
BALANCE AT MAY 31, 1993 $ 53,390,998
Net earnings 18,215,849
Divisional equity distributed (18,215,849)
------------
BALANCE AT MAY 31, 1994 53,390,998
Net earnings 26,212,512
Divisional equity distributed (26,212,512)
------------
BALANCE AT MAY 31, 1995 53,390,998
Net earnings 22,985,880
Divisional equity distributed (22,985,880)
------------
BALANCE AT MAY 31, 1996 53,390,998
Net earnings (unaudited) 10,946,363
Divisional equity distributed
(unaudited) (10,946,363)
------------
BALANCE AT NOVEMBER 30, 1996 (UNAUDITED) $ 53,390,998
============
</TABLE>
See notes to financial statements.
F-31
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVEST)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED NOVEMBER 30,
---------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net earnings $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 9,588,703 $ 10,946,363
Adjustments to reconcile net
earnings to net cash flows:
Depreciation and amortization 1,940,793 1,724,844 1,598,965 758,982 823,957
Gain (loss) on sale of property,
plant, and equipment 40,721 (431) 31,765 (31,765) (11,732)
Change in assets and liabilities:
Receivables (116,143) (568,635) (2,407,691) (4,363,783) (11,132,731)
Inventories (8,481,765) 16,861,993 (8,980,005) (3,800,097) (3,807,124)
Prepaid expenses and deposits 303,248 152,531 213,459 (973,824) (1,585,073)
Accounts payable and accrued
expenses (2,821,112) 482,095 957,592 780,552 9,383,114
------------ ------------ ------------ ----------- ------------
Total adjustments (9,134,258) 18,652,397 (8,585,915) (7,629,935) (6,329,589)
------------ ------------ ------------ ----------- ------------
Net cash provided by
operating activities 9,081,591 44,864,909 14,399,965 1,958,768 4,616,774
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from disposition of
property, plant, and equipment 1,000
Acquisition of property, plant, and
equipment (6,293,164) (2,557,886) (5,991,735) (3,038,896) (7,168,676)
------------ ------------ ------------ ----------- ------------
Net cash used in investing
activities (6,293,164) (2,556,886) (5,991,735) (3,038,896) (7,168,676)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net borrowings from
(repayments to) HSC 15,427,422 (16,095,511) 14,577,650 10,668,831 13,498,265
Divisional equity distributed (18,215,849) (26,212,512) (22,985,880) (9,588,703) (10,946,363)
------------ ------------ ------------ ----------- ------------
Net cash used in financing
activities (2,788,427) (42,308,023) (8,408,230) 1,080,128 2,551,902
------------ ------------ ------------ ----------- ------------
INCREASE (DECREASE)
IN CASH - - - - -
CASH AT BEGINNING
OF PERIOD - - - - -
------------ ------------ ------------ ----------- ------------
CASH AT END OF PERIOD $ - $ - $ - $ - $ -
============ ============ ============ =========== ============
</TABLE>
See notes to financial statements.
F-32
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND SIX
MONTHS ENDED NOVEMBER 30, 1995 AND 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS -- Harvest States Cooperatives Oilseed
Processing and Refining Division (the Division), formerly known as Honeymead
Products Company, is a division of Harvest States Cooperatives (HSC) and is not
organized as a separate legal entity. The Division's financial statements should
be read in connection with the consolidated financial statements of HSC. The
Division operates a single soybean crushing and oil refining plant in Mankato,
Minnesota and serves customers throughout the United States.
UNAUDITED INTERIM FINANCIAL STATEMENTS -- The Division's balance sheet as of
November 30, 1996, statements of earnings and cash flows for the six months
ended November 30, 1995 and 1996, statement of divisional equity for the six
months ended November 30, 1996, and the interim information in the notes to the
financial statements as of November 30, 1996 and for the six months ended
November 30, 1995 and 1996 are unaudited. In the opinion of management, such
unaudited financial statements include all adjustments (consisting of only
normal, recurring accruals) necessary for a fair presentation thereof. The
results of operations for any interim period are not necessarily indicative of
the results for the year.
SALE -- Sales of processed oilseeds are recognized upon shipment to customers,
net of freight charges.
CASH MANAGEMENT -- The Division draws all of its cash requirements from and
deposits all cash generated with a centralized HSC cash management system.
INVENTORIES -- Oilseed and processed oilseed products are stated at market,
including adjustment for open purchase, sales, and futures contracts and
deferral of profit on processed oilseed products.
The Division follows the general policy of hedging its oilseed inventories and
unfilled orders for oilseed products to the extent considered practicable for
minimizing risk from market price fluctuations. Futures contracts used for
hedging are purchased and sold through regulated commodity exchanges. However,
inventories, purchase commitments, and sales commitments are not completely
hedged, due in part to the Division's appraisal of its exposure from expected
price fluctuations. Noncommodity exchange purchase and sale contracts may expose
the Division to risk in the event that a counterparty to a transaction is unable
to fulfill its contractual obligation. The Division manages its risk by entering
into purchase contracts with preapproved producers and companies and by
establishing appropriate limits for individual suppliers. Sales contracts are
entered into with organizations of acceptable creditworthiness, as internally
evaluated.
PROPERTY, PLANT, AND EQUIPMENT -- Property, plant, and equipment are stated at
cost, less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
IMPAIRMENT OF LONG-LIVED ASSETS -- Management periodically reviews the carrying
value of property and equipment for potential impairment by comparing its
carrying value to the estimated undiscounted future cash flows expected to
result from the use of these assets. Should the sum of the related, expected
future net cash flows be less than the carrying value, an impairment loss would
be recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset.
INCOME TAXES -- Earnings generated on oilseed purchased by the Division from
nonmembers is characterized as nonpatronage and taxable. Earnings generated on
oilseed purchased from HSC are considered to be patronage to the extent of HSC's
patronage purchase percentage of that particular commodity; the other portion of
those earnings is considered taxable. Due to the high proportion of patronage
earnings, deferred taxes resulting from temporary differences are not
significant.
F-33
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
REVENUE FROM SIGNIFICANT CUSTOMERS -- Sales to individual customers in excess of
5% of total sales were approximately $103,700,000 to two customers, $132,500,000
to three customers, and $152,500,000 to three customers for the years ended May
31, 1994, 1995, and 1996.
2. RECEIVABLES
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ----------- -----------
Trade $20,782,921 $23,190,612 $34,323,343
Less allowance for losses (395,000) (395,000) (395,000)
----------- ----------- -----------
$20,387,921 $22,795,612 $33,928,343
=========== =========== ===========
3. INVENTORIES
MAY 31, NOVEMBER 30,
1995 1996 1996
----------- ----------- -----------
Oilseed $ 8,369,881 $17,141,111 $11,816,004
Processed oilseed products 8,885,334 9,094,109 18,226,340
----------- ----------- -----------
$17,255,215 $26,235,220 $30,042,344
=========== =========== ===========
4. PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE MAY 31, NOVEMBER 30,
IN YEARS 1995 1996 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Land $ 630,043 $ 630,043 $ 630,043
Elevators, crushing plant, and
refinery 15 to 20 19,743,982 21,268,532 21,192,093
Machinery and equipment 5 to 18 37,924,258 41,077,104 41,060,860
Furniture and fixtures 3 to 12 357,263 379,363 379,363
Other 5 to 12 99,112 99,112 99,112
------------ ------------ ------------
58,754,658 63,454,154 63,361,471
Less accumulated depreciation (40,532,200) (42,310,640) (43,053,646)
------------ ------------ ------------
18,222,458 21,143,514 20,307,825
Construction-in-progress 2,187,950 3,627,899 10,820,039
------------ ------------ ------------
$ 20,410,408 $ 24,771,413 $ 31,127,864
============ ============ ============
</TABLE>
F-34
5. DUE TO HSC
The Division satisfies its working capital needs through borrowings, both long
and short term, from HSC to the extent HSC's borrowing capacity permits.
Short-term borrowings of $9,482,351 were outstanding on May 31, 1996. No balance
was outstanding on May 31, 1995.
Interest on short-term borrowings from HSC is charged to the Division and all
other HSC divisions based upon a ratable allocation of consolidated HSC interest
expense related to short term borrowings based upon working capital employed by
each division. This results in an effective borrowing rate that may be less than
what the Division could obtain on an independent basis.
Long-term debt has been allocated by HSC on a specified use basis to its
divisions, generally for capital expenditures. The Division has had a relatively
low level of capital expenditures in recent years, and all such expenditures
have been financed through the cash flow generated by the Division and not
long-term debt.
6. DIVISIONAL EQUITY
The Division's earnings are distributed to HSC at the end of each quarter. All
patronage-related liability and capital accounts are maintained at HSC's
consolidated level.
7. RETIREMENT PLANS
The Division, through HSC, has noncontributory defined benefit retirement plans
covering substantially all salaried and full-time hourly employees. The
retirement plan benefits for salaried employees are based on years of service
and the participants' total compensation. Benefits for hourly employees are
based on various monthly amounts for each year of credited service. The plans
are funded by annual contributions to tax-exempt trusts in accordance with
federal law and regulations. Plan assets consist principally of corporate
obligations, U.S. Government bonds, money market funds, and immediate
participation guarantee contracts. Pension costs billed to the Division for the
years ended May 31, 1994, 1995, and 1996 were approximately $166,000, $264,000,
and $169,000, respectively. The Division's portion of the actuarial present
value or accumulated benefit obligations and net pension assets available for
benefits has not been determined. Selected information at May 31 for HSC's plans
are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits
of $67,539,069 and $74,406,137, respectively $69,898,635 $77,127,866
Projected benefit obligation for service rendered to date 73,686,670 81,036,131
Plan assets at fair value 70,122,276 75,743,570
</TABLE>
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 8.25% in 1994 and
1995 and 7.75% in 1996 and a rate of increase in future compensation of 5% in
1994, 1995, and 1996. The expected long-term rate of return on plan assets was
8.5% in 1994 and 1995 and 8% in 1996.
F-35
8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Division, through HSC, provides certain health care benefits for retired
employees. Employees become eligible for these benefits if they meet minimum
age and service requirements and are eligible for retirement benefits.
The accrued postretirement medical and other benefits costs of HSC that are not
funded were as follows at May 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ 5,991,309 $ 2,993,307
Fully eligible active plan participants 1,041,742 1,019,071
Other active plan participants 2,730,508 3,624,620
----------- -----------
Total APBO 9,763,559 7,636,998
Unrecognized transition obligation (9,984,815) (9,430,105)
Unrecognized net gains 2,000,094 4,059,863
----------- -----------
Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756
=========== ===========
</TABLE>
The net periodic costs billed to the Division for the years ended May 31, 1994,
1995, and 1996 were approximately $301,000, $238,000, and $197,000,
respectively.
The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996 and a
health care cost trend rate of 10% in 1996, declining to 6% in 2004. If the
health care cost trend rate increased by 1%, the APBO would increase by 8.7% and
the service cost and interest cost components would increase by 10%.
9. PROVISION FOR INCOME TAXES
HSC and its divisions, including the Oilseed Processing and Refining Division,
file consolidated federal income tax returns. HSC has a policy that provides for
the payment of taxes on an individual company basis for each of its divisions.
No significant deferred income tax provision was recorded by the Division.
A reconciliation of the statutory federal tax rate to the effective rate for the
years ended May 31 follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3
Patronage earnings (32.2) (32.4) (35.0)
Other 2.9 .2 2.2
----- ----- -----
Effective rate 8.3% 5.4% 6.5%
===== ===== =====
</TABLE>
F-36
10. COMMITMENTS AND CONTINGENCIES
The Division leases approximately 347 rail cars with remaining lease terms of
one to ten years.
Minimum rental payments due under these operating leases at May 31, 1996 are as
follows:
Year ending May 31:
1997 $1,983,390
1998 1,669,740
1999 1,494,810
2000 1,219,640
2001 1,002,660
2002 and thereafter 1,905,600
----------
$9,275,840
==========
Total rent expense, net of rail car mileage credits received from the railroad
and subleases, was approximately $1,634,253, $1,771,790, and $1,832,413 for the
years ended May 31, 1994, 1995, and 1996, respectively.
The Division is a party to various lawsuits and administrative proceedings
incidental to its business. It is impossible, at this time, to estimate what the
ultimate legal and financial liability of the Division will be; nevertheless,
management believes, based on the information available to date and the
resolution of prior proceedings, that the ultimate liability of all litigation
and proceedings will not have a material impact on the financial statements of
the Division taken as a whole.
At May 31, 1996, the Division had outstanding oilseed purchase contracts of
3,401,670 bushels at prices ranging from $6.27 per bushel to $8.23 per bushel,
and outstanding oil purchase contracts of 284,958,713 pounds at prices ranging
from $0.2505 per pound to $0.2930 per pound. In addition, the Division had
outstanding sales contracts totaling $36,953,870.
11. RELATED-PARTY TRANSACTIONS
Net sales for the years ended May 31, 1994, 1995, and 1996 included $22,354,368,
$79,133,437, and $124,299,369, respectively, to related parties.
The Division purchases substantially all of it soybeans from HSC, a related
party. Included in cost of goods sold for the years ended May 31, 1994, 1995,
and 1996 were $11,468,610, $5,502,705, and $3,772,327, respectively, of these
purchases.
All sales and purchases with related parties are made at prices which management
believes represents market value.
Additionally, HSC performs various direct management services and incurs certain
costs for its operating divisions. Such costs, including data processing, office
services, and insurance, are charged directly to the divisions. Indirect
expenses, such as publications, board expense, executive management, legal,
finance, and human resources, are allocated to the divisions based on
approximate usage. Management believes that these charges represent a reasonable
allocation of such expenses.
F-37
12. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:
1994 1995 1996
---------- -------- ----------
Net cash paid to HSC during year for:
Interest $ 164,300 $ -- $ 151,500
Income taxes 1,900,000 1,650,000 1,500,000
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS, requires disclosure of the fair value of all financial
instruments to which the Division is a party. All financial instruments are
carried at amounts that approximate estimated fair value.
14. SUBSEQUENT EVENT
HSC has announced a plan to offer Equity Participation Units (EPUs) to its
members. Each EPU will represent the rights and obligation to deliver a
specified quantity of soybeans to HSC. Holders of EPUs will be entitled to
receive patronage earnings related to the Division's crushing and refining of
soybeans delivered by the holder to HSC, as well as a ratable share of
consolidated HSC non-patronage earnings based upon total member deliveries to
HSC by members of all commodities. The portion of patronage dividends payable in
cash and the portion payable in Patrons' Equities will be at the discretion of
HSC's Board of Directors. EPUs will represent an equity interest in HSC and will
not represent an ownership interest in any assets of the Division.
In conjunction with the offering of EPUs, HSC announced its intention to begin
charging the Division interest on its daily average of short-term borrowings at
a rate equivalent to the weighted average interest rate on short-term borrowings
of HSC. On May 31,1996, the weighted average borrowing rate of HSC's short-term
borrowings was 6.05%. Amounts due from HSC will receive interest in the same
manner at the same rate.
F-38
Exhibit A
HARVEST STATES COOPERATIVES
SUBSCRIPTION AGREEMENT
The undersigned ("Subscriber") subscribes and agrees to purchase:
* ______ Equity Participation Units (Milling) at a price of $2.00 per unit.
* ______ Equity Participation Units (Processing and Refining) at a price of
$4.00 per unit.
Subscriber certifies that:
* Subscriber has received and carefully reviewed a copy of the Company's
Prospectus dated February 14, 1997.
* Subscriber is [check one]:
[ ] an agricultural producer actually engaged in the production of
agricultural products, or
[ ] an agricultural cooperative (an association of producers of agricultural
products organized and operating so as to adhere to the provisions of
the Agricultural Marketing Act, 12 U.S.C. ss. 1141(j)(a), as amended,
and the Capper-Volstead Act, 7 U.S.C. ss.ss. 291-292, as amended).
* Subscriber (if a producer) is capable of producing in the 1997 growing
season the number of bushels of wheat or soybeans covered by the Member
Marketing Agreement.
If Subscriber is requesting conversion or simultaneous redemption, check the
appropriate box:
[ ] Subscriber elects to use $___________ of Harvest States Capital Equity
Certificates owned by Subscriber (not to exceed one-sixth of the total
purchase price).
[ ] Subscriber is a member of an Affiliated Association named ______________
and has that cooperative's authorization to use simultaneous redemption
of $___________ of Harvest States equities held by that Affiliated
Association (authorization form attached).
[ ] Subscriber is a member of an Affiliated Association named ______________
and intends that such Affiliated Association will simultaneously redeem
$___________ of Harvest States equities held by such Affiliated
Association, but such redemption has not yet been authorized. Pending
such authorization, the subscriber has paid the full cash purchase
price, a portion of which will be refunded as provided in the
Prospectus.
This Subscription Agreement is accompanied by:
* A Member Marketing Agreement signed by the Subscriber.
* A check for $_______________.
The Units shall be registered (please print or type):
________________________________ ______________________________________________
Name of Subscriber Social Security Number or Taxpayer I.D. Number
Mailing Address: ____________________________________
____________________________________
____________________________________
Signatures
Date: _________________________ __________________________________________
Signature of Subscriber or
Subscriber's authorized representative
If Subscriber is an association of producers (please print or type):
___________________________________________________
Name of Subscriber's authorized representative
___________________________________________________
Position of Subscriber's authorized representative
Accepted:
HARVEST STATES COOPERATIVES
By _________________________________________________
Its _______________________________________________
EXHIBIT B
HARVEST STATES COOPERATIVES
MEMBER MARKETING AGREEMENT
THIS AGREEMENT is made and entered into by and between HARVEST STATES
COOPERATIVES, a Minnesota cooperative corporation and the undersigned Defined
Member, a ___________________________________________________
("Member"). [insert "producer" or "cooperative"]
In consideration of the mutual terms and conditions contained in this agreement
(including the Standard Terms and Conditions on the back of this form, as in
force from time to time) (this "Agreement"), the Association and Member agree
that Member shall deliver grain to the Association, and the Association shall
accept grain from Member, as further provided in this Agreement. This Agreement
contains the entire agreement, and supersedes and replaces any prior agreements
(either written or oral), between the parties with respect to the subject matter
hereof. This Agreement may be modified only as provided in Section 9 hereof.
IN WITNESS WHEREOF, the Association and Member have executed this Agreement
effective as of the date signed by Association indicated below.
HARVEST STATES COOPERATIVES
______________________________________
MEMBER NAME (Print or Type)
By: __________________________________ ______________________________________
Signature
Its: _________________________________ ______________________________________
Date
Date: ________________________________
ADDRESS: 1667 N. Snelling Avenue ADDRESS: _____________________________
P.O. Box 64594
St. Paul, MN 55164 _____________________________
Attn: Patron Equities Department
_____________________________
AUTHORIZED DELIVERY POINTS:
______________________________________
______________________________________
______________________________________
______________________________________
______________________________________
WHEAT _______ OR SOYBEANS _______
NUMBER OF BUSHELS: ____________________
HARVEST STATES COOPERATIVES
MEMBER MARKETING AGREEMENT
(STANDARD TERMS AND CONDITIONS)
1. OBLIGATION TO DELIVER GRAIN. During each processing year of the term of this
Agreement, Member shall deliver to the Association, and the Association shall
accept from Member, a base amount of one bushel of wheat or soybeans, depending
on which Defined Business Unit the Member belongs to, (the "Grain") for each
equity participation unit held by Member, subject to tolerance ranges for
deliveries of the Grain that may be established each year by the Board of
Directors of the Association; provided, however, the delivery obligation and
right under this Agreement for wheat will become fully effective for the fiscal
year in which the Pocono facility begins operating. Defined Members will be
notified. Until then, it will represent a right and obligation to deliver 78% of
the wheat set forth herein. For purposes of this Agreement, a processing year
shall begin on June 1 of each year and end on May 31 of the following year, with
the first processing year commencing June 1, 1997. Member understands and agrees
that its obligation to deliver Grain hereunder is unconditional, except as
provided in Paragraph 7.2 of this Agreement. If the undersigned is a producer,
rather than a cooperative, Member warrants that the Grain will be produced by
Member.
2. PRICE AND PAYMENT/PATRONAGE DISTRIBUTION. The Association (directly or
through its agent) shall pay Member the price for Grain delivered, received,
accepted and processed as provided hereunder. The price shall be based on the
prevailing price agreed to by the parties at the time of sale at the authorized
local elevator, Association's elevator, plant or receiving station ("Authorized
Delivery Point"). This price must be mutually agreed to and established between
the Member and Association or its agent. Final settlement price shall be
established prior to the end of the Processing Year.
In addition, Member's share of any and all patronage distributions relating to
the Defined Business Unit of which Member is a Defined Member (as such terms are
defined in the Association's Bylaws), subject to necessary or appropriate
accounting adjustments, shall be distributed by the Association to Member.
3. DELIVERY OF GRAIN. The full legal title of and to Grain received by the
Association shall pass to the Association, or its agent solely as agent for
Association, contemporaneously with its delivery to the Authorized Delivery
Point. Association shall provide Member with a list of Authorized Delivery
Points for the Member's Grain, amendments to which shall be provided by
Association if Authorized Delivery Points in Member's marketing area are added
or deleted. Member shall select up to five (5) Authorized Delivery Points to
which Member may deliver Grain. Member may change its Authorized Delivery Points
upon five (5) days prior written notice to Association. The Association
(directly or through its agent) may reject and refuse to accept delivery of any
and all Grain which in its judgment does not conform to the Association's
specifications and standards. Member shall receive credit for the quantity of
Grain accepted for delivery.
4. PRODUCT QUALITY STANDARDS/GRAIN TAXES OR FEES. The Member warrants that the
Grain sold under this Agreement shall be merchantable and shall not be
adulterated or misbranded within the meaning of the Federal Food, Drug and
Cosmetic Act, as amended, and regulations, or include any article or commodity
that may not, under the provisions of such Act, be introduced in interstate
commerce. All Grain delivered on behalf of Member to the Association shall meet
such specifications and standards, and be subject to such allowances, deductions
and premiums, as may from time to time be determined by the Association or its
agent, as well as any grain taxes or fees. Grain of substandard quality, as
determined by the Association, shall be either (a) rejected and returned to
Member with all costs relating to the rejection and return charged to Member; or
(b) accepted with deductions and allowances made and charged against Member
because of the inferior quality or condition at the time of delivery. The
Association may credit Member for certain premiums to be paid on the basis of
quality standards which may from time to time be established by the Association.
The Association and its agent shall use accepted standards to assess the quality
of Grain delivered by Member. Member agrees to observe and accept any rules and
regulations established by the Association.
5. SECURITY INTERESTS. The Member warrants that the Grain sold under this
Agreement shall be free and clear of any security interest, lien, penalty,
charge, or encumbrance, governmental or otherwise. If Member grants a security
interest in any of the Grain delivered, Member shall inform the Authorized
Delivery Point, in writing, at or before delivery of the Grain, of any security
interest it has granted in such Grain. The Authorized Delivery Point shall have
the right, but not the obligation, after acceptance of the Grain, to name the
lienholder as a payee on the payment for the Grain.
6. CONSEQUENCES OF FAILURE TO DELIVER. If during any processing year Member
fails to deliver the quantity of Grain required by Section 1 of this Agreement,
(i) Member shall forfeit patronage payments to the extent of such nondelivery,
and (ii) in the event of a loss by the Defined Business Unit of which Member is
a Defined Member, each equity participation unit held by Member shall be
charged, on a pro rata basis, with the amount of such loss, as liquidated
damages for such nondelivery.
7. FORCE MAJEURE.
7.1 In case of fire, explosions, interruption of power, strikes or other labor
disturbances, lack of transportation facilities, shortage of labor or supplies,
floods, action of the elements, riot, interference of civil or military
authorities, enactment of legislation or any unavoidable casualty or cause
beyond the control of the Association or its agent affecting the conduct of
their business to the extent of preventing or unreasonably restricting the
receiving, handling, production, marketing, or other operations, the Association
and its agent shall be excused from performance during the period that the
Association's or agent's business or operations are so affected. The Association
or its agent, in their judgment, may, during such period, accept such portion of
the Grain as the Association or agent has informed Member it can economically
handle. In any event, the Association (directly or through its agent) shall pay,
pursuant to this Agreement, for all the Grain it accepts.
7.2 The Member shall not be liable for failure or delay in performance of this
Agreement to the extent such failure or delay is caused by a crop failure due to
an Act of God, such as drought or flood. If Member's performance is excused
pursuant to this paragraph, Member shall give written notice to the Association
or its agent of Member's inability to perform, and shall forfeit patronage
payments to the extent of any resulting nondelivery of Grain, unless Member
elects to buy-in in accordance with policies and procedures established by
Association.
8. TERM AND TERMINATION. This Agreement shall enter into force effective as of
the date signed by Association for processing years beginning June 1, 1997 and
shall continue in force indefinitely unless earlier terminated as follows:
(i) The rights and obligations of Member under this Agreement may be
terminated at any time by written agreement of Member and the
Association incident to Member's transfer of equity participation
units in the Association and assignment of this Agreement, which
transfer and assignment must be approved by the Board of Directors
of the Association as provided in the Bylaws; or
(ii) This Agreement shall terminate within one year of the death of
Member, unless within such time period the estate of Member has
entered into a definitive binding arrangement to transfer Member's
equity participation units in the Association and such transfer has
been approved by the Board of Directors of the Association as
provided in the Bylaws; or
(iii) The nonbreaching party may terminate this Agreement in the event
of a breach hereof, if the breach continues for thirty (30) days
after the nonbreaching party provides written notice of the breach
to the breaching party; or
(iv) Member may terminate this Agreement upon written notice to the
Association. Such termination shall be effective at the end of the
processing year in which the notice was given.
(v) The Association may terminate this Agreement upon sale, liquidation,
dissolution or winding up of the Defined Business Unit in accordance
with the Bylaws of the Association.
Upon termination of this Agreement, the rights and obligations of each party
with respect to utilization of, marketing of and payment for Grain previously
delivered by Member to the Association hereunder shall continue in force until
such Grain has been utilized or marketed by the Association, and paid for by the
Association. Termination of this Agreement shall not release either party from
liabilities accrued prior to such termination; provided, however, that a
terminating Member shall not be entitled to receive patronage or other
distributions with respect to equity participation units held by Member other
than patronage earned prior to termination.
9. MODIFICATION. This Agreement shall at all times remain subject to
modification by the Association upon written notice to Member, provided that
such modification is first approved by Defined Members of the Association
holding a majority of the voting power of the Defined Business Unit of which
Member is a Defined Member who are present and voting at a regular or special
meeting of such Defined Members, where notice of such meeting includes a
statement of the proposed modification.
10. MISCELLANEOUS.
10.1 ASSIGNMENT. Member may not assign this Agreement or delegate performance of
its obligations without the written consent of the Board of Directors of the
Association. Consent may be granted or denied as the Association shall determine
in the exercise of business judgment, and with due consideration to related
provisions of the Bylaws. This restriction on assignment shall not be construed
to limit Member's right to grant to a third party a security interest in growing
crops or proceeds, subject to Section 5 hereof, and provided that any such
security agreement shall not empower either Member or any secured party other
than the Association to avoid Member's obligations to deliver Grain in
performance of this Agreement. Subject to the foregoing, all of the terms,
covenants and conditions of this Agreement shall inure to the benefit of and
shall bind the parties hereto and their successors, heirs and permitted assigns.
10.2 WAIVER OF BREACH. No waiver of a breach of any of the agreements or
provisions contained in this Agreement shall be construed to be a waiver of any
subsequent breach of the same or of any other provision of this Agreement.
10.3 NOTICES. Whenever notice is required by the terms hereof, it shall be given
in writing by delivery or by certified or registered mail addressed to the other
party at the address appearing below such party's signature above or such other
address as such party shall designate by appropriate notice. If notice is given
by mail, it shall be effective upon receipt.
10.4 CONSTRUCTION OF TERMS OF AGREEMENT. The language in all parts of this
Agreement shall be constructed as a whole according to its fair meaning and not
strictly for or against any party hereto. Headings in this Agreement are for
convenience only and are not construed as a part of this Agreement or in any way
defining, limiting or amplifying the provisions hereof. In the event any term,
covenant or condition herein contained is held to be invalid or void by any
court of competent jurisdiction, the invalidity of any such term, covenant or
condition shall in no way affect any other term, covenant or condition herein
contained.
10.5 MARKETING COMMITMENTS; INDEMNIFICATIONS. Member represents and warrants
that it is not under contract or obligation to sell, market, consign or deliver
any of the Grain committed to the Association under this Agreement to any other
person, firm, association, corporation or other entity. Further, Member shall
defend and hold harmless the Association from any costs, claims, liabilities,
suits or other proceedings or actions of any nature or kind whatsoever arising
from or connected with any such prior agreement, contract or arrangement or the
termination or cancellation of any prior agreements, contracts or arrangements.
10.6 CHOICE OF LAW; DISPUTE RESOLUTION. This Agreement shall be governed in all
respects by the laws of the State of Minnesota, excluding its conflict of laws
rules. All disputes arising under this Agreement which cannot be amicably
resolved between the parties shall be settled exclusively in state or federal
court in the State of Minnesota, and the parties specifically consent to
personal jurisdiction in any such court.
