Registration No. 333-17865
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
under
The Securities Act of 1933
HARVEST STATES COOPERATIVES
(Exact name of registrant as specified in charter)
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Minnesota 5150 41-0251095
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
P.O. Box 64594
St. Paul, Minnesota 55164
(612) 646-9433
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Thomas F. Baker
Group Vice President--Finance
Harvest States Cooperatives
1667 North Snelling
St. Paul, Minnesota 55108
(612) 641-3736
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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Copy To
William B. Payne
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
(612) 340-2722
<PAGE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 1997
HARVEST STATES COOPERATIVES [LOGO]
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.
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.
SEE "RISK FACTORS" COMMENCING ON PAGE___ 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.
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to the
Price Commissions(1) Company (2)
----------- --------------- ----------------
Milling
<S> <C> <C> <C>
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
</TABLE>
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(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.
The date of this Prospectus is ______________, 1997.
<PAGE>
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.
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Page
Prospectus Summary
Risk Factors
Use of Proceeds
Dividend Policy
Capitalization
Business
Management
Certain Transactions
Membership in the Company and Authorized Capital
Equity Participation Units
Trading of Units
Plan of Distribution
Validity of Units
Experts
Additional Information
Index to Financial Statements ...................... F-1
Exhibits
Subscription Agreement........................... Exhibit A
Member Marketing Agreement....................... Exhibit B
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Until ________, 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.
-2-
<PAGE>
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 an 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>
Income Statement Data:
Years Ended May 31,
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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 admin-
istrative ........ 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 admin-
istrative ........ 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
---- ---- ---- ---- ---- ---- ----
<S> <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--WHEAT
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.
<TABLE>
<CAPTION>
Income Statement Data:
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 admin-
istrative ........ 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 admin-
istrative ........ 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>
Balance Sheet Data
(at end of period):
May 31, November 30,
-------------------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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
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 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
------------ ------------ ------------ ------------ ------------
<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
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
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, November 30,
1996 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. 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>
Six Months Ended
Years Ended May 31, November 30,
------------------- ------------
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------ ------------
<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
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------ ------------
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)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
May 31, November 30,
1996 1996
----------- ----------
<S> <C> <C>
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
=========== ==========
</TABLE>
(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.
<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 ....... 6.28% 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
</TABLE>
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 and
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. 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 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
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.
<TABLE>
<CAPTION>
Term
Director Expires
Name and Address Age District Since in Nov.
- ---------------- --- -------- ----- -------
<S> <C> <C> <C> <C>
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
</TABLE>
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
T. 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"):
<TABLE>
<CAPTION>
Summary Compensation Table
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
President and Chief
Executive Officer........... 1996 $450,000 $162,500 $3,659 $7,508
Thomas F. Baker
Group Vice President--
Finance..................... 1996 225,300 127,500 7,400 7,908
Michael H. Bergeland
Group Vice President--
Grain and Agri-
Services.................... 1996 215,000 129,000 3,970 9,216
Garry A. Pistoria
Group Vice President--
Wheat Milling............... 1996 166,500 78,000 7,361 4,138
James Tibbetts(4)
Group Vice President--
Oilseed Processing
and Refining
Division.................... 1996 87,500 70,000 510 29
</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.
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 222,824 434,602 746,263
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 -- WHEAT MILLING -- 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 -- 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 Processings 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.
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 Division Business Unit and the Processing and Refining Division 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 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 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. The Company
will contract with an outside vendor to include an interactive link available to
patrons on the computerized network that the Company maintains with its
elevators and the elevators of most Affiliated Associations. 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
marketing agreement will be provided to each attendee. Attendees will be asked
to leave their name, address and telephone number, and agents of the Company
will inquire, at a later time, whether the attendee has any interest in the
investment. If the attendee has questions about the investment, the agent will
inform the attendee that an employee of the Company will call the attendee to
answer questions. 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.
<TABLE>
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INDEX TO FINANCIAL STATEMENTS
PAGE
Harvest States Cooperatives
<S> <C>
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
</TABLE>
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.
/s/ Deloitte & Touche LLP
August 19, 1996
<TABLE>
<CAPTION>
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31,
-------------------------------- NOVEMBER 30,
1995 1996 1996
(UNAUDITED)
ASSETS
<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
============== ============== ==============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
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
============== ============== ==============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL
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
============= ============= ============= ============= =============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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>
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.
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
<TABLE>
<CAPTION>
May 31,
---------------------------------- November 30,
1995 1996 1996
<S> <C> <C> <C>
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
=============== =============== ================
</TABLE>
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
=============== =============== ================
4. INVESTMENTS
May 31,
---------------------------------- November 30,
1995 1996 1996
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>
6. PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated May 31,
Useful Life ---------------------------------- 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
=============== =============== ================
During the years ended May 31, 1994, 1995, and 1996 the Company
capitalized interest of $0, $587,637 and $739,101, respectively.
</TABLE>
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.
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.
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.
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>
12. OTHER REVENUES
<TABLE>
<CAPTION>
Six Months Ended
For the Years 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
Years ending May 31:
<S> <C> <C> <C> <C>
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.
14. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities is as follows:
<TABLE>
<CAPTION>
Six Months Ended
For the Years 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 $15,819,222 $23,187,069 $25,617,898
from prior year's earnings
Noncash non-patronage certificates $ 1,832,136 $ 7,912,297
issued from prior year's earnings
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.
HARVEST STATES COOPERATIVES
WHEAT MILLING DIVISION
FINANCIAL STATEMENTS FOR THE YEARS ENDED
MAY 31, 1994, 1995, AND 1996 AND THE SIX MONTHS
ENDED NOVEMBER 30, 1995 AND 1996 (UNAUDITED)
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.
/s/ Deloitte & Touche LLP
December 11, 1996
<TABLE>
<CAPTION>
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
BALANCE SHEETS
MAY 31,
----------------------------- NOVEMBER 30,
1995 1996 1996
(UNAUDITED)
ASSETS
<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
============ ============ ============
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
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 2,415,155 3,834,289 4,471,563 1,655,748 2,503,655
administrative
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
============= ============= ============= ============ =============
See notes to financial statements.
</TABLE>
WHEAT MILLING DIVISION
(A DIVISION 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.
<TABLE>
<CAPTION>
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
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 $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
See notes to financial statements.
</TABLE>
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 recongnized 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 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
<TABLE>
<CAPTION>
May 31,
------------------------------- November 30,
1995 1996 1996
<S> <C> <C> <C>
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
=============== ============== ===============
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
May 31,
------------------------------- November 30,
1995 1996 1996
<S> <C> <C> <C>
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
=============== ============== ===============
</TABLE>
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>
5. PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant, and equipment is as follows:
Estimated May 31,
Useful Life ------------------------------ November 30,
in Years 1995 1996 1996
<S> <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>
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:
<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 services 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.
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>
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:
<TABLE>
<CAPTION>
Year ending May 31:
Milling
Rail Cars Facility Other Total
<S> <C> <C> <C> <C>
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
============= ============== ============= ===============
</TABLE>
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.
13. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Net cash paid during year for:
Interest $ 1,832,037 $ 2,278,544 $ 4,457,797
Income taxes 350,000 150,000 125,000
</TABLE>
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.
OILSEED PROCESSING AND
REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
FINANCIAL STATEMENTS FOR THE YEARS ENDED
MAY 31, 1994, 1995, AND 1996 AND THE SIX MONTHS
ENDED NOVEMBER 30, 1995 AND 1996 (UNAUDITED)
INDEPENDENT AUDITORS' REPORT
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.
/s/ Deloitte & Touche LLP
December 10, 1996
<TABLE>
<CAPTION>
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
BALANCE SHEETS
MAY 31,
--------------------------- NOVEMBER 30,
1995 1996 1996
(UNAUDITED)
ASSETS
<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
=========== =========== ===========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
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 4,722,900 5,137,663 4,544,763 2,445,721 2,441,463
administrative
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
============= ============= ============= ============ =============
See notes to financial statements.
</TABLE>
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF DIVISIONAL EQUITY
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 (10,946,363)
(unaudited)
BALANCE AT NOVEMBER 30, 1996 (UNAUDITED) $ 53,390,998
============
See notes to financial statements.
<TABLE>
<CAPTION>
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
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 $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
See notes to financial statements.
</TABLE>
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.
SALES - 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.
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
<TABLE>
<CAPTION>
May 31,
------------------------------- November 30,
1995 1996 1996
<S> <C> <C> <C>
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
=============== ============== ===============
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
May 31,
------------------------------- November 30,
1995 1996 1996
<S> <C> <C> <C>
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
=============== ============== ===============
</TABLE>
4. PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated
Useful Life May 31,
------------------------------- November 30,
in Years 1995 1996 1996
<S> <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>
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.
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>
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.
12. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Net cash paid to HSC during year for:
Interest $ 164,300 $ - $ 151,500
Income taxes 1,900,000 1,650,000 1,500,000
</TABLE>
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.
Exhibit A
SUBSCRIPTION AGREEMENT
HARVEST STATES COOPERATIVES
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 _______________, 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.
* 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 ______________________________
<PAGE>
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 attached hereto,
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: __________
<PAGE>
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.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees and expenses will be paid by the Company in
connection with the issuance and distribution of the securities registered
hereby. All such expenses, except for the SEC fee, are estimated.
SEC registration fee .......................... $ 34,788
Legal fees and expenses ........................ 194,400
Accounting fees and expenses .................. 119,800
Blue Sky fees and expenses ..................... 53,100
Printing and engraving expenses ................ 50,000
Selling expenses, including
travel and meetings ............................ 318,300
Miscellaneous .................................. 79,612
----------
Total ................................ $ 850,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The statutes of the State of Minnesota give the Company the power to
indemnify any director, officer, manager, employee or agent, who was or is a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, against certain
liabilities and expenses incurred in connection with the action, suit or
proceeding.
Article VII of the Bylaws of the Company provides that the Company
shall 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 to which such directors, officers, managers,
employee or agents of an association may be indemnified under the law of the
State of Minnesota or any amendments thereto or substitutions therefor. Article
VII provides that the Company shall have power to purchase and maintain
insurance against any liability asserted against such persons and incurred by
such persons in any such capacity.
Article X of the Company's Amended and Restated Articles of
Incorporation provides 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: (i) for a breach of the director's duty of
loyalty to the Company or its members; (ii) for acts of omissions not in good
faith or that involve intentional misconduct or a knowing violation of law;
(iii) for a transaction from which the director derived an improper personal
benefit; or (iv) for an act or omission occurring prior to the date when the
provisions of such Article (or predecessor thereto) became effective. It is the
stated intention of the members of the Company to eliminate or limit the
personal liability of the directors of the Company to the greatest extent
permitted under Minnesota law. Such Article X provides that if amendments to the
Minnesota Statutes are passed after the effective date of such Article X which
authorize associations to act to further eliminate or limit the personal
liability of directors, then the liability of the directors of the Company shall
be eliminated or limited to the greatest extent permitted by the Minnesota
Statutes, as so amended.
A cooperative has other rights, powers or privileges granted by the
laws of Minnesota to other corporations, except those that are inconsistent with
the express provisions of the Minnesota Cooperative Law. The Minnesota Business
Corporation Act provides that a corporation shall provide indemnification to
directors and officers if the person has not been indemnified by another
organization, acted in good faith, received no improper personal benefit, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct
was unlawful and reasonably believed that the conduct was in the best interests
of the corporation (or in certain circumstances was not opposed to the best
interests of the corporation).
The Company maintains a standard policy of officers' and directors'
liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of unregistered securities within the last
three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
3.1* Amended and Restated Articles of Incorporation of the Company.
3.2* Amended and Restated Bylaws of the Company.
4.1 Resolutions of the Board of Directors creating the Equity
Participation Units (Processing and Refining).
4.2 Resolutions of the Board of Directors creating the Equity
Participation Units (Milling).
5.1 Opinion of Dorsey & Whitney LLP.
10.1*+ Lease Agreement between Peavey Company and Amber Milling
Company, a division of Harvest States Cooperatives, effective
as of August 31, 1994.
10.2* Lease between the Port of Kalama and North Pacific Grain
Growers, Inc., dated November 22, 1960.
10.3* Limited Liability Company Agreement for the Wilsey-Holsum
Foods, LLC dated July 24, 1996.
10.4*+ Long Term Supply Agreement between Wilsey-Holsum Foods, LLC
and Harvest States Cooperatives dated August 30, 1996.
10.5* Partnership Agreement between Continental Grain Company and
Harvest States Cooperatives dated September 28, 1992.
10.6* Harvest States Cooperatives Deferred Compensation Plan.
10.7* Harvest States Cooperatives Deferred Compensation Supplemental
Retirement Plan.
10.8* Harvest States Cooperatives Management Compensation Program.
10.9* Revolving Credit Agreement by and among Harvest States
Cooperatives, Banque Nationale de Paris et al., the St. Paul
Bank for Cooperatives and CoBank, ACB dated November 1, 1996.
10.10* Amended and Restated Master Syndicated Loan Agreement by and
among Harvest States Cooperatives, CoBank, ACB (successor to
the National Bank for Cooperatives) and the St. Paul Bank for
Cooperatives dated October 28, 1996.
10.11* Fourth Supplement to the August 30, 1994 Master Syndicated
Loan Agreement by and among Harvest States Cooperatives,
CoBank, ACB (successor to the National Bank for Cooperatives)
and the St. Paul Bank for Cooperatives dated October 28, 1996.
10.11(a)* Promissory Note of Harvest States Cooperatives to the St.
Paul Bank for Cooperatives for $25,000,000 dated October
28, 1996.
10.11(b)* Promissory Note of Harvest States Cooperatives to CoBank,
ACB for $25,000,000 dated October 28, 1996.
10.12* Third Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, CoBank,
ACB (successor to the National Bank for Cooperatives) and the
St. Paul Bank for Cooperatives dated December 15, 1995.
10.12(a)* Promissory Note of Harvest States Cooperatives to the St.
Paul Bank for Cooperatives for $10,000,000 dated December
15, 1995.
10.12(b)* Promissory Note of Harvest States Cooperatives to CoBank,
ACB for $10,000,000 dated December 15, 1995.
10.13* First Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, the
National Bank for Cooperatives and the St. Paul Bank for
Cooperatives dated August 30, 1994.
10.13(a)* Promissory Note of Harvest States Cooperatives to the St.
Paul Bank for Cooperatives for $42,500,000 dated August
30, 1994.
10.13(b)* Promissory Note of Harvest States Cooperatives to the
National Bank for Cooperatives for $42,500,000 dated
August 30, 1994.
10.14* Employment Agreement between John D. Johnson and Harvest
States Cooperatives dated January 23, 1997.
10.15 Lease Agreement between the Port of Houston Authority of
Harris County, Texas, and Harvest States Cooperatives,
dated October 3, 1995.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to
this Registration Statement).
24* Power of Attorney.
----------------------------
* Previously filed.
+ Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibits 10.1 and 10.4 have been deleted
and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment.
Pursuant to Instruction 4(ii) of Item 601(b) of Regulation S-K, copies
of certain instruments defining the rights of holders of certain long-term debt
of the Company and its subsidiaries are not filed and, in lieu thereof, the
Company agrees to furnish copies thereof to the Securities Exchange Commission
upon request.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change to such information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the "maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change in the
information set forth in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 2 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Falcon Heights, State of Minnesota, on February 7,
1997.
HARVEST STATES COOPERATIVES
By: /s/John D. Johnson
-------------------------------------
John D. Johnson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement on Form S-1 has been signed by the
following persons in the capacities indicated on February 7, 1997.
Signature Title
- --------- -----
/s/John D. Johnson President and Chief Executive Officer
- ----------------------------------- (principal executive officer)
John D. Johnson
/s/T. F. Baker Group Vice President--Finance
- ----------------------------------- (principal financial officer)
T. F. Baker
/s/John Schmitz Vice President--Corporate Accounting
- ----------------------------------- (principal accounting officer)
John Schmitz
Steven Burnet* Chairman of the Board of Directors
Steve Carney* Director
Sheldon Haaland* Director
Jerry C. Hasnedl* Director
Edward Hereford* Director
Gerald Kuster* Director
Tyrone A. Moos* Director
Duane G. Risan* Director
William J. Zarak, Jr.* Director
Edward Ellison* Director
Leonard D. Larsen* Director
Duane Stenzel* Director
Russell W. Twedt* Director
Merlin Van Walleghen* Director
*By /s/John D. Johnson
- -----------------------------------
John D. Johnson
Attorney-in-fact
EXHIBIT INDEX
Number Description Page
- ------ ----------- ----
4.1 Resolutions of the Board of Directors creating the Equity
Participation Units (Processing and Refining)
4.2 Resolutions of the Board of Directors creating the Equity
Participation Units (Milling)
5.1 Opinion of Dorsey & Whitney LLP
10.15 Lease Agreement between the Port of Houston Authority of Harris
County, Texas, and Harvest States Cooperatives,
dated October 3, 1995.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to
this Registration Statement).
- -------------------------
+ Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibits 10.1 and 10.4 have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.
RESOLUTIONS
of the
BOARD OF DIRECTORS
of
HARVEST STATES COOPERATIVES
---
CREATING
the
OILSEED PROCESSING AND REFINING
DEFINED BUSINESS UNIT
and
EQUITY PARTICIPATION UNITS (PROCESSING AND REFINING)
RESOLVED, pursuant to the authority conferred by the Amended
and Restated Articles of Incorporation and the Amended and Restated Bylaws of
the Association, as follows:
Section 1. There is hereby created, as a separate defined
business unit of the Association, the Oilseed Processing and Refining Defined
Business Unit (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 to carry on the operations of the
Processing and Refining Division.
Section 2. The Processing and Refining Business Unit shall be
created effective at the close of business on May 31, 1997, and on that date
there shall be allocated to the Processing and Refining Business Unit the assets
and liabilities, including commitments, contingencies and obligations,
appropriately belonging to the Processing and Refining Division. The Association
shall withdraw sufficient cash from the Processing and Refining Business Unit to
bring its net worth to $53,400,000 (representing its equity at May 31, 1996).
Section 3. There is hereby created an issue of up to
15,300,000 Equity Participation Units (Processing and Refining) (the "Units")
having the rights, preferences and privileges set forth herein to be sold to
Defined Members of the Processing and Refining Business Unit at a price of $4.00
per Unit in cash or partially in cash and partially upon conversion of
outstanding Capital Equity Certificates. Units may be purchased and held only by
Defined Members, who shall be either persons actually engaged in the production
of agricultural products or associations of producers of agricultural products.
The Association shall be deemed to hold Equity Participation Units equal to the
capacity of the Processing and Refining Business Unit not held by Defined
Members.
Section 4. Prior to the sale of any Unit to any person, such
person shall enter into a Member Marketing Agreement in substantially the form
of Exhibit 1 hereto, 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 Defined Member.
Section 5. With the approval of the Board of Directors, Units
may be transferred only to other Members of the Association who enter into a
Member Marketing Agreement equal to the number of Units being transferred. No
producer may purchase Units representing more than such producer's current
anticipated annual production of soybeans. No holder of a Unit may hold fewer
than 1,500 Units. No one Defined Member may own more than 1% of the outstanding
capacity of the Processing and Refining Business Unit. The officers of the
Association are authorized to adopt processes, regulations and forms with
respect to the transfer of Units.
Section 6. Revenues from the sale of products of the
Processing and Refining Business Unit shall be credited to the Processing and
Refining Business Unit, and all direct expenses incurred by the Processing and
Refining Business Unit shall be charged against the Processing and Refining
Business Unit. Corporate, general and administrative expenses of the Association
shall be allocated to the Processing and Refining Business Unit in a reasonable
manner based on the utilization by the Processing and Refining Business Unit.
Intracompany accounts shall be established for the advancements to, and the loan
of funds by, the Processing and Refining Business Unit, with interest thereon
imputed at prevailing rates. Income taxes shall be allocated to the Processing
and Refining Business Unit as if it were a separate taxpayer. The Processing and
Refining Business Unit shall perform and be responsible for commitments,
contingencies and obligations allocated to the Processing and Refining Business
Unit.
Section 7. 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 Association as patronage
refunds based on the total amount of soybeans processed, giving effect to Units
held and Units deemed to be held by the Association. As between holders of the
Units, patronage sourced income will be allocated to each Defined Member
proportionate to the number of bushels of soybeans delivered pursuant to the
Member Marketing Agreement. Defined Members 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.
Section 8. With respect to each year, the total net income
from the Processing and Refining Business Unit will be withdrawn by the
Association from the Processing and Refining Business Unit, except to the extent
that patronage dividends are not paid in cash and are retained in the Processing
and Refining Business Unit as equity. The Association shall be responsible for
the allocation of net income arising from operations of the Processing and
Refining Business Unit between Defined Members and the remainder of the
Association's operations.
Section 9. Upon the acquisition by the Association from a
third party of any assets (whether by means of an acquisition of assets or
stock, merger, consolidation or otherwise) reasonably related to the Processing
and Refining Business Unit, such assets and related liabilities, including
commitments, contingencies and obligations, shall be allocated to the Processing
and Refining Business Unit and the aggregate cost or fair market value of such
assets and liabilities shall be paid by the Processing and Refining 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.
Section 10. Upon any sale, transfer, assignment or other
disposition by the Association of any or all assets of the Processing and
Refining 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 Processing and Refining 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.
Section 11. The Board of Directors may from time to time
reallocate any asset from the Processing and Refining Business Unit to the
Association or any other Business Unit of the Association 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.
Section 12. The Association shall not enter into any agreement
by which the net patronage sourced earnings of the Processing and Refining
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.
Section 13. In connection with the merger, consolidation,
liquidation or sale of all or substantially all of the assets of the Association
as an entirety or upon the sale of all or substantially all of the assets of the
Processing and Refining Business Unit, all, but not less than all, Units of the
Processing and Refining Business Unit shall be redeemed at their original
purchase price of $4.00, provided that the Preferred Capital Certificates or
unit retains of the Processing and Refining Business Unit not previously paid
are also redeemed in connection therewith; that such payments include any pro
rata profit (or loss) associated with disposition of the assets of the
Processing and Refining Business Unit as though the assets, subject to the
liabilities, of the Processing and Refining Business Unit had been sold in
connection with such event at their fair market value; and that provision is
made for the allocation 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. For purposes of this Section 13, 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 the Processing and Refining Business Unit.
Section 14. The Board of Directors is authorized to establish
and designate one or more series of Preferred Capital Certificates of the
Association that may have a priority in payment over the Units and to fix (and
to increase and decrease) the amount, the designations, and the relative powers,
rights, preferences and limitations of such series.
Section 15. Defined Members who hold Units of the Processing
and Refining Business Unit shall have the right to elect a Defined Member Board
comprised of between five and ten individuals. The members of the 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 Processing and Refining Business Unit; provided, however, no
employee of the Association may serve as a member of the Defined Member Board.
The initial Defined Member Board shall consist of five persons designated by the
Company's Board of Directors and shall hold such office until the Association's
1997 Annual Meeting and until their successors are duly elected and qualified.
Thereafter the Defined Member Board shall be elected by the Defined Members of
the Processing and Refining Business Unit on a one Defined Member/one vote
basis. The Chairperson shall be selected by and from the Association's Board of
Directors. Individuals serving on a Defined Member Board shall serve staggered
three-year terms, divided into classes as nearly equal in number as possible.
The terms of two members of the Defined Member Board elected at the 1997 Annual
Meeting shall expire in 2000, two in 1999 and one in 1998, to be determined by
lot. The 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 Association's Board of Directors.
Section 16. Holders of Units shall have no voting rights
except as Members of the Association and as provided in Sections 15 and 21.
Section 17. The Board of Directors from time to time may
authorize the sale by the Association of Units deemed owned by the Association
for the account of the Association provided that sales shall be at fair market
value determined by the Board of Directors taking into account such matters as
the Board of Directors and its financial advisers, if any, deem relevant.
Section 18. The Association 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 the Processing and Refining Business
Unit. Units purchased for the account of the Association shall be deemed
outstanding Units of the Processing and Refining Business Unit. Units purchased
by the Processing and Refining Business Unit shall be cancelled and shall no
longer be deemed outstanding by the Processing and Refining Business Unit.
Section 19. 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 Units shall be allocated to the Processing and
Refining Business Unit.
Section 20. Holders of Units shall have no preemptive rights
to subscribe for or purchase additional Units or any other securities issued by
the Processing and Refining Business Unit or the Association.
Section 21. The operations of the Processing and Refining
Business Unit shall be carried out by the Association through the Board of
Directors, officers and management of the Association. The capital assets of the
Processing and Refining Business Unit may be disposed of in the ordinary course
of business and the disposition of any substantial portion of the assets of the
Processing and Refining 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 the Processing and Refining Business Unit or to abandon or shut
down the operations of the Processing and Refining 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.
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.
Section 22. These resolutions may be amended from time to time
by the Board of Directors of the Association, except for Sections 6 through 13,
which may be amended only with the approval of a majority of Defined Members
owning Units not held or deemed held by the Association.
RESOLUTIONS
OF THE
BOARD OF DIRECTORS
OF
HARVEST STATES COOPERATIVES
---
CREATING
THE
WHEAT MILLING
DEFINED BUSINESS UNIT
AND
EQUITY PARTICIPATION UNITS (MILLING)
RESOLVED, pursuant to the authority conferred by the Amended
and Restated Articles of Incorporation and the Amended and Restated Bylaws of
the Association, as follows:
Section 1. There is hereby created, as a separate defined
business unit of the Association, the Wheat Milling Defined Business Unit (the
"Milling Business Unit") for the purpose of purchasing wheat (including durum)
and the processing and sale thereof into flour and various byproducts to carry
on the operations of the Wheat Milling Division.
Section 2. The Milling Business Unit shall be created
effective at the close of business on May 31, 1997, and on that date there shall
be allocated to the Milling Business Unit the assets and liabilities, including
commitments, contingencies and obligations, appropriately belonging to the Wheat
Milling Division. The Association shall contribute sufficient cash to the
Milling Business Unit to bring its net worth to $66,597,072 (representing its
equity of $27,797,072 at May 31, 1996 plus $38,800,000) so that construction of
the Pocono facility can be financed from equity capital.
Section 3. There is hereby created an issue of up to
26,800,000 Equity Participation Units (Milling) (the "Units") having the rights,
preferences and privileges set forth herein to be sold to Defined Members of the
Milling Business Unit at a price of $2.00 per Unit in cash or partially in cash
and partially upon conversion of outstanding Capital Equity Certificates. Units
may be purchased and held only by Defined Members, who shall be either persons
actually engaged in the production of agricultural products or associations of
producers of agricultural products. The Association shall be deemed to hold
Equity Participation Units equal to the capacity of the Milling Business Unit
not held by Defined Members.
Section 4. Prior to the sale of any Unit to any person, such
person shall enter into a Member Marketing Agreement in substantially the form
of Exhibit 1 hereto, 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 Defined Member. The delivery right and obligation for the
Milling Business Unit will become fully effective for the fiscal year in which
the Pocono facility begins operating. Initially and until the Member Marketing
Agreement becomes fully effective, it will represent a right and obligation to
deliver 78% of the wheat set forth therein.
Section 5. With the approval of the Board of Directors, Units
may be transferred only to other Members of the Association who enter into a
Member Marketing Agreement equal to the number of Units being transferred. No
producer may purchase Units representing more than such producer's current
anticipated annual production of wheat. No holder of a Unit may hold fewer than
3,000 Units. No one Defined Member may own more than 1% of the outstanding
capacity of the Milling Business Unit. The officers of the Association are
authorized to adopt processes, regulations and forms with respect to the
transfer of Units.
Section 6. Revenues from the sale of products of the Milling
Business Unit shall be credited to the Milling Business Unit, and all direct
expenses incurred by the Milling Business Unit shall be charged against the
Milling Business Unit. Corporate, general and administrative expenses of the
Association shall be allocated to the Milling Business Unit in a reasonable
manner based on the utilization by the Milling Business Unit. Intracompany
accounts shall be established for the advancements to, and the loan of funds by,
the Milling Business Unit, with interest thereon imputed at prevailing rates.
Income taxes shall be allocated to the Milling Business Unit as if it were a
separate taxpayer. The Milling Business Unit shall perform and be responsible
for commitments, contingencies and obligations allocated to the Milling Business
Unit.
Section 7. Patronage sourced income from the operations of the
Milling Business Unit will be allocated by the Association as patronage refunds
based on the total amount of wheat processed, giving effect to Units held and
Units deemed to be held by the Association. As between holders of the Units,
patronage sourced income will be allocated to each Defined Member proportionate
to the number of bushels of wheat delivered pursuant to the Member Marketing
Agreement. Defined Members 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.
Section 8. With respect to each year, the total net income
from the Milling Business Unit will be withdrawn by the Association from the
Milling Business Unit, except to the extent that patronage dividends are not
paid in cash and are retained in the Milling Business Unit as equity. The
Association shall be responsible for the allocation of net income arising from
operations of the Milling Business Unit between Defined Members and the
remainder of the Association's operations.
Section 9. Upon the acquisition by the Association from a
third party of any assets (whether by means of an acquisition of assets or
stock, merger, consolidation or otherwise) reasonably related to the Milling
Business Unit, such assets and related liabilities, including commitments,
contingencies and obligations, shall be allocated to the Milling Business Unit
and the aggregate cost or fair market value of such assets and liabilities shall
be paid by the Milling 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.
Section 10. Upon any sale, transfer, assignment or other
disposition by the Association of any or all assets of the Milling 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 Milling
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.
Section 11. The Board of Directors may from time to time
reallocate any asset from the Milling Business Unit to the Association or any
other Business Unit of the Association 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.
Section 12. The Association shall not enter into any agreement
by which the net patronage sourced earnings of the Milling 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.
Section 13. In connection with the merger, consolidation,
liquidation or sale of all or substantially all of the assets of the Association
as an entirety or upon the sale of all or substantially all of the assets of the
Milling Business Unit, all, but not less than all, Units of the Milling Business
Unit shall be redeemed at their original purchase price of $2.00, provided that
the Preferred Capital Certificates or unit retains of the Milling Business Unit
not previously paid are also redeemed in connection therewith; that such
payments include any pro rata profit (or loss) associated with disposition of
the assets of the Milling Business Unit as though the assets, subject to the
liabilities, of the Milling Business Unit had been sold in connection with such
event at their fair market value; and that provision is made for the allocation
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.
For purposes of this Section 13, 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
the Milling Business Unit.
Section 14. The Board of Directors is authorized to establish
and designate one or more series of Preferred Capital Certificates of the
Association that may have a priority in payment over the Units and to fix (and
to increase and decrease) the amount, the designations, and the relative powers,
rights, preferences and limitations of such series.
Section 15. Defined Members who hold Units of the Milling
Business Unit shall have the right to elect a Defined Member Board comprised of
between five and ten individuals. The members of the 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 Milling Business Unit; provided, however, no employee of the Association may
serve as a member of the Defined Member Board. The initial Defined Member Board
shall consist of five persons designated by the Company's Board of Directors and
shall hold such office until the Association's 1997 Annual Meeting and until
their successors are duly elected and qualified. Thereafter the Defined Member
Board shall be elected by the Defined Members of the Milling Business Unit on a
one Defined Member/one vote basis. The Chairperson shall be selected by and from
the Association's Board of Directors. Individuals serving on a Defined Member
Board shall serve staggered three-year terms, divided into classes as nearly
equal in number as possible. The terms of two members of the Defined Member
Board elected at the 1997 Annual Meeting shall expire in 2000, two in 1999 and
one in 1998, to be determined by lot. The 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 Association's Board of
Directors.
Section 16. Holders of Units shall have no voting rights
except as Members of the Association and as provided in Sections 15 and 21.
Section 17. The Board of Directors from time to time may
authorize the sale by the Association of Units deemed owned by the Association
for the account of the Association provided that sales shall be at fair market
value determined by the Board of Directors taking into account such matters as
the Board of Directors and its financial advisers, if any, deem relevant.
Section 18. The Association 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 the Milling Business Unit. Units
purchased for the account of the Association shall be deemed outstanding Units
of the Milling Business Unit. Units purchased by the Milling Business Unit shall
be cancelled and shall no longer be deemed outstanding by the Milling Business
Unit.
Section 19. 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 Units shall be allocated to the Milling
Business Unit.
Section 20. Holders of Units shall have no preemptive rights
to subscribe for or purchase additional Units or any other securities issued by
the Milling Business Unit or the Association.
Section 21. The operations of the Milling Business Unit shall
be carried out by the Association through the Board of Directors, officers and
management of the Association. The capital assets of the Milling Business Unit
may be disposed of in the ordinary course of business and the disposition of any
substantial portion of the assets of the Milling 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 the Milling Business Unit or to
abandon or shut down the operations of the Milling 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.
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.
Section 22. These resolutions may be amended from time to time
by the Board of Directors of the Association, except for Sections 6 through 13,
which may be amended only with the approval of a majority of Defined Members
owning Units not held or deemed held by the Association.
Harvest States Cooperatives
1667 North Snelling Avenue
St. Paul, MN 55108
Re: Registration Statement on Form S-1
SEC File No. 333-17865
Ladies and Gentlemen:
We have acted as counsel to Harvest States Cooperatives, a Minnesota
cooperative (the "Company"), in connection with a Registration Statement on Form
S-1 (the "Registration Statement") relating to the sale by the Company of up to
26,800,000 Equity Participation Units in its Wheat Milling Defined Business Unit
and 15,300,000 Equity Participation Units in its Oilseed Processing and Refining
Defined Business Unit (collectively, the "Equity Participation Units").
We have examined such documents and have reviewed such questions of law
as we have considered necessary and appropriate for the purposes of our opinions
set forth below. In rendering our opinions set forth below, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures and the conformity to authentic originals of all documents
submitted to us as copies. We have also assumed the legal capacity for all
purposes relevant hereto of all natural persons and, with respect to all parties
to agreements or instruments relevant hereto other than the Company, that such
parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations of
such parties. As to questions of fact material to our opinions, we have relied
upon certificates of officers of the Company and of public officials. We have
also assumed that the Equity Participation Units will be issued and sold as
described in the Registration Statement.
Based on the foregoing, we are of the opinion that the Equity
Participation Units have been duly authorized by all requisite corporate action
and, upon issuance and payment therefor as described in the Registration
Statement, will be validly issued, fully paid and nonassessable.
Our opinions expressed above are limited to the laws of the State of
Minnesota.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading
"Validity of Units" in the Prospectus constituting part of the Registration
Statement.
Dated: February 7, 1997
Very truly yours,
/s/Dorsey & Whitney LLP
WBP
LEASE AGREEMENT
THIS LEASE AGREEMENT is entered as of the date set forth on
the signature page hereof between the PORT OF HOUSTON AUTHORITY OF HARRIS
COUNTY, TEXAS, a body politic and a governmental subdivision of the State of
Texas (the "Landlord"), and HARVEST STATES COOPERATIVES (the "Tenant").
Recitals
By Minute 11 of its meeting of September 27, 1995, the Port
Commission of the Port of Houston Authority, Landlord authorized the execution
of this Lease with Tenant for the leasing of approximately 2.8 acres, in Harris
County, Texas, more specifically described in Exhibit "A," which Exhibit is
incorporated herein and made a part hereof for all purposes. In this regard,
Landlord and Tenant are desirous of entering into this Lease to set forth the
terms and conditions of the leasing of the Leased Premises by Landlord to
Tenant.
Agreements
NOW, THEREFORE, in consideration of the mutual agreements
herein set forth, Landlord and Tenant agree as follows:
Article 1. Definitions. As used in this Lease, the following terms (in addition
to the terms defined elsewhere herein), and whether singular or plural thereof,
shall have the following meanings when used herein with initial capital letters:
"Award" shall mean any payment or other compensation received or
receivable from or on behalf of any governmental authority or any
person or entity vested with the power of eminent domain for or as a
consequence of any Taking.
"Additional Rent" shall have the meaning ascribed to it in Section
5.02.
"Base Rent" shall have the meaning ascribed to it in Section 5.01.
"Business Day" shall mean a day other than a Saturday, Sunday or legal
holiday recognized in Landlord's Tariffs.
"Commencement Date" shall mean October 1, 1995.
"Completion Date" shall mean the date that the Project is complete,
commissioned and ready for operation in accordance with its
specifications or August 31, 1996, which ever date is earlier.
"Elevator" shall mean the Houston Public Grain Elevator No. 2 Facility
owned by Landlord and located adjacent to the Project.
"Excluded Property" shall mean the machinery and equipment described on
Exhibit "B-1", including all replacements, enhancements, accessions or
substitutives thereof or thereto and all other personal property,
office supplies, moveable office furniture and other property
constituting trade fixtures not attached to or constituting a part of
the Leased Premises.
"Force Majeure" shall mean:
(a) acts of God, landslides, lightning, earthquakes,
hurricanes, tornadoes, blizzards , fires, explosions, floods,
acts of a public enemy, wars, blockades, insurrections, riots
or civil disturbances;
(b) labor disputes, strikes, work slowdowns, or work
stoppages (excluding, however, those of Tenant's or Landlord's
employees); and
(c) any other similar cause or event, provided that
the foregoing is beyond the reasonable control of the party
claiming Force Majeure.
"Grain" shall mean wheat.
"Hazardous Materials" shall have the meaning ascribed to it in Section
4.03 hereof.
"Impositions" shall mean (a) all real estate, personal property,
rental, water, sewer, transit, use, occupancy and other taxes,
assessments, charges, excises and levies which are imposed upon or with
respect to (i) the Leased Premises or any portion thereof, or the
sidewalks, streets or alley ways adjacent thereto, or the ownership,
use, occupancy or enjoyment thereof or (ii) this Lease and the Rent
payable hereunder; and (b) all charges for any easement, license,
permit or agreement maintained for the benefit of the Leased Premises.
"Landlord" shall mean the Port of Houston Authority of Harris County,
Texas, the body politic and governmental subdivision identified in the
opening recital of this Lease, and its successors and assigns and
subsequent owners of the Leased Premises.
"Landlord's Tariffs" shall mean the rates, rules, regulations, policies
and tariffs issued, by Landlord and in effect as of the effective date
of this Lease and any amendments, modifications or changes thereto. In
the event the Landlord issues new tariff provisions on flour milling,
flour milling's related processed products, or the conveyance of such
products, other than the conveyance across Landlord's wharves, then the
Tenant and the Project shall be exempt from such new tariff provisions
during the term of this Lease unless otherwise agreed to in writing by
Tenant.
"Lease" shall mean this Lease as amended in accordance with Section
22.08.
"Leased Premises" shall mean (a) the property leased by Tenant
described in Exhibit "A" hereto.
"Legal Requirements" shall mean any and all (a) judicial decisions,
orders, injunctions, writs, statutes, rulings, rules, regulations,
promulgations, directives, permits, certificates or ordinances of any
governmental authority in any way applicable to Tenant or the Leased
Premises, including zoning, environmental and utility conservation
matters, (b) Landlord's Tariffs, (c) insurance requirements and (d)
other documents, instruments or agreements (written or oral) relating
to the Leased Premises or to which the Leased Premises may be bound or
encumbered.
"Permitted Use" shall mean Grain milling and the products and the
byproducts thereof, and the manufacture of any products using milled
products, byproducts and additives, together with all other related
business uses.
"Project" shall mean the mill, warehouse and other improvements to be
constructed by Tenant as further described in Exhibit "B" hereto
together with all alterations, improvements and additions to and
replacements of such improvements, and shall include the Excluded
Property.
"Rent" shall mean Base Rent, Additional Rent and all other amounts
provided for under this Lease to be paid by Tenant, whether as
additional rent or otherwise.
"Taking" shall mean the taking, damaging or destroying of all or any
portion of the Leased Premises or the Elevator by or on behalf of any
governmental authority or any other person or entity pursuant to its
power of eminent domain. "Total Taking" shall mean any Taking of all or
substantially all of the Leased Premises or the Elevator, or of so much
of the Leased Premises or the Elevator that the portion remaining
cannot, in Tenant's or Landlord's good faith judgment reasonably
exercised, be economically restored. "Partial Taking" shall mean any
Taking of less than all of the Leased Premises or the Elevator such
that the portion remaining can, in Tenant's or Landlord's good faith
judgment reasonably exercised, be economically restored.
"Tenant" shall mean the tenant identified in the opening recital of
this Lease and its permitted Transferees which succeed to the leasehold
estate created hereby.
"Tenant Grain" shall mean wheat purchased or owned by or under the
control of Tenant for use in the Project and put through the Elevator.
"Term" shall mean the effective period of this Lease, as described in
Article 3 hereof.
"Transfer" shall mean (a) an assignment (direct or indirect, absolute
or conditional, by operation of law or otherwise) by Tenant of all or
any portion of Tenant's interest in this Lease or the leasehold estate
created hereby, (b) a sublease of all or any portion of the Leased
Premises or (c) the grant or conveyance by Tenant of any concession or
license within the Leased Premises. If Tenant is a corporation then any
transfer of this Lease by merger, consolidation or dissolution.
"Transferee" shall mean the assignee, sublessee, pledgee, concessionee,
licensee or other transferee of all or any portion of Tenant's interest
in this Lease, the leasehold estate created hereby or the Leased
Premises.
Article 2. Leased Premises. Subject to the provisions of this Lease, Landlord
hereby leases, demises and lets to Tenant, and Tenant hereby leases from
Landlord, the Leased Premises.
Article 3. Term. The Term of this Lease shall commence on the Commencement Date
and shall (subject to earlier termination as herein provided) continue for a
period of thirty (30) years thereafter. Tenant may extend the term of this Lease
for four (4) additional terms of five (5) years each (the "Renewal Terms"). Said
extension shall be exercised by written notice by Tenant to Landlord no less
than six (6) months prior to the end of the term then in effect.
Article 4. Use.
Section 4.01. Permitted Use: Continuous Operation. (a) Tenant will
occupy and use the Leased Premises solely for the Permitted Use and in strict
compliance with all Legal Requirements.
(b) Tenant shall not cease business operations at the Leased
Premises for periods in excess of three (3) consecutive months during any twelve
(12) month period during the term of this Lease. The covenants of this Section
4.01(b) are material to this Lease and should Tenant fail to satisfy such
covenants, Landlord (as its sole remedy for such failure) shall have the right
to terminate this Lease by giving Tenant at least sixty (60) days prior written
notice of such termination, in which event Tenant shall pay to Landlord all Rent
and other amounts accrued hereunder to the effective date of termination.
Section 4.02. Specifically Prohibited Use. Tenant will not (a) use,
occupy or permit the use or occupancy of the Leased Premises for any purpose or
in any manner which is or may be, directly or indirectly, (i) inconsistent with
the requirements of Section 4.01 hereof, (ii) violative of any of the Legal
Requirements, (iii) dangerous to life, health, the environment or property, or a
public or private nuisance or (iv) disruptive to the activities any other tenant
or occupant of property adjacent to the Leased Premises, (b) commit or permit to
remain any waste to the Leased Premises or (c) commit, or permit to be
committed, any action or circumstance in or about the Leased Premises which,
directly or indirectly, would or might justify any insurance carrier in
cancelling the insurance policies maintained by Tenant or Landlord on the Leased
Premises or the Elevator and improvements thereon.
Section 4.03. Environmental Restrictions. Tenant shall not cause or
permit any Hazardous Materials to be generated, treated, stored on or about the
Leased Premises or transferred to the Leased Premises in contravention of
Landlord's Tariffs or any other Legal Requirement. Any use of Hazardous
Materials by any person on the Leased Premises shall be in strict conformance
with all Legal Requirements and shall not cause the Leased Premises to be
subject to remedial obligations to protect health or the environment. The term
"Hazardous Materials" shall mean any flammables, explosives, radioactive
materials, hazardous waste, toxic substances or related materials, including
substances defined as "hazardous substances," "hazardous materials," "toxic
substances" or "solid wastes" in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et
seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sec. 1801, et seq.;
the Resources Conservation and Recovery Act, 42 U.S.C. Sec. 6901, et seq.; the
Toxic Substance Control Act, as amended, 15 U.S.C. Sec. 2601 et seq.; Landlord's
Tariffs; the Texas Solid Waste Disposal Act, Tex. Rev. Civ. Stat. Ann. Art.
4477-7; or any other Legal Requirement.
Article 5. Rent.
Section 5.01. Base Rent. In consideration of Landlord's leasing the
Leased Premises to Tenant, Tenant shall pay to Landlord, commencing as of the
Commencement Date, Base Rent of NINETY DOLLARS ($90.00) per acre per month up to
the Completion Date. Commencing as of the Completion Date, Tenant shall pay to
the Landlord Base Rent of NINE HUNDRED AND NO/100 DOLLARS ($900.00) per acre of
Lease Premises for each calendar month during the Term (the "Base Rent").
Landlord and Tenant agree that the Leased Premises consists of approximately
plus/minus (3) three acres. The Base Rent shall be adjusted every five (5) years
during the Term of this Lease (including Renewal Terms) to equal the usual and
ordinary rent per acre per month charged by the Landlord on similar property at
the time of such adjustment. The value and the use of the Project and the
Excluded Property shall be excluded in determining the Base Rent and the Base
Rent shall be based upon the rent charged by Landlord for bare land.
Section 5.02. Additional Rent. Tenant shall pay Landlord, as Additional
Rent hereunder, any and all rates, charges and amounts called for and provided
to be paid to Landlord under Landlord's Tariffs.
Section 5.03. Payment of Rent. Except as otherwise expressly provided
in this Lease, all Base Rent shall be due and payable in advance monthly
installments on the first day of each calendar month during the Term. The
Additional Rent shall be due and payable in accordance with Landlord's Tariffs,
and all other Rent shall be due and payable ten (10) days after Landlord
provides Tenant with a written invoice therefor. Rent shall be paid to Landlord
at its address for notice hereunder or to such other person or at such other
address in Harris County, Texas, as Landlord may from time to time designate in
writing. Rent shall be paid in legal tender of the United States of America (or
in legal tender of any other nationality acceptable to Landlord) without notice,
demand, abatement, deduction or offset.
Section 5.04. Delinquent Payments and Handling Charge. All Rent and
other payments required of Tenant hereunder shall bear interest from the date
due until the date paid at the rate of interest specified in Section 22.13. In
no event, however, shall the charges permitted under Section 5.03, Section 22.13
hereof, or elsewhere in this Lease, to the extent any or all of the same are
considered to be interest under applicable law, exceed the maximum rate of
interest allowable under applicable law.
Section 5.05. Prepaid Rent. Tenant shall provide to Landlord
contemporaneously with the execution of this Lease, the sum of NINETY AND NO/100
DOLLARS ($90.00) per acre repre senting (a) the first monthly installment of
Base Rent paid in advance, to be applied to the Base Rent for the first month of
the Term when due. Landlord may apply any or all of any installment of Rent
hereunder towards the payment of any sum or the performance of any obligation
which Tenant was obligated, but failed, to pay or perform hereunder.
Article 6. Construction, Ownership and Operation of the Project .
Section 6.01. The Project . Subject to delays caused by Force Majeure
(as specified in Section 22.18 hereof), Tenant shall complete, at its sole cost
and expense, the Project . Tenant shall construct the Project in a good and
workmanlike manner and in accordance with plans and specifications approved in
writing in advance by Landlord and in compliance with any applicable building
code and all applicable Legal Requirements. Tenant shall test all fill used in
construction of Project for the presence of Hazardous Materials. Tenant shall
not use fill that contains Hazardous Materials. Tenant shall provide a copy of
all test results to Landlord.
Section 6.02 Alterations and Improvements.
(a) Tenant shall have the right to make alterations,
additions, or improvements to the Leased Premises or the Project, including
constructing or improving buildings. Such alterations, additions and
improvements shall be done at Tenant's cost and expense and in a good and
workmanlike manner. Plans for such alterations, additions and improvements shall
be submitted to and approved by Landlord, which approval shall not be
unreasonably withheld. Landlord acknowledges and agrees that, subject to a
mutual agreement being reached between Landlord and Tenant, Tenant may use the
warehouse facilities owned by Landlord adjacent to the Leased Premises. Tenant
would intend to construct a conveyor system or pneumatic piping from the Project
to such warehouse for transportation of finished product. Landlord agrees to
cooperate with Tenant in the location and construction of such system, subject
to reaching a mutually satisfactory agreement as set out above. Tenant
acknowledges that the warehouse is and will remain a transit shed for
water-bourne cargo. Tenant further acknowledges that this Section 6.02 is not to
be construed as limiting Landlord's ability to enter into leases or freight
handling assignments with third parties with respect to the warehouse or other
portion of Landlord's property at the Woodhouse Terminal.
(b) Tenant agrees to pay for in advance or to build or
otherwise provide, at Tenant's election, any government-required
improvements to the Elevator needed to support the Project.
Section 6.03. Permits. Tenant shall obtain and maintain in effect at
all times during the Term all permits, licenses and consents required or
necessary for the construction, installation, maintenance, use and operation of
the Project and Tenant's use and occupancy of and operations at the Leased
Premises.
Section 6.04. Ownership and Removal of the Excluded Property . The
Project (excluding the Excluded Property) shall constitute Tenant improvements
and shall be the property of Tenant, and provided that the Project (excluding
the Excluded Property) shall be surrendered with the Leased Premises as part
thereof at the expiration or earlier termination of the Term without any
payment, reimbursement or compensation therefor or at Landlord's sole option, be
removed from the Leased Premises within 240 days after the expiration or earlier
termination of the Term and Tenant shall repair any damages caused by such
removal. Tenant shall remove the Excluded Property upon the expiration or
earlier termination of the Term and Tenant shall repair all damage to the Leased
Premises caused by such removal. If Tenant fails to remove the Excluded Property
within 240 days following the expiration or earlier termination of the Term,
then, at Landlord's election, (x) Tenant's rights, title and interest in and to
such Excluded Property shall be vested in Landlord (without the necessity of
executing any conveyance instruments) or (y) Landlord shall be entitled to
remove and store such Excluded Property as specified in Article 17 hereof.
Section 6.05. Condition of Leased Premises. Tenant acknowledges that
Tenant has independently and personally inspected the Leased Premises and that
Tenant has entered into this Lease based upon such examination and inspection.
Tenant acknowledges that Landlord has provided to it the environmental site
assessment referred to in Article 16. Tenant accepts the Leased Premises in its
present condition, "AS IS, WITH ALL FAULTS, IF ANY, AND WITHOUT ANY WARRANTY
WHATSOEVER, EXPRESS OR IMPLIED," specifically (without limiting the generality
of the foregoing) without any warranty of (a) the nature or quality of any
construction, structural design or engineering of any improvements currently
located at or constituting a portion of the Leased Premises, (b) the quality of
the labor and materials included in any such improvements, or (c) soil and
environmental conditions existing at the Leased Premises and the suitability of
the Leased Premises for any particular purpose or developmental potential.
Landlord shall not be required to make any improvements to the Leased Premises
or to repair any damages to the Leased Premises.
Section 6.06. Repair and Maintenance.
(a) Tenant shall maintain the Leased Premises at all times
during the Term in a good, clean, and operable condition to the
standards prevailing for comparable flour mills in the United States,
and will not commit or allow to remain any waste or damage to any
portion of the Leased Premises.
(b) Landlord shall maintain and keep the Elevator and
Landlord's roads leading up to the Project in good, clean, and operable
condition to the standards prevailing for export grain elevators in the United
States.
Section 6.07. Laborers and Mechanics. Tenant shall pay for all labor
and services performed for, materials used by or furnished to Tenant, or used by
or furnished to any contractor employed by Tenant with respect to the Leased
Premises and hold Landlord and the Leased Premises harmless and free from any
liens, claims, encumbrances or judgments created or suffered by Tenant. If
Tenant elects to post a payment or performance bond or is required to post an
improvement bond with a public agency in connection with the above, Tenant
agrees to include Landlord as an additional obligee thereunder.
Article 7. Landlord's Contribution to Project. Landlord agrees to reimburse
Tenant in the manner set out below the costs incurred by Tenant for
infrastructure improvements for the benefit of the Project, solely in the manner
set out below, up to a maximum of Five Hundred Thousand Dollars ($500,000).
Infrastructure improvements shall include the following: (i) road construction
and improvement; (ii) construction of utilities to serve the Project (including,
without limitation, electrical, sanitary sewer, storm sewer or drainage, water,
natural gas) and the purchase of any equipment in connection therewith; (iii)
rail or rail-related purchase and construction; and (iv) purchase and
construction of a conveyor system between the Elevator and the Project. Landlord
shall reimburse Tenant for such amount by crediting to Tenant all of the Base
Rent or put-through fees due to Landlord under this Lease until such
reimbursement has been paid in full. Landlord shall never be required to pay
Tenant any money in fulfillment of its obligation under this section of the
Lease, but only to provide credit from revenues due Landlord from Tenant under
the Lease. Not withstanding the foregoing, Tenant shall pay all water, gas
electricity, telephone, sewage treatment and drainage and any other utilities or
similar service charges or fees used in or on the Leased Premises. Tenant shall
pay the same promptly as such charges accrue, and agrees to protect, indemnify
and hold Landlord harmless from and against any and all liability for any such
costs or charges. To the extent Landlord provides any such services to the
Leased Premises or pays the cost for any such services, Tenant shall pay to
Landlord the cost of such services as Rent hereunder upon receiving an invoice
therefor pursuant to Section 5.03 hereof.
Article 8. Impositions. During the Term, Tenant shall pay or cause to be paid as
and when the same shall become due, all Impositions. Impositions that are
payable by Tenant for the tax year in which Commencement Date occurs as well as
during the year in which the Term ends shall be apportioned so that Tenant shall
pay its proportionate share of the Impositions payable for such periods of time.
Where any Imposition that Tenant is obligated to pay may be paid pursuant to law
in installments, Tenant may pay such Imposition in installments as and when such
installments become due. Tenant shall deliver to Landlord evidence of payment of
all Impositions Tenant is obligated to pay hereunder, concurrently with the
making of such payment. Tenant shall, within 60 days after payment of any
Imposition, deliver to Landlord copies of the receipted bills or other evidence
reasonably satisfactory to Landlord showing such payment.
Article 9. Transfer by Tenant.
Section 9.01. General. Tenant shall not effect or suffer any Transfer
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld. Any attempted Transfer without such consent shall be void
and of no effect. If Tenant desires to effect a Transfer, it shall deliver to
Landlord written notice thereof in advance of the date on which Tenant proposes
to make the Transfer, together with all of the terms of the proposed Transfer
and the identity of the proposed Transferee. Landlord shall have 45 days
following receipt of the notice and information within which to notify Tenant in
writing whether Landlord elects (a) to refuse to consent to the Transfer and to
continue this Lease in full force and effect as to the entire Leased Premises or
(b) to permit Tenant to effect the proposed Transfer. If Landlord fails to
notify Tenant of its election within said 45 day period, Landlord shall be
deemed to have elected option (b). The consent by Landlord to a particular
Transfer shall not be deemed a consent to any other Transfer. If a Transfer
occurs without the prior written consent of Landlord as provided in this Section
9.01, Landlord may nevertheless collect rent from the Transferee and apply the
net amount collected to the Rent payable hereunder, but such collection and
application shall not constitute a waiver of the provisions hereof or a release
of Tenant from the further performance of its obligations hereunder.
Notwithstanding the foregoing, Tenant may, without Landlord's consent, effect or
suffer a Transfer to any person or entity in which Tenant maintains at least a
50% interest in the equity or voting rights thereof, provided that in case of
such Transfer, Tenant shall not be relieved of its obligations under this Lease.
Section 9.02. Conditions. The following conditions shall automatically
apply to each Transfer, without the necessity of same being stated in or
referred to in Landlord's written consent:
(a) Tenant shall execute, have acknowledged and deliver to
Landlord, and cause the Transferee to execute, have acknowledged and
deliver to Landlord, an instrument in form and substance acceptable to
Landlord in which (i) the Transferee adopts this Lease and assumes and
agrees to perform, jointly and severally with Tenant, all of the
obligations of Tenant hereunder, as to the space transferred to it,
(ii) the Transferee grants Landlord an express first and prior contract
lien and security interest in its improvements located upon and
property brought into the transferred premises to secure its
obligations to Landlord hereunder, (iii) Tenant subordinates to
Landlord's statutory lien, contract lien and security interest any
liens, security interests or other rights which Tenant may claim with
respect to any property of the Transferee, (iv) Tenant agrees with
Landlord that, if the rent or other consideration due by the Transferee
exceeds the Rent for the transferred space, then Tenant shall pay
Landlord as Rent hereunder all such excess rent and other consideration
immediately upon Tenant's receipt thereof, (v) the Transferee agrees to
use and occupy the transferred space solely for the purposes permitted
under Article 4 and otherwise in strict accordance with this Lease and
(vi) Tenant and acknowledges and agrees in writing that,
notwithstanding the Transfer, Tenant remains directly and primarily
liable for the performance of all the obligations of Tenant hereunder
(including, without limitation, the obligation to pay all Rent), and
Landlord shall be permitted to enforce this Lease against Tenant or the
Transferee, or either of them, without prior demand upon or proceeding
in any way against any other persons, and
(b) Tenant shall deliver to Landlord a counterpart of all
instruments relative to the Transfer executed by all parties to such
transaction (except Landlord).
Section 9.03. Liens. Without in any way limiting the generality of the
foregoing, Tenant shall not grant, place or suffer, or permit to be granted,
placed or suffered, against all or any part of the Leased Premises or Tenant's
leasehold estate created hereby, any lien, security interest, pledge,
conditional sale contract, claim, charge or encumbrance (whether constitutional,
contractual or otherwise) and if any of the aforesaid does arise or is asserted,
Tenant will, promptly upon demand by Landlord and at Tenant's expense, cause
same to be released.
Article 10. Access by Landlord. In accordance with procedures agreed upon in
writing between Tenant and Landlord, Landlord, its employees, contractors,
agents and representatives, shall have the right (and Landlord, for itself and
such persons and firms, hereby reserves the right) to enter the Leased Premises
at all hours (a) to inspect the Leased Premises (b) to determine whether Tenant
is performing its obligations hereunder and, if it is not, to perform same at
Landlord's option and Tenant's expense, or (c) for emergency purposes, provided
that Landlord shall not unreasonably or unduly interfere with Tenant's business
operations.
Article 11. Landlord's Services.
Section 11.01. Handling of Tenant Grain. Landlord agrees to unload,
store in the Elevator and assist Tenant to transfer to the Project Tenant Grain.
Tenant shall be responsible for any overtime charges associated with such
transfer. Landlord shall unload Tenant Grain inbound by truck and shall further
unload Tenant Grain inbound by vessel if such service is or becomes available
from Landlord at a handling fee mutually acceptable to Landlord and Tenant.
Tenant agrees to give Landlord at least two (2) Business days advance notice of
inbound rail shipments of Tenant Grain and at least ten (10) days advance notice
of inbound vessel shipments of Tenant Grain. When inbound vessels of Tenant
Grain are loaded for Tenant, Tenant shall thereupon promptly notify Landlord of
the vessel's estimated time of arrival at the Elevator. Landlord shall unload
Tenant Grain as expeditiously as possible.
If as a result of Landlord's failure to unload Tenant Grain from any
train in a timely manner (that is, unloading 52 cars per 24 hours after
constructive placement of the cars, non-Business Days excluded, provided that
Saturdays shall not be excluded if Saturdays are not demurrage free days for the
railroad delivering the rails cars and provided further that Tenant shall be
responsible for any overtime charges for unloading cars on a Saturday if Tenant
has requested that Landlord unload cars on a Saturday), and only when Tenant's
space allocation as set forth in Section 11.02(a) and (b) has not been exceeded,
if as a result of Landlord's failure to unload cars in a timely manner, Tenant
loses rebates or allowances negotiated by Tenant with the rail carrier, or if
Tenant is charged any demurrage costs, expenses, or penalties as a result of
Landlord's failure to unload a train in a timely manner, then Landlord shall
reimburse Tenant as provided below for the amount of such rebates, allowances,
demurrage costs, expenses or penalties lost or paid as a direct result of
Landlord's failure to unload timely as provided above. Notwithstanding anything
else to the contrary in this Section, Landlord's liability to Tenant for failure
to unload a train in a timely manner shall not exceed $2,000
per calendar month and further provided that Landlord's liability to Tenant
under this Section shall be reduced by any credits or reimbursements Tenant
obtains from the rail carrier for that train. Losses and credits shall be
documented in writing before the Landlord is liable to pay any money under this
section. Landlord agrees that it will unload cars in accordance with its usual
and customary practice and that it will not intentionally defer unloading
Tenant's cars so as to avoid demurrage liability to a third party.
Tenant shall take a sample of Grain from each car carrying inbound
Tenant Grain and shall provide grades to the Landlord. Sampling shall be
conducted by a third party firm or agency approved by Landlord.
To the extent Landlord performs such services, Landlord shall take
samples of Grain from each truck carrying inbound Tenant Grain and shall provide
grades to Tenant. If Landlord ceases to provide such services, Tenant shall take
samples from trucks and provide grades to Landlord.
Landlord shall immediately notify Tenant if Landlord believes that
Tenant Grain appears off-grade or abnormal in any other respect and immediately
stop unloading such grain until Tenant advises otherwise.
Section 11.02. Storage; Transfer of Grain.
(a) All Tenant Grain stored at the Elevator by Landlord shall
be stored on an identity-preserved basis. Landlord agrees to have
available for Tenant at all times on an exclusive basis during the Term
hereof sufficient space for storage of 550,000 bushels of Tenant Grain.
Landlord shall provide a minimum of nine (9) separations. In the event
the Tenant is not using space; Landlord may use the empty bins;
provided that 550,000 bushels of storage shall be available when needed
by Tenant for Tenant Grain.
(b) If Tenant requires additional storage space for Tenant
Grain at any time during the Term hereof because of expansion of
Tenant's milling capacity, Landlord agrees to provide 40,000 bushels of
dedicated identity-preserved storage for each addition of 1,000 cwt.
per 24 hours of expanded milling capacity, provided that the additional
storage capacity shall not exceed 180,000 bushels. Landlord agrees to
provide for Tenant Grain one (1) additional separation for each 60,000
bushels of expanded storage capacity dedicated to the Project.
(c) Landlord agrees to transfer Tenant Grain from storage to
the Project at Tenant's request on Business Days during normal business
hours. Tenant will notify Landlord at least 24 hours prior to each
required transfer with the quantities and specific storage bins where
those quantities are stored. Landlord will transfer Tenant Grain from
storage to the Project from those bins specified by Tenant. During the
transfer of Tenant Grain, Tenant will
work with Landlord to avoid slowing, shutting down or otherwise,
negatively affecting Landlord's export grain operations. The Project
shall include an automated conveyor system to permit transfer of Tenant
Grain from the Elevator to the Project by Tenant, which system is
acceptable to Landlord and Tenant.
Section 11.03 Overtime. If requested by Tenant, Landlord shall provide
the services to Tenant specified in this Article 11 on a non-Business Day;
provided that Tenant shall reimburse Landlord for the additional costs and
expenses incurred by Landlord as a result thereof.
Section 11.04. Outbound Shipments; Access for Truck and Rail Service.
Tenant shall be solely responsible for shipment of outbound products, including
designation of and contracting with carriers. To the extent within Landlord's
control, Landlord shall provide continued uninterrupted access to the Project
for truck and rail service for inbound wheat and outbound product necessary for
the efficient operation of the Project.
Section 11.05. Handling and Storage Restrictions.
(a) All shrink in excess of .25% shall be for the account of
Landlord and Landlord shall reimburse Tenant for all losses resulting therefrom.
Landlord agrees that it shall use the same standard of care when handling and
storing Tenant Grain as it uses when Landlord handles other Grain in the
Elevator, including, without limitation, periodically monitoring the temperature
of and, at Tenant's request, the turning of any stored Tenant Grain at the
charge provided in Landlord's Tariff No, 18.
(b) Landlord assumes no responsibility and shall have no
liability to Tenant hereunder if Tenant Grain is received at the
Elevator in condition or of a quality different from the condition or
quality which Tenant expects or is entitled to receive. Landlord agrees
to give access to Tenant and its agents for the purpose of making
reasonable inspection of inbound Tenant Grain shipments.
(c) Landlord shall provide daily inventory bin reports based
upon inbound Tenant Grain received and Tenant Grain provided to the
Project for the previous day. Landlord agrees to give Tenant monthly
inventory reports based upon soundings of the Tenant's bins. If Tenant
objects to any inventory report made by Landlord and the parties cannot
resolve the differences, then the disputed quantities of Tenant Grain
shall be loaded out, weighed and replaced in storage. The scale weights
thus taken shall be conclusive and the cost of the loading and weighing
shall be borne equally by the parties hereto. Landlord shall provide
Tenant with house unload and house transfer weights of all Tenant Grain
handled by Landlord for Tenant. All transfers and unload weights will
be received in writing within 24 hours. Each car and truck shall be
weighed individually. At least once each year during the term of this
Lease, Landlord shall conduct a weigh-up of all Tenant Grain owned by
the Tenant and stored in the Elevator and shall provide Tenant with a
report of the results of such weigh-ups.
(d) Tenant shall provide to Landlord the grade, quantity,
quality, and car number at least two (2) working days prior to arrival
of Tenant's Grain.
Section 11.06. Through-Put Fee.
(a) Tenant shall pay Landlord a through-put fee (the "Fee") of
three cents per bushel for each bushel of Tenant Grain transferred by
Landlord from or through the Elevator to the Project, provided that the
Fee shall not exceed the through-put fee (if lower) charged by Landlord
for Grain of lesser or equal volumes and the Fee shall be reduced to
such lesser fee during the time the lesser fee is in effect. In
determining the volume of Grain put through the Elevator by the Tenant
for the purpose of calculating a reduction in the Fee for Tenant Grain,
all Grain put through the Elevator by Tenant (including all of its
affiliates, parent and its parent's divisions or subsidiaries) shall be
considered.
(b) The Fee in effect from time to time shall be increased or
decreased every five (5) years during the Term of this Lease (including
Renewal Terms) by the increase or decrease in the Consumer Price Index
Urban - Houston, Texas, as calculated at the time of such increase or
decrease, from the first day of the preceding five-year period until
the last day of such period, provided however that the Fee should never
be less than zero cents (0(cent)).
(c) The Fee shall be computed and invoiced by Landlord to
Tenant in arrears. The Fee shall be paid by Tenant within thirty (30) days
following receipt of the invoice.
Section 11.07. Minimum Bushels. Tenant hereby guarantees Landlord that
a minimum of 5,000,000 bushels of Tenant Grain will be through-put the Elevator
for the Project annually; provided that such volume requirement shall be
phased-in as follows:
(a) 70% of such requirement shall be met during the first
fourteen (14) months commencing with the Completion Date.
(b) 100 % of such requirement shall be met every twelve (12)
months thereafter.
(c) Tenant shall pay to Landlord the difference between the
Fee actually paid during the time period specified in Section 11.07 (a) and (b)
above and the Fee that would have been paid during that period had Tenant met
its minimum tonnage commitments as set out in this section.
Section 11.08. Independent Operations. It is understood and agreed by
the parties that Tenant is acting entirely as an independent contractor and not
in any respect as an agent, employee, representative, partner or co-venturer
with Landlord. As such, Tenant shall, without interference by or on behalf of
Landlord, have full authority over the operation of its business on the Leased
Premises, including without limitation the authority to establish prices for its
goods and services.
Article 12. Insurance. Tenant shall obtain and maintain throughout the
Term the following policies of insurance:
(a) Insurance on the Project and improvements to or
constituting a part of the Leased Premises (including boiler and
machinery insurance, as applicable) sufficient to provide coverage for
the full insurable value thereof; and the policy for such insurance
shall have a replacement cost endorsement or similar provision. "Full
insurable value" shall mean actual replacement value, and such full
insurable value shall be confirmed from time to time (but not more
frequently than the dates of renewals of such policy) at the request of
Landlord by one of the insurers or (at the option of Landlord) by an
insurance appraiser;
(b) Commercial general liability, covering claims for personal
injury, death and property damage occurring in or about the Leased
Premises; such insurance to afford protection to the limits of
$1,000,000 combined single limit each occurrence for bodily injury and
property damage, subject to a $2,000,000 general aggregate limit;
(c) Wharfingers' and Warehousemans' legal liability.
(d) Vehicle liability insurance, including coverage for all
owned or leased vehicles, such insurance to afford protection to the
limits of at least $500,000 combined single limit each accident for
bodily injury and property damage;
(e) Umbrella liability insurance having limits of not less
than $1,000,000 (over and above the limits of liability on the
underlying policies specified in clauses (b) and (d) above) with
respect to bodily injury or death to any number of persons in any one
accident or occurrence;
(f) Workers' compensation insurance with limits required by
the Workers' Compensation Laws of the State of Texas.
The minimum insurance protection amounts set forth in clauses (b), (d), and (e)
above shall be increased from time to time upon request by Landlord to an amount
which is reasonable at the time. Tenant shall deliver to Landlord, prior to the
Commencement Date, certificates of the insurance described in this Article 12,
or such other proof of insurance as shall be deemed acceptable by the Authority
and shall, at all times during the Term, deliver to Landlord upon request true
and correct copies of said insurance policies. The policies of such insurance
shall (w) (except for the workers' compensation insurance) name Landlord as an
additional insured, (x) provide that it will not be can celled or reduced in
coverage without 30 days' prior written notice to Landlord, (y) be primary
coverage, so that any insurance coverage obtained by Landlord shall be in excess
thereto and (z) permit deductible or self-insured retention limits up to a
maximum of $500,000.00. Tenant shall deliver to Landlord certificates of renewal
prior to the expiration date of each such policy and copies of new policies
prior to terminating any such policies. All policies of insurance required to be
obtained and maintained by Tenant shall be subject to the approval of Landlord
as to terms, coverage, deductibles and issuer, which approval shall not be
unreasonably withheld.
Article 13. Tenant Indemnity. Tenant agrees to indemnify and hold Landlord
harmless from and against any and all claims, costs, expenses, actions, causes,
liens, liabilities, damages, judgments and attorneys fees arising from or
connected with property damage or personal injury or death caused directly or
indirectly by Tenant's acts or omissions as lessee, occupant or operator of or
at the Leased Premises.
Article 14. Casualty Loss.
Section 14.01. Obligation to Restore.
(a) If all or any part of the improvements located on (or
constituting a part of) the Leased Premises are destroyed or damaged by
any casualty during the Term, Tenant shall promptly commence and
thereafter prosecute diligently to completion the restoration of the
same to the condition in which the destroyed or damaged portion existed
prior to the casualty. Tenant will perform such restoration with at
least as good workmanship and quality as the improvements being
restored, and in compliance with the provisions of Article 6 hereof.
Notwithstanding the foregoing provisions of this subparagraph (a) to
the contrary, if all of such improvements are wholly destroyed by any
casualty, or are so damaged or destroyed that, in Tenant's sole
judgment it would be uneconomical to cause the same to be restored (and
Tenant shall give written notice of such determination to Landlord
within 90 Business Days after the date the casualty occurred), then
Tenant shall not be obligated to restore such improvements and this
Lease shall terminate as of the date of the casualty or its discovery.
(b) If all or any part of the Elevator serving the Project is
damaged by any casualty during the Term, Landlord shall promptly
commence and thereafter prosecute diligently to completion the
restoration of the same to the condition in which the destroyed or
damaged portion existed prior to the casualty. Notwithstanding the
foregoing provisions of this subparagraph (b) to the contrary, if the
Elevator is wholly destroyed by any casualty, or if it is so damaged or
destroyed that in Landlord's sole judgment it would be uneconomical to
cause the same to be restored (and Landlord shall give written notice
of such determination to Tenant within 90 Business Days after the date
the casualty occurred or is discovered), the Landlord shall not be
obligated to restore the Elevator and this Lease shall terminate as of
the date of the casualty or its discovery.
(c) If a casualty loss affecting the Leased Premises occurs,
all insurance proceeds arising from policies maintained by Tenant for
the damages arising from such casualty and which is attributed to the
Project (including the Excluded Property) shall be distributed and paid
directly to Tenant.
Section 14.02. Notice of Damage. Tenant shall immediately notify
Landlord of any destruction of or damage to the Leased Premises.
Article 15. Condemnation.
Section 15.01. Total Taking. If a Total Taking of the Leased Premises
or Elevator occurs, then this Lease shall terminate as of the date the
condemning authority takes lawful possession of the Leased Premises or Elevator
and Tenant shall be entitled to receive and retain the Award for the Taking of
the Project (including the Excluded Property) and Landlord shall be entitled to
receive and retain the Award for the Taking of the balance of the Leased
Premises and for the Elevator.
Section 15.02. Partial Taking. If a Partial Taking of the Leased
Premises or Elevator occurs and both Land and Tenant desire to continue the
Lease, (a) this Lease shall continue in effect as to the portion of the Leased
Premises or Elevator not Taken, and (b) Tenant shall promptly commence and
thereafter prosecute diligently to completion the restoration of the remainder
of the Project located in (or constituting a part of) the Leased Premises to an
economically viable unit with at least as good workmanship and quality as
existed prior to the Taking. In the event a Partial Taking occurs, either
Landlord or Tenant may terminate this Lease by giving 90 Business Days written
notice to the other. In the event of a Partial Taking of the Leased Premises,
Tenant shall be entitled to receive and retain the Award for the portion of the
Project Taken and the Landlord shall be entitled to receive and retain the Award
for the balance of the Leased Premises Taken. In addition, upon a Partial
Taking, the Base Rent payable during the remainder of the Term (after the
condemning authority takes lawful possession of the portion Taken) shall be
reduced proportionally giving due regard to the relative value of the portion of
the Leased Premises (excluding the Project) Taken as compared to the remainder
thereof.
Section 15.03. Notice of Proposed Taking. Tenant and Landlord shall
immediately notify the other of any Proposed Taking of any portion of the Leased
Premises.
Section 15.04. Tenant's Option Upon Casualty Loss or Total or Partial
Taking. If a casualty loss to or a Total or Partial Taking of the Elevator
occurs as described in Sections 14.01 (b), 15.01 or 15.02 and as a result
thereof Landlord has determined in its sole judgment that it would be
uneconomical to cause the Elevator to be restored, and has notified Tenant of
its intention to terminate this Lease as provided in those sections, Tenant
shall have the option, at Tenant's sole cost and expense, exercised by written
notice to Landlord by Tenant within ninety (90) days after Landlord's written
notice to Tenant that it will not restore the elevator and intends to terminate
this Lease, to:
(a) Restore the Elevator to the extent necessary to continue
to serve and operate the Project; or
(b) Construct new grain storage, rail unloading facilities and
rail on the Project-restoration site shown on Exhibit "A" to this Lease to the
extent necessary to continue to operate the Project.
If Tenant exercises its option pursuant to this Section
15.04 then:
(y) Landlord shall have been deemed to have elected to close
the Elevator and the provisions, terms and conditions of Section 22.21
shall apply, including without limitation the terms of Section
22.21(c); and
(z) The improvements shall be constructed by Tenant in
accordance with Section 6.02.
Article 16. Landlord's Representations and Warranties. Landlord has provided
Tenant with Phase I, Phase II and Phase III Environmental Site assessments
obtained by Landlord from HBJ and Associates. Tenant may perform its own
environmental site assessments and install any monitoring wells needed. Should
the results of Tenant's environmental site assessment show, in Tenant's sole
judgement, that the Leased Premises are not suited for Tenant's purposes, Tenant
shall have the right upon written notice to Landlord to cancel this Lease,
provided, however, Tenant shall exercise its right to cancel this Lease pursuant
to this section no later than February 1, 1996.
Article 17.00. Quiet Enjoyment. Tenant, on paying the Rent and all other sums
called for herein and performing all of Tenant's other obligations contained
herein, shall and may peaceably and quietly have, hold, occupy, use and enjoy
the Leased Premises during the Term subject to the provisions of this Lease.
Landlord agrees to warrant and forever defend Tenant's right to occupancy of the
Leased Premises against the claims of any and all persons whomsoever lawfully
claiming the same or any part thereof, by, through or under Landlord (but not
otherwise), subject to the provisions of this Lease, all matters of record in
the Official Public Records of Real Property of Harris County, Texas, and any
unrecorded easements or licenses executed by Landlord to the extent the
foregoing are validly existing and applicable to the Leased Premises.
Article 18. Default by Tenant.
Section 18.01. Events of Default. Each of the following occurrences
shall constitute an "Event of Default" by Tenant under this Lease:
(a) The failure of Tenant to pay Rent as and when due
hereunder and the continuance of such failure for a period of fifteen
(15) days after written notice of default is sent by Landlord to
Tenant;
(b) The failure of Tenant to perform, comply with or observe
any other agreement, obligation or undertaking of Tenant, or any other
term, condition or provision, in this Lease, and the continuance of
such failure for a period of 45 days after written notice from Landlord
to Tenant specifying the failure; provided, however that if a failure
other than failure to pay Rent cannot reasonably be cured within the
45-day time period, Tenant shall not be in default if Tenant commences
to cure within the 45-day period and thereafter pursues curing the
failure diligently until completion.
(c) The filing of a petition by or against Tenant (the term
"Tenant" meaning, for the purpose of this clause (c), shall include any
Guarantor) (i) in any bankruptcy or other insolvency proceeding, (ii)
seeking any relief under the Code or any similar debtor relief law,
(iii) for the appointment of a liquidator or receiver for all or
substantially all of Tenant's property or for Tenant's interest in this
Lease or (iv) to reorganize or modify Tenant's capital structure; and
(d) The admission by Tenant in writing that it cannot meet its
obligations as they become due or the making by Tenant of an assignment
for the benefit of its creditors.
Section 18.02. Remedies of Landlord. Upon any Event of Default,
Landlord may, at Landlord's option and in addition to all other rights, remedies
and recourse afforded Landlord hereunder or by law or equity, terminate this
Lease by the giving of written notice of termination to Tenant, in which event
Tenant shall pay to Landlord upon demand the sum of (i) all Rent and other
amounts accrued hereunder to the date of termination, (ii) all amounts due under
Section 18.03 and (iii) damages in an amount equal to (A) the total Rent that
Tenant would have been required to pay for the remainder of the Term discounted
to present value at a discount rate reasonably designated by Landlord minus (B)
the then present fair rental value of the Leased Premises for such period. If
Tenant cures the Event or Events of Default within 20 days after receipt of the
notice of termination, Landlord may rescind such notice by giving a written
notice to Tenant.
Section 18.03. Payment by Tenant. Upon any Event of Default, Tenant
shall also pay to Landlord all costs and expenses incurred by Landlord,
including court costs and reasonable attorneys' fees, in (a) retaking or
otherwise obtaining possession of the Leased Premises, (b) removing and storing
Tenant's or any other occupant's property, (c) repairing, restoring, altering,
remodeling or otherwise putting the Leased Premises into its original condition,
(d) reletting all or any part of the Leased Premises, (e) paying or performing
the underlying obligation which Tenant failed to pay or perform and (f)
enforcing any of Landlord's rights, remedies or recourses arising as a
consequence of the Event of Default.
Section 18.04. Reletting. Upon termination of this Lease, Landlord may,
but shall not be obligated to, attempt to relet the Leased Premises. If Landlord
does elect to relet, Landlord may relet such portion of the Leased Premises, for
such period, to such tenant, and for such use and purpose as Landlord, in the
exercise of its sole discretion, may choose. Tenant shall not be entitled to the
excess of any rent obtained by reletting over the Rent herein reserved.
Section 18.05. Landlord's Right to Pay or Perform. If Tenant fails to
perform or observe any of its covenants, agreements, or obligations hereunder
for a period of 10 days after notice of such failure is given by Landlord, then
in addition to all other rights of Landlord provided herein Landlord shall have
the right, but not the obligation, at its sole election (but not as its
exclusive remedy), to perform or observe the covenants, agreements, or
obligations which are asserted to have not been performed or observed at the
expense of Tenant and to recover all costs or expenses incurred in connection
therewith as Rent hereunder by delivering an invoice therefor to Tenant pursuant
to Section 5.03 hereof. Any performance or observance by Landlord pursuant to
this Section 18.05 shall not constitute a waiver of Tenant's failure to perform
or observe.
Section 18.06. Injunctive Relief; Remedies Cumulative. Landlord may
restrain or enjoin any Event of Default or threatened Event of Default by Tenant
hereunder without the necessity of proving the inadequacy of any legal remedy or
irreparable harm. The rights, remedies and recourses of Landlord for an Event of
Default shall be cumulative and no right, remedy or recourse of Landlord,
whether exercised by Landlord or not, shall be deemed to be in exclusion of any
other.
Section 18.07. No Waiver; No Implied Surrender. Provisions of this
Lease may not be waived orally or impliedly, but only by the party entitled to
the benefit of the provision evidencing the waiver in writing. Thus, neither the
acceptance of Rent by Landlord following an Event of Default (whether known to
Landlord or not), nor any other custom or practice followed in connection with
this Lease, shall constitute a waiver by Landlord of such Event of Default or
any other Event of Default. Further, the failure by Landlord to complain of any
action or inaction by Tenant, or to assert that any action or inaction by Tenant
constitutes (or would constitute, with the giving of notice and the passage of
time) an Event of Default, regardless of how long such failure continues, shall
not extinguish, waive or in any way diminish the rights, remedies and recourses
of Landlord with respect to such action or inaction. No waiver by Landlord of
any provision of this Lease or of any breach by Tenant of any obligation of
Tenant hereunder shall be deemed to be a waiver of any other provision hereof,
or of any subsequent breach by Tenant of the same or any other provision hereof.
Landlord's consent to any act by Tenant requiring Landlord's consent shall not
be deemed to render unnecessary the obtaining of Landlord's consent to any
subsequent act of Tenant. No act or omission by Landlord (other than Landlord's
execution of a document acknowledging such surrender) or Landlord's agents,
including the delivery of the keys to the Leased Premises, shall constitute an
acceptance of a surrender of the Leased Premises.
Article 19. Defaults by Landlord. Landlord shall not be in default under this
Lease, and Tenant shall not be entitled to exercise any right, remedy or
recourse against Landlord or otherwise as a consequence of any alleged default
by Landlord under this Lease, unless and until Landlord fails to perform any of
its obligations hereunder and said failure continues for a period of 90 days
after Tenant gives Landlord written notice thereof specifying, with reasonable
particularity, the nature of Landlord's failure; provided, however, that if the
failure cannot reasonably be cured within the 90 day time period, Landlord shall
not be in default hereunder if Landlord commences to cure the failure within the
90 days and thereafter pursues the curing of same diligently to completion. If
Landlord in curing its default hereunder is required to advertise for public
bids for the work to complete such cure, then Landlord shall be deemed to have
commenced such cure upon commencement of preparation of specifications to be
used in advertising such public bids. If Landlord defaults under this Lease and,
as a consequence of the default, Tenant recovers a money judgment against
Landlord, the judgment, which must be final, shall be satisfied only out of, and
Tenant hereby agrees to look solely to, any money due by Tenant to Landlord
under this Lease and the interest of Landlord in the Leased Premises as the same
may then be encumbered, and Landlord shall not be liable for any deficiency. In
no event shall Tenant have the right to levy execution against any property of
Landlord other than its interest in the Leased Premises. Tenant's remedies for a
default by Landlord hereunder shall be limited to claims for damages, specific
performance and injunctive relief; and in no event shall Tenant be entitled to
rescind or terminate this lease or Tenant's obligations hereunder as a
consequence of such default by Landlord. Landlord shall not be obligated to
impose taxes or any special assessments to satisfy its obligations hereunder.
Article 20. Right of Reentry. Upon the expiration or termination of the Term,
Tenant shall immediately, quietly and peaceably surrender to Landlord possession
of the Leased Premises in the condition and state of repair required under
Section 6.05 hereof and Tenant shall remove the Removable Property in accordance
with Section 6.04 hereof. If Tenant fails to surrender possession as herein
required, Landlord may initiate any and all legal action as Landlord may elect
to dispossess Tenant and all of its Excluded Property, and all persons or firms
claiming by, through or under Tenant and all of their Excluded Property, from
the Leased Premises, and may remove from the Leased Premises and store (without
any liability for loss, theft, damage or destruction thereto) any such Excluded
Property at Tenant's cost and expense. For so long as Tenant remains in
possession of the Leased Premises after such expiration, termination or exercise
by Landlord of its re-entry right, Tenant shall be deemed to be occupying the
Leased Premises as a tenant-at-sufferance, subject to all of the obligations of
Tenant under this Lease, except that the daily Base Rent shall be twice the per
day Base Rent in effect immediately prior to such expiration, termination or
exercise by Landlord. No such holding over shall extend the Term. If Tenant
fails to surrender possession of the Leased Premises in the condition herein
required, Landlord may, at Tenant's expense, restore the Leased Premises to such
condition.
Article 21. Conditions Precedent to Tenant's Obligations. The obligations and
liabilities of Tenant arising under this Lease are subject to and contingent
upon the following:
Section 21.01 Tax Abatement. Tenant shall have received the approval of
all applicable governmental authorities to tax abatement status for the Project
from property taxes levied by county and local taxing authorities, which
abatement shall be upon terms and conditions reasonably acceptable to Tenant.
Section 21.02. Rail Service Contracts. Tenant shall have obtained rail
service contracts to service the Project upon terms and conditions reasonably
acceptable to Tenant.
Section 21.03. Permits and Approvals. Tenant shall have obtained all
federal, state, county and local platting, subdivision, permits and other
approvals required for the Project.
Section 21.04. Construction Contracts. Tenant shall have executed
construction, engineering and equipment supply contracts for construction and
operation of the Project upon terms and conditions reasonably acceptable to
Tenant.
Section 21.05. Utility Service Contracts. Tenant shall have obtained
power, water, sewer, natural gas and other service contracts required for
operation of the Project upon terms and conditions reasonably acceptable to
Tenant.
Section 21.06. Environmental Audit; Engineering Tests. Tenant shall
have obtained and completed an environmental review and environmental audit of
the Leased Premises, along with any other engineering tests, including soil
tests, necessary for construction of the Project, the results of which shall be
reasonably satisfactory Tenant.
The foregoing conditions shall be satisfied, or waived in writing by
Tenant in its sole discretion, on or before February 1, 1996, or either party
may, upon ten (10) days prior written notice to the other, elect to terminate
this Lease. Upon such termination, neither party shall have any further rights
or obligations to the other.
If Landlord elects to terminate this Lease as provided in the preceding
paragraph then, within such ten (10) day notice period, Tenant may waive in
writing any conditions remaining unsatisfied, in which event this Lease shall
remain in full force and effect.
Article 22. Miscellaneous.
Section 22.01. Time of Essence. Time is of the essence with respect to
each date or time specified in this Lease by which an event is to occur.
Section 22.02. Applicable Law. This Lease shall, insofar as relevant,
be governed by the Constitution and laws of the State of Texas, and including
the Texas Tort Claims Act.
Section 22.03. Estoppel Certificates. From time to time at the request
of Landlord, Tenant will promptly and without compensation or consideration
execute, have acknowledged and deliver a certificate stating (a) the rights (if
any) of Tenant to extend the Term or to expand the Leased Premises, (b) the Rent
(or any components of the Rent) currently payable hereunder, (c) whether this
Lease has been amended in any respect and, if so, submitting copies of or
otherwise identifying the amendments, (d) whether, within the knowledge of
Tenant after due investigation, there are any existing breaches or defaults by
Landlord hereunder and, if so, stating the defaults with reasonable
particularity and (e) such other information pertaining to this Lease as
Landlord may reasonably request.
Section 22.04. Signs. Tenant shall be permitted to install any signs,
placards or other advertising or identifying marks upon the Leased Premises or
upon the exterior of any improvements to or constituting a part of the Leased
Premises provided that such signs have been approved in writing in advance by
Landlord, which approval shall not be unreasonably withheld. Tenant agrees to
remove promptly (at Tenant's sole cost and expense) upon the expiration or
earlier termination of the Term any and all such signs, placards or other
advertising or identifying marks.
Section 22.05. Relation of the Parties. Nothing in this Lease shall be
construed to make the parties partners or joint venturers or to render either
party liable for any obligation of the other.
Section 22.06. Public Disclosure. Landlord is a governmental authority
subject to the requirements of the Texas Open Meetings Act and the Texas Open
Records Act (Texas Government Code Chapters 551 and 552), and as such Landlord
is required to disclose to the public (upon request) this Lease and certain
other information and documents relating to the consummation of the transactions
contemplated hereby. In this regard, Tenant agrees that the disclosure of this
Lease or any other information or materials related to the consummation of the
transactions contemplated hereby to the public by Landlord as required by the
Texas Open Meetings Act, Texas Open Records Act, or any other Legal Requirement
will not expose Landlord (or any party acting by, through or under Landlord) to
any claim, liability or action by Tenant.
Section 22.07. Notices. All notices and other communications given
pursuant to this Lease shall be in writing and shall either be mailed by first
class United States mail, postage prepaid, registered or certified with return
receipt requested, and addressed as set forth in this Section or delivered in
person to the intended addressee, or sent by prepaid telegram, cable or telex
followed by a confirmatory letter. Notice mailed in the aforesaid manner shall
become effective three business days after deposit; notice given in any other
manner, and any notice given to Landlord, shall be effective only upon receipt
by the intended addressee. For the purposes of notice, the address of
(a) Landlord shall be:
Port of Houston Authority
111 East Loop North
Post Office Box 2562
Houston, Texas 77252-2562
Attention: Executive Director
and
(b) Tenant shall be:
Harvest States Cooperatives
1667 Snelling Avenue North
Post Office Box 64594
St. Paul, Minnesota 55164-0594
Attention: Mr. Patrick Kluempke
Each party shall have the continuing right to change its address for notice
hereunder by the giving of 15 days' prior written notice to the other party in
accordance with this Section 22.07; provided, however, if Tenant vacates the
location that constitutes its address for notice hereunder without changing its
address for notice pursuant to this Paragraph 22.07, then Tenant's address for
notice shall be deemed to be the Leased Premises.
Section 22.08. Entire Agreement, Amendment and Binding Effect. This
Lease constitutes the entire agreement between Landlord and Tenant relating to
the subject matter hereof and all prior agreements relative hereto which are not
contained herein are terminated. This Lease may be amended only by a written
document duly executed by Landlord and Tenant, and any alleged amendment which
is not so documented shall not be effective as to either party. The provisions
of this Lease shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors and assigns;
provided, however, that this Section 22.08 shall not negate, diminish or alter
the restrictions on Transfers applicable to Tenant set forth elsewhere in this
Lease.
Section 22.09. Severability. This Lease is intended to be performed in
accordance with and only to the extent permitted by all Legal Requirements. If
any provision of this Lease or the application thereof to any person or
circumstance shall, for any reason and to any extent, be invalid or
unenforceable, but the extent of the invalidity or unenforceability does not
destroy the basis of the bargain between the parties as contained herein, the
remainder of this Lease and the application of such provision to other persons
or circumstances shall not be affected thereby, but rather shall be enforced to
the greatest extent permitted by law.
Section 22.10. Construction. Unless the context of this Lease clearly
requires otherwise, (a) pronouns, wherever used herein, and of whatever gender,
shall include natural persons and corporations and associations of every kind
and character; (b) the singular shall include the plural wherever and as often
as may be appropriate; (c) the term "includes" or "including" shall mean
"including without limitation"; (d) the word "or" has the inclusive meaning
represented by the phrase "and/or"; and (e) the words "hereof" or "herein" refer
to this entire Lease and not merely the Section or Article number in which such
words appear. Article and Section headings in this Lease are for convenience of
reference and shall not affect the construction or interpretation of this Lease.
Any reference to a particular "Article" or "Section" shall be construed as
referring to the indicated article or section of this Lease.
Section 22.11. Attorneys' Fees. If either party initiates any
litigation against the other relating to this Lease, the party that prevails in
such litigation shall be entitled to recover, in addition to all damages allowed
by law and other relief, all court costs and reasonable attorneys' fees incurred
in connection with such litigation.
Section 22.12. Brokers. Tenant hereby warrants and represents unto
Landlord that it has not incurred or authorized any brokerage commission,
finder's fees or similar payments in connection with this Lease, and agrees to
defend, indemnify and hold Landlord harmless from and against any claim for
brokerage commission, finder's fees or similar payment arising by virtue of
authorization by, through or under Tenant in connection with this Lease.
Section 22.13. Interest on Tenant's Obligations. Any amount due from
either party to the other which is not paid when due shall bear interest at the
maximum rate allowed by law (or, if there is no maximum rate, at twenty percent
per annum) from the date such payment is due until paid, but the payment of such
interest shall not excuse or cure the default in payment.
Section 22.14. Dollars. As used in this Lease, the symbol "$" shall
mean United States dollars, the lawful currency of the United States.
Section 22.15. Authority. The person executing this Lease on behalf of
Tenant personally warrants and represents unto Landlord that (a) Tenant is a
duly organized and existing legal entity, in good standing in the State of, and
authorized to do business in, Texas, (b) Tenant has full right and authority to
execute, deliver and perform this Lease, (c) the person executing this Lease on
behalf of Tenant was authorized to do so and (d) upon request of Landlord, such
person will deliver to Landlord satisfactory evidence of his or her authority to
execute this Lease on behalf of Tenant.
Section 22.16. Recording. Landlord agrees that this Lease (including
any Exhibit hereto) or any memorandum hereof may be recorded by Tenant.
Section 22.17. Incorporation by Reference. Exhibits "A" and "B" and
"B-1" hereto are incorporated herein for any and all purposes.
Section 22.18. Force Majeure. Landlord and Tenant shall be entitled to
rely upon Force Majeure as an excuse for timely performance hereunder only as
expressly provided herein and shall not be entitled to rely upon Force Majeure
as an excuse for timely performance unless the party seeking to rely on Force
Majeure (a) uses its good faith efforts to overcome the effects of the event of
Force Majeure, (b) gives written notice to the other party within 5 days after
the occurrence of the event describing with reasonable particularity the nature
thereof, (c) commences performance of its obligation hereunder immediately upon
the cessation of the event and (d) gives written notice to the other party
within 5 days after the cessation of the event advising the other party of the
date upon which the event ceased to constitute an event of Force Majeure.
Section 22.19. Interpretation. Both Landlord and Tenant and their
respective legal counsel have reviewed and have participated in the preparation
of this Lease. Accordingly, no presumption will apply in favor of either
Landlord or Tenant in the interpretation of this Lease or in the resolution of
the ambiguity of any provision hereof.
Section 22.20. Assignment by Landlord. Landlord shall have the right to
assign, in whole or in part, any or all of its rights, titles or interests in
and to the Leased Premises or this Lease; provided that, as a condition of such
assignment the Assignee shall agree in writing to become bound by the terms and
conditions of this Lease. Further, any purchaser acquiring the Elevator shall
agree in writing to be bound by the terms and conditions of this Lease as a
condition to purchasing the Elevator from the Landlord.
Section 22.21 Closure of the Elevator.
(a) Closure Period. Upon not less than six (6) months prior
written notice to Tenant from Landlord, Landlord may close the Elevator
(the period of time during which the elevator is thus closed is
referred to herein as a "Closure Period"). The closure date specified
in such notice shall be deemed to be the beginning of the relevant
Closure Period. During such Closure Period, Landlord's obligations
under this Lease for operation and maintenance of the Elevator shall be
suspended including specifically those in Articles 6 and 11; Upon not
less than thirty (30) calendar days' prior written notice to Tenant
from Landlord, Landlord may resume operations at the Elevator and end
any then-current Closure Period, provided that:
(i) Landlord's obligations pursuant to Article 11 and Section
6.06 (b) hereof shall resume as of the end of the Closure Period.
(ii) If the period of notice provided to Tenant by Landlord to
end a Closure Period is less than six (6) months, then Landlord shall reimburse
Tenant for any out-of-pocket expenses reasonably incurred by Tenant with regard
to the winding up of Tenant's operations at the Elevator and transfer of the
operations of the Elevator back to Landlord, including without limitation any
liabilities pursuant to the Worker Adjustment and Retraining Notification Act,
29 U.S.C. Section 2101 et seq., provided Landlord's liability under this
subsection shall never exceed $5,000.00.
(iii) Landlord purchases from Tenant all of the capital
improvements made by Tenant to the Elevator or the Elevator site during
the Closure Period which were reasonably necessary for continued
operation of the Project at the net book value of such capital
improvements on Tenant's books as of the end of the Closure Period,
provided Landlord has prior approval over those capital improvements,
which approval shall not be unreasonably withheld.
(b) Operation of Elevator During any Closure Period. During
any Closure Period, Tenant shall have the right and option, at Tenant's
cost and expense, to operate the Elevator for the benefit of the
Project, including fulfilling Landlord's obligations for operation of
the Elevator under this Lease, including specifically those in Articles
6 and 11. If Tenant operates the Elevator, Tenant shall use the
Elevator only to maintain and operate the Project and shall indemnify
and defend the Landlord from any loss, claim, damage or injury
resulting from Tenant's use. Tenant shall continue to pay Rent during
the Closure Period, except for through-put charges due to Landlord
under this Lease.
(c) Landlord's Sale or Lease of the Elevator. Upon Landlord's
sale or lease of the Elevator during the Closure Period, Landlord shall
provide written notice ("Landlord's Notice") thereof to Tenant at least
thirty (30) days prior to such sale or lease. The Closure Period shall
be deemed to end upon such sale or lease of the Elevator by Landlord
and all terms and conditions of this Lease shall be in full force and
effect, binding upon the purchaser or lessee of the Elevator. If
Landlord's Notice is less than six months prior to the effective date
of the sale or lease of the Elevator, the terms of Section 22.21(a)
(ii) shall apply.
Section 22.22. Multiple Counterparts. This Lease may be executed in two
or more counterparts, each of which shall be an original, but all of which shall
constitute but one instrument.
EXECUTED as of October 3, 1995.
ATTEST/SEAL: HARVEST STATES COOPERATIVES
Nanci L. Lilja By /s/ Patrick Kluempke
- ------------------------------- -------------------------------
Assistant Secretary Name Patrick Kluempke
-----------------------------
(Type or Print)
(Affix Corporate Seal Here) Title Senior Vice President
----------------------------
PORT OF HOUSTON AUTHORITY
By /s/ H.T. Kornegay
--------------------------------
Executive Director
APPROVED AS TO FORM: APPROVED AS TO REAL ESTATE
/s/ Martha T. Williams /s/ Brenda McDonald
- ------------------------------- -----------------------------------
Counsel Manager
EXHIBIT "A"
[MAP OMITTED]
EXHIBIT "B"
This exhibit consists of plans and specifications for construction of a flour
mill pursuant to the Lease, which specifications are on file in the office of
Tenant and Landlord's Real Estate Manager.
EXHIBIT B-1
EXCLUDED PROPERTY
MECHANICAL EQUIPMENT:
Scourers
Rollstands & Hammer Mills
Pin Mills
Blowers
Separators
De-stoners /Classifiers
Disc Separators
Indented Cylinder Machines
Tempering Equipment and Electronics
Variable Speed Drives
Single Speed Drives
Magnets and Metal Detection Devices
Aspirators
Concentrators
Wheat Heaters
Gravity Tables
Paddy Separators
Spiral Separators
Detachers
Sifters (All Types)
Purifiers
Dusters (All Types)
Disrupters
Filters (Baghouses)
Fans (Hi & Lo Pressure)
Bucket Elevators
Spouting
Electric Motors
Camera and Monitors & Related Equipment
Line Shafts (Including Bearings, Pulleys and Hangers)
Airlocks & Hoppers
Feed-in Hoppers and Related Equipment
Scales and Scale Feeders
Lift Pickups
Cyclone Receivers
Filter Receives
Bin Gates and Related Equipment
Surge Hoppers and Feeders
Vibro Bin Bottoms and Feeders
Product Valves (All Types)
Level Sensors, Flow Sensors, Heat Sensors & Motion Sensors
Conveyors (All Types)
Boiler & Associated Equipment
Maint. Shop Equipment
Office Equipment and Furniture
Packing System Equipment (Packer, Closer, Stitcher, Palletizer, etc.)
Entolators (Infestation Destroyer)
Water Chlorinating Equipment
Ingredient Feeders/Mixers
Air Makeup Unit Systems
ELECTRICAL:
Breakers
Starters
Enclosures/Panels
Power Factor Correction Equipment
Relays
I.O. Panels
P.L.C. Equipment
Computers
SUBSIDIARIES OF HARVEST STATES COOPERATIVES
STATE OF INCORPORATION/
SUBSIDIARY/ADDRESS ORGANIZATION
The Terminal Agency, Inc. Minnesota
1667 North Snelling Avenue
P.O. Box 64594
St. Paul, MN 55164
Country Hedging, Inc. Delaware
1667 North Snelling Avenue
P.O. Box 64594
St. Paul, MN 55164
Fin-Ag, Inc. South Dakota
4001 South Westport Avenue
P.O. Box 88808
Sioux Falls, SD 57105
Harvest States Cooperatives - N.D. North Dakota
P.O. Box 108
Norma, North Dakota 58746
Harvest States Cooperatives - Montana Montana
P.O. Box B
Circle, Montana 59215
Harvest States Cooperatives - Idaho, Inc. Idaho
1200 Snake River Avenue
Lewiston, Idaho 83501
Harvest States Cooperatives - Minnesota
Northwest Grain, Inc.
1667 North Snelling Avenue
St. Paul, MN 55108
PGG/HSC Feed Company, L.L.C. Oregon
300 West Feedville Road
Hermiston, Oregon 97838
Ag States Agency, LLC Minnesota
1667 North Snelling Avenue
P.O. Box 64594
St. Paul, Minnesota 55164
Harvest States Farmland Specialty Feed Minnesota
800 24th Avenue NW
P.O. Box 493
Owatonna, MN 55060-0493
Tacoma Export Marketing Company Washington
222 SW Columbia Street
Koin Tower, Suite 1100
Portland, OR 97201
Tillamook/GTA Feeds, LLC Oregon
4000 Blimp Boulevard
Tillamook, Oregon 97141
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 Registration Statement No.
333-17865 of Harvest States Cooperatives of our reports on the consolidated
financial statements of Harvest States Cooperatives, the Oilseed Processing and
Refining Division (a division of Harvest States Cooperatives), and the Wheat
Milling Division (a division of Harvest States Cooperatives) dated August 19,
1996, December 10, 1996, and December 11, 1996, respectively, appearing in the
prospectus, which is part of this Registration Statement, and to the reference
to us under the headings "Selected Financial Data" and "Experts" in such
prospectus.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 7, 1997
