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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
COMMISSION FILE NUMBER: 333-17865
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CENEX HARVEST STATES COOPERATIVES
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0251095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5500 CENEX DRIVE (651) 451-5151
INVER GROVE HEIGHTS, MINNESOTA 55077 (Registrant's Telephone number,
(Address of principal executive office) including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not applicable
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: The registrant has no voting stock outstanding.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: The registrant has
no common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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INDEX
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NO.
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PART I.
Item 1. Business
The Company ............................................................. 1
Energy .................................................................. 2
Crop Inputs ............................................................. 3
Grain Merchandising ..................................................... 4
Oilseed Processing and Refining Defined Business Unit ................... 8
Wheat Milling Defined Business Unit ..................................... 12
Farm Marketing and Supply ............................................... 15
Services ................................................................ 16
Membership in the Company and Authorized Capital ........................ 17
Equity Participation Units .............................................. 22
Cautionary Statement .................................................... 26
Item 2. Properties .............................................................. 26
Item 3. Legal Proceedings ....................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders ..................... 28
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ... 29
Item 6. Selected Financial Data
Consolidated Company .................................................... 29
Oilseed Processing and Refining Defined Business Unit ................... 30
Wheat Milling Defined Business Unit ..................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Consolidated Company .................................................... 32
Oilseed Processing and Refining Defined Business Unit ................... 39
Wheat Milling Defined Business Unit ..................................... 43
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk .............. 47
Item 8. Financial Statements and Supplementary Data ............................. 48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. 48
PART III.
Item 10. Directors and Executive Officers of the Registrant
Board of Directors ...................................................... 49
Executive Officers ...................................................... 54
Item 11. Executive Compensation .................................................. 57
Item 12. Security Ownership of Certain Beneficial Owners and Management .......... 62
Item 13. Certain Relationships and Related Transactions .......................... 64
PART IV.
Item 14. Exhibits, Financial Statements and Reports Filed on Form 8-K ............ 65
SUPPLEMENTAL INFORMATION ........................................................... 66
SIGNATURES ......................................................................... 67
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PART I.
ITEM 1. BUSINESS
THE COMPANY
Pursuant to a Plan of Combination dated May 29, 1998 (the "Plan of
Combination"), CENEX, Inc. ("Cenex") and Harvest States Cooperatives combined
through merger on June 1, 1998 (the "Combination") and Harvest States
Cooperatives became the surviving corporation. In accordance with the Plan of
Combination, the Articles of Incorporation and By-Laws of Harvest States
Cooperatives were restated and the name of Harvest States Cooperatives was
changed to Cenex Harvest States Cooperatives ("Cenex Harvest States" or "the
Company"). The Combination constituted a tax-free reorganization and has been
accounted for as a pooling of interests.
Subsequent to the Combination, the Company changed its fiscal year end to
August 31, and filed a Form 10-Q Transition Report under Rule 15d-10(c) for the
three-month period ended August 31, 1998. The Company is filing this form 10-K
for its first fiscal year ended August 31, 1999.
The Company's consolidated financial statements reflect the financial
position and results of operations of the combined companies as if the merger
had occurred on June 1, 1996. The consolidated statements of operations and cash
flows for the years ended May 31, 1998 and 1997, reflect the results of
operations and cash flows of Harvest States Cooperatives for the years then
ended combined with the results of operations and cash flows of Cenex for the
years ended September 30, 1997 and 1996, respectively. The consolidated balance
sheet as of May 31, 1998 reflects the financial position of Harvest States
Cooperatives on that date combined with the financial position of Cenex as of
September 30, 1997. The consolidated results of operations of Cenex for the
eight months ended May 31, 1998, have been excluded from the reported results of
operations and, therefore, have been recorded as an adjustment to the Company's
equities and cash flows in the consolidated statements of equities and
comprehensive income and cash flows during the three months ended August 31,
1998.
Each person serving as a director of Cenex or Harvest States at the time of
the Combination became a director of Cenex Harvest States. At the 1999 annual
meeting to be held in December 1999, the number of directors will decrease from
27 to 17.
As a result of the Combination, each holder of common stock of Cenex became
a member of Cenex Harvest States, to the extent eligible for membership, and all
equity interests of Cenex were determined and exchanged for equal equity
interests in Cenex Harvest States at its stated dollar amount on a dollar for
dollar basis as more thoroughly set forth in the Plan of Combination, a copy of
which was filed as part of the Company's Form 8-K dated June 10, 1998.
In May 1999, the Company and Farmland Industries, Inc. (Farmland) announced
their intention to work towards a combination of the two companies. On September
8, 1999 the Board of Directors approved a resolution recommending this
combination to the Company's membership. A transaction agreement was signed as
of September 23, 1999. Approval of the merger by the membership requires a
two-thirds vote in favor of the merger from members of both Cenex Harvest States
and Farmland Industries, Inc., respectively, who vote on this proposal. Votes
must be cast by November 23, 1999. Assuming a favorable vote, the combination
will take one of two forms. Farmland may merge into the Company, with the
Company as the survivor, or both Farmland and the Company may merge into a new
Ohio cooperative. Assuming a favorable vote for the combination, the two
companies intend to consummate the combination on or before March 1, 2000.
The Company is an agricultural cooperative organized for the mutual benefit
of its members. Members of the Company are located primarily throughout the
Midwest and Northwest regions of the United States. Primary businesses of the
Company include petroleum refining and marketing, wholesale and retail agronomy
product marketing, grain marketing, and wheat milling and soybean processing and
refining. In addition, the Company offers a variety of agricultural services to
its members.
The Company has authorized three classes of membership: Individual Members
("Individual Members"), Cooperative Association Members ("Cooperative
Association Members") and Defined
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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 non-cash portion of any patronage
refund in taxable income for federal income tax purposes. Cooperative
Association Members are associations of producers of agricultural products
complying with certain federal requirements which have conducted a minimum
amount of business with the Company as prescribed by the Board of Directors
during its 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.
Individual Members, Defined Members and Cooperative Association Members who
sell grain to the Company, and Individual Members, Defined Members and
Cooperative Association Members 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 elect to add to
the Unallocated Capital Reserve an amount not to exceed 10% of the distributable
net income from patronage income, and may also elect to allocate
non-member-sourced income to its Members and Non-Member Consenting Patrons in
proportion to patronage.
The Board of Directors created the Oilseed Processing and Refining Defined
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 was allocated to the
Oilseed Processing and Refining Defined Business Unit the assets and
liabilities, including commitments, contingencies and obligations, appropriately
belonging to the Division.
The Board of Directors created the Wheat Milling Defined 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 was allocated to the Wheat Milling Defined Business Unit the assets and
liabilities, including commitments, contingencies and obligations, appropriately
belonging to the Division.
Effective August 1999, Grain Marketing operations, and the Wheat Milling
and Oilseed Processing and Refining Defined Business Units have been combined
into one operating division of Cenex Harvest States, called Aligned Grain, which
will be led by Senior Vice President Mark Palmquist. Mike Bergeland, Executive
Vice President Grain & Agri Services, will continue to lead Aligned Grain,
Country Services and Farm Marketing & Supply. The Company's foods and packaging
partnerships with Ventura Foods, LLC and Sparta Foods, Inc., have been organized
into a separate Consumer Foods group, which will be led by Executive Vice
President Jim Tibbetts and will focus on identifying further food processing and
packaging opportunities that will help deliver value to consumers.
The segment information for the Company is provided in Note 11 of the
consolidated financial statements on pages F-20 and F-21.
ENERGY
The energy operations of the Company include a 46,000 barrel per day
refinery in Laurel, Montana, which is wholly owned by the Company, and a 74.5%
ownership interest in a 75,500 barrel per day refinery in McPherson, Kansas. The
Company is not in the oil exploration business but rather purchases crude oil
from both domestic and foreign sources.
The Laurel, Montana refinery processes primarily heavy, high sulfur
Canadian crude oil and produces approximately 44% gasoline, 32% diesel and other
distillates and 24% asphalt and other residual products. Refined fuels are
shipped west on the Yellowstone Pipeline to Montana terminals and to Spokane and
Moses Lake, Washington; south on common carrier pipelines to Wyoming terminals
and Denver, Colorado, and east on the Company's wholly owned pipeline to
Glendive, Montana as well as to Minot and Fargo, North Dakota. Crude oil is
delivered to Laurel on the wholly owned Front Range Pipeline.
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The McPherson refinery operated by National Cooperative Refinery
Association (NCRA), of which the Company owns 74.5%, receives its supply of
crude oil via the Jayhawk pipeline, which is wholly owned by NCRA, and through
the common carrier pipelines of Osage and Kaw. The Company holds ownership
interests of 35% and 33%, respectively, in these two pipelines. Approximately
86% of the crude oil processed is domestic from Kansas, Oklahoma and Texas, and
14% is Venezuelan crude. The McPherson refinery produces approximately 57%
gasoline, 34% distillates and 9% propane and other products. Refined fuels are
shipped via NCRA's proprietary products pipeline to its terminal in Council
Bluffs, Iowa and to other markets via Kaneb and Williams common carrier
pipelines. Approximately 9% of refined products are loaded to transport trucks
at the refinery.
The production from these two refineries is marketed by Country Energy,
LLC, a petroleum marketing joint venture with Farmland Industries, Inc. and sold
to the Company's member cooperatives, where the product is sold to farmers,
ranchers and the general public. In addition to distilled fuels, the Company
also wholesales other auto and farm machinery products such as oil, grease,
batteries and tires, as well as providing propane for heating fuel and grain
drying.
The Company also operates approximately 40 convenience stores where it
retails its own brand of distilled fuels along with typical convenience
products.
Upon the purchase of crude oil, the Company has risks of carrying the
inventory, including price changes and performance risk (including delivery,
quality, quantity and shipment period). To reduce the price change risk
associated with holding fixed price positions, the Company generally takes
opposite and offsetting positions by entering into a commodity futures contract
on a regulated mercantile exchange. While hedging activities reduce the risk of
loss from changing market values of crude oil and distilled products, such
activities also limit the gain potential which otherwise could result from
changes in market prices.
Because most of the Company's energy product market is located in rural
areas, sales activity tends to follow the planting and harvest cycles. More fuel
efficient equipment, reduced crop tillage, depressed prices for crops, warm
winter weather, and government programs which encourage idle acres all have the
effect of reducing demand for the Company's energy products. In addition,
private energy companies compete with the Company.
Effective September 1, 1999, NCRA and Farmland Industries formed a limited
liability company, Cooperative Refining, LLC, to operate jointly the refining,
pipeline and terminal assets of Farmland and NCRA. This includes NCRA's 75,500
barrel per day McPherson, Kansas refinery and Farmland's 95,000 barrel per day
Coffeyville, Kansas refinery. NCRA has a 57.565% interest in the LLC and
Farmland has a 42.435% interest. The refining, pipeline and terminal assets are
owned by NCRA and Farmland Industries, but are operated by the LLC with the
expenses of operation being reimbursed by the LLC to both members.
Currently, energy operations has 259 full time employees. Of these
employees, 125 are employed by the Company, and 134 are employed by Country
Energy, LLC.
CROP INPUTS
The Company, through a joint venture established by Cenex with Land
O'Lakes, Inc. (another regional cooperative headquartered in the St. Paul,
Minnesota area) participates in the crop input business. The Company has a 50%
ownership interest in the Cenex/Land O'Lakes Agronomy Company ("Agronomy"),
which acts as a sales agent for the two companies. The agronomy company markets
plant food (fertilizers) and crop protection products (herbicides and
insecticides) on behalf of its two owners. Such products are sold to the member
cooperatives of the Company on a wholesale basis, as well as marketed through
approximately 220 company owned facilities on a retail basis to individual
farmer-patrons.
The Company distributes a complete line of fertilizers, including potash,
nitrogen-based fertilizers and phosphate-based fertilizers. Approximately 80% of
the fertilizer products sold by the Company through its agency arrangement are
purchased from CF Industries, of which the Company owns 22%.
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CF Industries is a large domestic fertilizer producer. The Company purchases
crop protection products from several chemical companies, including Imperial,
Inc., a wholly owned subsidiary of the Cenex/Land O'Lakes Agronomy Company.
Many of the risk factors related to the energy operations also apply to the
agronomy product operations. Spring and fall weather conditions, depressed grain
prices, idle acreage and genetic engineering of crops which are more insect and
disease resistant all effect the demand for agronomy products. Competition in
most of the Company's trade area for such products is also intense. Supply and
price of fertilizer ingredients fluctuates widely, which exposes the Company to
risk on any fixed price commitment. In addition, increased domestic and foreign
production of fertilizer expands supply and tends to depress the profitability
of CF Industries, and reduces the patronage paid by CF Industries to the
Company.
On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada,
Ltd. (the Entities), both companies owned 50/50 by the Company and Land O'Lakes,
Inc., purchased approximately 310 agronomy facilities from Terra International,
Inc., at a price of approximately $350.0 million. In conjunction with this
purchase transaction, the Company invested $51.5 million in the Entities and
issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd.
Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes
Agronomy Company, are without recourse to the Company.
The Cenex/Land O'Lakes Agronomy Company currently has 727 full time
employees, 48 part time employees and 407 seasonal employees. The Company does
not have any employees in crop inputs operations.
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.
A significant portion of high production grains (wheat, corn and soybeans)
grown domestically have been exported. United States production competes with
production in numerous other countries to supply the 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.
Imports of grains into the U.S. consist mainly of wheat, oats and barley.
The amounts imported have not had 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.
The Freedom to Farm Act of 1996, enacted in April 1996, has had a profound
effect on the production patterns within the United States. The flexibility of
the program allows producers to grow crops, which provide the highest gross
financial return. For example, this year the U.S. producer reacted
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to Loan Deficiency Payments (LDP) for oilseeds in the year ended May 31, 1998
with an increase in acreage for all oilseeds for the year ended August 31,
1999. U.S. export subsidies, principally the Export Enhancement Program,
continue to decline in importance and overall use.
INTRODUCTION
The Company buys grain through its Grain Marketing Division from
Cooperative Association Members (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. 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, the Company has significant capacity
to sell grain for export.
PURCHASES. The number of bushels of grain purchased from Individual Members
and Cooperative Association Members, the total grain purchased and the
percentage relationship for the periods indicated are set forth below:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
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YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996
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(BUSHELS IN THOUSANDS)
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Member purchases ......... 785,999 172,180 720,421 757,705 959,167
Total purchases .......... 1,169,393 244,978 1,145,852 1,280,557 1,692,439
Percentage ............... 67.2% 70.3% 62.9% 59.2% 56.7%
</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>
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YEARS ENDED MAY 31,
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YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996
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(BUSHELS IN THOUSANDS)
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Wheat .............. 412,967 100,941 416,067 478,979 505,607
Corn ............... 406,616 86,911 347,494 425,851 777,631
Soybeans ........... 230,239 36,220 229,558 219,687 234,930
Barley ............. 54,548 13,180 66,085 61,839 75,226
Milo ............... 40,826 4,426 37,816 51,723 48,200
Sunflowers ......... 7,814 549 28,789 14,603 25,953
Oats ............... 6,354 1,246 9,008 22,487 20,008
All other .......... 10,029 1,505 11,035 5,388 4,884
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1,169,393 244,978 1,145,852 1,280,557 1,692,439
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Sales of grain by the Company for the periods indicated are set forth
below:
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YEARS ENDED MAY 31
-----------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996
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(DOLLARS IN MILLIONS)
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Wheat ............. $ 1,169.8 $ 373.1 $ 1,794.4 $ 2,490.3 $ 2,631.2
Corn .............. 896.6 215.0 989.8 1,558.4 2,518.9
Soybeans .......... 1,010.0 162.8 1,432.0 1,421.9 1,431.5
All other ......... 232.9 59.8 413.4 565.9 545.6
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Total ............. $ 3,309.3 $ 810.7 $ 4,629.6 $ 6,036.5 $ 7,127.2
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MERCHANDISING
The Company buys and sells grain through offices of its Grain Marketing
Division located in Portland, Oregon; Lincoln, Nebraska; Kansas City, Kansas;
St. Paul, Minnesota; Winona, Minnesota; Davenport, Iowa; 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% of rail movement for Grain Merchandising
for the year ended August 31, 1999 was carried out through leased railcars
(either directly or by use of pools in which such leased railcars participate).
Vessel and truck transportation 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 that 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 Cooperative Association Members 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, 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
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among these six. 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 locations 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 173 Farm Marketing and Supply 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'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 Cargill operates an export terminal at
Tacoma, Washington, for feed grain and oilseed shipments to Pacific Rim
customers. A Cargill facility in Seattle, Washington is also being utilized by
the joint venture until it is sold. A facility in Spokane, Washington is used
for storage and transloading, and an elevator in Petersburg, North Dakota is
used to standardize barley for a particular customer.
The Company entered into a joint venture with United Grain, located in
Portland, Oregon, forming a grain marketing company called United Harvest, LLC.
United Harvest, LLC is a joint venture 50% owned by each company, and began
operation in December 1998. United Harvest, LLC will operate the Kalama,
Washington and Kennewick, Washington terminal elevators owned by the Company,
and the Vancouver, Washington terminal of United Grain as well as market the
grain for each of the parent companies in the western United States, including
Washington, Oregon, Idaho, Utah and Montana. The Company has interests in three
river terminals located on the Snake River which are being utilized by United
Harvest LLC. These terminals include the 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 grain marketing operation 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
7
<PAGE>
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 operation inventory and purchase
contracts for delivery to the Company may be substantial. The Grain Marketing
Group has a risk management policy and procedures that include net position
limits. It is defined by commodity and includes both trader and management
limits. This policy and computerized procedure triggers a review by management
of the grain marketing operation when any trader is outside of position limits
and also triggers review by management of the Company if the grain marketing
operation 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.
EMPLOYEES
As of August 31, 1999, the Grain Marketing Division had 445 employees, of
which 68 were traders, 249 production staff, 14 management and 114 support
staff. See "Farm Marketing and Supply" with respect to employment by
Agri-Service Centers. Of these employees, 169 at seven locations are subject to
collective bargaining agreements expiring at various times through 2000.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
The soybean crushing industry converts soybeans into meal used for feeding
animals, soyflour 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 close
to adequate sources of soybeans and strong demand for meal. 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 increased 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.
8
<PAGE>
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 pork and poultry 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 acquiring other processors, expanding capacity of existing
plants or building new plants, domestically or internationally. Unless exports
increase or existing facilities are closed, this extra capacity is likely to put
additional pressure on prices and challenge 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 margin relationships have been
maintained.
EQUITY PARTICIPATION UNITS
At its integrated crushing and refining facility in Mankato, Minnesota, the
Oilseed Processing and Refining Defined Business Unit processes soybeans into
soybean meal, soyflour and crude soybean oil. The crude soybean oil, with
additional purchased crude oil, is refined.
At August 31, 1999 Equity Participation Units in the Oilseed Processing and
Refining Defined Business Unit represented the right to deliver 1,047,000
bushels of soybeans, approximately 3% of the processing capacity of the Defined
Business Unit.
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. While hedging activities reduce the risk of loss from changing market
values of oilseeds, 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 within limits, but the Company
can be long or short at any time. The Defined Business Unit'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 cash contract.
At any one time the Defined Business Unit's inventory and purchase
contracts for delivery to the Defined Business Unit may be substantial. The
Defined Business Unit has a risk management policy and procedures that include
net position limits. It is defined by commodity and includes both trader and
management limits. This policy and computerized procedure triggers a review by
management of the Defined Business Unit when any trader is outside of position
limits and also triggers review by management of the Company if the Defined
Business Unit is outside of its position limits. The position limits are
reviewed at least annually with management of the Company. The Defined Business
Unit 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 Oilseed Processing and Refining Defined Business Unit purchases
virtually all of the soybeans processed by it from Members. Because the Oilseed
Processing and Refining Defined Business Unit 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 Oilseed Processing and Refining Defined Business Unit 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,
9
<PAGE>
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 Oilseed Processing and Refining Defined Business Unit also purchases
crude soybean oil for processing at its refinery. Approximately 40% of the crude
oil refined is produced by the Oilseed Processing and Refining Defined Business
Unit, and the balance is purchased. Major suppliers have been AGP, South Dakota
Soybean Processors and ADM. Because ADM opened a refinery late in 1997 in
Minnesota, it is no longer a supplier of crude oil. However, there are several
producers of crude oil, and the Company has been 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 Oilseed Processing and
Refining Defined Business Unit has never experienced an inability to source
soybeans.
CUSTOMERS
REFINED OILS. The Oilseed Processing and Refining Defined Business Unit
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 have lower freight costs and are
therefore slightly more profitable. Customers in these states accounted for more
than 50% of refined oil sales in the year ended August 31, 1999. The Company
estimates that of oil sold, 25% is used for margarine, 15% to 20% for salad
dressing and smaller percentages for snack foods, baked goods, imitation cheese
goods, processed potato goods and others. Approximately 5% of oil sales are for
industrial use. During the year ended August 31, 1999, the Oilseed Processing
and Refining Defined Business Unit had over 100 customers, the largest of which
was Ventura Foods, LLC and its predecessor operations described in the next
paragraph. One other customer was responsible for over 9% of refined oil sales
by the Defined Business Unit. Sales of refined oil are made by Defined Business
Unit employees and to a lesser extent by brokers.
The Company has a long-term supply agreement with Ventura Foods, LLC. which
commenced January 1, 1997 and will continue 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
that 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 Oilseed Processing and Refining
Defined Business Unit is used for feeding livestock. During the year ended
August 31, 1999, the Defined Business Unit sold meal to over 500 customers,
primarily feed lots and feed mills. During the year ended August 31, 1999, seven
customers accounted for approximately 48% of meal sold, and three customers,
which would be difficult to replace, accounted for approximately 32% of meal
sold. For the year ended August 31, 1999, 69% of meal was sold in Minnesota, 22%
in Wisconsin, 6% in Canada and the balance in Iowa, North Dakota and South
Dakota. 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 Defined Business Unit.
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.
COMPETITION
The Company believes that the Oilseed Processing and Refining Defined
Business Unit has 6% to 8% of the domestic refined soybean oil market and less
than 3% of the domestic soybean crushing capacity.
10
<PAGE>
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 that 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 Oilseed Processing and Refining Defined Business Unit 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 Oilseed Processing and Refining Defined Business Unit currently 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.
In July 1998 the Company announced its site selection for the construction
of a new soybean processing and refining plant in southwestern Minnesota. The
facility, to be constructed near the city of Fairmont, Minnesota, is expected to
cost between $60 and $90 million. The precise configuration and size of the
crushing plant and oil refinery has yet to be determined.
EMPLOYEES
The Oilseed Processing and Refining Defined Business Unit currently employs
203 employees, 35 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 (137
employees) expiring in 2002 and the Pipefitters' Union (2 employees) expiring in
2000.
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 that 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 $55.6 million as
of August 31, 1999.
Sales by the Oilseed Processing and Refining Defined Business Unit to
Ventura Foods and its predecessors in interest (Holsum and Wilsey) are shown
below:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996
----------------- ------------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales ...................... $ 93,565 $ 22,685 $ 101,440 $ 110,679 $ 124,299
Percentage of total refinery
sales ...................... 35% 34% 38% 45% 45%
</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
11
<PAGE>
and Wilsey Foods appoints half the committee members. The Company and Wilsey
Foods must each 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.
WHEAT MILLING DEFINED BUSINESS UNIT
INDUSTRY OVERVIEW
The Company's Wheat Milling Defined Business Unit mills durum wheat into
flour and semolina and mills spring and winter (hard) wheats into bread flour.
The Wheat Milling Defined Business Unit is the largest miller of durum wheat in
the United States. The Wheat Milling Defined Business Unit 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, its Houston facility, which began production in June 1997, Mount Pocono
facility, which began production in January 1999, the Defined Business Unit 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
ingredients 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 declined slightly in the past two years.
Pasta in its many forms is sold at retail, for restaurants and institutional use
and for use in other processed food products.
Major competitors in the industry include the Company, Italgrani and Miller
Milling. 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 had been increasing until 1998. Total production
and per capita consumption decreased 1.3% in the year ended December 31, 1998.
While there was a decline in consumption, 1998 was still the second largest
production year recorded. 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.
EQUITY PARTICIPATION UNITS
At August 31, 1999, Equity Participation Units in the Wheat Milling Defined
Business Unit represented the right to deliver 4,629,000 bushels of wheat,
approximately 7% of the processing capacity of the Defined Business Unit.
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. 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 Defined Business Unit's
policy is to generally maintain hedged positions in grain that is hedgeable, but
the Company can be long or short at any time. The Defined Business Unit'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.
12
<PAGE>
At any one time the Defined Business Unit's inventory and purchase
contracts for delivery to the Defined Business Unit may be substantial. The
Defined Business Unit has a risk management policy and procedures that include
net position limits. It is defined by commodity and includes both trader and
management limits. This policy triggers a review by management of the Defined
Business Unit when any trader is outside of position limits and also triggers
review by management of the Company if the Defined Business Unit is outside of
its position limits. The position limits are reviewed at least annually with
management of the Company. The Defined Business Unit 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 Wheat Milling
Defined Business Unit are 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. Additionally, the new durum
futures market offers some limited potential for hedging. To minimize the price
volatility for winter and spring wheats, the Wheat Milling Defined Business Unit
usually hedges by purchasing wheat futures at the time of pricing the flour.
The availability, price and quality of durum and spring and winter wheat
affect the operations and profitability of the Wheat Milling Defined Business
Unit. The Wheat Milling Defined Business Unit has never experienced a supply
shortage of durum, but shortages have affected prices.
CUSTOMERS
SEMOLINA & DURUM FLOUR. The Wheat Milling Defined Business Unit sells
semolina and durum flour to ten major customers and approximately 50 smaller
customers, which are large and mid-size pasta manufacturers in the United
States. The customer base is broad and diverse with no single customer being
more than 15% of the total durum milling demand.
In 1999, American Italian Pasta Company ("AIPC") began operation of a new
pasta plant adjacent to the Wheat Milling Defined Business Unit's mill in
Kenosha, Wisconsin. AIPC is this country's largest pasta manufacturer. Direct
pipelines from the mill to the pasta plant will reduce costs to transfer
product, create efficiencies for both companies, as well as provide a dedicated
customer/supplier relationship. Production startup for the AIPC plant is
expected in about a year.
The Wheat Milling Defined Business Unit would be adversely affected by a
decline in pasta production in the United States.
Most of the Wheat Milling Defined Business Unit's products are marketed by
employees of the Defined Business Unit. The Wheat Milling Defined Business Unit
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 14% of the Wheat Milling Defined Business Unit's bread
flour production. The Company believes because of the large number of potential
customers and the fact that the Wheat Milling Defined Business Unit is not
dependent on any customer, it would not have substantial difficulty in replacing
an existing customer.
The Wheat Milling Defined Business Unit's first hard wheat milling unit
(Kenosha) began production in late 1995. In October 1996, the Wheat Milling
Defined Business Unit 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, which began production in June 1997, added additional hard wheat
capacity. The Company believes that there is a substantial customer base
available in the Houston area, as well as export markets. The mill serves a
sizeable population base and there are no other milling facilities within the
area. In January 1999, the Mount Pocono, Pennsylvania mill began production
supplying flour to major bakery customers in the Northeast.
13
<PAGE>
COMPETITION
DURUM MILLING. The Wheat Milling Defined Business Unit's largest
competitors in durum milling are Italgrani and Miller Milling Company.
Dakota Growers has expanded its Carrington, North Dakota, milling facility
and its pasta production capacity and has added additional milling capacity to
supply its recently acquired New Hope, Minnesota plant. Philadelphia Macaroni
has completed a semolina mill in Minot, North Dakota. Miller Milling has
recently expanded its Winchester, Virginia, semolina mill. Barilla, an Italian
pasta manufacturer and durum miller, is operating an integrated mill and pasta
plant in Ames, Iowa. In the past, it has exported significant volumes of pasta
from Italy into the U.S. and will now compete with domestic manufacturers in the
dry retail pasta market.
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 Wheat Milling
Defined Business Unit. Capacity for hard wheat milling has been expanding faster
than consumption. This additional capacity has put pressure on margins.
PROCESSING
The Defined Business Unit 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 Wheat Milling Defined Business Unit has five milling facilities in
operation, including Mount Pocono that began production in January 1999. Each
facility includes a milling plant as well as an elevator to store grain.
Information on the five mills, follows:
<TABLE>
<CAPTION>
LOCATION GRAIN MILLED CAPACITY BUSHEL EQUIVALENT
- ------------------ ------------------------- ----------------- ------------------
<S> <C> <C> <C>
Rush City, MN Primarily durum 10,000 cwts/day 23,500 bu/day
Huron, OH Primarily durum 9,500 cwts/day 22,800 bu/day
Spring and winter wheat 5,000 cwts/day 11,000 bu/day
Kenosha, WI Durum 11,000 cwts/day 26,400 bu/day
Spring and winter wheat 10,000 cwts/day 22,000 bu/day
Houston, TX Spring and winter wheat 13,000 cwts/day 28,600 bu/day
Pocono, PA Durum 4,000 cwts/day 9,600 bu/day
Spring and winter wheat 14,000 cwts/day 30,800 bu/day
----------------- ------------------
Total 76,500 cwts/day 174,700 bu/day
================= ==================
</TABLE>
At Huron, Ohio, the land and buildings are leased from ConAgra.
The Rush City, Kenosha and Mount Pocono 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.
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, Mount Pocono and Houston mills are in proximity to a
large customer base.
Approximately 85% of the Wheat Milling Defined Business Unit'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. For the year ended
August 31, 1999 the Wheat Milling Defined Business Unit facilities ran at 70% of
capacity based upon a year of 307 operating days
14
<PAGE>
being 100%, compared to 81% in 1998. This decrease in run time was due to
startup in Mount Pocono and a temporary shut down of Huron due to shifting one
line from semolina production to bread flour production.
EMPLOYEES
As of August 31, 1999 the Wheat Milling Defined Business Unit employed the
following full time equivalents: production and plant management (165) and
headquarters (22). Of these, 25 production workers at the Rush City Mill are
subject to a collective bargaining agreement with the American Federation of
Grain Millers expiring in 2001.
FARM MARKETING AND SUPPLY
The Farm Marketing and Supply Division owns and operates three types of
business units: Agri-Service Centers, Feed Manufacturing and Fin Ag, Inc.
AGRI-SERVICE CENTERS Agri Service Centers provide farm supplies and
services to producers for their production systems. Farm supplies include plant
food, feed, seed, energy products and crop protection products. Services include
grain and seed marketing and other related services in production agriculture.
There are 317 locations in the states of Minnesota, Iowa, North Dakota, South
Dakota, Nebraska, Colorado, Montana, Idaho, Oregon and Washington. Not all
locations provide every product and service. Locations are grouped into 65
operating units of which 17 are regionalizations; these regionalizations have
their own producer board and participate in separate patronage pools.
Agri Service Centers purchase grain and seed from member and non-member
producers and other elevators and grain dealers. Seventy-seven locations have
the capability of loading unit trains. Most of the grain purchased is sold
through the Company's grain marketing division, local feed usage or local
processing operations.
The farm supplies sold at these locations are purchased through other
company divisions in the respective areas whenever possible. The Agri Service
Centers sell agronomy products through 125 locations. Feed products are sold
through 89 locations and energy products through 87 locations.
Competitors for the purchase of grain include other elevators and large
grain marketing companies. Competitors for farm supply include a variety of
cooperatives, privately held and large national companies. The Company competes
on the basis of services and patronage.
On August 31, 1999, the group had 1,868 full time and 708
seasonal/temporary employees. Statistics for the periods indicated are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Number of centers ......... 317 245 239 253 249 195
Number of operating
units .................... 65 70 73 71 74 69
</TABLE>
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
CoBank, on which the Company bears a 15% residual exposure. The Company's
exposure at August 31, 1999, was approximately $3.0 million. Under the Company's
borrowing arrangements the maximum amount of the loans outstanding at any one
time may not exceed $50.0 million. On August 31, 1999 the total number of full
time employees was 15.
FEED MANUFACTURING The Company manufactures and sells feed products,
ingredients, supplements and animal health products. In addition, it provides
livestock production services and custom rations. The Company owns nine feed
plants, three retail operations and has joint venture agreements with three
additional plants.
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On June 1, 1998, the Company formed a 50/50 LLC with Land O'Lakes, Inc.
called Land O'Lakes/Harvest States Feed LLC. The Company included eight plants
and three retail operations in the states of Minnesota, Nebraska, South Dakota,
North Dakota and Montana with Land O'Lakes plants in Beatrice and Norfold,
Nebraska and Dawson and Detroit Lakes, Minnesota to form the LLC. A four-person
board, two from Cenex Harvest States and two from Land O'Lakes govern the joint
venture. The administrative office and general manager of the joint venture is
located at the Sioux Falls, South Dakota location.
The Company is involved in joint ventures of plants in Owatonna, Minnesota,
Tillamook, Oregon and Hermiston, Oregon. The Company owns a plant in Snohomish,
Washington, which was not operating on August 31, 1999.
On August 31, 1999 the feed manufacturing group had 240 full time and 7
part time employees in all operations. All but three employees are leased to the
Land O'Lakes/Harvest States LLC.
Feed tons for the periods indicated are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Manufactured feed (tons) ......... 591,510 133,381 377,000 326,000 351,000 333,000
</TABLE>
These numbers include the total tons of the joint ventures and LLC's.
SERVICES
The Company's Country Services Division provides certain services to
Individual Members and Cooperative Association Members.
COUNTRY HEDGING, INC.
Country Hedging, Inc. offers full service commodity futures and options
brokerage. For the year ended August 31, 1999, 50% of revenues were from
Cooperative Association Members, 37% from Individual Members and 13% 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 August 31, 1999, 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, 93% 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 August 31, 1999, substantially all of its revenues were from local
cooperatives. Ag States Agency, LLC competes with other insurance agencies.
On January 1, 1998 Ag States Agency, LLC acquired 50% ownership in Ag
States Benefits, LLC. Ag States Benefits, LLC is an independent insurance agency
which sells primarily group benefit policies such as health, life, dental, long
term care and disability insurance to primarily local cooperative employees and
members of local cooperatives.
FINANCIAL SERVICES DEPARTMENT
The Financial Services Department provides business planning consulting and
financing to Cooperative Association Members. 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% by 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
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account for settlement of grain purchases and as a cash management tool. Open
account financing has been provided to more than 200 Cooperative Association
Members in the past year.
During the year ended August 31, 1999, average aggregate loan balances
outstanding were $41,753,248 (of which CoBank's participation was $19,177,110)
and the highest aggregate loan balance outstanding at any one time was
$55,646,123 (of which CoBank's participation was $25,146,516). The Company's
borrowing arrangements limit loan balances outstanding to not more than
$150,000,000 at any one time.
Pursuant to its agreement with CoBank, the Company has additional credit
risk on CoBank participations up to 10% of total loan commitments.
Fin-Ag, Inc., 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 August 31, 1999, substantially
all of its revenues were from local cooperatives.
FIELD SERVICES DEPARTMENT
The Field Services Department acts as a liaison between cooperative
association members 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
cooperative association members and assists in planning meetings and organizing
visits to Company facilities.
MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL
INTRODUCTION
The Company is an agricultural membership cooperative organized to do
business with members and non-members. Net savings from member patronage of the
Company shall be distributed to members on the basis of patronage, except that
the Board of Directors may elect to add to the Unallocated Capital Reserve an
amount not to exceed 10% of the distributable net income from patronage
business. These net savings, when distributed, are referred to as "patronage
dividends," regardless of whether distributed in cash or Patron Equities. The
Company may obligate itself to do business with a non-member on a patronage
basis. The determination of net savings may be made by allocation units which
may be functional, divisional, departmental, geographic, or otherwise as
determined by the Board of Directors, provided that each Defined Business Unit
shall be accounted for as a separate allocation unit. Patronage refunds shall be
distributed in cash, allocated patronage equities, revolving fund certificates,
securities of this cooperative, other securities, or any combination thereof
designated by the Board of Directors. Any non-cash allocations are redeemable
only at 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
Equity Certificates or any combination thereof designated by the Board of
Directors. The current redemption policy is to redeem to estates for
Non-Patronage Equity Certificates.
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.
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GOVERNANCE
The business and affairs of the Company are managed by a Board of Directors
of not less than 17 persons, elected by the members at the Company's annual
meeting. The Board currently is comprised of 27 directors and will be decreased
to 17 at the December 1999 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 June, 1998.
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 restricted to associations of producers of
agricultural products which are organized and operating so as to adhere to the
provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as
amended, and to certain producers of agricultural products. The Board of
Directors may establish a minimum amount of business that cooperative
associations must transact with or through the Company to be eligible for
membership, and also may adopt such additional conditions, qualifications,
methods of acceptance, duties, rights and privileges of membership in this
Company as it may from time to time deem advisable.
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 does not 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
transferable 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.
Cooperative Associations are associations of agricultural producers.
Cooperative 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
Cooperative Association Members are entitled to: (i) one vote for each
producer of agricultural products registered and accepted as a member of such
cooperative association who patronized the Cooperative Association within the
preceding year; (ii) one vote for each $10,000 or major fraction thereof, of the
average annual business transacted with the Company during the past three fiscal
years;
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and (iii) one vote for each $1,000, or major fraction thereof, of equity issued
by the Company as patronage refunds and standing on the books of the Company in
the name of the Cooperative Association Member.
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 and Defined Members associated with a
grain elevator, feed mill, seed plant or any other Company facility, except
supply and marketing locations brought to the Company by Cenex, as designated
and recognized by the Board of Directors. 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. Patrons'
Associations are entitled to: (i) one vote for each Individual Member and
Defined Member grouped in such Patrons' Association (minus one vote for each
Individual Member or Defined Member in such Patrons' Association who chooses to
cast a vote personally); (ii) one vote for each $10,000 or major fraction
thereof, of the average annual business transacted with the Company by the
Individual Members and Defined Members grouped into such Patrons' Associations,
during the past three fiscal years; and (iii) one vote for each $1,000,or major
fraction thereof, of equity issued by this cooperative as a patronage refund and
standing on the books of this Company in the name of the Individual Members and
Defined Members grouped in such Patrons' Associations, calculated on an
aggregate basis.
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 is affiliated with a "Defined Business Unit" and holds
Equity Participation Units in that Defined Business Unit. Holders of Equity
Participation Units 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 is 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 was elected by the Company's
Board of Directors in June, 1997. Eight individuals were appointed to serve on
the Wheat Milling Defined Member Board, a Chairman plus one member from District
1, three members from District 2, one from District 3, one from District 4 and
one from District 5. Six individuals were appointed to serve on the Oilseed
Processing and Refining Defined Member Board, a Chairman plus three members from
District 1, one member from District 2 and one member from District 3. In
November of 1997 the Defined Member Boards of each Defined Business Unit were
elected by the Defined Members associated with the particular Defined Business
Unit on a one Defined Member/one vote basis. The Defined Member Boards adopted a
Nominating and Election Procedure that was sent to each Defined Member. In
subsequent years, Defined Members will elect members of the Defined Member
Boards as their terms expire. In December of 1998, Districts were renamed
"Regions" and the Region boundaries were changed. As a result, the Wheat Milling
Defined Member Board is comprised of a Chairman plus one Member from Region 1,
one member from Region 2, three from Region 3, one from Region 4, and one from
Region 6. The Oilseed Processing and Refining Defined Member Board is comprised
of a Chairman plus three members from Region 1, one member
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from Region 3 and one from Region 4. The Chairperson is selected by and from the
Company's Board of Directors. Individuals serving on a Defined Member Board
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.
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. 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 is represented by Capital Equity
Certificates, non-patronage equity certificates, Equity Participation Units 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 EQUITY CERTIFICATES. The Board of Directors may issue
Non-Patronage Equity 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 Cooperative Association Members that meet all of
the requirements of membership as a Cooperative Association Member except
that they do not transact at least the minimum volume 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
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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 Equity
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.
Beginning June 1, 1998, inactive direct members and patrons and active
direct members and patrons age 61 and older on that date will be eligible for
patronage certificate redemption at age 72 or death. For active direct members
and patrons who were age 60 or younger on June 1, 1998, and Cooperative
Association Members, equities will be redeemed annually based on a prorata
formula where the numerator is dollars available for such purpose as determined
by the Board of Directors, and the denominator is the sum of the patronage
certificates held by such eligible members and patrons. There can be no
assurance that the Company's Board of Directors will not elect to modify its
policy regarding the redemption of equities. The Board is under no restriction
in modifying such policy, other than legal agreements to which the Company may
be a party 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 the Defined Business Units.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
In the event of any dissolution, liquidation or winding up this
cooperative, whether voluntary or involuntary, all debts and liabilities of this
cooperative shall be paid first according to their respective priorities. As
more particularly provided in the Bylaws, the remaining assets shall then be
paid to the holders of equity capital to the extent of their interests therein
and any excess shall be paid to the patrons of this cooperative on the basis of
their past patronage. The Bylaws provide more particularly for the allocation
among the members and nonmember patrons of this cooperative of the consideration
received in any merger or consolidation to which this cooperative is a party.
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
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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 ("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 is affiliated with a Defined Business Unit and holds Equity
Participation Units in that Defined Business Unit. Holders of Equity
Participation Units have delivery rights and obligations for farm products
pursuant to the Agreements between such Defined Members and the Company.
Each Defined 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 and the Resolutions. The
Resolutions may be amended by the Board of Directors, except in certain
respects, without a vote of holders of the Units. Holders of the Units have the
rights and remedies provided by the Minnesota Cooperative Law.
WHEAT MILLING DEFINED BUSINESS UNIT
Holders of Equity Participation Units in the Wheat Milling Defined Business
Unit have a right to participate in the patronage sourced income from the
operations of the Wheat Milling Defined Business Unit. Prior to the sale of any
Unit to any person, such person entered into an Agreement that gave the right
and obligation to such person to deliver the number of bushels of wheat equal to
the number of Units purchased by such Member.
Patronage sourced income from the operations of the Wheat Milling Defined
Business Unit is allocated by the Company as patronage refunds based on the
total amount of wheat processed. 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 are entitled to the allocation of patronage refunds
originating from the Wheat Milling Defined Business Unit, they may also receive,
upon allocation by the Board of Directors, nonpatronage income from operations
of the Company, including operations of the Wheat Milling Defined Business Unit
generating nonpatronage income.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Holders of Equity Participation Units in the Oilseed Processing and
Refining Defined Business Unit have a right to participate in the patronage
sourced income from the operations of the Oilseed Processing and Refining
Defined Business Unit. Prior to the sale of any Unit to any person, such person
entered into an Agreement that gave the right and obligation to such person to
deliver the number of bushels of soybeans equal to the number of Units purchased
by such Member.
Patronage sourced income from the operations of the Oilseed Processing and
Refining Defined 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. 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 are entitled to the allocation of patronage refunds
originating from the Oilseed Processing and Refining Defined Business Unit, they
may also receive, upon allocation by the Board of Directors, nonpatronage income
from operations of the Company, including operations of the Oilseed Processing
and Refining Defined Business Unit generating nonpatronage income.
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ALLOCATIONS RELATING TO DEFINED BUSINESS UNITS
Revenues from the sale of products of a Defined Business Unit shall be
credited to the Defined Business Unit, and all direct expenses incurred by a
Defined Business Unit shall be charged against the Defined Business Unit.
Corporate, general and administrative expenses of the Company shall be allocated
to each Defined Business Unit in a reasonable manner based on the utilization by
such Defined Business Unit. Intracompany accounts have been established for the
advancements to, and the loan of funds by, each Defined Business Unit, with
interest thereon imputed at prevailing rates. Income taxes shall be allocated to
each Defined Business Unit as if it were a separate taxpayer. Each Defined
Business Unit shall perform and be responsible for commitments, contingencies
and obligations allocated to such Defined Business Unit.
Patronage sourced income from the operations of a Defined Business Unit
(except as set forth above with respect to the Oilseed Processing and Refining
Defined 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
Defined Business Unit generating nonpatronage income.
With respect to each year, the total net income from a Defined Business
Unit will be withdrawn by the Company from the Defined Business Unit, except to
the extent that patronage dividends are not paid in cash and are retained in the
Defined Business Unit as equity. The Company will be responsible for the
allocation of net income arising from operations of a Defined Business Unit
between Defined Members of any one or more Defined 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 Defined Business Unit, such assets and
related liabilities, including commitments, contingencies and obligations, shall
be allocated to that Defined Business Unit and the aggregate cost or fair market
value of such assets and liabilities shall be paid by the Defined 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 Defined 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 Defined Business Unit. If an asset is
allocated to more than one Defined Business Unit, the proceeds or the fair
market value of the disposition shall be allocated among all Defined 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
Defined Business Unit to the Company or any other Defined 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 Defined 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
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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
Defined 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 Defined 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 Defined 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 Defined Business Unit, all, but
not less than all, Units of such Defined Business Unit shall be redeemed by the
Company at their original purchase price, provided that the Preferred Capital
Certificates or unit retains of such Defined 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
Defined Business Unit as though the assets, subject to the liabilities, of the
Defined 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 Defined Business Unit.
OPERATIONS
The operations of a Defined 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 Defined Business Unit may be disposed of in the ordinary
course of business and the disposition of any substantial portion of the assets
of a Defined 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 Defined Business Unit or to abandon or shut down the operations
of a Defined Business Unit. Abandonment or shutting down the operations of a
Defined Business Unit (other than on a temporary basis) will be considered sale
of all of the assets of the Defined 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 Wheat
Milling Defined Business Unit and the Oilseed Processing and Refining Defined
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 is obligated to deliver during each delivery year one
bushel of wheat or soybeans which is of merchantable 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.
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 during the Processing Year. Certain
Cooperative Association Members have contracted with the Company to act as an
agent for handling required deliveries (and will receive funds for that
service). In
24
<PAGE>
addition, the Company has designated most of its owned and operated elevators as
delivery points (approx. 135). 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
August 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 Defined
Business Unit attributable to such Defined Member's patronage of the Defined
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 Defined Business Unit.
As a result, in the event that Members holding the majority of the voting power
of the applicable Defined 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.
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.
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 Defined 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.
25
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The information in this Annual Report on Form 10-K for the year ended
August 31, 1999, includes forward-looking statements with respect to the
Company. Risks and uncertainties could cause actual results to differ materially
from those discussed in such forward-looking statements. These risks and
uncertainties include, but are not limited to: supply and demand forces, price
risks, business competition and competitive trends, year 2000, taxation of
cooperatives and dependence on certain customers. The risks and uncertainties
are further described in Exhibit 99.1, and other risks or uncertainties may be
described from time to time in the Company's future filings with the Securities
and Exchange Commission.
ITEM 2. PROPERTIES
The Company owns or leases energy, grain handling and processing, and
agronomy related facilities throughout the United States. Below is a summary of
these locations.
ENERGY
Facilities include the following, all of which are owned except where
indicated as leased:
<TABLE>
<S> <C>
Refinery Laurel, Montana
Propane Plants 33 locations in Iowa, Idaho, Minnesota, North Dakota, Oregon,
South Dakota, Wisconsin, and Wyoming
Propane Terminals 3 locations in Minnesota, North Dakota and Wisconsin
Transportation Terminals/ 10 locations in Iowa, Minnesota, Montana, North Dakota,
Repair Facilities South Dakota, Washington and Wisconsin, 2 of which
are leased
Petroleum & Asphalt 12 locations in Kansas, Montana, North Dakota, Washington
Terminals/Storage Facilities and Wisconsin
Pump Stations 10 locations in Montana and North Dakota
Pipelines
Cenex Pipeline Company Laurel, Montana to Fargo, North Dakota
Front Range Pipeline Canadian Border to Laurel, Montana
Convenience Stores/Gas Stations 40 locations in Iowa, Minnesota, Montana, Nebraska,
South Dakota, and Wyoming
Lube Plants/Warehouses 3 locations in Minnesota and Ohio
</TABLE>
The Company has a 74.5% interest in the following facilities of NCRA:
<TABLE>
<S> <C>
Refinery McPherson, Kansas
Petroleum Terminals/Storage 2 locations in Iowa and Kansas
Pipeline McPherson, Kansas to Council Bluffs, Iowa
Jayhawk Pipeline Throughout Kansas, with branches in Oklahoma and Texas
Jayhawk Stations 40 locations located in Kansas and Oklahoma
</TABLE>
26
<PAGE>
GRAIN MERCHANDISING
The Company owns or leases grain terminals at the following locations:
Davenport, Iowa I(1)
Davenport, Iowa II(2)
Kalama, Washington(2)
Kansas City, Missouri I(2)
Kansas City, Missouri II(2)
Kennewick, Washington(1)
Myrtle Grove, Louisiana(1)
Petersburg, North Dakota(2)
St. Paul, Minnesota(2)
Savage, Minnesota(1)
Spokane, Washington(1)
Superior, Wisconsin(1)
Winona, Minnesota(1)
- ------------------
(1) Owned
(2) Leased
OILSEED PROCESSING AND REFINING
The Oilseed Processing and Refining Defined Business Unit owns one facility
in Mankato, Minnesota, comprised of a crushing plant, a refinery, a soyflour
plant, and a quality control laboratory.
WHEAT MILLING
The Wheat Milling Defined Business Unit owns or leases flour milling
facilities at the following locations:
Rush City, MN(1) .................. 10,000 cwts/day
Huron, OH(2) ...................... 14,500 cwts/day
Kenosha, WI(1) .................... 21,000 cwts/day
Houston, TX(1) .................... 13,000 cwts/day
Mount Pocono PA(1) ................ 18,000 cwts/day
- -------------------
(1) Owned
(2) Owned equipment, leased land and facilities
AGRI SERVICES CENTERS
The Company owned 317 Agri Service Centers (of which some of the facilities
are on leased land) located in Minnesota, Nebraska, North Dakota, South Dakota
and Montana, Washington, Oregon, Idaho, Iowa and Colorado.
FEED
The Company owns the following feed manufacturing facilities:
Dickinson, North Dakota
Edgeley, North Dakota
Gettysburg, South Dakota
Great Falls, Montana
Hardin, Montana
Minot, North Dakota
Norfolk, Nebraska
Sioux Falls, South Dakota
Snohomish, Washington
Willmar, Minnesota
27
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
No equity securities were sold by the Registrant during the year ended
August 31, 1999, or the three-month period ended August 31, 1998, that were not
registered under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED COMPANY
The selected financial information below has been derived from the
Company's consolidated financial statements for the periods indicated below. The
selected consolidated financial information should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
elsewhere in this filing.
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
YEAR ENDED THREE MONTHS ENDED --------------------------------------------------------
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
--------------- ------------------- ------------- --------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Grain and Oilseed ................... $3,309,310 $ 810,723 $4,629,553 $ 6,036,503 $ 7,127,223 $4,191,665
Energy .............................. 1,345,772 343,747 1,858,069 1,676,842 1,402,314 1,401,262
Agronomy ............................ 593,927 91,231 696,441 683,429 560,032 528,869
Processed grain and oilseed ......... 531,877 145,645 615,049 730,101 819,864 708,219
Feed and farm supplies .............. 547,732 126,907 546,063 531,177 451,882 376,906
---------- ----------- ---------- ------------ ----------- ----------
6,328,618 1,518,253 8,345,175 9,658,052 10,361,315 7,206,921
Patronage dividends ................. 5,876 5,111 70,387 71,070 47,170 9,642
Other revenues ...................... 100,031 19,271 98,520 85,390 81,980 68,385
---------- ----------- ---------- ------------ ----------- ----------
6,434,525 1,542,635 8,514,082 9,814,512 10,490,465 7,284,948
Costs and expenses:
Cost of goods sold .................. 6,140,580 1,473,243 8,149,605 9,475,682 10,185,544 6,962,256
Marketing, general, and
Administrative ..................... 148,510 34,998 126,061 126,297 130,274 131,133
Interest ............................ 42,438 12,311 34,620 33,368 46,450 34,199
Minority Interests .................. 10,017 3,252 6,880 7,984 (147) 11,806
---------- ----------- ---------- ------------ ----------- ----------
6,341,545 1,523,804 8,317,166 9,643,331 10,362,121 7,139,394
---------- ----------- ---------- ------------ ----------- ----------
Income before income taxes,
discontinued operations, and
cumulative effect of a change in
accounting .......................... 92,980 18,831 196,916 171,181 128,344 145,554
Loss from discontinued operations .... 5,558
Cumulative effect of a change in
accounting .......................... (6,480)
Income taxes ......................... 6,980 2,895 19,615 19,280 13,139 19,929
---------- ----------- ---------- ------------ ----------- ----------
Net income ........................... $ 86,000 $ 15,936 $ 177,301 $ 151,901 $ 115,205 $ 126,547
========== =========== ========== ============ =========== ==========
Balance Sheet Data (at end of period):
Working capital ..................... $ 219,045 $ 284,452 $ 235,720 $ 219,395 $ 220,581 $ 206,205
Net property, plant and
equipment .......................... 968,333 915,770 868,073 798,757 713,643 642,111
Total assets ........................ 2,787,664 2,469,103 2,436,515 2,422,564 2,484,006 2,111,882
Long-term debt, including
current maturities ................. 482,666 456,840 378,408 335,737 315,985 260,328
Total equity ........................ 1,117,636 1,065,877 1,029,973 944,798 849,701 776,116
</TABLE>
29
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
The selected financial information presented below has been derived from
the Oilseed Processing and Refining Defined Business Unit's financial statements
for the periods indicated below. The selected financial information should be
read in conjunction with the Defined Business Unit's financial statements and
notes thereto included elsewhere in this filing.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER BUSHEL AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Processed oilseed sales ................. $ 358,042 $ 98,919 $410,386 $441,738 $399,271 $398,095
Other revenues and costs ................ 30 1,115 1,746 (1,660) 1,436 1,163
---------- -------- -------- -------- -------- --------
358,072 100,034 412,132 440,078 400,707 399,258
Costs and expenses:
Cost of goods sold ...................... 338,386 95,304 379,272 405,791 371,425 366,407
Marketing and administrative ............ 5,095 1,257 4,730 4,342 4,545 5,138
Interest ................................ 557 251 380 322 151 --
---------- -------- -------- -------- -------- --------
344,038 96,812 384,382 410,455 376,121 371,545
---------- -------- -------- -------- -------- --------
Income before income taxes ............... 14,034 3,222 27,750 29,623 24,586 27,713
Income taxes ............................. 800 525 1,825 2,100 1,600 1,500
---------- -------- -------- -------- -------- --------
Net income ............................... $ 13,234 $ 2,697 $ 25,925 $ 27,523 $ 22,986 $ 26,213
========== ======== ======== ======== ======== ========
Operating Data:
Quantities processed Soybeans (bu.) ..... 36,759 4,607 32,626 32,232 30,446 30,808
Crude oil (lb.) ......................... 1,024,900 226,024 953,359 960,407 920,492 894,970
Production:
Meal (tons) ............................. 841 217 754 742 728 741
Flour (tons) ............................ 33 10 32 36 40 41
Refined oil (lbs.) ...................... 996,176 219,918 948,797 957,398 858,240 835,396
Balance Sheet Data (at end of period):
Working capital ......................... $ 22,193 $ 22,881 $ 23,111 $ 20,306 $ 28,620 $ 32,981
Net property, plant and equipment ....... 39,001 35,596 34,953 33,085 24,771 20,410
Total assets ............................ 80,735 82,868 91,482 92,416 74,113 63,673
Long-term debt, including current
maturities ............................. -- -- -- -- -- --
Total equity ............................ 61,194 58,477 58,064 53,391 53,391 53,391
Other Data(1):
Pretax income ........................... 14,034 3,222 $ 27,750 $ 29,623 $ 24,586 $ 27,713
Earnings from purchased oil ............. (2,907) (58) (3,265) (7,015) (3,558) (4,681)
Non-patronage joint venture income ...... (976) (738) (615) (1,354) (990)
Book to tax differences ................. 13 (121) (384) 2,210 (71) 393
---------- -------- -------- -------- -------- --------
Tax basis soybean income ................. $ 11,140 $ 2,067 $ 23,363 $ 24,203 $ 19,603 $ 22,435
========== ======== ======== ======== ======== ========
Bushels processed ....................... 36,759 9,467 32,626 32,232 30,466 30,808
Income per bushel ....................... $ 0.30 $ 0.22 $ 0.72 $ 0.75 $ 0.64 $ 0.73
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1999
----------------
<S> <C>
Equity Participation Units delivered (bushels) 1,253
Patronage rate ................................ $ 0.30
-------
Income to holders ............................. $ 370
=======
</TABLE>
- -----------------
(1) Because patronage dividends attributable to the Units are 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 Oilseed Processing and Refining Defined Business Unit.
30
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
The selected financial information presented below has been derived from
the Wheat Milling Defined Business Unit's financial statements for the periods
indicated below. The selected financial information should be read in
conjunction with the Defined Business Unit's financial statements and notes
thereto included elsewhere in this filing.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
YEAR ENDED THREE MONTHS ENDED ------------------------------------------------
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER BUSHEL AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Income Statement data:
Revenues:
Processed grain sales ................... $ 174,133 $ 46,914 $ 205,282 $199,079 $173,316 $ 119,725
Other revenues .......................... 1,820
---------- -------- --------- -------- -------- ---------
174,133 46,914 207,102 199,079 173,316 119,725
Costs and expenses:
Cost of goods sold ...................... 170,510 43,733 189,614 181,566 161,293 112,691
Marketing and administrative ............ 10,610 2,071 8,072 6,749 4,472 3,834
Interest ................................ 5,184 843 3,122 5,230 4,458 2,278
Other ................................... 826 162 2,000
---------- -------- --------- -------- -------- ---------
187,130 46,647 200,970 195,545 170,223 118,803
(Loss) income before income taxes ........ (12,997) 267 6,132 3,534 3,093 922
Income taxes (benefit) ................... (1,125) 25 475 300 200 125
---------- -------- --------- -------- -------- ---------
Net (loss) income ........................ $ (11,872) $ 242 $ 5,657 $ 3,234 $ 2,893 $ 797
========== ======== ========= ======== ======== =========
Operating Data:
Wheat used (bu.) Durum .................. 15,863 4,453 19,307 21,372 19,376 16,058
Spring .................................. 11,144 2,251 8,891 6,732 3,013 1,638
Winter .................................. 9,368 1,453 3,165
Shipments (cwt):
Semolina/flour .......................... 9,258 2,351 10,505 11,168 10,085 8,718
Baking flour ............................ 7,671 1,389 4,270 2,599 634 --
Balance Sheet Data (at end of period):
Working capital ......................... $ (25,112) $ (1,361) $ 12,787 ($ 1,939) $ 3,338 $ 1,604
Net property and equipment .............. 110,547 97,428 85,627 69,130 59,233 43,396
Total assets ............................ 165,471 162,461 146,311 120,918 125,322 82,606
Long-term debt, including current
maturities ............................. 38,515 48,520 51,209 61,214 54,000 33,750
Total equity ............................ 66,340 68,033 67,958 27,797 27,797 27,797
Other Data(1):
Pretax (loss) income .................... $ (12,997) $ 267 $ 6,132 $ 3,534 $ 3,093 $ 922
Book to tax differences ................. 2,249 103 690 2,376 (85) 124
---------- -------- --------- -------- -------- ---------
Tax basis (loss) income .................. $ (10,748) $ 370 $ 6,822 $ 5,910 $ 3,008 $ 1,046
========== ======== ========= ======== ======== =========
Bushels milled ........................... 36,375 8,156 31,363 28,104 22,390 17,697
(Loss) income per bushel ................. $ (0.30) $ 0.05 $ 0.22 $ 0.21 $ 0.13 $ 0.06
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 1999
---------------
<S> <C>
Equity Participation Units delivered (bushels) ................ 5,728
Patronage rate ................................................ $ (0.30)
--------
Loss to holders to be carried forward against future income ... $ (1,693)
========
</TABLE>
- -----------------
(1) Because patronage dividends attributable to the Units are 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 Wheat Milling Defined Business Unit.
31
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
CONSOLIDATED COMPANY
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives combined
through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives
became the surviving corporation. In accordance with the Plan of Combination,
the Articles of Incorporation and By-Laws of Harvest States Cooperatives were
restated and the name of Harvest States Cooperatives was changed to Cenex
Harvest States Cooperatives (Cenex Harvest States or the Company). The
combination constituted a tax-free reorganization and has been accounted for as
a pooling of interests.
Prior to the Combination, Cenex's year end was September 30 and Harvest
States Cooperatives' year end was May 31. Subsequent to the Combination, the
Company changed its fiscal year end to August 31 and is filing this Report on
Form 10-K representing the first fiscal year of the Company based upon that
date. The management discussion and analysis which follows includes the
consolidated statements of operations and cash flows for the years ended May 31,
1998 and 1997, which reflect the results of operations and cash flows of Harvest
States Cooperatives for the years then ended combined with the results of
operations and cash flows of Cenex for the years ended September 30, 1997 and
1996, respectively. The consolidated balance sheet as of May 31, 1998 reflects
the financial position of Harvest States Cooperatives on that date combined with
the financial position of Cenex as of September 30, 1997. The consolidated
results of operations of Cenex for the eight months ended May 31, 1998 have been
excluded from the reported results of operations and, therefore, have been
recorded as an adjustment to the Company's equities and cash flows in the
consolidated statements of equities and comprehensive income and cash flows
during the three months ended August 31, 1998.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31,
1998
The Company's consolidated net income of approximately $86.0 million for
the year ended August 31, 1999 represents a $91.3 million (51%) decrease from
the year ended May 31, 1998. This decrease is partially attributable to the
absence of a plant food patronage refund of which approximately $57.4 million
was received from the Company's primary supplier of plant food during the year
ended May 31, 1998. In addition, depressed gross margins in the Company's food
processing and energy operations also contributed to the decrease in net income.
Consolidated net sales of $6.3 billion for the year ended August 31, 1999
decreased approximately $2.0 billion (24%) compared to the year ended May 31,
1998.
Grain and oilseed sales of $3.3 billion decreased $1.3 billion (29%) during
the year ended August 31, 1999 when compared to the year ended May 31, 1998.
Although grain volumes declined 22.2 million bushels, the primary cause for the
decreased sales is a decline in the average sales price of all grain and
oilseeds marketed by the Company of $1.15 per bushel.
Energy sales of $1.3 billion decreased $0.5 billion (28%) during the year
ended August 31, 1999 compared to the year ended May 31, 1998. Refined fuels
sales volumes decreased slightly in 1999 compared to 1998, and contributing to
the overall energy sales decline was the refined fuels reduced average sales
price of 18 cents per gallon.
Agronomy sales of $593.9 million decreased $102.5 million (15%) during the
year ended August 31, 1999 as compared to the year ended May 31, 1998. Plant
food sales volumes decreased slightly in 1999 compared to 1998, and contributing
to the overall agronomy sales decline was plant foods reduced average sales
price of $36.00 per ton.
Processed grain and oilseed sales of $531.9 million decreased $83.2 million
(14%) during the year ended August 31, 1999 compared to the year ended May 31,
1998. This decrease is primarily attributable
32
<PAGE>
to a reduction in sales price for processed soybean products, primarily soymeal,
of approximately $76.00 per ton, in addition to a reduction of the average sales
price of $2.89 per hundred weight for milled wheat products partially offset by
a 3.1 million hundred weight volume increase.
Feed and farm supplies sales of $547.7 million during the year ended August
31, 1999 were essentially unchanged in total when compared to the year ended May
31, 1998. Although there was a decrease in sales related to agronomy products
due to decreased volume and price, this was offset by an increase in sales for
feed, seed and energy products.
Patronage dividends received of $5.9 million decreased $64.5 million (92%)
during the year ended August 31, 1999 compared to the year ended May 31, 1998.
During the year ended May 31, 1998 a patronage dividend in the amount of $57.4
million was received from the Company's primary plant food supplier. During the
year ended August 31, 1998 the Company did not receive a patronage dividend from
this supplier.
Other revenues of $100.0 million for the year ended August 31, 1999 were
essentially unchanged from the year ended May 31, 1998. The most significant
change within other revenues was from the Company's share of income from joint
ventures. Income from the Company's food packaging joint venture, grain
marketing joint ventures and the newly formed agronomy joint ventures increased
by $5.1 million and $2.3 million, and decreased by $4.3 million, respectively
for the current year as compared to May 31, 1998. This net increase in joint
ventures income was offset by a decline in other miscellaneous revenues.
Cost of goods sold of $6.1 billion decreased $2.0 billion (25%) during the
current fiscal year compared to the year ended May 31, 1998. During the year
ended August 31, 1999 the average cost per bushel of all grains and oilseed
procured by the Company through its grain marketing and country elevator system
decreased $1.15 per bushel and the average cost of refined fuels decreased 17
cents per gallon as compared to the year ended May 31, 1998. Also during the
year ended August 31, 1999 plant food volumes decreased 103,000 tons as compared
to the year ended May 31, 1998. In the Company's food processing operations, the
average cost per bushel of wheat and soybeans declined $1.45 and $1.94 per
bushel, respectively.
Marketing, general and administrative expenses of $148.5 million for the
year ended August 31, 1999 increased $22.4 million (18%) compared to the year
ended May 31, 1998. This increase is primarily related to additional locations
and expansion of many of the Company's business segments.
Interest expense of $42.4 million for the year ended August 31, 1999
increased $7.8 million (23%) compared to the year ended May 31, 1998. The
average seasonal borrowings during 1999 increased as a result of higher working
capital needs, and long-term borrowings which reflected finance activities
related to the acquisition of property, plant and equipment, generated most of
this additional expense.
Minority interests in operations of $10.0 million for the year ended August
31, 1999 increased $3.1 million (46%) compared to the year ended May 31, 1998.
Substantially all of the minority interest is in National Cooperative Refinery
Association (NCRA), which operates a refinery near McPherson, Kansas. The
Company owns approximately 75% of NCRA. This net change in minority interests
during the current year is reflective of more profitable operations within the
Company's majority owned subsidiaries.
Income tax expense of $7.0 and $19.6 for the years ended August 31, 1999
and May 31, 1998 resulted in effective tax rates of 7.5% and 10.0%,
respectively. The reduced effective tax rate for the year ended August 31, 1999
is primarily reflective of reduced nonpatronage earnings as a percentage of
total pretax earnings.
COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997
The Company's consolidated net income of $177.3 million for the year ended
May 31, 1998 represents a $25.4 million (17%) increase from 1997. This increase
is primarily attributable to improved gross margins in 1998 compared to 1997.
Consolidated net sales of $8.3 billion in 1998 decreased $1.3 billion (14%)
from the prior year.
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<PAGE>
The decrease in grain and oilseed sales of $1.4 billion (23%) was due
primarily to reduced grain prices in 1998, when the weighted average sales price
of all grain and oilseeds marketed by the Company declined 85 cents a bushel
compared to 1997. In addition, volumes declined approximately 88 million bushels
in 1998.
Energy sales of $1.9 billion in 1998 increased $181.2 million (10%) as
compared to the same period in 1997. This increase in energy sales is primarily
attributable to volume increases in refined fuels and propane gallons of 44
million and 57 million, respectively.
Agronomy sales of $696.4 million in 1998 increased $13.0 million (2%) as
compared to 1997. Crop protection product sales in 1998 of $287.2 million
increased $35.2 million (14%) as compared to the same period in 1997. This
increase was offset by a decrease in the plant food average sales price of $3.71
per ton for the same period.
Processed grain and oilseed sales of $615.0 million in 1998 decreased
$115.1 million (16%) when compared to 1997. This decrease is primarily
attributable to a reduction in sales price for processed soybean products of
approximately $40.00 per ton, partially offset by increased sales volumes for
milled wheat products.
Feed and farm supplies sales of $546.1 million in 1998 were substantially
the same as the prior year with an increase of $14.9 million (3%).
Patronage dividends received during the year ended May 31, 1998 of $70.4
million remained at about the same level as the previous year.
Other revenue of $98.5 million in 1998 increased $13.1 million (15%) when
compared to 1997. The major factors contributing to this change were the
expansion of various country elevator services during 1998, and losses
recognized on certain properties in the amount of approximately $4.0 million in
1997.
Cost of goods sold of $8.1 billion decreased $1.3 billion (14%) in 1998
when compared to 1997. During 1998 the average cost per bushel of all grains and
oilseed procured by the Company through its grain marketing and country elevator
system decreased 87 cents per bushel and the average cost of refined fuels
increased $.02 per gallon when compared to 1997. Also during the year ended May
31, 1998 the cost of plant food decreased $4.00 per ton compared to the prior
year. In the Company's food processing operations, the average cost of wheat and
soybeans declined 42 cents and 70 cent per bushel, respectively.
Marketing, general and administrative expenses of $126.1 million for the
year ended May 31, 1998 compares to $126.3 million for the same period in 1997.
This decrease is primarily related to the transfer of the Consumer Products
Packaging Division to a nonconsolidated joint venture at the end of the first
quarter of the year ended May 31, 1997, partially offset by increased costs in
the Company's growth areas, specifically country elevator operations and wheat
milling.
Interest expense of $34.6 million decreased $1.3 million (4%) in 1998. This
decrease is primarily attributable to lower inventory and receivable levels,
partially offset by interest on additional long-term borrowings incurred
primarily to finance property, plant and equipment expenditures.
Income tax expense of $19.6 million and $19.3 million for 1998 and 1997,
respectively, resulted in effective tax rates of 10.0% and 11.3%. The reduced
effective tax rate for the year ended May 31, 1998 is primarily reflective of
reduced nonpatronage earnings as a percentage of total pretax earnings.
COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH THE THREE MONTH
ENDED AUGUST 31, 1997
The Company's consolidated net income for the three months ended August 31,
1998 and 1997 was $15.9 million and $35.2 million, respectively, which
represents a $19.3 million (55%) decrease. Relatively low commodity prices had a
direct impact on volume at the Company's country elevator and grain exporting
facilities and influenced demand for crop protection and plant food products.
With reduced volumes in most of the Company's business operations, gross margins
were eroded considerably by fixed costs.
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<PAGE>
Consolidated net sales of $1.5 billion decreased $0.3 billion (18%) during
the three-month period ended August 31, 1998 compared to the same period in
1997. Grain volume of approximately 230.0 million bushels during the three
months ended August 31, 1998 declined 27.0 million bushels compared to 1997. In
addition to decreased volumes, the average sales price for all grains and
oilseeds marketed by the Company declined by 41 cents a bushel. Total grain and
oilseed sales decreased $219.3 million (21%) as a result of these two factors.
While the gallon sales of refined fuels increased slightly during the
three-month period ended August 31, 1998 compared with the same period in 1997,
a reduced average sales price of 18 cents a gallon resulted in a decline in
sales of $71.2 million (17%) for energy products during the 1998 period compared
with 1997.
Agronomy sales declined $47.4 million (34%) during the three months ended
August 31, 1998 compared to the same period in 1997, resulting in a 12% decrease
in plant food volumes, and 10% decrease in the average per ton sales price of
such products.
Processed grain and oilseed sales increased $14.9 million (11%) during the
three months ended August 31, 1998 compared to the same period in 1997. This
change is primarily attributable to increased volume within the Company's
Oilseed Processing and Refining Defined Business Unit, where soymeal sales
volume increased from approximately 105,000 tons during the three months ended
August 31, 1997 to approximately 215,000 tons in 1998. During the three months
ended August 31, 1997, the oilseed crushing plant was closed for 41 days to
allow for the installation of equipment. During the 1998 period, this crushing
plant operated at its normal capacity.
Feed and farm supplies sales remained essentially unchanged between the two
periods, although sales during the 1998 period represented a decline in sales
relationship to actual retail capacity due to the addition of several retail
locations since the end of the 1997 period.
Patronage dividends decreased $2.3 million (31%) during the three months
ended August 31, 1998 compared to the same period in 1997 resulting from higher
patronage earnings distributed by cooperative customers and suppliers in 1997.
Other revenue of $19.3 million decreased $0.2 million (1%) for the three
months ended August 31, 1998 compared to the same period in 1997. Earnings from
the Company's nonconsolidated consumer products packaging joint venture
decreased approximately $1.1 million for the three months ended August 31, 1998
compared to the same period in 1997. Earnings from the Company's share of a
grain exporting joint venture declined approximately $0.9 million during the
1998 period compared to 1997. In addition, the Company experienced a decline in
service income at its export terminals due to reduced bushel volume activity at
these locations. These reductions in other revenues were partially offset by a
$2.9 million increase in interest income. Due to of the relatively low cost of
grain during the period ended August 31, 1998, the Company did not have any
short term borrowing requirements. In addition, the Company's refinancing
program in anticipation of long term capital requirements, completed in June of
1998, produced temporary cash available for short term investments.
Cost of goods sold of $1.5 billion decreased $306.9 million (17%) during
the three months ended August 31, 1998 compared to the same period in 1997.
Reduced volumes and raw material costs in most of the Company's business
activities, as discussed in the sales section of this analysis, produced most of
this reduction in costs. Although the commodity and other raw material costs
which are a component of costs of goods sold changed in relative proportion to
sales dollars, fixed operating costs remain constant regardless of volume and
price activity. This factor contributed to an erosion in total gross margin of
approximately $28.0 million (46%) during the three months ended August 31, 1998
compared with the same period in 1997.
Marketing, general and administrative expenses of $35.0 million for the
three months ended August 31, 1998 increased $5.4 million (18%) compared to the
same three months ended in 1997. Costs related to the relocation of staff and
consolidation of the business units, and a warranty claim for the re-roofing of
a building which had been part of the Company's capital contribution to the
consumer products packaging joint venture comprised the majority of this
increase.
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<PAGE>
Interest expense of $12.3 million for the three months ended August 31,
1998 represents an increase of $4.1 million (50%) compared to the same period in
1997. Long-term borrowings to finance the acquisition of property, plant and
equipment generated most of this additional expense. Long-term debt proceeds not
yet expended for fixed assets generated interest income as discussed in the
other revenue discussion above, and should be considered as an offset to a
portion of the increase in interest expense.
Minority interests in operations for the three-month periods ended August
31, 1998 and 1997 was $3.3 million and $5.5 million, respectively.
Substantially all of the minority interest is in NCRA.
Income tax expense of $2.9 million and $8.9 million for the three-month
periods ended August 31, 1998 and 1997, respectively, resulted in effective tax
rates of 15.4% and 20.1%. The effective tax rate changes from period to period
based upon the portion of non-patronage business activity compared to total
business activity during each period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $27.5 million during
the year ended August 31, 1999. Net income of $86.0 million and a positive
adjustment of $17.2 million from net non-cash expenses, costs and revenues were
offset by increased working capital requirements of approximately $130.7
million.
Operating activities for the year ended May 31, 1998 provided net cash of
approximately $223.6 million. Net income of $177.3 million, a positive
adjustment for non-cash expenses, costs and revenues of $1.5 million, and
decreased working capital requirements of approximately $44.8 million provided
this net cash from operations.
Operating activities for the year ended May 31, 1997 provided net cash of
approximately $401.5 million. Net income of $151.9 million and decreased working
capital requirements of approximately $267.5 million, were partially offset by a
negative adjustment of approximately $11.3 million for net non-cash expenses,
costs and revenues and net cash used for discontinued operations of
approximately $6.6 million.
CASH FLOWS FROM INVESTING ACTIVITIES
For the years ended August 31, 1999, and May 31, 1998 and 1997, the net
cash flows used in the Company's investing activities totaled approximately
$160.7 million, $99.9 million and $115.8 million, respectively.
The acquisition of property, plant and equipment comprised the primary use
of cash totaling $124.5 million, $145.2 million and $200.3 million for the three
years ended August 31, 1999, and May 31, 1998 and 1997, respectively.
On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada,
Ltd. (the Entities), both companies owned 50/50 by the Company and Land O'Lakes,
Inc., purchased approximately 310 agronomy facilities from Terra International,
Inc., at a price of approximately $350.0 million. In conjunction with this
purchase transaction, the Company invested $51.5 million in the Entities and
issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd.
Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes
Agronomy Company (of which Cenex Harvest States owns 50%), are without recourse
to the Company.
Cash outlays for the acquisition of property, plant and equipment and
investments in other entities were partially offset by proceeds from the
disposition of property, plant and equipment of approximately $6.8 million,
$21.9 million and $28.4 million for the years ended August 31, 1999, and May 31,
1998 and 1997, respectively. For the year ended August 31, 2000 the Company
expects to spend approximately $139.6 million for the acquisition of property,
plant and equipment.
Also partially offsetting cash usage were proceeds received from joint
ventures and investments totaling $11.2 million, $31.5 million and $27.3 million
for the years ended August 31, 1999, and May 31,
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<PAGE>
1998 and 1997, respectively. For the year ended May 31, 1997, discontinued
operations of petroleum exploration and production operations also provided net
cash of $33.2 million from the liquidation of this investment.
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 the Company's consumer products packaging division as its capital
investment in the joint venture. In return for these assets, the Company
received a 40% interest in the joint venture, and the joint venture assumed debt
of approximately $33.7 million.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company finances its working capital needs through short-term lines of
credit with National Bank for Cooperatives (CoBank) and commercial banks. In
June 1998, the Company established a 364-day credit facility of $400.0 million,
which was renewed in May 1999, and a five-year revolving facility of $200.0
million, all of which is committed. In addition to these lines of credit, the
Company has a 364 day credit facility dedicated to NCRA, with CoBank in the
amount of $50.0 million, all of which is committed. On August 31, 1999 the
Company had short-term indebtedness on the 364-day credit facility of $196.0
million, and had no amount drawn on the five-year revolving facility. In
addition to these bank facilities, the Company, on August 31, 1999, had
additional short-term indebtedness of approximately $1.0 million in the form of
other notes payable. On August 31, 1998, the Company had short-term indebtedness
of approximately $0.5 million. On May 31, 1998, the Company had short-term
indebtedness on its bank facilities and other short-term notes payable of
approximately $52.5 million. This short-term borrowing activity follows the
working capital requirements created by commodity volumes and prices as
discussed in the "Cash Flows from Operations" section of this analysis.
The Company has financed its long-term capital needs in the past, primarily
for the acquisition of property, plant, and equipment, with long-term agreements
through the banks for cooperatives. On May 31, 1998, the Company had total
indebtedness related to these long-term lines of credit of $332.1 million of
which approximately $17.6 million represented long-term borrowings of NCRA. The
Company also had long-term debt in the form of capital leases, industrial
development revenue bonds and miscellaneous notes payable totaling approximately
$46.3 million on May 31, 1998.
In June 1998, the Company established a new long-term loan agreement
through the banks for cooperatives whereby the Company repaid $279.6 million of
long-term debt and borrowed $134.0 million on the long-term credit facility.
This facility committed $200.0 million of long-term borrowing capacity to the
Company, with repayments through the year 2009, of which an additional $30.0
million was drawn by the Company before the commitment expired on May 31, 1999.
The amount outstanding on this credit facility was $164.0 million and $134.0
million on August 31, 1999 and 1998, respectively.
Also in June 1998, as part of the refinancing program for the merged
operations, the Company issued a private placement with several insurance
companies for long-term debt in the amount of $225.0 million, with repayments
beginning in the year 2008 and ending in the year 2013.
During the year ended August 31, 1999, the Company, through NCRA, borrowed
an additional $10.0 million from CoBank with equal annual repayments through the
year 2009.
During the years ended August 31, 1999, May 31, 1998 and 1997, the Company
borrowed on a long-term basis $40.0 million, $83.9 million and $74.9 million,
respectively, and during the same periods repaid long-term debt of $14.6
million, $42.2 million and $55.5 million, respectively.
On August 31, 1999, the Company had total long-term debt outstanding of
$482.7 million, of which approximately $227.2 million was bank financing, $225.0
was private placement proceeds and $30.5 million was industrial development
revenue bonds, capitalized leases and miscellaneous notes payable.
In accordance with the By-Laws and action of the Board of Directors, annual
net earnings from patronage sources were distributed to consenting patrons
following the close of each fiscal year and were based on amounts reportable for
federal income tax purposes as adjusted in accordance with the By-Laws. The cash
portion of this distribution, deemed by the Board of Directors to be 30% for
regular
37
<PAGE>
patronage and 80% for Equity Participation Units, totaled approximately $43.8
million, $35.9 million and $30.8 million distributed in the years ended August
31, 1999, and May 31, 1998 and 1997, respectively.
Cash patronage for the year ended August 31, 1999, deemed by the Board of
Directors to be 75% for Equity Participation Units and 30% for regular patronage
earnings, to be distributed in fiscal year 2000, is expected to be approximately
$17.3 million and is classified as a current liability on the August 31, 1999
balance sheet.
For the years ended August 31, 1999, May 31, 1998 and 1997, the Company
redeemed patronage related equities in accordance with authorization from the
Board of Directors in the amounts of approximately $23.8 million, $36.9 million
and $18.6 million, respectively. During the three months ended August 31, 1998,
the Company redeemed approximately $4.4 million of such patronage certificates.
The current equity redemption policy, as authorized by the Board of
Directors, allows for the redemption of capital equity certificates held by
inactive direct members and patrons and active direct members and patrons at age
72 or death who were of age 61 or older on June 1, 1998. For active direct
members and patrons who were of age 60 or younger on June 1, 1998, and member
cooperatives, equities will be redeemed annually based on a prorata formula
where the numerator is dollars available for such purpose as determined by the
Board of Directors, and the denominator is the sum of the patronage certificates
held by such eligible members and patrons. Such redemptions related to the year
ended August 31, 1999, to be distributed in fiscal year 2000, are expected to be
approximately $25.7 million and are classified as a current liability on the
August 31, 1999 balance sheet.
During the year ended May 31, 1997, the Company offered securities in the
form of Equity Participation Units (EPUs)in its Wheat Milling and Oilseed
Processing and Refining Defined Business Units. These EPUs give the holder the
right and obligation to deliver to the Company a stated number of bushels in
return for a prorata share of the undiluted grain based patronage earnings of
these respective DBUs. The offering resulted in the issuance of such equity with
a stated value of $13,870,000 and generated additional capital and cash of
$10,837,000, after issuance cost and conversion privileges. Conversion
privileges allowed a member to elect to use outstanding patrons' equities for
the payment of up to one-sixth the purchase price of the EPUs.
Holders of the EPUs will not be entitled to 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 defined business unit on the basis of wheat or soybeans
delivered pursuant to the Member Marketing Agreement. The Board of Directors'
goal is to distribute patronage refunds attributable to the EPUs in the form of
75% cash and 25% capital equity certificates, and to retire those capital equity
certificates 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 Defined Business Units and is subject to the discretion of the Board
of Directors. The redemption policy will also be subject to change at the
discretion of the Board of Directors.
EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS
The Company believes that inflation and foreign currency fluctuations have
not had a significant effect on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, a new standard related to the accounting for derivative transactions
and hedging activities. In July 1999, the FASB issued SFAS No. 137 which defers
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. While management does not believe this standard
will materially impact the financial position and results of operations of the
Company, it is currently evaluating the reporting requirements under this new
standard.
38
<PAGE>
YEAR 2000
In preparation for the year 2000, the Company has engaged an information
technology consulting firm specializing in year 2000 systems projects. The scope
of the program management effort at the Company includes internal mainframe,
midrange, and LAN based systems as well as facilities, package software vendors,
and interfaces with external vendors, processors and customers. Remediation and
upgrades of these systems have been completed for all mission critical systems.
Management believes that the total cost to the Company to review and correct its
own computer systems will be approximately $2.0 million, of which $1.8 million
has been expensed through August 31, 1999.
Based on its assessment, the Company's management believes that the Company
has in place an effective program to address the year 2000 issue in a timely
manner and that it is taking the steps reasonably necessary to resolve this
issue with respect to matters within its control. However, it also recognizes
that failure to sufficiently resolve all aspects of the year 2000 issue in a
timely fashion presents substantial risks for the Company. Furthermore, while
the Company has taken, and will continue to take, steps to determine the extent
of remediation efforts being undertaken by key customers and suppliers, there is
no guarantee that the systems of other companies on which this Company relies
will be remediated in a timely fashion to avoid having a material adverse effect
on the Company's results of operations or its financial position.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives combined
through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives
became the surviving corporation. In accordance with the Plan of Combination,
the Articles of Incorporation and By-Laws of Harvest States Cooperatives were
restated and the name of Harvest States Cooperatives was changed to Cenex
Harvest States Cooperatives (Cenex Harvest States or the Company).
Subsequent to the Combination, the Company changed its fiscal year to
August 31 and is filing this Report on Form 10-K representing the first fiscal
year of the Company based upon that date. The management discussion and analysis
of the Oilseed Processing and Refining Defined Business Unit which follows,
compares the first new fiscal year ended August 31, 1999 with the previous
fiscal year ended May 31, 1998, as well the year ended May 31, 1998 with the
year ended May 31, 1997. In addition, the three-month transition period ended
August 31, 1998 is compared with the unaudited three-month period ended August
31, 1997.
See the Management Discussion and Analysis for the Company in regard to new
accounting pronouncements and discussion of the Year 2000.
RESULTS OF OPERATIONS
Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of sales,
except processing margins.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31
----------------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross margin percentage ......... 5.49% 3.65% 7.58% 7.76% 7.33% 8.25%
Marketing, general and
administrative ................. 1.42% 1.27% 1.15% .98% 1.14% 1.29%
Interest ........................ 0.16% 0.25% 0.09% 0.07% 0.04% --
Processing margins
Crushing/bu .................... $ .18 $ .14 $ .57 $ .59 $ .60 $ .59
Refining/lb .................... $.0127 $.0099 $.0133 $.0173 $.0154 $.0149
</TABLE>
Because of the volatility of commodity prices, the Company believes that
processing margins are a better measure of the Defined Business Unit's
performance than gross margin percentages.
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<PAGE>
COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31,
1998
The Oilseed Processing and Refining Defined Business Unit's net income of
$13.2 million for the year ended August 31, 1999 represents a $12.7 million
decrease (49%) compared to the twelve-month period ended on May 31, 1998. This
decrease is primarily attributable to reduced gross margins for soymeal and
other processed soybean products. The average gross margin for such products
declined approximately $15.60 per ton during the twelve months ended August 31,
1999, compared to the gross margin per ton generated on those products during
the twelve months ended May 31, 1998.
Net sales of $358.0 million for the year ended August 31, 1999 decreased by
$52.3 million (13%) compared to the twelve months ended May 31, 1998. A
reduction in the sales price for processed soybean products, primarily soymeal,
of approximately $76.00 per ton and a decline of about $0.02 a pound for refined
oil, partially offset by an 11% increase in sales volume for processed soybean
products and a 7% increase in refined oil volume produced this change in sales
dollars.
Other revenues decreased approximately $1.7 million during the year ended
August 31, 1999 compared to the year ended May 31, 1998. For the year ended May
31, 1998, the Oilseed Processing and Refining Defined Business Unit received
approximately $0.7 million from an oilseed joint venture, and also recognized
net gains on the sale of property, plant and equipment totaling approximately
$0.7 million. During the twelve-month period ended August 31, 1999, the Oilseed
Processing and Refining Defined Business Unit recorded a net loss on the
disposal of property, plant and equipment of approximately $0.2 million, and did
not receive any joint venture income during the period.
Cost of goods sold of $338.4 million for the year ended August 31, 1999
decreased $40.9 million (11%) compared to the year ended May 31, 1998. Reduced
cost for soybeans averaging $1.94 per bushel and reduced cost for crude soybean
oil averaging $0.012 per pound during the year ended August 31, 1999, compared
to the year ended May 31, 1998, were partially offset by a 13% increase in crush
volume (4.1 million bushels) and a 7% increase in refining volume (71.5 million
pounds).
Marketing, general and administrative expenses of $5.1 million for the year
ended August 31, 1999 increased approximately $0.4 million (8%) compared to the
year ended May 31, 1998. Essentially all of this increase relates to wages and
employee benefits.
Interest expense for the year ended August 31, 1999 was $0.6 million,
compared with approximately $0.4 million for the year ended May 31, 1998. This
change is primarily attributable to capital expenditures made during and
subsequent to the 1998 period.
Income tax expense of $0.8 million and $1.8 million for the years ended
August 31, 1999 and May 31, 1998 respectively, resulted in effective tax rates
of 5.7% and 6.6%, respectively. The effective tax rate changes from period to
period based upon the portion of non-patronage business activity compared to
total business activity during each period.
COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997
The Oilseed Processing and Refining Defined Business Unit's net income of
$25.9 million for the year ended May 31, 1998 represents a $1.6 million decrease
(6%) compared to the same period in 1997. This decrease is primarily
attributable to reduced gross margins for soymeal and lower demand for refined
soy oil, which reduced the Defined Business Unit's sales volume for refined oil.
Net gains on the disposal of fixed assets of about $0.7 million partially offset
the decline in gross margins.
Net sales of $410.4 million for the year ended May 31, 1998 decreased by
$31.4 million (7%) compared to the same period in 1997. A reduced average sales
price for processed soybean products of $201.93 per ton in 1998 compared to
$241.59 per ton in 1997 was the primary contributor to the reduction in sales
dollars.
Other revenues of $1.7 million for the year ended May 31, 1998 compared to
1997, increased $3.4 million. During the year ended May 31, 1997 the Defined
Business Unit recognized a loss of $2.0 million on equipment to be replaced by
plant expansion and recognized a loss of $0.3 million on an investment. During
the year ended May 31, 1998, the Oilseed Processing and Refining Defined
Business Unit recognized gains on fixed asset disposals of approximately $0.7
million.
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Cost of goods sold for the year ended May 31, 1998 of $379.3 million
decreased $26.5 million (7%) compared to the year ended May 31, 1997. This
reduction in cost is primarily attributable to a decline in the average price of
soybeans during the year ended May 31, 1998, from $7.50 a bushel in 1997 to
$6.80 in 1998, and to a reduction in refined oil volume, from 968 million pounds
in 1997 to 953 million pounds in 1998.
Interest expense for the year ended May 31, 1998 was $0.4 million, compared
with $0.3 million a year ago.
Income tax expense of $1.8 million and $2.1 million for the years ended May
31, 1998 and 1997 respectively, results in effective tax rates of 6.6% and 7.1%,
respectively. The effective tax rate changes from period to period based upon
the portion of non-patronage business activity compared to total business
activity during each period.
COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH 1997
The Oilseed Processing and Refining Defined Business Unit's net income of
$2.7 million for the three months ended August 31, 1998 represents a $0.5
million decrease (15%) compared to the same period in 1997. This decrease is
primarily attributable to lower gross margins for refined oil. The average gross
margin per pound on refined oil generated by the Oilseed Processing and Refining
Defined Business Unit during the three months ended August 31,1998 declined 33%
compared to that margin for the same three-month period in 1997. The impact of
that reduction in profitability was partially offset by increased sales volume
of soymeal, at an average gross margin 40% higher per ton than that of a year
ago.
Net sales of $98.9 million for the three-month period ended August 31, 1998
increased by $12.6 million (15%) compared to the same period in 1997. During the
three months ended August 31, 1997, the crushing portion of the plant was
shutdown for 41 days to allow for the installation of new equipment. As a
result, soymeal and soyflour sales activity was reduced to approximately 110,000
tons during the 1997 three-month period, compared with almost 230,000 tons
during the 1998 three-month period. While increased processing volume increased
sales dollars, a significant decline of approximately $110 a ton in the sales
price partially offset the volume variance. Together, these factors increased
sales approximately $6.0 million. For the refined oil portion of the business,
volumes were approximately the same in each of the three-month periods, while an
increase in the per pound price of refined soybean oil increased sales
approximately $6.6 million.
Other revenues of $1.1 million during the three months ended August 31,
1998 decreased approximately $0.1 million (7%) compared to the same period in
1997. During the 1997 period, the Oilseed Processing and Refining Defined
Business Unit recognized gains on disposal of replaced equipment of
approximately $0.5 million. Also included in other revenues for both of the
three-month periods is income from an oilseed joint venture. Income from this
source during the 1998 period exceeded that recognized in the 1997 period by
approximately $0.3 million.
Cost of goods sold of $95.3 million for the three months ended August 31,
1998 increased $12.8 million (16%) compared to the same period ended in 1997.
This change is primarily attributable to the increase in soymeal volume
discussed above in the sales analysis, partially offset by a decline of
approximately $2 per bushel in cost of soybeans.
Marketing, general and administrative expenses of $1.3 million for the
three months ended August 31, 1998 were essentially unchanged from the same
period in 1997.
Interest expense for the three months ended August 31, 1998 was $0.3
million, compared with $0.01 million of a year ago. This increase is primarily
attributable to increased average inventory levels during the 1998 three-month
period. During the 1997 period, soybean and processed product inventories were
minimal during the shutdown period discussed above, as were receivables related
to the sale of processed soybean products.
Income tax expense of $0.5 million and $0.7 million for the three months
ended August 31, 1998 and 1997 respectively, resulted in effective tax rates of
16.3% and 17.6%, respectively. The effective tax rate
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changes from period to period based upon the portion of non-patronage business
activity compared to total business activity during each period.
LIQUIDITY AND CAPITAL RESOURCES
The Oilseed Processing and Refining Defined Business Unit'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 years ended August 31, 1999, May 31, 1998 and
May 31, 1997 provided net cash of $22.0 million, $27.2 million, and $23.6
million, respectively. For the year ended August 31, 1999, net income of $13.2
million, non-cash revenues and expenses of approximately $2.5 million, and
decreased working capital requirements of approximately $6.3 million provided
this net cash from operating activities. For the year ended May 31, 1998, net
income of $25.9 million and non-cash revenues and expenses of approximately $1.4
million were partially offset by increased working capital requirements of
approximately $0.1 million. For the year ended May 31, 1997, net income of $27.5
million and non-cash revenues and expenses of approximately $3.8 million were
partially offset by increased working capital requirements of approximately $7.7
million.
Operating activities for the three-month periods ended August 31, 1998 and
1997, respectively, provided net cash of $11.3 million and $21.2 million due to
net income of $2.7 million and $3.2 million respectively, non-cash revenues and
expenses of $0.6 million in 1998 and decreased working capital requirements of
approximately $8.0 million and $18.0 million, respectively.
CASH FLOWS USED FOR INVESTING ACTIVITIES
The Oilseed Processing and Refining Defined Business Unit used net cash of
approximately $6.0 million during the year ended August 31, 1999 for the
acquisition of property, plant and equipment. During the year ended May 31,
1998, the Oilseed Processing and Refining Defined Business Unit received cash of
approximately $10.7 million from the sale of soybean processing equipment and
entered into a leaseback transaction for that equipment. During that same
period, the Oilseed Processing and Refining Defined Business Unit expended
approximately $14.0 million for the purchase of property, plant and equipment.
For the year ended May 31, 1997, the Oilseed Processing and Refining Defined
Business Unit expended approximately $12.1 million for the purchase of property,
plant and equipment. For the year ended August 31, 2000, the Oilseed Processing
and Refining Defined Business Unit expects to spend approximately $14.7 million
for the acquisition of property, plant and equipment.
The Oilseed Processing and Refining Defined Business Unit used net cash of
approximately $1.2 million and $8.2 million during the three-month periods ended
August 31, 1998 and 1997, respectively, for the purchase of property, plant and
equipment. During the three-month period ended August 31, 1997, the Oilseed
Processing and Refining Defined Business Unit received cash of approximately
$10.3 million for the sale of soybean processing equipment, which was
subsequently leased back from the purchaser. This transaction, as well as the
capital expenditures for this three-month period of $8.2 million, are included
in the activity for the year ended May 31, 1998.
CASH FLOWS FROM FINANCING ACTIVITIES
The Defined Business Unit'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 Defined Business Unit 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 a Defined Business Unit 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.
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With respect to earnings for the year ended August 31, 1999, total income
from the Oilseed Processing and Refining Defined Business Unit will be withdrawn
by the Company from the Oilseed Processing and Refining Defined Business Unit
except to the extent that patronage dividends are not paid in cash and are
instead retained in the Oilseed Processing and Refining Defined Business Unit as
equity. Such dividends retained as equity from the Equity Participation Unit
share of earnings, which equals 30% of the total patronage refund to such
patron's share of earnings, totaled approximately $1.0 million and will be
matched with equity on behalf of the Company's open membership in proportion to
non-Equity Participation Unit bushels processed totaling approximately $2.6
million.
The Oilseed Processing and Refining Defined Business Unit had debt
outstanding to the Company of $9.5 million on August 31, 1999 compared with
$15.1 million on August 31, 1998. On May 31, 1998, the Oilseed Processing and
Refining Defined Business Unit had debt outstanding to the Company of $22.9
million. These interest-bearing balances reflect working capital and fixed asset
financing requirements at the end of the respective years.
WHEAT MILLING DEFINED BUSINESS UNIT
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), Cenex, Inc. (Cenex) and Harvest States Cooperatives combined
through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives
became the surviving corporation. In accordance with the Plan of Combination,
the Articles of Incorporation and By-Laws of Harvest States Cooperatives were
restated and the name of Harvest States Cooperatives was changed to Cenex
Harvest States Cooperatives (Cenex Harvest States or the Company).
Subsequent to the Combination, the Company changed its fiscal year to
August 31 and is filing this Report on Form 10-K representing the first fiscal
year of the Company based upon that date. The management discussion and analysis
of the Wheat Milling Defined Business Unit which follows, compares the first new
fiscal year ended August 31, 1999 with the previous fiscal year ended May 31,
1998, as well the year ended May 31, 1998 with the year ended May 31, 1997. In
addition, the three-month transition period ended August 31, 1998 is compared
with the unaudited three-month period ended August 31, 1997.
See the Management Discussion and Analysis for the Company in regard to new
accounting pronouncements and discussion of the Year 2000.
RESULTS OF OPERATIONS
Certain operating information pertaining to the Defined Business Unit is
set forth below, as a percentage of sales, except for margins per hundred weight
(Margins/cwt).
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross margin percentage ......... 2.08% 6.78% 7.63% 8.80% 6.94% 5.88%
Marketing, general and
administrative ................. 6.09% 4.41% 3.93% 3.39% 2.58% 3.20%
Interest ........................ 2.98% 1.80% 1.52% 2.63% 2.57% 1.90%
Margins/cwt ..................... $ .21 $ .85 $ 1.06 $ 1.27 $ 1.12 $ .81
</TABLE>
Because of the volatility of commodity prices, the Company believes that
margins per hundred weight (manufacturing margins) are a better measure of the
Defined Business Unit's performance than gross margin percentages.
COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31,
1998
The Wheat Milling Defined Business Unit incurred a net loss of $11.9
million for the year ended August 31, 1999 compared to net income of $5.7
million for the year ended May 31, 1998, for a decrease of $17.5 million.
Approximately $9.4 million of this decrease was created by a reduction in
production at the Huron mill, where the conversion of a semolina line to hard
wheat bakery flour reduced volume
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30% compared to the year ended May 31, 1998, with essentially the same fixed
costs applied against lower volumes. The Huron conversion was operational in
February 1999, and the Wheat Milling Defined Business Unit is currently
attempting to grow its share of the bakery flour market from this mill's
production. A general deterioration in gross margins of approximately $0.66 per
hundred weight for all products, along with increased marketing, general and
administrative and interest expenses of $4.6 million created most of the balance
of the decline in income.
Net sales of $174.1 million for the year ended August 31, 1999 decreased
approximately $31.1 million (15%) compared to the twelve-month period ended May
31, 1998. A reduction in the average sales price of $2.89 per hundred weight,
partially offset by a 3.1 million hundred weight volume increase produced this
decline in sales revenue. Increased volume at the Houston mill of 1.5 million
hundred weight, increased volume at the Rush City mill of 0.7 million hundred
weight, and additional production of 2.9 million hundred weight at the Mount
Pocono mill which commenced operations during the current fiscal year offset a
significant decline in volume of 1.7 million hundred weight at the Huron mill.
Cost of goods sold of $170.5 million for the year ended August 31, 1999,
decreased $19.1 million (10%) compared to the year ended May 31, 1998. This
decrease was created primarily by a $1.45 per bushel decline in the cost of raw
material during the year ended August 31, 1999, compared to the year ended May
31, 1998. This price variance was partially offset by an increase in volume of
approximately 5.0 million bushels, and by a $5.8 million increase in plant
expense, primarily attributable to the Mt. Pocono mill which commenced
operations in January 1999, the Houston mill which was operating in a startup
phase during much of the 1998 period and Rush City, where 1999 volume exceeded
1998 volume by 29%.
Marketing, general and administrative expenses were $10.6 million for the
year ended August 31, 1999, and increased approximately $2.5 million (31%)
compared to the year ended May 31, 1998. Approximately $1.5 million of this
increase is attributable to a provision for uncollectable accounts receivable.
The balance of this increase is primarily attributable to expenses incurred at
the Mount Pocono mill, which commenced operations during the current fiscal
year.
Interest expense of $5.2 million for the year ended August 31, 1999
increased $2.1 million (66%) compared to the year ended May 31, 1998. During the
year ended May 31, 1998, the Wheat Milling Defined Business Unit received credit
for cooperative bank patronage refunds received by the Company attributable to
the Wheat Milling Defined Business unit's borrowings totaling approximately $0.7
million. The comparable amount received during the year ended August 31, 1999
was less than $0.1 million. On June 1, 1997 the Company contributed $38.8
million of additional capital to the Wheat Milling Defined Business Unit for the
purpose of constructing the Mount Pocono mill. Throughout the construction phase
of this project, the unexpended balance of this cash contribution reduced
borrowing requirements to finance inventories and receivables, and consequently,
reduced interest expense. As cash has been expended for Mount Pocono
construction, additional borrowings have been required to finance working
capital. The balance of the increase in interest expense during the year ended
August 31, 1999 compared to the year ended May 31, 1998 is primarily
attributable to this activity.
Other expenses of $0.8 million and $0.2 million for the years ended August
31, 1999 and May 31, 1998, respectively, primarily represent the recognition of
losses on certain equipment, either disposed of or obsolete for the Wheat
Milling Defined Business Unit's purposes and therefore available for sale.
An income tax benefit of $1.2 million for the year ended August 31, 1999 is
based upon an effective tax rate of 8.7% applied to the pretax loss of $13.0
million. For the year ended May 31, 1998, income tax expense of $0.5 million
resulted in an effective tax rate of 7.7%. The effective tax rate changes from
period to period based upon the portion of non-patronage business activity
compared to total business activity during each period.
COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997
The Wheat Milling Defined Business Unit's net income of $5.7 million for
the year ended May 31, 1998 increased $2.4 million (75%) compared to the same
period in 1997. For the year ended May 31, 1997, the Defined Business Unit
recognized a $2.0 million loss on the impairment of fixed asset value at its
Rush City, Minnesota mill which represents the primary difference in net income
between the two fiscal years.
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Net sales for the year ended May 31, 1998 of $205.3 million increased $6.2
million (3%) compared to the same period ended in 1997. Increased sales volumes
during the year ended May 31, 1998 contributed $19.4 million to sales, while
lower average sales prices during this same period reduced sales revenue by
approximately $13.2 million. The increased sales volume was generated through
expanded Kenosha operations and the commencement of operations at the Houston,
Texas mill during fiscal 1998 partially offset by reduced production at the Rush
City, Minnesota mill.
The Wheat Milling Defined Business Unit recognized other income during the
year ended May 31, 1998 of $1.8 million. Of this amount $1.5 million represents
warranty proceeds for milling equipment. Interest income of approximately $0.4
million was generated during the year ended May 31, 1998 on the Wheat Milling
Defined Business Unit's working capital account with the Company. This interest
income is primarily the result of additional capital of $38.8 million
contributed by the Company on June 1, 1997 for the purpose of constructing the
mill at Mt. Pocono, Pennsylvania. Construction at Mt. Pocono commenced in early
September 1997, and as disbursements have made for that purpose, interest-
generating funds have been depleted.
Cost of goods sold of $189.6 million for the year ended May 31, 1998,
increased $8.0 million (4%) compared to the same period ended in 1997. The raw
material component of cost of goods sold increased approximately $5.7 million in
1998. The Wheat Milling Defined Business Unit milled approximately 31.4 million
bushels during the year ended May 31, 1998, an increase of approximately 3.2
million bushels over the prior year. The cost of this additional volume was
partially offset by a decline of $0.42 a bushel in the average cost of raw
material. The mill expense component of cost of goods sold increased
approximately $2.3 million during the year ended May 31, 1998 compared to the
prior year. This increase is primarily attributable to the commencement of
operations in June at the mill in Houston, Texas, partially offset by reduced
variable costs at the Rush City, Minnesota mill. As a start-up operation during
fiscal 1998, the Houston mill ran at approximately 50% of capacity, which
generated inadequate revenue to cover costs for that location. The Rush City
mill, which was closed throughout the month of June and early July of calendar
year 1997, operated at approximately two-thirds of its 1997 fiscal year
production level.
Marketing, general and administrative expenses were $8.1 million during the
year ended May 31, 1998, an increase of $1.3 million (20%) from 1997. This
increase is primarily attributable to additional staffing and system expansion
costs related to the Houston mill and in anticipation of future volumes from the
Mt. Pocono mill.
The Wheat Milling Defined Business Unit incurred interest expense of $3.1
million and $5.2 million during the years ended May 31, 1998 and 1997,
respectively. This decrease of approximately $2.1 million (40%) during the 1998
twelve-month period is primarily the result of the additional capital
contributed by the Company on June 1, 1997, which decreased short-term
borrowing.
Other expenses were $0.2 million and $2.0 million for the years ended May
31, 1998 and 1997, respectively. During the 1998 year, the Wheat Milling Defined
Business Unit recognized a loss on certain equipment and during 1997, the
Company assessed the carrying value of the Rush City mill relative to expected
cash flows and recognized a loss due to impairment.
Income tax expenses of $0.5 million and $0.3 million for the years ended
May 31, 1998 and 1997, respectively, resulted in effective tax rates of 7.7% and
8.5%. The effective tax rate changes from period to period based upon the
percentage of non-patronage business activity to total business activity.
COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH 1997
The Wheat Milling Defined Business Unit's net income of $0.2 million for
the three-month period ended August 31, 1998 decreased $1.0 million (81%)
compared to the same period in 1997. Commencing in June 1998 and continuing
throughout the period, the Defined Business Unit began conversion of a semolina
line at the Huron mill to hard wheat bakery flour. This disruption of production
resulted in a 35% decline in volume, compared to the same period in 1997. While
fixed costs at the facility remained relatively constant with the prior period,
revenues net of raw material costs declined significantly. This situation caused
operating earnings to decline approximately $1.4 million. This decline in profit
contribution from the Huron mill was partially offset by increased volume from
the other mills.
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Net sales for the three months ended August 31, 1998 of $46.9 million
increased $2.5 million (6%) compared to the same period in 1997. Increased sales
volume for all products of approximately 600,000 hundred weights, offset by a
$0.76 per hundred weight average reduction in sales price produced this increase
in sales dollars. The increased sales volume was primarily through the Houston
and Rush City mills, offset by a decline in production at the Huron mill. The
Houston mill was in its early startup phase during the 1997 three-month period,
while the Rush City mill was not operating in June and early July of 1997 due to
a shortage of business. The Huron mill operated at approximately 65% of its
normal volume during the three months ended August 31, 1998, as one of the
semolina milling lines at that facility was in the process of being converted to
hard wheat bakery flour milling capacity.
Cost of goods sold of $43.7 million for the three months ended August 31,
1998, increased $3.2 million (8%) compared to the same period in 1997. The raw
material component of cost of goods sold increased $3.0 million for the 1998
period compared with 1997. Increased volume contributed $5.4 million to this
increase, partially offset by $2.4 million in lower per bushel costs. Mill
expenses were essentially the same between the two periods.
Marketing, general and administrative expenses were $2.1 million during the
three months ended August 31, 1998, an increase of $0.4 million (26%) compared
to 1997. This increase was primarily attributable to additional staffing and
system expansion costs related to the Houston mill and in anticipation of future
volumes from the Mt. Pocono mill.
During the three months ended August 31, 1998, the Wheat Milling Defined
Business Unit incurred interest expense of $0.8 million. During the same period
of 1997, the Wheat Milling Defined Business Unit generated interest income of
approximately $0.3 million on its working capital account with the Company,
which is attributable to the capital contribution of $38.8 million made by the
Company on June 1, 1997 for the purpose of constructing the Mt. Pocono,
Pennsylvania mill. During the three months ended August 31, 1997, the Wheat
Milling Defined Business Unit incurred interest expense on its long-term debt of
$1.1 million, for a net interest expense during the period of approximately $0.8
million. While the working capital credit balance which generated the prior
year's interest income was depleted as construction costs for Mt. Pocono mill
were paid, resulting interest costs have been capitalized as part of the new
mill fixed asset. Consequently, net interest expense for the two periods was
essentially unchanged.
LIQUIDITY AND CAPITAL RESOURCES
The Defined Business Unit's cash requirements result from capital
improvements and from a need to finance additional inventories and receivables
based on increased raw material cost and levels.
The Company's Board of Directors has authorized the purchase of land near
Orlando, Florida as the site for a new mill. The Board has authorized
expenditures up to $1.8 million for the cost of the land and an access road. The
land was purchased during the second quarter of the current fiscal year at a
cost of approximately $1.2 million. Plans for this mill are subject to due
diligence, routine regulatory review and cost verification. Anticipated costs
for this mill are approximately $35.0 million and may be financed with debt,
open member equity, additional equity participation units, or a combination of
these financing alternatives. No determination has been made at this time as to
when construction will commence.
CASH FLOWS FROM OPERATIONS
Operating activities for the years ended August 31, 1999, May 31, 1998 and
May 31, 1997 provided net cash of approximately $2.9 million, $1.5 million and
$19.6 million, respectively. For the year ended August 31, 1999, the net loss of
$11.9 million was offset by non-cash expenses of approximately $6.7 million and
decreased working capital requirements of approximately $8.1 million. For the
year ended May 31, 1998, net income of $5.7 million and non-cash expenses of
approximately $4.9 million were partially offset by increased working capital
requirements of approximately $9.1 million. For the year ended May 31, 1997, net
income of $3.2 million, non-cash expenses of $6.1 million decreased working
capital requirements of approximately $10.3 million provided net cash from
operating activities of $19.6 million.
Operating activities for the three months ended August 31, 1998 and 1997,
respectively, used net cash of $0.9 million and $1.3 million. For the
three-month period ended in 1998, net income of $0.3
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<PAGE>
million and non-cash expenses of $1.3 million were offset by increased working
capital requirements of approximately $2.5 million. For the same period ended in
1997, net income of $1.3 million and non cash expenses of $1.2 million were
offset by increased working capital requirements of approximately $3.8 million.
CASH FLOWS USED FOR INVESTING ACTIVITIES
Cash flows expended for the acquisition of property, plant, and equipment
during the years ended August 31, 1999, May 31, 1998 and May 31, 1997, totaled
approximately $18.7 million, $20.3 million and $15.0 million, respectively. For
the year ended August 31, 2000 the Wheat Milling Defined Business Unit expects
to spend approximately $3.4 for the acquisition of property, plant and
equipment.
During the three-month periods ended August 31, 1998 and 1997, the Wheat
Milling Defined Business Unit expended approximately $12.8 million and $2.3
million, respectively, for the acquisition of property, plant and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES
The Wheat Milling Defined Business Unit'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 Defined
Business Unit 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 a Defined Business Unit 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 the
availability of funds.
The Wheat Milling Defined Business Unit had short-term debt outstanding and
payable to the Company of $48.9 million on August 31, 1999, compared with $33.2
million on August 31, 1998. On May 31, 1998 the Wheat Milling Defined Business
Unit had short-term debt outstanding to the Company of $16.7 million. This
increase is primarily due to payments for Mount Pocono capital expenditures, for
which the Company had contributed $38.8 million of capital to this account on
June 1, 1997.
The Wheat Milling Defined Business Unit had long-term debt outstanding to
the Company of $38.5 million on August 31, 1999 compared with $48.5 million on
August 31, 1998. On May 31, 1998, the Wheat Milling Defined Business Unit had
long-term debt outstanding to the Company of $51.2 million. This debt, net of
subsequent repayments, was incurred for the acquisition, expansion and
construction of certain mills with the Wheat Milling Defined Business Unit.
With respect to the net operating loss of the current period, the Company's
Board of Directors has resolved that the portion of this loss attributable to
the Equity Participation Units be carried forward, as authorized in the
Company's By-Laws, against future earnings attributable to the Equity
Participation Units. The total loss carryforward attributed to the Equity
Participation Units is approximately $1.7 million.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as part of its trading activity, utilizes futures and option
contracts offered through regulated commodity exchanges to reduce risk. The
Company is exposed to risk of loss in the market value of inventories and fixed
or partially fixed purchase and sale contracts. So as to reduce that risk, the
Company generally takes opposite and offsetting positions using future contracts
or options.
Certain commodities cannot be hedged with future or option contracts
because such contracts are not offered for these commodities by regulated
commodity exchanges. Inventories and purchase contracts for those commodities
are hedged with forward sales contracts to the extent practical so as to arrive
at a net commodity position within the formal position limits set by the Company
and deemed prudent for each of those commodities. Commodities for which future
contracts and options are
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available are also typically hedged first in this manner, with futures and
options used to hedge within position limits that portion not covered by forward
contracts.
Unrealized gains and losses on futures contracts and options used to hedge
grain and oilseed inventories and fixed priced contracts are recognized for
financial reporting, and the inventories and fixed priced contracts are marked
to market so that gains or losses on the derivative contracts are offset by
gains or losses on inventories and fixed priced contracts during the same
accounting period.
Unrealized gains and losses on futures contracts and options used to hedge
energy inventories and fixed priced contracts are deferred until such future
contracts and options are closed. The inventories hedged with these derivatives
are valued at lower of cost or market. Open hedge positions and deferred gains
and losses for futures and option contracts were not significant as of August
31, 1999, and a change in market price producing additional gain or loss on
these derivative contracts would be offset partially or entirely with an
offsetting gain or loss on inventories and fixed priced contracts.
The Company manages interest expense using a mix of fixed and floating rate
debt. These debt instruments are carried at amounts approximating estimated fair
value. Short term debt used to finance inventories and receivables is
represented by notes payable within thirty days or less so that the blended
interest rate to the Company for all such notes approximates current market
rates. Long-term debt used to finance non-current assets carries various fixed
interest rates and is payable at various dates so as to minimize the effect of
market interest rate changes. The effective interest rate to the Company on
fixed rate debt outstanding on August 31, 1999 was approximately 7.3%; a 10%
adverse change in market rates would not materially effect the Company's results
of operations, financial position or liquidity.
The Company conducts essentially all of its business in U.S. dollars and
has no mark to market risk regarding foreign currency fluctuations on August 31,
1999. Foreign currency fluctuations do, however, impact the ability of foreign
buyers to purchase U.S. agricultural products and the competitiveness of U.S.
agricultural products compared to the same products offered by alternative
sources of world supply.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in 14(a)(1) follow the signatures.
Registrant is not required to provide the supplementary financial information
required by Item 302. Financial statement schedules are omitted because they are
not applicable or the required information is shown in the financial statements
or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The table below lists the directors of the Company as of August 31, 1999.
These were the initial directors of Cenex Harvest States Cooperatives and
consisted of the 14 incumbent directors of Harvest States Cooperatives and the
13 incumbent directors of Cenex, Inc. as of May 31, 1998.
DIRECTOR
NAME AND ADDRESS AGE DISTRICT SINCE
---------------- --- -------- -----
Bruce Anderson 47 3 1995
13500 42nd St NE
Glenburn, ND 58740-9564
Robert Bass 45 5 1994
S 2276 Highway K
Reedsburg WI 53959
Steven Burnet 59 6 1983
94699 Monkland Lane
Moro, OR 97039-9705
Steve Carney 48 2 1988
P.O. Box 1122
Scobey, MT 59263-1122
Curt Eischens 47 1 1990
RR 1 Box 59
Minneota, MN 56264
Robert Elliott 49 8 1996
324 Hillcrest
Alliance NE 69301
Edward Ellison 64 1 1978
401 Hamburg Ave.,
P.O. Box 8
Herman, MN 56248-0008
Sheldon Haaland 61 1 1984
RR 2, Box 55
Hanley Falls, MN 56245-9731
Fred Harris 65 6 1991
1004 Powell Street
Grandview WA 98930
Jerry Hasnedl 53 1 1995
RR 1, Box 39
St. Hilaire, MN 56754
Edward Hereford 60 6 1983
1902 Cashup Flat Road
Thornton, WA 99176-9710
Douglas Johnson 56 2 1989
HC 89, Box 5240
Sidney MT 59270
James Kile 51 6 1992
508 W Bell Lane
St John WA 99171
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DIRECTOR
NAME AND ADDRESS AGE DISTRICT SINCE
---------------- --- -------- -----
Gerald Kuster 64 3 1979
780 First Ave. N.E.
Reynolds, ND 58275-9742
Leonard Larsen 63 3 1993
5128-11th Ave. N.
Granville, ND 58741-9595
Tyrone Moos 63 4 1991
HCR 1, Box 1
Philip, SD 57567-9601
Gaylord Olson 66 3 1985
RR 1
Buxton ND 58218
Duane Risan 63 3 1989
7452-37th Street N.W.
Parshall, ND 58770-9403
Denis Schilmoeller 64 7 1992
4758 450th Street
Granville IA 51022
Duane Stenzel 53 1 1993
RR 2, Box 173
Wells, MN 56097
Michael Toelle 37 1 1992
RR 1 Box 190
Browns Valley MN 56219
Richard Traphagen 54 4 1983
39555 124th Street
Columbia SD 57433
Russell Twedt 50 2 1993
P.O. Box 296
Rudyard, MT 59540-0296
Merlin Van Walleghen 63 4 1993
24106-408th Avenue
Letcher, SD 57359-6021
Elroy Webster 66 1 1982
Route 2 Box 123
Nicollet MN 56074
Arnold Weisenbeck 64 5 1976
6602 Highway 25
Durand WI 54736
William Zarak, Jr. 64 3 1983
3711 124th Ave. S.W.
South Heart, ND 58655-9767
BRUCE ANDERSON was elected to the board in 1995. He has held positions with
North Dakota Farmers Union, Farmers Union Mutual Insurance Co. and has served a
four-year term in the North Dakota House of Representatives. He is a member of
the North Dakota Agricultural Products Utilization Commission. Bruce and his
wife Pam raise small grains on their farm near Glenburn, North Dakota.
ROBERT BASS, elected to the board in 1994, operates a 500-acre dairy and
feed grain farm with his brother near Reedsburg, Wisconsin. Bob currently serves
as president of the board of Co-op Country Partners in Baraboo, Wisconsin, an
affiliate with 1998-99 sales of $43 million. He holds a B.S. degree from the
University of Wisconsin in agricultural education and is a former vo-ag teacher.
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STEVEN BURNET has been a board member since 1983 and has served as past
Chairman of Harvest States Cooperatives. He is a member of the Oregon Wheat
Growers League and the Oregon Cattlemen's Association. Steve is a past president
of Mid-Columbia Grain Growers and past vice president of North Pacific Grain
Growers. He serves as a director on the Agricultural Co-op Council of Oregon and
is a former board member of the Oregon State University Alumni Association.
Steve and his wife, Patty, grow dryland wheat and barley, and support a cow/calf
and yearling operation with irrigated hay and pasture.
STEVE CARNEY has been a board member since 1988. He is a patron of Farmers
Elevator Company at Scobey and Peerless, Montana, a division of Cenex Harvest
States, PRO Co-op at Peerless, Grain Growers Oil Company in Scobey and Prairie
States Terminal at Zahl, North Dakota. Steve is a member of Montana Grain
Growers Association; Montana Stock Growers Association; Montana Farmers Union;
PRO Co-op at Peerless and Grain Growers Oil Co. in Scobey, Montana. He raises
spring wheat and durum with his wife, Diana, and his brother Jack.
CURT EISCHENS was elected to the board in 1990. He has been a director for
Farmers Co-op Association in Canby for nine years, eight as chairman. He is
director of the Minnesota Association of Cooperatives, and a member of the
Minnesota Soybean Association and Minnesota Farmers Union. Curt and his wife,
Wendy, operate a corn and soybean farm near Canby, Minnesota.
ROBERT ELLIOTT, elected to the board in 1996, is the first director for the
region consisting of Nebraska, Kansas, Oklahoma, Colorado and Texas. He and his
wife, Jayne, operate a 5,000-acre farm near Alliance, Nebraska. Bob is president
of the Hemingford Scholarship Foundation. He is past president of the Nebraska
Wheat Growers Association and served on the boards of Western Cooperative
Alliance (Westco) and New Alliance Bean & Grain Company.
EDWARD ELLISON was elected to the board in 1978. He is a member of
Herman-Norcross Ag Center and Farmers Co-op Oil, Elbow Lake, and is also a past
director/chairman of Herman Market Co. Ed serves on the boards of the
Agricultural Utilization Research Institute (AURI), and Farmland Insurance. He
also is a former board member of Agricultural Cooperative Development
International (ACDI). Ed and his wife, Barbara, have three sons and a daughter.
With two of their sons, they raise soybeans, corn and wheat on their Grant
County farm.
SHELDON J. HAALAND was elected to the board in 1984. He is a member of
several cooperatives, including Minnesota Corn Processors in Marshall, Tri-Line
Co-op in Clarkfield, and Cenex Harvest States' Marshall Agri-Service Center. He
has previously served on the boards of Cottonwood Co-op Oil Co. and Western
Transport Co-op, and has been an advisory board member of the Southwest State
University Co-op Program. Sheldon, his wife, Margery, and family raise corn,
soybeans and wheat.
FRED HARRIS was elected to the board in 1991. He and his wife, Ruth,
operate a 36-acre apple and cherry orchard near Grandview, Washington. He
retired in 1991 as manager of Bleyhl Farm Service at Grandview after serving 27
years. Besides his involvement in cooperatives, he has been active in many
facets of civic, community and church life.
JERRY HASNEDL was elected to the board in 1995. He is a member and past
director of Northwest Grain, a Cenex Harvest States regionalization; a member of
Farmers Union Oil Co. in Thief River Falls; Garden Valley Telephone Co-op in
Erskine; Red Lake Electric Co-op in Red Lake Falls; Minnesota Wheat Growers; and
Minnesota Barley Growers. He is currently serving on the interim board for
Minnesota Marketplace. Jerry and his wife, Ruth, raise wheat, barley, corn,
soybeans, sunflowers and alfalfa on their northern Minnesota farm.
EDWARD HEREFORD has been a board member since 1983. Ed serves on the boards
of the Idaho Co-op Council and ACDI/VOCA. He is a patron of Whitman County
Growers, where he served as a director and board president; Colfax Grange
Supply; and Grange Supply in Pullman. He is a member of Thornton Grange, the
Washington Association of Wheat Growers, and the Washington Assn. of Peas and
Lentils Growers. Ed, his wife, Diane, and their two sons, produce wheat, barley,
peas and lentils on their dryland farm.
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DOUGLAS JOHNSON joined the board in 1989. Johnson served on the Montana
Farmers Union board for eight years. He spent 13 years on the board of Richland
Homes Nursing Home and currently serves as President of the board of Trinity
Lutheran Church. He and his wife, Pamela, and a son, farm 4,000 acres near
Sidney in northeastern Montana.
JAMES KILE, the first graduate of Young Producer Institute to join the
board, was elected in 1992. He served 18 years, 10 as chairman, on the board of
his local St. John Grange Supply, and represents Cenex Harvest States on the
Washington State Council of Farmer Cooperatives and is a member of Grange and
Washington Association of Wheat Growers. He and his wife, Barb, operate a
1,300-acre dryland wheat, barley and pea operation near St. John, Washington.
GERALD KUSTER was elected to the board in 1979 and became chairman in 1997.
Kuster's more than three decades of involvement in co-ops include serving as a
member and president of the board of Agri-City Cooperative Service in Grand
Forks, and vice president of the Burdick Center for Cooperatives, North Dakota
State University. He is a member of the Americus Township board and a deacon on
the Trinity Free Lutheran Church board. Gerald and his wife, Arla Mae, operate a
4,000-acre farm with their son, Loren.
LEONARD LARSEN has been a board member since 1993. He is a member of the
Farmers Union Oil Companies in Minot and Velva, Cenex Harvest States Sunprairie
Grain, and Dakota Growers Pasta Company. Starting as a board member of the
Simcoe Elevator in 1970, Leonard served through the unification with the Minot
Farmers Union Elevator, where he was a board member for 11 years and chairman
for six. He has served on the Hendrickson Township board, the First Lutheran
Church council, and the Granville Economic Development Corporation. He is a
member of the North Dakota Farmers Union and a 34-year member of the American
Legion. Leonard, his wife, Marlene, and a son, farm a grain, sunflower, canola
and flax operation.
TYRONE MOOS has been a board member since 1991. He is a member of South
Dakota Farmers Union, South Dakota Farm Bureau, and First Lutheran Church. He is
a past chairman of the local co-op elevator board, a former FmHA County
committee member and a former member of the Philip School Board. Tyrone and his
wife, Elvera, along with their son and two daughters, operate a combination farm
and ranch partnership. They raise winter wheat, millet and corn, also managing
cow/calf and hog finishing operations.
GAYLORD OLSON became a member of the board in 1985. He has served on the
local Farmers Union Oil and Elevator Company boards at Buxton, North Dakota, for
over 30 years. Prior to 1985, he had served as vice president of North Dakota
Farmers Union and North Dakota Farmers Union Mutual Insurance Company and North
Dakota Farmers Union Service Association. With two of their five children,
Gaylord and his wife, Gayle, operate a 1,500-acre, third-generation, centennial
farm near Buxton.
DUANE RISAN has been a member of board since 1989 and currently serves as
chairman of the Wheat Milling Defined Member Board. A former educator, he has a
degree in mathematics and education from Jamestown College. He is a member of
Dakota Growers Pasta Co. and a patron of Dakota Quality Grain Co-op. Duane
raises durum, spring wheat and barley with his wife, Joyce, and a son.
DENIS SCHILMOELLER was elected to the board in 1992 as Iowa's first
director. He has served on the board of Farmers Cooperatives of Paullina and
Granville, Iowa, since 1985, with five of those years as chairman of the board.
He represents the regional with the Iowa Institute for Cooperatives and has
served as a director of Remsen Mutual Insurance Association since 1978. He with
his wife, RoseMary, and a son operate a corn, soybean and livestock farm near
Granville in northwest Iowa.
DUANE STENZEL was elected to the board in 1993 and currently serves as
chairman of the Oilseed Processing & Refining defined member board. He is a
member of Watonwan Farm Service; Wells Farmers Elevator, where he served as
board president and secretary. He raises 665 acres of soybeans, sweet corn and
corn on his farm in south central Minnesota, acreage that also includes land
homesteaded by his great-grandfather more than 100 years ago.
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MICHAEL TOELLE was elected to the board in 1992. He has been serving on the
board of Country Partners Cooperative of Browns Valley for 11 years and as
chairman for the past 7 years. He also is actively involved in National FFA
Organization, Ag Council of America, Minnesota Wheat Growers, Minnesota Corn
Growers and Minnesota Soybean Growers associations. He currently serves as
chairman of the Finance & Investment Committee for the Cenex Harvest States
Foundation. He and his wife, Sue, operate a grain, hog and beef farm with his
brother and parents near Browns Valley.
RICHARD TRAPHAGEN was elected to the board in 1983 and currently serves as
the second vice chairman of the Cenex Harvest States board. He is past chairman
of the board of Centrol, Inc., of South Dakota and of the board of the Farmers
Union Cooperative Association of Brown County in Columbia, South Dakota. He has
served on a number of other boards. Richard and his wife, Cindy, operate a
1,600-acre corn, soybean and wheat farm.
RUSSELL TWEDT has been a board member since 1993. Russ is a member of
Farmers Union Oil Co. of Great Falls and Farmers Union Oil Co. of Rudyard, where
he served as chairman. He is a member of the Co-op Curriculum Executive
Committee for Montana State University and a member of other industry and
community organizations. He is former chair of the local Water Users Association
and a former ASCS County committeeman. Russ is a third-generation Hill County
farmer and rancher. Russ, his wife, Diana, and family raise winter wheat, spring
wheat, barley, oats and hay, and have a cow/calf operation.
MERLIN VAN WALLEGHEN has been a board member since 1993. He is a former
director of Farmers Co-op Elevator Association of Mitchell, Letcher and
Alexandria, serving as board president for 10 years. Merlin also served nine
years on the South Dakota Association of Cooperatives board of directors, seven
as president. A former FmHA committee member, he is currently chairman of the
Sanborn County Development board and also a member of Heartland Consumer Power
District board. Merlin and his wife, Patricia, and a son, operate a grain farm
producing corn and soybeans.
ELROY WEBSTER was elected to the board in 1982 and became its chairman in
1988. His leadership record includes service as a director for the Minnesota
Association of Cooperatives, Western Co-op Transport Association and Agland
Cooperative. Webster is past chairman of the Agricultural Council of America and
is chairman of the Board of Trustees for the Cenex Harvest States Foundation. He
also works with Southwest State University as an advisor for its Cooperative
Studies program. Webster is an active farmer with a corn and soybean operation
near Nicollet, Minnesota.
ARNOLD WEISENBECK was elected to the board in 1976. He recently retired
from his board position for the Durand Cooperatives where he had served for 20
years, 13 as chairman. He serves as stockholder representative on the board of
Universal Cooperatives, Minneapolis, Minnesota. Arnie and his wife, Edie, and
their two sons, operate a 2,000-acre farm near Durand, Wisconsin, which has been
in the family since the late 1800's.
WILLIAM ZARAK, JR. has been a member of the board since 1983. Bill is a
member of Dakota Growers Pasta Co. and Southwest Grain Cooperative, a Cenex
Harvest States regionalization. He owns and operates a 2,000-acre family farm
with his wife, Darlene, and two of their sons. On this southwestern North
Dakota acreage, they raise small grains, corn, beef cows and hogs, and also
backgrounds calves.
At the December 1999 annual meeting, the Board will decrease from 27 to 17,
consisting of five directors from Region 1 (comprised of the state of
Minnesota), one director from Region 2 (comprised of the states of Montana and
Wyoming), three directors from Region 3 (comprised of the state of North
Dakota), two directors from Region 4 (comprised of the state of South Dakota),
two directors from Region 5 (comprised of the states of Wisconsin, Michigan and
Illinois), two directors from Region 6 (comprised of the states of Alaska,
Arizona, California, Idaho, Oregon, Washington and Utah), one director from
Region 7 (comprised of the states of Iowa and Missouri) and one director from
Region 8 (comprised of the states of Colorado, Nebraska, Kansas, Oklahoma and
Texas. (In addition to the states referenced above, the Board of Directors has
temporarily assigned the states of Connecticut, Indiana, Kentucky and Ohio to
Region 5, the states of Alabama, Arkansas, Florida, Louisiana and Mississippi to
Region 7 and the state of New Mexico to Region 8.) Downsizing will be achieved
by early retirement. Ten directors have accepted an early retirement option that
will be effective December 1999. The plan
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developed by the Board for staggered terms designated terms for each director
based upon their last election date. The plan calls for the election in 1999 of
directors in each of the following Regions:
Region 1 (Minnesota) (two seats) Incumbent Curt Eischens
Incumbent Jerry Hasnedl
Region 2 (Montana, Wyoming) No Incumbent
Region 3 (North Dakota) Incumbent Bruce Anderson
Region 5 (Wisconsin, Michigan, Illinois) No Incumbent
Region 6 (Alaska, Arizona, California, Incumbent Steve Burnet
Idaho, Oregon, Washington, Utah)
Region 7 (Iowa, Missouri) Incumbent Denis Schilmoeller
All these elections will be for three-year terms and are open to any
eligible candidate. To be eligible, a candidate must meet the following
qualifications:
o At the time of the election, the individual must be less than the age
of 68.
o The individual must be a member of this cooperative or a member of a
Cooperative Association Member.
o The individual must reside in the Region from which he or she is to be
elected.
o The individual must be an active farmer or rancher. "Active farmer or
rancher" means an individual whose primary occupation is that of a
farmer or rancher.
o The definition of "farmer or rancher" shall not include anyone who is
a full-time employee of this cooperative, or of a Cooperative
Association Member.
o The individual must currently be serving or shall have served at least
one full term as a director of a Cooperative Association Member of
this cooperative.
EXECUTIVE OFFICERS
The table below lists the executive officers and other senior officers of
the Company as of August 31, 1999, 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>
Noel K. Estenson 60 Chief Executive Officer
John D. Johnson 51 President and General Manager
Michael H. Bergeland 55 Executive Vice President -- Grain & Agri Services
James D. Tibbetts 49 Executive Vice President -- Consumer Foods
Leon E. Westbrock 52 Executive Vice President -- Energy & Crop Inputs
Other senior officers:
Patrick Kluempke 51 Senior Vice President -- Corporate Planning
Tom Larson 51 Senior Vice President -- Public and Government Affairs
Maury Miller 54 Senior Vice President -- Financial/Member Services
Robert Oebser 59 Group Vice President -- Energy
Mark Palmquist 42 Senior Vice President -- Aligned Grain
John Schmitz 49 Senior Vice President and Chief Financial Officer
David Swenson 44 Senior Vice President -- Farm Marketing & Supply
Debra Thornton 48 Senior Vice President -- General Counsel and Administration
</TABLE>
NOEL K. ESTENSON. Noel Estenson, Chief Executive Officer of Cenex Harvest
States, started his career at Cenex in 1963. He was appointed President and CEO
in 1987. On June 1, 1998, Cenex, Inc. and Harvest States Cooperatives merged to
form Cenex Harvest States Cooperatives and Mr. Estenson was named Chief
Executive Officer of the Company. In addition, Mr. Estenson is currently
Chairman of the boards of CF Industries, Inc. and National Council of Farmer
Cooperatives, based in Washington, D.C. Mr. Estenson was raised on his family's
potato and grain farm in Northwestern Minnesota's Red River Valley. He
graduated from North Dakota State University with a degree in agricultural
economics.
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JOHN D. JOHNSON. John Johnson was born in Rhame, N.D., and grew up in
Spearfish, S.D. He earned a degree in business administration and a minor in
economics from Black Hills State University. In 1976, he joined Harvest States
Cooperatives as a feed consultant in the FTA Feeds Division, later becoming
regional sales manager, Director of Sales and Marketing and then General Manager
of GTA Feeds. In 1992, he was elected Group Vice President of Farm Marketing and
Supply for Harvest States Cooperatives and was selected President and CEO in
January 1995. Mr. Johnson became President and General Manager of Cenex Harvest
States upon its creation June 1, 1998. Mr. Johnson serves on Ventura Foods,
Sparta Foods and NCRA boards of directors.
MICHAEL H. BERGELAND. Michael Bergeland, Executive Vice President of Grain
and Agri-Services, is responsible for the Farm Marketing and Supply Division
and the Aligned Grain Division of Cenex Harvest States. Mr. Bergeland is a
native Minnesotan, and the son of a cooperative elevator manager. He attended
Moorhead State College before joining Harvest States Cooperatives in 1967. He
has held various positions in the Grain Marketing Division, which included
grain merchandising at the GTA marketing offices of Montevideo, MN; Great
Falls, MT; and Portland OR. He returned to the St. Paul office in 1978 as a
senior corn merchandiser. In 1982, Mr. Bergeland was named Director of Line
Elevator Operations, In May of 1987, he was named Senior Vice President and
Director of Country Services. In January 1995, he was appointed Group Vice
President of Grain and Agri Services.
JAMES D. TIBBETTS. James D. (Jim) Tibbetts, Executive Vice President --
Consumer Foods, manages the Company's current partnerships with Ventura Foods
and Sparta Foods. He also identifies further food processing and packaging
opportunities that help the Company deliver value to consumers. Mr. Tibbetts
joined Harvest States Cooperatives in November 1995. During the first year, he
managed the Holsum Foods Division. This food manufacturing operation was merged
with the food manufacturing operations of Mitsui of Japan to form Ventura
Foods, LLC., a major packager of agricultural-based vegetable oil products in
August, 1996. Prior to joining the Company, Mr. Tibbetts was a Senior Vice
President for Farm Credit Leasing in Minneapolis, Minnesota. Mr. Tibbetts is a
native of South Dakota and was raised on a Midwestern diversified farm. He
graduated from Northern State University in Aberdeen, S.D., with a degree in
Business Administration.
LEON E. WESTBROCK. Leon Westbrock is the Executive Vice President --
Energy and Crop Inputs for Cenex Harvest States. He joined the cooperative
system in 1976 in the Merchandising Department at Cenex. He then managed local
cooperatives in Michigan, North Dakota, Elbow Lake, MN and Alexandria MN. In
1998, he became co-president of Country Energy, LLC., an energy sales,
distribution and marketing alliance between Cenex Harvest States and Farmland
Industries. At the regional level, Mr. Westbrock has held numerous positions in
member services and petroleum. He serves as Chairman of Cooperative Refining,
LLC and as Vice Chairman of the Board of Directors of Universal Cooperatives.
He also serves on the Cenex/Land O'Lakes Agronomy Company Board and is the
Chairman of the National Cooperative Refinery Association Board. Mr. Westbrock
was born and raised on his family's 640-acre small grain and dairy farm near
Browns Valley, MN. Mr. Westbrock received a Bachelor's Degree from St. Cloud
State University and served a tour in the U.S. Army.
OTHER SENIOR OFFICERS:
PATRICK KLUEMPKE, Senior Vice President of Corporate Planning, was raised
on a family dairy farm in central Minnesota, and received a Bachelor of Science
degree in Finance and Accounting from St. Cloud University and the University of
Minnesota. Mr. Kluempke served in the United States Army in South Vietnam and
South Korea, as Aide to General J. Guthrie. He began his agribusiness career in
grain procurement and merchandising at General Mills and later with Louis
Dreyfus Corporation in export marketing. Mr. Kluempke joined the predecessor to
Cenex Harvest States when G.T.A. was being merged with North Pacific Grain
Growers, in 1983, to form Harvest States Cooperatives and has held various
positions in the commodity marketing division and at the corporate level. Mr.
Kluempke serves on the board of Ventura Foods, a joint venture company between
Cenex Harvest States and Mitsui & Company, Japan.
TOM LARSON is Sr. Vice President, Public and Government Affairs at Cenex
Harvest States. After growing up on a 480-acre crop and hog farm near Slayton,
Minnesota, he earned a Bachelor's degree in Agriculture Education from South
Dakota State University. After working as a vo-ag teacher, he took
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an agronomy sales position with Cenex and later managed the local cooperative at
Hoffman, Minnesota, for two years. Mr. Larson returned to the regional
cooperative in 1978 and held positions in marketing and planning. He moved to
Agronomy in 1987 and became director of Agronomy Services for Cenex/Land O'Lakes
Agronomy Company in 1988. He was later named Vice President of Agronomy Services
until 1996 when he became Vice President of Cenex Supply and Marketing which
included overseeing the operation of more than two dozen Cenex-owned
agricultural supply outlets. Mr. Larson was named to his current position --
Senior Vice President, Public and Governmental Affairs -- in January 1999. He
oversees the public affairs area of the Company, which includes communications,
corporate giving, meetings and travel and governmental affairs, including the
Washington, D.C. office. He is active in the FFA organization and is a recipient
of its Honorary American Degree. Mr. Larson and his wife, Denice, have two
children and reside in Circle Pines, Minnesota.
MAURY MILLER, Senior Vice President of Financial/Member Services, grew up
on a farm in Clarkfield, MN. He is a graduate of Gustavus Adolphus College and
also served as an officer in the U.S. Navy. Mr. Miller joined Cenex in 1971 and
in 1978 was named Vice President of Planning. Since 1987 he has been Vice
President of Member Services and Marketing Communications for the Cenex Land
O'Lakes joint venture. In 1999, he became Senior Vice President of Financial/
Member Services.
ROBERT OEBSER, Group Vice President, Energy, is responsible for the
Company's refinery at Laurel, Montana, as well as pipeline and terminal
operations and crude oil supply. He joined Cenex in 1985 as General Manager,
Refining and Crude Supply, and was promoted to his present position in September
1987. Mr. Oebser was chairman of the National Cooperative Refinery Association
Board of Directors at August 31, 1999. Prior to joining Cenex, Bob spent twenty
years in the petroleum industry. A native of Chicago, Mr. Oebser grew up in Iowa
and prior to three-years in the Air Force, he graduated from the University of
Iowa with a degree in Business Administration.
MARK PALMQUIST is the Senior Vice President of the Aligned Grain Division.
He is responsible for all areas of Grain Marketing including terminal
operations, exports, logistics, transportation, and grain marketing joint
ventures. He is also responsible for the operations of wheat milling and oilseed
processing. Mr. Palmquist has worked for Cenex Harvest States in the Grain
Marketing Division for 19 years. Starting as a grain buyer and moving into
merchandising, Mark has traded many different commodities including corn,
soybeans and spring wheat. In 1990, he assumed the role of Vice President and
director of Grain Marketing and then, in 1993, was promoted to Senior Vice
President. Mr. Palmquist attended Gustavus Adolphus College in St. Peter, MN,
graduating in 1979. He also attended the Master of Business Administration
program at the University of Minnesota.
JOHN SCHMITZ is the Senior Vice President and Chief Financial Officer of
the Company. Mr. Schmitz joined Harvest States Cooperatives in 1974 as Corporate
Accountant and has held a number of accounting and finance positions within the
Company, including divisional controller positions in Country Services, Farm
Marketing & Supply and Grain Marketing. In 1986, he was named Vice President and
controller of Harvest States, and had served in that position up to the time of
the merger with Cenex when he became Vice President, Finance, of Cenex Harvest
States. In May 1999, Mr. Schmitz became Senior Vice President and Chief
Financial Officer. Mr. Schmitz earned a Bachelor of Science Degree in Accounting
from St. Cloud State University, and is a member of the American Institute of
Certified Public Accountants, the Minnesota Society of CPA's and the National
Society of Accountants for Cooperatives.
DAVID R. SWENSON, Senior Vice President of the Farm Marketing & Supply
Division, is responsible for all aspects of the division including Agri Service
Centers, Regionalizations, Feed Operations, Farm Supply, Fin-Ag and all Cenex
Supply and Marketing locations. Mr. Swenson grew up on a cash grain farm near
Elbow Lake, MN. He graduated from the University of Minnesota with an
agriculture business administration degree and began his career with the St.
Paul Bank for Cooperatives. He then joined the Company in 1979 as the director
of Financial and Field Services. He has also had the following responsibilities:
Vice President, director of Line Operations 1986-1990, Senior Vice President,
director of Country and Ag Marketing Services 1991-1992, Senior Vice President,
Corporate Planning and Business Development 1992-1993, and Senior Vice
President, Country and Marketing Services 1993-1994. In 1995 Mr. Swenson was
appointed to Senior Vice President, Farm Marketing & Supply and is also an
active member on various boards in the Ag Industry.
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DEBRA THORNTON, Senior Vice President, General Counsel and Administration,
is responsible for the Company's legal, risk management, administration and
human resources operations. She was born in Sioux Falls, SD, but has spent most
of her life in the Twin Cities. She graduated from Mankato State College in 1973
with a Bachelor of Science Degree and worked as an insurance adjuster for a
couple of years before attending William Mitchell College of Law. While she
attended law school at night, Ms. Thornton worked as a law clerk for a
Minneapolis litigation firm, Hvass, Weisman & King. She graduated cum laude in
1979 with a Juris Doctorate degree. In 1979, Debra joined Harvest States as an
attorney and was named Vice President and Corporate Counsel in 1993. On June 1,
1998, following Harvest States Cooperatives merger with Cenex, Inc., Ms.
Thornton was named Senior Vice President and General Counsel of Cenex Harvest
States Cooperatives. On June 1, 1999, she was appointed to her current position
as Senior Vice President, General Counsel and Administration. Ms. Thornton is a
member of the Minnesota State Bar Association, the American Bar Association, the
American Corporate Counsel Association and the Legal, Tax and Accounting
Committee of the National Council of Farmer Cooperatives.
As of June 1, 1998, Noel Estenson, who was the President and Chief
Executive Officer of Cenex, became the Chief Executive Officer of Cenex Harvest
States to serve through no later than December 31, 2000. John D. Johnson, who
was the President and Chief Executive Officer of the Harvest States
Cooperatives, became the President and General Manager of Cenex Harvest States,
reporting to the Chief Executive Officer. Mr. Johnson will assume the position
of Chief Executive Officer of Cenex Harvest States upon Mr. Estenson's
retirement.
ITEM 11. 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 August 31, 1999, exceeded $100,000 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR ENDED SALARY(1) BONUS(1) COMPENSATION(2) COMPENSATION(3)
- -------------------------------- ------------ ----------- ---------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Noel K. Estenson 8/31/99 $543,333 $355,680 $20,000 $12,719
Chief Executive Officer 5/31/98 480,000 352,800 6,836 8,850
5/31/97 476,250 360,000 6,679 8,850
John D. Johnson 8/31/99 583,347 235,971 8,622 13,468
President and General Manager 5/31/98 550,000 350,000 6,699 11,600
5/31/97 500,000 150,000 7,172 7,186
Michael H. Bergeland 8/31/99 273,765 227,100 7,172 16,757
Executive Vice President -- 5/31/98 233,100 140,000 6,099 10,352
Grain and Agri-Services 5/31/97 224,000 120,000 7,048 7,890
James D. Tibbetts 8/31/99 257,500 55,200 3,665 10,226
Executive Vice President -- 5/31/98 180,000 108,000 2,489 5,266
Consumer Foods 5/31/97 160,000 80,000 5,699 2,882
Leon E. Westbrock 8/31/99 313,269 125,972 723 11,066
Executive Vice President -- 5/31/98 252,500 181,688 3,662 8,850
Energy and Crop Inputs 5/31/97 245,000 151,263 2,114 8,850
</TABLE>
- ------------------
(1) Amounts shown include amounts deferred at the employee's election under the
Company's Deferred Compensation Program and amounts waived in exchange for
share options.
(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.
57
<PAGE>
On June 1, 1999 the Company entered into an employment agreement with Noel
Estenson, the CEO. The employment agreement provides that Mr. Estenson will be
employed from June 1, 1999 through December 31, 2000. The agreement provides a
base salary of $520,000 per year with increases annually of not less than 4%. In
addition, Mr. Estenson would be entitled to receive annual variable and
long-term incentive compensation based on projected earnings in the long-range
business plan in effect on January 1, 1998. The agreement provides that if the
Company and Farmland Industries, Inc. complete the proposed consolidation prior
to December 31, 2000, and Mr. Estenson remains employed through December 31,
2000, he shall be entitled to an incentive payment of 2.99 times his average W-2
income for the five calendar years ending December 31, 1999. In the event that
he is terminated without cause or resigns for good reason as defined in the
agreement, he would receive severance pay based on the same formula; provided,
however, that in no event will Mr. Estenson be entitled to both severance pay
and a transaction incentive. The employment agreement also includes covenants by
Mr. Estenson not to compete with the Company for a period of two years after his
employment ends.
On June 16, 1999 the Company entered into an employment agreement with John
Johnson, the President and General Manager. The employment agreement provides
for a rolling three-year period of employment commencing on June 16, 1999 at an
initial base salary of at least $575,000, subject to annual review. Mr.
Johnson's employment may be terminated at any time by either party, subject to
the rights and obligations set forth in the employment agreement. The Company is
obligated to pay Mr. Johnson a severance allowance of 2.99 times his base salary
and target bonus 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
includes a provision to pay Mr. Johnson a transaction incentive in the amount of
his base salary plus target bonus for the calendar year 1999 if the Company and
Farmland Industries, Inc. complete the proposed consolidation prior to December
31, 2000 and Mr. Johnson has not by then resigned or been terminated for cause.
The employment agreement provides that if the consolidation with Farmland is
closed on or before December 31, 2000 and if Mr. Johnson is not offered the
position of CEO of the consolidated company on or before June 1, 2001 and he
thereafter resigns, he shall receive 1.99 times his base salary plus target
bonus. The agreement further provides that if the consolidation with Farmland is
not closed on or before December 31, 2000 and he is not offered the position of
CEO of Cenex Harvest States on or before December 31, 2000, he shall be entitled
to 2.99 times his base salary plus target bonus. The contract provides for a
gross-up for any possible excise tax. Mr. Johnson has also agreed to a
non-compete clause for one or two years, depending on the circumstances.
The Company has also entered into an employment agreement with Michael
Bergeland, an Executive Vice President dated May 1, 1999. This agreement is for
a term beginning on the effective date and continuing through August 31, 2001.
Base salary has been set at $300,000, subject to annual review, and the maximum
annual bonus under the variable pay plan. At expiration of the agreement, Mr.
Bergeland will be given five years credit on his non-qualified retirement plan.
Mr. Bergeland is also entitled to a transaction incentive of one times base pay
plus target bonus for 1999 if the consolidation with Farmland closes on or
before December 31, 2000. Mr. Bergeland has agreed to a three-year non-compete
clause.
Certain management employees are eligible to participate in a plan
providing an opportunity to receive a bonus based on Annual Compensation (base
and target bonus) if the unification of Cenex Harvest States and Farmland
Industries takes place prior to 12/31/00. The plan requires continued employment
through the date of unification. The plan also provides a severance arrangement
tied to Annual Compensation if employment is terminated under certain
circumstances, within two years after the unification.
THE FOLLOWING SUMMARIZES CERTAIN BENEFITS IN EFFECT AS OF 8/31/99 TO THE
NAMED EXECUTIVE OFFICERS.
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
August 31, 1999. The Incentive Program is based on Company, group or division
performance and individual performance. These amounts were paid after August 31,
1999. The target incentive is 50% of base compensation.
58
<PAGE>
RETIREMENT PLAN
Each of the Named Executive Officers is entitled to receive benefits under
the Company's 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, 1999, Pay Credits are earned according to the
following schedule:
PAY BELOW SOCIAL SECURITY PAY ABOVE SOCIAL SECURITY
YEARS OF BENEFIT SERVICE TAXABLE WAGE BASE TAXABLE WAGE BASE
- -------------------------- ------------------------- -------------------------
1 to 3 years ............. 3% 6%
4 to 7 years ............. 4% 8%
8 to 11 years ............ 5% 10%
12 to 15 years ........... 6% 12%
16 years and more ........ 7% 14%
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, 1998, the dollar value of the account of each of the
Named Executive Officers was:
Noel K. Estenson ............................................. $848,035
John D. Johnson .............................................. 215,310
Michael H. Bergeland ......................................... 453,294
Leon E. Westbrock ............................................ 276,457
James D. Tibbetts ............................................ 148,151
Mr. Estenson, Mr. Westbrock and Mr. Bergeland could be eligible for a
retirement benefit, under a grandfather provision of a prior provision of the
plan, or a predecessor plan, instead of the above amount. Such amount would be
affected by age at retirement and salary.
59
<PAGE>
DEFERRED COMPENSATION PLAN
Effective April 1, 1994, the Company established a 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.
In October 1997, the Company adopted a share option plan, which allows
executive officers to waive bonuses and up to 30 percent of salary in exchange
for options to purchase at a discount, shares of selected mutual funds. The
Company has filed a Form S-8, dated December 12, 1997 on this program. This plan
allows officers to buy investments at a specific price. Some options have
vesting schedules.
401(k) PLAN
Each Named Executive Officer is eligible to participate in the Cenex
Harvest States Savings Plan (the "401(k) Plan"). All benefit-eligible employees
of the Company are eligible to participate in the 401(k) Plan. Effective January
1, 1999 participants may contribute between 1% and 16% (not to exceed 6% 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 Company's
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
60
<PAGE>
eligible by the President of the Company to participate in such plan.
Compensation deferred under the Deferred Compensation Plan or waived under the
Share Option 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, 1998, the dollar value of the account of each of the
Named Executive Officers was approximately:
Noel K. Estenson .......................................... $3,962,808
John D. Johnson ........................................... 1,296,217
Michael H. Bergeland ...................................... 709,236
Leon E. Westbrock ......................................... 692,807
James D. Tibbetts ......................................... 70,887
DIRECTORS' COMPENSATION
The Board of Directors met monthly during the year ended August 31, 1999.
Through August 31, 1999 the Company provided its directors with compensation of
$42,000, paid in twelve monthly payments, with the two Co-Chairmen of the Board
receiving an additional annual compensation of $12,000, paid in twelve monthly
payments. The directors receive a per diem of $300 plus actual expenses and
travel allowance for each day spent on Company meetings (other than regular
Board meetings and the Annual Meeting), life insurance and health and dental
insurance. The directors have a retirement benefit of $125 per month per year of
service, with a maximum benefit of $1,875 per month, for life with a guarantee
of 120 months (paid to beneficiary in the event of death). This benefit
commences at age 60 or retirement, whichever is later. This retirement benefit
may be converted to a lump sum. The retired directors may also continue health
benefits until eligible for Medicare and thereafter pay at their own expense for
a Medicare supplemental policy.
The ten directors who volunteered to take the early retirement option
effective December, 1999 will receive $4,000 per month for 24 months, or the
equivalent lump sum using the GATT rate as the discount rate.
COMMITTEES OF THE BOARD OF DIRECTORS
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 salaries and incentive
compensation for the chief executive officer and for the president and general
manager using industry and compensation studies. The Board of Directors has a
standing committee to review the results and scope of the annual audit and other
services provided by the Company's independent auditors, and another standing
committee to review equity redemption policy and its application to situations
believed by the equity holder or patron's equity department to be unusual.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the Company's Board of Directors did not have a
Compensation Committee. The entire Board of Directors determined the
compensation of the Chief Executive Officer and the terms of the employment
agreement with the Chief Executive Officer. The Chief Executive Officer
determined the compensation for all other executive officers, other than the
president and himself.
61
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial ownership of equity securities as of August 31, 1999, is shown
below:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
TITLE OF CLASS NAME OF BENEFICIAL OWNER(1) OWNERSHIP % OF CLASS
- -------------- --------------------------------------- ------------- ----------
<S> <C> <C> <C>
Wheat Milling Equity
Participation Units: Directors:
Bruce Anderson ...................... --
Robert Bass ......................... --
Steven Burnet ....................... 30,000 units *
Steve Carney ........................ 27,000 units *
Curt Eischens ....................... --
Robert Elliott ...................... --
Edward Ellison ...................... 6,000 units *
Sheldon Haaland ..................... --
Fred Harris ......................... --
Jerry Hasnedl ....................... 10,000 units *
Edward Hereford ..................... --
Douglas Johnson ..................... --
James Kile .......................... --
Gerald Kuster ....................... 22,000 units *
Leonard Larsen ...................... 9,000 units *
Tyrone Moos ......................... 3,000 units *
Gaylord Olson ....................... --
Duane Risan ......................... 24,000 units *
Denis Schilmoeller .................. --
Duane Stenzel ....................... --
Michael Toelle ...................... --
Richard Traphagen ................... --
Russell Twedt ....................... 5,000 units *
Merlin Van Walleghen ................ --
Elroy Webster ....................... --
Arnold Weisenbeck ................... --
William Zarak, Jr. .................. 6,000 units *
Noel Estenson ....................... --
John D. Johnson ..................... --
Michael H. Bergeland ................ --
James Tibbetts ...................... --
Leon Westbrock ...................... --
Patrick Kluempke .................... --
Tom Larson .......................... --
Maury Miller ........................ --
Robert Oebser ....................... --
Mark Palmquist ...................... --
John Schmitz ........................ --
David Swenson ....................... --
Debra Thornton ...................... --
Directors and executive officers as a --------------- ----
group .............................. 142,000 units 3.07%
=============== ====
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
TITLE OF CLASS NAME OF BENEFICIAL OWNER(1) OWNERSHIP % OF CLASS
- -------------- --------------------------------------- ------------- ----------
<S> <C> <C> <C>
Oilseed Processing
and Refining Equity
Participation Units: Directors:
Bruce Anderson ...................... --
Robert Bass ......................... --
Steven Burnet ....................... --
Steve Carney ........................ --
Curt Eischens ....................... --
Robert Elliott ...................... --
Edward Ellison ...................... 12,000 units 1.15%
Sheldon Haaland ..................... 1,500 units *
Fred Harris ......................... --
Jerry Hasnedl ....................... 1,500 units *
Edward Hereford ..................... --
Douglas Johnson ..................... --
James Kile .......................... --
Gerald Kuster ....................... 5,000 units *
Leonard Larsen ...................... --
Tyrone Moos ......................... --
Gaylord Olson ....................... --
Duane Risan ......................... --
Denis Schilmoeller .................. --
Duane Stenzel ....................... 2,500 units *
Michael Toelle ...................... --
Richard Traphagen ................... --
Russell Twedt ....................... --
Merlin Van Walleghen ................ 6,000 units *
Elroy Webster ....................... --
Arnold Weisenbeck ................... --
William Zarak, Jr. .................. --
Noel Estenson ....................... --
John D. Johnson ..................... --
Michael H. Bergeland ................ --
James Tibbetts ...................... --
Leon Westbrock ...................... --
Patrick Kluempke .................... --
Tom Larson .......................... --
Maury Miller ........................ --
Robert Oebser ....................... --
Mark Palmquist ...................... --
John Schmitz ........................ --
David Swenson ....................... --
Debra Thornton ...................... --
Directors and executive officers as a --------------- ----
group .............................. 28,500 units 2.72%
=============== ====
</TABLE>
- ------------------
(1) Includes units held by spouse.
* Less than 1%.
No director listed above has the right or option to acquire beneficial
ownership in additional securities other than by purchase on the open market
from current holders of such securities. Executive officers, as non-producers,
are ineligible to hold these securities.
63
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 periods
indicated 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
NAME AUGUST 31, 1999
- ---- ---------------
William Zarak ........................................... $ 80,415
Steve Carney ............................................ 318,571
Jerry Hasnedl ........................................... 187,151
Merlin Van Walleghen .................................... 165,041
Edward Ellison .......................................... 631,790
Gerald Kuster ........................................... 101,986
Arnold Weisenbeck ....................................... 295,112
64
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS FILED ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and the Report of Independent
Accountants therein are filed as part of this Form 10-K.
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
I. CENEX HARVEST STATES COOPERATIVES
Consolidated Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ................ F-1
Consolidated Statements of Operations for the year ended August 31, 1999, the three months
ended August 31, 1998 and the years ended May 31, 1998 and 1997 ............................ F-2
Consolidated Statements of Equities and Comprehensive Income for the year ended
August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998
and 1997 ................................................................................... F-3
Consolidated Statements of Cash Flows for the year ended August 31, 1999, the three months
ended August 31, 1998 and the years ended May 31, 1998 and 1997 ............................ F-5
Notes to Consolidated Financial Statements .................................................. F-6
Report of Independent Accountants ........................................................... F-25
II. OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ............................. F-26
Statements of Operations for the year ended August 31, 1999, the three months ended
August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-27
Statements of Defined Business Unit Equity and Comprehensive Income (Loss) for the year
ended August 31, 1999, the three months ended August 31, 1998 and the years ended
May 31, 1998 and 1997 ...................................................................... F-28
Statements of Cash Flows for the year ended August 31, 1999, the three months ended
August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-29
Notes to Financial Statements ............................................................... F-30
Report of Independent Accountants ........................................................... F-37
Independent Auditors' Report ................................................................ F-38
III. WHEAT MILLING DEFINED BUSINESS UNIT
Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ............................. F-39
Statements of Operations for the year ended August 31, 1999, the three months ended
August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-40
Statements of Defined Business Unit Equity and Comprehensive Income (Loss) for the year
ended August 31, 1999, the three months ended August 31, 1998 and the years ended
May 31, 1998 and 1997 ...................................................................... F-41
Statements of Cash Flows for the year ended August 31, 1999, the three months ended
August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-42
Notes to Financial Statements ............................................................... F-43
Report of Independent Accountants ........................................................... F-50
Independent Auditors' Report ................................................................ F-51
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
None.
(a)(3) EXHIBITS
10.32 Benefit Plan dated June 9, 1999 incorporated by reference, exhibit
10.32 of registrant's 10-Q for the period ended May 31, 1999.
10.33 Tacoma Export Marketing Company Amended and Restated Partnership
Agreement between Cargill, Incorporated and Cenex Harvest States
Cooperatives dated as of July 12, 1999.
10.34 Cooperative Refining, LLC Limited Liability Company Agreement dated
September 1, 1999.
10.35 Transaction Agreement dated September 23, 1999 between Cenex Harvest
States and Farmland Industries, Inc.
10.36 Employment Agreement between Michael Bergeland and Cenex Harvest
States Cooperatives dated May 1, 1999.
65
<PAGE>
23.1 Consent of Independent Accountants.
23.2 Independent Auditors' Consent.
24.1 Power of Attorney.
99.1 Cautionary Statement.
99.2 Independent Auditor's Report.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedules for the three months ended
August 31, 1998 due to reclassifications made to conform to current
presentation, and for the years ended May 31, 1998 and 1997 due to the
merger of Harvest States Cooperatives and Cenex, Inc. accounted for as
a pooling of interests.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the fourth
quarter of the year ended August 31, 1999.
(c) EXHIBITS
The exhibits shown in Item 14(a)(3) above are being filed herewith.
(d) SCHEDULES
None.
SUPPLEMENTAL INFORMATION
As a cooperative, the Company does not utilize proxy statements.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
November 22, 1999.
CENEX HARVEST STATES COOPERATIVES
By: /s/ NOEL K. ESTENSON
-------------------------
Noel K. Estenson
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on November 22, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------------- --------------------------------------------------
<S> <C>
/s/ NOEL K. ESTENSON Chief Executive Officer
------------------------------------- (principal executive officer)
Noel K. Estenson
/s/ JOHN SCHMITZ Senior Vice President and Chief Financial Officer
------------------------------------- (principal financial officer)
John Schmitz
/s/ JODELL HELLER Vice President and Controller
------------------------------------- (principal accounting officer)
Jodell Heller
Gerald Kuster* Co-Chairman of the Board of Directors
Elroy Webster* Co-Chairman of the Board of Directors
Bruce Anderson* Director
Robert Bass* Director
Steven Burnet* Director
Steve Carney* Director
Curt Eischens* Director
Robert Elliott* Director
Edward Ellison* Director
Sheldon Haaland* Director
Fred Harris* Director
Jerry C. Hasnedl* Director
Edward Hereford* Director
Douglas Johnson* Director
James Kile* Director
Leonard D. Larsen* Director
Tyrone A. Moos* Director
Gaylord Olson* Director
Duane G. Risan* Director
Denis Schilmoeller* Director
Duane Stenzel* Director
Michael Toelle* Director
Richard Traphagen* Director
Russell Twedt* Director
Merlin Van Walleghen* Director
Arnold Weisenbeck* Director
William J. Zarak, Jr.* Director
* By: /s/ NOEL K. ESTENSON
--------------------
Noel K. Estenson
ATTORNEY-IN-FACT
</TABLE>
67
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
CENEX HARVEST STATE COOPERATIVES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
-------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 75,667 $ 120,008 $ 68,798
Receivables ................................................ 606,641 471,516 492,003
Inventories ................................................ 549,703 479,734 533,948
Other current assets ....................................... 39,414 37,707 57,757
----------- ----------- ----------
Total current assets ..................................... 1,271,425 1,108,965 1,152,506
Investments ................................................. 427,896 347,334 320,621
Property, plant and equipment ............................... 968,333 915,770 868,073
Other assets ................................................ 120,010 97,034 95,315
----------- ----------- ----------
TOTAL ASSETS ............................................. $ 2,787,664 $ 2,469,103 $2,436,515
=========== =========== ==========
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .............................................. $ 196,986 $ 475 $ 52,446
Current portion of long-term debt .......................... 21,562 13,855 29,743
Patrons' credit balances ................................... 44,970 41,324 40,182
Patrons' advance payments .................................. 127,755 148,021 112,348
Drafts outstanding ......................................... 30,654 26,367 33,569
Accounts payable ........................................... 449,774 383,161 447,756
Book cash overdraft ........................................ 17,951 28,375 19,257
Accrued expenses ........................................... 119,728 119,373 92,543
Patronage dividends and equity retirements payable ......... 43,000 63,562 88,942
----------- ----------- ----------
Total current liabilities ................................ 1,052,380 824,513 916,786
Long-term debt .............................................. 461,104 442,985 348,665
Other liabilities ........................................... 88,173 75,801 80,364
Minority interests in subsidiaries .......................... 68,371 59,927 60,727
Commitments and contingencies ............................... 1,117,636 1,065,877 1,029,973
----------- ----------- ----------
TOTAL LIABILITIES AND EQUITIES ........................... $ 2,787,664 $ 2,469,103 $2,436,515
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-1
<PAGE>
CENEX HARVEST STATE COOPERATIVES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Grain and oilseed ............................. $ 3,309,310 $ 810,723 $ 4,629,553 $ 6,036,503
Energy ........................................ 1,345,772 343,747 1,858,069 1,676,842
Agronomy ...................................... 593,927 91,231 696,441 683,429
Processed grain and oilseed ................... 531,877 145,645 615,049 730,101
Feed and farm supplies ........................ 547,732 126,907 546,063 531,177
----------- ---------- ----------- -----------
6,328,618 1,518,253 8,345,175 9,658,052
Patronage dividends ........................... 5,876 5,111 70,387 71,070
Other revenues ................................ 100,031 19,271 98,520 85,390
----------- ---------- ----------- -----------
6,434,525 1,542,635 8,514,082 9,814,512
----------- ---------- ----------- -----------
COST AND EXPENSES:
Cost of goods sold ............................ 6,140,580 1,473,243 8,149,605 9,475,682
Marketing, general and administrative ......... 148,510 34,998 126,061 126,297
Interest ...................................... 42,438 12,311 34,620 33,368
Minority interests ............................ 10,017 3,252 6,880 7,984
----------- ---------- ----------- -----------
6,341,545 1,523,804 8,317,166 9,643,331
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES ..................... 92,980 18,831 196,916 171,181
INCOME TAXES ................................... 6,980 2,895 19,615 19,280
----------- ---------- ----------- -----------
NET INCOME ..................................... $ 86,000 $ 15,936 $ 177,301 $ 151,901
=========== ========== =========== ===========
DISTRIBUTION OF NET INCOME:
Patronage refunds ............................. $ 57,500 $ 32,650 $ 144,578 $ 119,171
Nonpatronage refunds .......................... 8,609
Deferred patronage ............................ 21,773 (24,134) (2,482) 11,137
Unallocated capital reserve ................... 6,727 7,420 26,596 21,593
----------- ---------- ----------- -----------
Net income .................................. $ 86,000 $ 15,936 $ 177,301 $ 151,901
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS ENDED AUGUST 31, 1998
AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
CAPITAL NONPATRONAGE
EQUITY EQUITY COMMON
CERTIFICATES CERTIFICATES STOCK
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCES, JUNE 1, 1996 ......................................... $ 241,516 $ 9,740 $ 21
Patronage determination
Patronage distribution ........................................ 30,877 6,115
Equity retirement determination ...............................
Equities retired .............................................. (8,130) (74) (1)
Equities issued ............................................... 5,066
Other, net .................................................... 90 (637)
Comprehensive income:
Net income ...................................................
Other comprehensive income ...................................
Total comprehensive income ....................................
Initial investment offering, net .............................. (2,035)
Cash patronage refund provisions ..............................
Equity retirement provisions ..................................
--------- -------- ----------
BALANCES, MAY 31, 1997 ......................................... 267,384 15,144 20
Patronage determination .......................................
Patronage distribution ........................................ 31,258 6,863
Equity retirement determination ...............................
Equities retired .............................................. (9,542) (520)
Equities issued ............................................... 10,561
Other, net .................................................... 128 (178)
Comprehensive income:
Net income ................................................... 8,609
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. (13,329)
--------- -------- ----------
BALANCES, MAY 31, 1998 ......................................... 286,460 29,918 20
Results of operations of Cenex, Inc. for the eight
months May 31, 1998 .......................................... (21) (36)
Exchange of equities to effect pooling ........................ 540,058 (20)
Included with May 31, 1998 equity retirements payable ......... 4,429
Equities retired .............................................. (4,429) (13)
Equities issued ............................................... 911
Other, net .................................................... (64)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. 1,832
--------- -------- ----------
BALANCES, AUGUST 31, 1998 ...................................... 829,240 29,805 --
Patronage determination ....................................... 19,412
Patronage distribution ........................................ 99,052 (612)
Equities retired .............................................. (23,700) (97)
Equities issued ............................................... 14,714
Other, net .................................................... (674) (311)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. (25,750)
--------- -------- ----------
BALANCES, AUGUST 31, 1999 ...................................... $ 912,294 $ 28,785 $ --
========= ======== ==========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE
<TABLE>
<CAPTION>
WHEAT OILSEED PROCESSING
PREFERRED MILLING & REFINING
STOCK EPUs EPUs
------------- -------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCES, JUNE 1, 1996 ......................................... $ 456,618
Patronage determination .......................................
Patronage distribution ........................................ 42,014
Equity retirement determination ............................... 11,189
Equities retired .............................................. (11,107)
Equities issued ...............................................
Other, net .................................................... (2,060)
Comprehensive income:
Net income ...................................................
Other comprehensive income ...................................
Total comprehensive income ....................................
Initial investment offering, net .............................. $ 9,574 $ 4,296
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. (27,453)
---------- --------- -------
BALANCES, MAY 31, 1997 ......................................... 469,201 9,574 4,296
Patronage determination .......................................
Patronage distribution ........................................ 52,831
Equity retirement determination ............................... 27,453
Equities retired .............................................. (27,362)
Equities issued ...............................................
Other, net .................................................... (3,451) (96) (96)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. (31,273)
---------- --------- -------
BALANCES, MAY 31, 1998 ......................................... 487,399 9,478 4,200
Results of operations of Cenex, Inc. for the eight
months May 31, 1998 .......................................... 52,639
Exchange of equities to effect pooling ........................ (540,038)
Included with May 31, 1998 equity retirements payable .........
Equities retired ..............................................
Equities issued ...............................................
Other, net .................................................... (6) (6)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions ..................................
---------- --------- ---------
BALANCES, AUGUST 31, 1998 ...................................... -- 9,472 4,194
Patronage determination .......................................
Patronage distribution ........................................
Equities retired ..............................................
Equities issued ...............................................
Other, net .................................................... (214) (6)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions ..................................
---------- --------- ---------
BALANCES, AUGUST 31, 1999 ...................................... $ -- $ 9,258 $ 4,188
========== ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS ENDED AUGUST 31, 1998
AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
UNALLOCATED ACCUMULATED OTHER ALLOCATED
PATRONAGE DEFERRED CAPITAL COMPREHENSIVE CAPITAL TOTAL
REFUNDS PATRONAGE RESERVE INCOME (LOSS) RESERVER EQUITIES
- ------------- -------------- ------------- ------------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 72,370 $ (82,862) $ 143,641 $ 458 $ 8,200 $ 849,702
31,358 (357) 31,001
(103,728) (6,512) (31,234)
11,189
(19,312)
5,066
636 (1,971)
119,171 11,137 21,593 151,901
823 823
-----------
152,724
-----------
(998) 10,837
(35,751) (35,751)
(27,453)
---------- ---------- --------- --------- ------- -----------
83,420 (71,725) 158,003 1,281 8,200 944,798
36,061 (309) 35,752
(119,481) (7,511) (36,040)
27,453
(37,424)
10,561
299 (6) (3,400)
144,578 (2,482) 26,596 177,301
(86) (86)
-----------
177,215
-----------
(44,340) (44,340)
(44,602)
---------- ---------- --------- --------- ------- -----------
100,238 (74,207) 177,078 1,195 8,194 1,029,973
(23,310) (13,086) 13,401 29,587
--
4,429
(4,442)
911
(1,177) (2) (1,255)
32,650 (24,134) 7,420 15,936
(1,294) (1,294)
-----------
14,642
-----------
(9,800) (9,800)
1,832
---------- ---------- --------- --------- ------- -----------
99,778 (111,427) 196,722 (99) 8,192 1,065,877
44,150 63,562
(143,928) 1,738 (43,750)
(23,797)
14,714
350 (44) (899)
57,500 21,773 6,727 86,000
(1,071) (1,071)
-----------
84,929
-----------
(17,250) (17,250)
(25,750)
---------- ---------- --------- --------- ------- -----------
$ 40,250 $ (89,654) $ 205,537 $ (1,170) $ 8,148 $ 1,117,636
========== ========== ========= ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ------------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 86,000 $ 15,936 $ 177,301 $ 151,901
---------- ---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................ 81,246 20,570 69,877 63,387
Noncash net (income) loss from joint ventures ............ (22,363) 9,142 (8,381) (7,635)
Adjustment of inventories to market value ................ (35,346) 12,108 10,153 (24,384)
Noncash portion of patronage dividends received .......... (4,847) (9,305) (61,732) (38,787)
Gain on sale of property, plant and equipment ............ (1,706) (458) (7,487) (3,125)
Other, net ............................................... 196 (978) (768)
Changes in operating assets and liabilities:
Receivables ............................................. (133,641) 92,897 63,221 52,143
Inventories ............................................. (34,623) 31,178 25,753 194,101
Other current assets and other assets ................... (29,483) (3,441) 2,929 (1,712)
Patrons' credit balances ................................ 3,646 (1,552) 10,594 (1,760)
Patrons' advance payments ............................... (20,266) 39,533 (45,531) (55,554)
Accounts payable and accrued expenses ................... 66,968 (89,932) (18,215) 68,839
Drafts outstanding and other liabilities ................ 16,670 (3,234) 6,066 11,508
---------- ---------- ---------- ----------
Total adjustments ........................................ (113,549) 97,506 46,269 256,253
---------- ---------- ---------- ----------
Net cash (used in) provided by continuing
operations ............................................ (27,549) 113,442 223,570 408,154
Net cash used in discontinued operations ................ -- -- -- (6,630)
---------- ---------- ---------- ----------
Net cash (used in) provided by operating activities ..... (27,549) 113,442 223,570 401,524
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment .............. (124,471) (41,152) (145,231) (200,275)
Proceeds from disposition of property, plant
and equipment ............................................ 6,785 824 21,877 28,447
Discontinued operations investing activities, net ......... 33,164
Investments ............................................... (54,358) (1,592) 1,566 12,686
Investments redeemed ...................................... 11,241 391 29,933 14,657
Changes in notes receivable ............................... 334 792 (5,036) 834
Other investing activities, net ........................... (278) 327 (3,033) (5,307)
---------- ---------- ---------- ----------
Net cash used in investing activities ................... (160,747) (40,410) (99,924) (115,794)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable .................................. 196,511 (53,025) (88,901) (224,831)
Long-term debt borrowings ................................. 40,000 359,078 83,916 74,905
Principal payments on long-term debt ...................... (14,585) (317,228) (42,171) (55,544)
Changes in book cash overdraft ............................ (10,424) (20,939) (8,418) (10,001)
Proceeds from sale of equity participation units, net ..... 10,837
Retirements of equity ..................................... (23,797) (4,442) (36,880) (18,576)
Cash patronage dividends paid ............................. (43,750) (35,898) (30,819)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities ..... 143,955 (36,556) (128,352) (254,029)
---------- ---------- ---------- ----------
NET CASH FLOWS OF CENEX, INC. FROM OCTOBER 1,
1997 THROUGH MAY 31, 1998 ................................. 14,734
---------- ---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................... (44,341) 51,210 (4,706) 31,701
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD .................................................... 120,008 68,798 73,504 41,803
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 75,667 $ 120,008 $ 68,798 $ 73,504
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Cenex Harvest States Cooperatives (Cenex Harvest States) or
(the Company) is an agricultural cooperative organized for the mutual benefit of
its members. Members of the cooperative are located primarily throughout the
Midwest and Northwest regions of the United States. In addition to grain
marketing, milling and oilseed processing, the Company provides its patrons with
energy and agronomy products and other farm supplies. Sales are both domestic
and international.
In accordance with the By-Laws and by action of the Board of Directors,
annual net savings from patronage sources is distributed to consenting patrons
following the close of each year, and is based on amounts reportable for federal
income tax purposes as determined by the cooperative and further adjusted in
accordance with the By-Laws. The By-Laws provide that an amount of up to 10% of
the distributable annual net savings from patronage sources be added to the
unallocated reserve as determined by the Board of Directors.
BASIS OF PRESENTATION -- Pursuant to a Plan of Combination dated May 29,
1998 (the Plan of Combination), CENEX, Inc. (Cenex) and Harvest States
Cooperatives combined through merger on June 1, 1998 (the Combination), with
Harvest States Cooperatives the surviving corporation. In accordance with the
Plan of Combination, the Articles of Incorporation and By-Laws of Harvest States
Cooperatives were restated and the name was changed to Cenex Harvest States
Cooperatives.
As a result of the Combination, each holder of common stock of Cenex became
a member of Cenex Harvest States, to the extent eligible for membership, and all
equity interests of Cenex were determined and exchanged for equal equity
interests in Cenex Harvest States at its stated dollar amount on a
dollar-for-dollar basis as more thoroughly set forth in the Plan of Combination.
Prior to the Combination, Cenex's year end was September 30 and Harvest States
Cooperatives' year end was May 31. Subsequent to the Combination, the Company
changed its fiscal year end to August 31.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. The Company's consolidated financial statements
reflect the financial position and results of operations of the combined
companies as if the merger had occurred on June 1, 1996. The consolidated
statements of operations and cash flows for the years ended May 31, 1998 and
1997, reflect the results of operations and cash flows for Harvest States
Cooperatives for the years then ended combined with the results of operations
and cash flows of Cenex for the years ended September 30, 1997 and 1996,
respectively. The consolidated balance sheet as of May 31, 1998 reflects the
financial position of Harvest States Cooperatives on that date combined with the
financial position of Cenex as of September 30, 1997. The consolidated results
of operations of Cenex for the eight months ended May 31, 1998, have been
excluded from the reported results of operations and, therefore, have been
recorded as an adjustment to the Company's equities and cash flows in the
consolidated statements of equities and comprehensive income and cash flows
during the three months ended August 31, 1998.
All significant transactions between Harvest States Cooperatives and Cenex
prior to the Combination have been eliminated. Certain amounts previously
reported have been reclassified to conform to the current year presentation.
CONSOLIDATION -- The consolidated financial statements include the accounts
of Cenex Harvest States and all of its wholly-owned and majority-owned
subsidiaries, including National Cooperative Refinery Association (NCRA). The
effects of all significant intercompany transactions have been eliminated.
CASH EQUIVALENTS -- Cash equivalents include short-term highly liquid
investments with original maturities of three months or less at date of
acquisition.
INVENTORIES AND HEDGING -- Grain, processed grain, oilseed and processed
oilseed are stated at market values including appropriate adjustments for open
purchases, sales and futures contracts. All other inventories are stated at the
lower of cost or market. The cost of certain energy inventories
F-6
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(wholesale refined products, crude oil and asphalt) is determined on the
last-in, first-out (LIFO) method; all other inventories are valued on the
first-in, first-out (FIFO) and average cost methods.
The Company enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on energy, grain and
oilseed transactions 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, may not be
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
assessment 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.
Commodity trading in futures and options contracts is a natural extension
of cash market trading. The commodity futures and options markets have
underlying principles of increased liquidity and longer trading periods than the
cash market, and hedging is one method of reducing exposure to price
fluctuations. The Company's use of futures and options contracts reduces the
effects of price volatility, thereby protecting against adverse short-term price
movements while somewhat limiting the benefits of short-term price movements.
Gains and losses on futures transactions related to energy inventories are
credited or charged to cost of goods sold. Energy related gains and losses on
hedge contracts not yet closed are accounted for as unrealized gains and losses
and, accordingly, are deferred in the consolidated balance sheets as part of
inventories. All other futures transactions are marked to market. Open hedge
positions and deferred gains and losses for futures and options contracts were
not significant as of August 31, 1999 and 1998, and May 31, 1998.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, a new standard
related to the accounting for derivative transactions and hedging activities. In
July 1999, the FASB issued SFAS No. 137 which defers the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. While management does not believe this standard will materially impact
financial results of the Company, it is currently evaluating the reporting
requirements under this new standard.
INVESTMENTS -- Investments in cooperatives are stated at cost, plus
patronage refunds received in the form of capital stock and other equities.
Patronage dividends are recorded at the time written notices of allocation are
received. Joint ventures and other investments in which the Company has
significant ownership and influence, but not control, are included in the
consolidated financial statements under the equity method of accounting.
Investments in other debt and equity securities are considered available for
sale and are stated at market value, with unrealized amounts included in
accumulated other comprehensive income (loss).
PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS -- Property,
plant and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on the straight-line
method by charges to operations at rates based upon the expected useful lives of
individual or groups of assets. Leasehold rights and other intangible assets are
amortized using the straight-line method over 3 to 40 years, primarily 15 to 20
years. The cost and related accumulated depreciation and amortization of assets
sold or otherwise disposed of are removed from the related accounts and
resulting gains or losses are reflected in operations. The Company periodically
reviews
F-7
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
property, plant and equipment and other long-lived assets in order to assess
recoverability based on projected income and related cash flows on an
undiscounted basis. 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.
REVENUE RECOGNITION -- Grain and oilseed sales are recorded at time of
settlement, net of freight charges. All other sales are recognized upon shipment
to customers, net of freight charges.
ENVIRONMENTAL EXPENDITURES -- Liabilities related to remediation of
contaminated properties are recognized when the related costs are considered
probable and can be reasonably estimated. Estimates of these costs are based on
current available facts, existing technology, undiscounted site-specific costs
and currently enacted laws and regulations. In reporting environmental
liabilities, no offset is made for potential recoveries. All liabilities are
monitored and adjusted as new facts or changes in law or technology occur.
Environmental expenditures are capitalized when such costs provide future
economic benefits.
INCOME TAXES -- The Company is a nonexempt agricultural cooperative and
files a consolidated federal income tax return with its 80% or more owned
subsidiaries. The Company is subject to tax on net income from nonpatronage
sources and undistributed patronage-sourced income. Deferred income taxes
reflect the impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes, at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
COMPREHENSIVE INCOME -- As of June 1, 1998, the Company adopted SFAS
No.130, which established new rules for the reporting of comprehensive income
and its components. The adoption of SFAS No. 130 had no impact on the Company's
net income. SFAS No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities as well as the Company's charge to equity related
to its pension liability to be included as components of other comprehensive
income (loss) and accumulated other comprehensive income (loss) in the
consolidated statements of equities and comprehensive income.
SEGMENT INFORMATION -- Effective August 31, 1999 the Company adopted SFAS
No. 131, which requires the management approach in determining business
segments. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments.
USE OF 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 expenses
during the reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECEIVABLES
Receivables as of August 31, 1999 and 1998, and May 31, 1998 are as
follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Trade ......................................... $595,403 $474,454 $494,270
Other ......................................... 34,493 20,377 22,601
-------- -------- --------
629,896 494,831 516,871
Less allowances for doubtful accounts ......... 23,255 23,315 24,868
-------- -------- --------
$606,641 $471,516 $492,003
======== ======== ========
</TABLE>
All export sales are denominated in U.S. dollars. Export sales for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE YEARS ENDED
FOR THE YEAR MONTHS ENDED -----------------------
ENDED AUGUST 31, MAY 31, MAY 31,
AUGUST 31, 1999 1998 1998 1997
----------------- -------------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Africa ................ $158 $ 94 $ 280 $ 227
Asia .................. 310 149 1,217 2,318
Europe ................ 358 79 404 577
North America ......... 198 104 331 360
South America ......... 122 10 268 18
</TABLE>
3. INVENTORIES
Inventories as of August 31, 1999 and 1998, and May 31, 1998 are as
follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Energy .............................. $209,661 $170,544 $225,008
Grain and oilseed ................... 202,166 153,384 145,998
Agronomy ............................ 69,050 67,760 64,226
Processed grain and oilseed ......... 14,342 37,464 37,544
Feed and farm supplies .............. 50,908 47,842 58,876
Other ............................... 3,576 2,740 2,296
-------- -------- --------
$549,703 $479,734 $533,948
======== ======== ========
</TABLE>
As of August 31, 1999, the Company valued approximately 29% of inventories,
primarily related to energy, using the lower of cost, determined on the LIFO
method, or market (22% and 25% as of August 31, 1998 and May 31, 1998,
respectively). As of August 31, 1999 and 1998, and May 31, 1998, reserves
amounting to $20.4 million, $61.7 million and $24.6 million, respectively, have
been established to reduce energy inventories to estimated market value.
F-9
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
Investments as of August 31, 1999 and 1998, and May 31, 1998 are as
follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cooperatives:
CF Industries, Inc. ............................. $152,996 $152,996 $136,125
National Bank for Cooperatives (CoBank) ......... 33,942 37,630 36,061
Ag Processing, Inc. ............................. 23,252 19,438 19,487
Land O'Lakes, Inc. .............................. 19,256 15,489 12,078
Joint Ventures:
Ventura Foods, LLC .............................. 55,562 41,666 40,954
Cenex/Land O'Lakes Agronomy Company ............. 36,933 34,068 29,202
Agro Distribution, LLC .......................... 45,741
Tacoma Export Marketing Company ................. 8,821 6,849 7,147
Other ............................................ 51,393 39,198 39,567
-------- -------- --------
$427,896 $347,334 $320,621
======== ======== ========
</TABLE>
Effective July 1, 1999 St. Paul Bank for Cooperatives (St. Paul Bank)
merged with CoBank and, as a result, the existing investment in St. Paul Bank
was transferred to CoBank. The Company's investment in St. Paul Bank as of
August 31, 1998 and May 31, 1998 has been included with CoBank in the table
above.
On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada,
Ltd., (the Entities) both companies owned 50/50 by the Company and Land O'Lakes,
Inc., purchased approximately 310 agronomy facilities from Terra International,
Inc., at a price of approximately $350.0 million. In conjunction with this
purchase transaction, the Company invested $51.5 million in the Entities and
issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd.
Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes
Agronomy Company (of which Cenex Harvest States owns 50%), are without recourse
to the Company.
SFAS No. 107 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 there are no quoted market prices and, as such, it is
not practicable to estimate their fair value.
Various agreements with other owners of investee companies and a
majority-owned subsidiary set out parameters whereby Cenex Harvest States may
buy and sell additional interests in those companies, upon the occurrence of
certain events, at fair values determinable as set forth in the specific
agreements.
F-10
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment as of August 31, 1999 and
1998, and May 31, 1998 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31,
IN YEARS 1999 1998 1998
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Energy refineries ............................. 3-40 $ 660,424 $ 633,149 $ 601,899
Distribution and general ...................... 3-40 298,931 283,773 233,891
Grain terminals and country elevators ......... 3-50 272,311 243,005 249,368
Energy pipelines and terminals ................ 3-40 220,367 211,781 211,207
Grain processing plants ....................... 3-40 208,210 164,026 187,316
Feed plants ................................... 3-40 27,216 27,081 27,060
Construction in progress ...................... 64,508 77,548 35,722
--------- --------- ---------
1,751,967 1,640,363 1,546,463
Less accumulated depreciation and
amortization ................................. 783,634 724,593 678,390
--------- --------- ---------
$ 968,333 $ 915,770 $ 868,073
========= ========= =========
</TABLE>
In May 1995, the Cenex Board of Directors approved a plan to dispose of its
exploration and production (E&P) operations. A purchase and sale agreement was
signed, and the transaction recorded in early fiscal year 1996. The E&P
operations have been accounted for as discontinued operations.
6. OTHER ASSETS
Other assets as of August 31, 1999 and 1998, and May 31, 1998 are as
follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Intangible assets, less accumulated amortization of
$22,720, $20,886, and $18,241, respectively ........ $ 21,539 $22,888 $20,912
Notes receivable .................................... 4,547 6,172 11,836
Other assets ........................................ 93,924 67,974 62,567
-------- ------- -------
$120,010 $97,034 $95,315
======== ======= =======
</TABLE>
F-11
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt as of August 31, 1999 and 1998, and May
31, 1998 consisted of the following:
<TABLE>
<CAPTION>
INTEREST RATES
AT AUGUST 31, AUGUST 31, AUGUST 31, MAY 31,
1999 1999 1998 1998
------------------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes payable(a),(e) ................... 5.40% to 7.01% $196,986 $ 475 $ 52,446
======== ======== ========
Long-term debt:
Revolving term loans from
cooperative banks, payable in
installments through 2009, when the
balance is due(b),(e) ................ 6.48% to 14.32% $227,211 $192,005 $332,130
Private placement, payable in equal
installments beginning in 2008
through 2013(c),(e) .................. 6.81% 225,000 225,000
Industrial Revenue Bonds, payable in
installments through 2010(d) ......... 5.23% to 9.26% 27,045 36,155 42,665
Other notes and contracts ............. 4.00% to 12.00% 3,410 3,680 3,613
-------- -------- --------
Total long-term debt ................... 482,666 456,840 378,408
Less current portion .................. 21,562 13,855 29,743
-------- -------- --------
Long-term portion ...................... $461,104 $442,985 $348,665
======== ======== ========
</TABLE>
- ------------------
(a) The Company finances its working capital needs through short-term lines of
credit with banks for cooperatives and commercial banks. In June 1998, the
Company established a 364-day credit facility of $400.0 million, which was
renewed in May 1999, and a five-year revolving credit facility of $200.0
million, all of which is committed. On August 31, 1999, $196.0 million was
outstanding on the 364-day credit facility, with no amounts outstanding on
the five-year revolving credit facility as of that date.
(b) In June 1998, the Company repaid certain of its existing debt and
established a new long-term credit agreement under which the term loan
balance outstanding as of May 31, 1998 was repaid and partially refinanced
through the new agreement. The new long-term agreement commits $200.0
million of long-term borrowing capacity to the Company through May 31,
1999, of which $164.0 million was drawn before the expiration date of that
commitment. NCRA term loans are collateralized by NCRA's investment in the
cooperative bank.
(c) In June 1998, as a part of the refinancing program for the merged
operations, the Company entered into a private placement with several
insurance companies for long-term debt in the amount of $225.0 million.
(d) Industrial Revenue Bonds are collateralized by property, plant and
equipment, primarily energy refinery equipment, with a cost of
approximately $155.9 million, $156.1 million and $156.3 million, less
accumulated depreciation of approximately $97.5 million, $91.3 million and
$85.7 million as of August 31, 1999 and 1998, and May 31, 1998,
respectively.
(e) Restrictive covenants under various note agreements have requirements for
maintenance of minimum working capital levels and other financial ratios.
Based on quoted market prices for the same or similar issues, the fair
value of long-term debt approximates book value as of August 31, 1999 and 1998,
and May 31, 1998.
F-12
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
For the year ended August 31, 1999, for the three months ended August 31,
1998, and for the years ended May 31, 1998, and 1997, the Company capitalized
interest of $1.7 million, $0.4 million, $1.8 million, and $3.7 million,
respectively.
The aggregate amount of long-term debt payable as of August 31, 1999, is as
follows (dollars in thousands):
2000 ................. $ 21,562
2001 ................. 29,087
2002 ................. 17,495
2003 ................. 13,524
2004 ................. 14,561
Thereafter ........... 386,437
8. INCOME TAXES
The provision for income taxes for the year ended August 31, 1999, for the
three months ended August 31, 1998, and for the years ended May 31, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED -------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current .............. $5,783 $ 5,189 $17,886 $ 21,129
Deferred ............. 1,197 (2,294) 1,729 (1,849)
------ -------- ------- --------
Income taxes ......... $6,980 $ 2,895 $19,615 $ 19,280
====== ======== ======= ========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of August 31, 1999 and 1998,
and May 31, 1998 are as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Accrued expenses and valuation reserves .................... $10,741 $10,017 $14,435
Postretirement health care and pension liabilities ......... 3,665 3,137 3,982
Alternative minimum tax credit carryforward ................ 883 920 1,013
Other ...................................................... 5,880 6,340 4,915
------- ------- -------
Total deferred tax assets ................................. 21,169 20,414 24,345
------- ------- -------
Deferred tax liabilities:
Property, plant and equipment .............................. 3,185 3,169 8,335
Equity method investments .................................. 8,513 6,279 4,120
Other ...................................................... 3,165 3,505 6,769
------- ------- -------
Total deferred tax liabilities ............................ 14,863 12,953 19,224
------- ------- -------
Net deferred tax asset ...................................... $ 6,306 $ 7,461 $ 5,121
======= ======= =======
</TABLE>
As of August 31, 1999, net deferred tax assets of approximately $1.6
million and $4.7 million are included in other current assets and other assets,
respectively ($3.5 million and $4.0 million, respectively, as of August 31,
1998, and $1.9 million and $3.3 million, respectively, as of May 31, 1998).
F-13
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The reconciliation of the statutory federal income tax rate to the
effective rate for the year ended August 31, 1999, for the three months ended
August 31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED -------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- --------- ----------
<S> <C> <C> <C> <C>
Statutory federal income tax rate ................... 35.0% 35.0% 35.0% 35.0%
State and local income taxes, net of federal
income tax benefit ................................. 3.9 4.1 4.2 4.2
Patronage earnings .................................. (24.1) (67.4) (29.1) (27.5)
Tax effect of changes in deferred patronage ......... ( 6.8) 51.3 0.5 ( 2.6)
Rate changes on deferred tax assets and
liabilities ........................................ 0.5 (11.2)
Other ............................................... ( 1.0) 3.6 ( 0.6) 2.2
----- ----- ----- -----
Effective tax rate .................................. 7.5% 15.4% 10.0% 11.3%
===== ===== ===== =====
</TABLE>
The principal differences between financial statement income and taxable
income for the year ended August 31, 1999, for the three months ended August 31,
1998, and for the years ended May 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE FOR THE YEARS ENDED
ENDED MONTHS ENDED --------------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
-------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Income before income taxes ................ $ 92,980 $ 18,831 $ 196,916 $ 171,181
Financial reporting/tax differences:
Environmental reserves ................... 1,343 (563) 1,916 (776)
Oil and gas activities, net .............. 18,005 8,448 (405) (13,851)
Energy inventory market reserves ......... (48,445) 7,150 (9,279) (21,064)
Other, net ............................... 9,258 12,310 2,488 25,993
Patronage refund provisions .............. (57,500) (32,650) (144,578) (119,171)
--------- --------- ---------- ----------
Taxable income ............................ $ 15,641 $ 13,526 $ 47,058 $ 42,312
========= ========= ========== ==========
</TABLE>
9. EQUITIES
PATRON'S EQUITY -- In accordance with the By-Laws and by action of the
Board of Directors, annual net savings from patronage sources is distributed to
consenting patrons following the close of each year and is based on amounts
reportable for federal income tax purposes as adjusted in accordance with the
By-Laws. The cash portion of this distribution is determined annually by the
Board of Directors, with the balance issued in the form of capital equity
certificates.
Annual net savings from sources other than patronage may be added to the
unallocated capital reserve or, upon action by the Board of Directors, allocated
to members in the form of non-patronage equity certificates.
Inactive direct members and patrons and active direct members and patrons
age 61 and older on June 1, 1998 are eligible for redemption of their capital
equity certificates at age 72 or death. For other
F-14
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EQUITIES (CONTINUED)
active direct members and patrons and member cooperatives, equities will be
redeemed annually as determined by the Board of Directors.
On May 31, 1997, the Company completed an offering for the sale of equity
participation units (EPUs) in its Wheat Milling Defined Business Unit and its
Oilseed Processing and Refining Defined Business Unit to qualified subscribers.
Qualified subscribers are identified as Defined Members or representatives of
Defined Members which are persons or associations of producers actually engaged
in the production of agricultural products. Subscribers were allowed to purchase
a portion of their EPUs by exchanging existing patronage certificates. The
purchasers of EPUs have the right and obligation to deliver annually the number
of bushels of wheat or soybeans equal to the number of units held. Unit holders
participate in the net patronage sourced income from operations of the
applicable defined business unit as patronage refunds. Retirement of patrons'
equities attributable to EPUs is at the discretion of the Board of Directors,
and it is the Board's goal to retire such equity on a revolving basis seven
years after declaration.
CENEX EQUITY PRIOR TO JUNE 1, 1998 -- In accordance with the Cenex By-Laws
and by action of the Cenex Board of Directors, annual net savings from patronage
sources was distributed to consenting patrons following the close of each year,
and was based on amounts reportable for federal income tax purposes as adjusted
in accordance with the Cenex By-Laws. A minimum of 20% of the patronage refund
was paid in cash with the balance distributed in the form of preferred stock.
The Cenex By-Laws required that annual net savings from sources other than
patronage be added to the unallocated capital reserve. The Cenex By-Laws also
provided that an amount equal to 10% of the distributable annual net savings
from patronage sources be added to the unallocated capital reserve, until the
total unallocated capital reserve reached 25% of total equities.
The authorized preferred stock consisted of 30,000,000 shares at a par
value of $25 each. The preferred stock was nonvoting and was not subject to the
payment of dividends. The Articles of Incorporation provided that the preferred
stock may be retired at par value at any time and in any order as determined by
the Cenex Board of Directors.
The authorized common stock consisted of 5,000 shares at a par value of $25
each. Common stock was not subject to the payment of dividends. Voting rights
were limited to holders of common stock, with cooperative associates entitled to
one vote for each of their registered producer members, plus one additional vote
for each $1,000, or major fraction thereof, of preferred stock or equity issued
as patronage.
F-15
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EQUITIES (CONTINUED)
The following is a summary of share activity for common and preferred stock
of Cenex for the eight months ended May 31, 1998 and for the years ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
COMMON PREFERRED
-------- ---------------
<S> <C> <C>
Shares outstanding, September 30, 1995 .......... 844 18,821,335
Patronage distribution .......................... 1,682,589
Equities retired, net ........................... (17) (419,485)
Other ........................................... (33,115)
--- ----------
Shares outstanding, September 30, 1996 .......... 827 20,051,324
Patronage distribution .......................... 2,115,756
Equities retired, net ........................... (13) (1,059,461)
Other ........................................... (107,515)
--- ----------
Shares outstanding, September 30, 1997 .......... 814 21,000,104
Patronage distribution .......................... 2,578,292
Equities retired, net ........................... (31) (1,254,979)
Other ........................................... (201,856)
--- ----------
Shares outstanding, May 31, 1998 ................ 783 22,121,561
=== ==========
</TABLE>
HARVEST STATES COOPERATIVES EQUITY PRIOR TO JUNE 1, 1998 -- In accordance
with the Harvest States Cooperatives By-Laws and by action of the Harvest States
Cooperatives Board of Directors, annual net earnings from patronage sources were
distributed to consenting patrons following the close of each year and were
based on amounts reportable for federal income tax purposes as adjusted in
accordance with the Harvest States Cooperatives By-Laws. The cash portion of the
distribution was determined annually by the Harvest States Cooperatives Board of
Directors, with the balance issued in the form of capital equity certificates.
Annual net earnings from sources other than patronage were added to the
unallocated capital reserve or, upon action by the Harvest States Cooperatives
Board of Directors, allocated to members in the form of nonpatronage
certificates.
The Harvest States Cooperatives Board of Directors authorized the
redemption of capital equity certificates held by patrons who were 72 years of
age and those held by estates of deceased patrons. The Harvest States
Cooperatives Board of Directors also authorized the redemption of nonpatronage
certificates held by estates of deceased patrons.
DEFERRED PATRONAGE -- The Company follows the practice of accounting for
deferred patronage charges and credits in a separate equity account instead of
including such amounts in the unallocated capital reserve. Deferred patronage
results from the fact that patronage distributions are primarily determined on
the basis of taxable income rather than net income as reported in the
consolidated financial statements. Deferred patronage consists of items which
have been included in the computation of net income for financial statement
purposes, but not for income tax or patronage purposes. As the items reverse,
patronage refunds and deferred patronage are affected.
F-16
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Effective June 1, 1998, the Company adopted SFAS No. 132, a new standard on
disclosure requirements related to pension and other postretirement benefits.
Accordingly, disclosures related to all periods prior to the three months ended
August 31,1998, have been restated in accordance with this new standard.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------------------------- ----------------------------------------
FOR THE THREE
FOR THE MONTHS FOR THE FOR THE FOR THE THREE FOR THE
YEAR ENDED ENDED YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
AUGUST 31, AUGUST 31, MAY 31, AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998 1999 1998 1998
------------ -------------- ------------ ------------ --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at
beginning of period ........... $ 265,045 $ 245,444 $ 219,869 $ 23,474 $ 22,210 $ 21,298
Service cost ................... 8,733 5,212 7,046 1,421 387 727
Interest cost .................. 17,817 11,771 16,275 1,769 956 1,525
Plan participants'
contributions ................. 131
Plan amendments ................ 10,673 772 247 (630) --
Actuarial (gain) loss .......... (8,322) 6,021 18,275 3,993 517 (38)
Assumption change .............. (6,103) 5,348 (146) 326
Settlements .................... 275
Special termination
benefits ...................... 674
Benefits paid .................. (21,467) (10,197) (16,268) (1,338) (1,053) (1,302)
--------- --------- --------- --------- --------- ---------
Benefit obligation at end
of period ..................... $ 266,651 $ 265,045 $ 245,444 $ 28,543 $ 23,474 $ 22,210
========= ========= ========= ========= ========= =========
Change in plan assets:
Fair value of plan assets at
beginning of period ........... $ 241,949 $ 252,659 $ 211,845
Actual return on plan
assets ........................ 35,622 (6,263) 47,549
Company contributions .......... 3,256 5,750 9,419 $ 1,338 $ 922 $ 1,302
Participants' contributions .... 131
Net transfers .................. 114
Benefits paid .................. (21,467) (10,197) (16,268) (1,338) (1,053) (1,302)
--------- --------- --------- --------- --------- ---------
Fair value of plan assets at
end of period ................. $ 259,360 $ 241,949 $ 252,659 $ -- $ -- $ --
========= ========= ========= ========= ========= =========
</TABLE>
F-17
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------------------------- -------------------------------------------
AUGUST 31, AUGUST 31, MAY 31, AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998 1999 1998 1998
------------ ------------ ----------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Funded status ...................... $ (7,291) $ (23,096) $ 7,215 $ (28,543) $ (23,474) $ (22,210)
Employer contributions after
measurement date .................. 5,331 3,336 200 97 102
Unrecognized actuarial loss
(gain) ............................ 27,869 59,511 27,746 (2,341) (6,372) (7,487)
Unrecognized transition (asset)
obligation ........................ (2,690) (3,938) (5,081) 13,004 13,941 14,444
Unrecognized prior service cost 10,386 524 (34) (592) 3 2
--------- --------- -------- --------- --------- ---------
Prepaid benefit (accrued) cost ..... $ 33,605 $ 33,001 $ 33,182 $ (18,272) $ (15,805) $ (15,149)
========= ========= ======== ========= ========= =========
Amounts recognized on balance
sheets consist of:
Prepaid benefit cost .............. $ 42,099 $ 41,554 $ 36,493
Accrued benefit liability ......... (13,158) (9,396) (4,609) $ (18,272) $ (15,805) $ (15,149)
Intangible asset .................. 3,272 350 816
Accumulated other
comprehensive loss ............... 1,392 493 482
--------- --------- -------- --------- --------- ---------
Net amount recognized ............. $ 33,605 $ 33,001 $ 33,182 $ (18,272) $ (15,805) $ (15,149)
========= ========= ======== ========= ========= =========
</TABLE>
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the year ended August 31,
1999. The rate was assumed to decrease gradually to 6% for 2003 and remain at
that level thereafter.
F-18
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS
-----------------------------------------------------
FOR THE
FOR THE THREE MONTHS FOR THE YEARS ENDED
YEAR ENDED ENDED -------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost ......................... $ 8,733 $ 5,212 $ 7,046 $ 7,474
Interest cost ........................ 17,817 11,771 16,275 16,209
Expected return on assets ............ (26,552) (14,809) (18,199) (17,788)
Prior service cost
amortization . ...................... 812 214 189 252
Actuarial loss (gain)
amortization ........................ 8,145 671 1,307 1,456
Transition amount
amortization ........................ (1,248) (1,143) (2,506) (2,507)
Special termination benefits ......... 674
------- ---------- ------- -------
Net periodic benefit cost ............ $ 7,707 $ 2,590 $ 4,112 $ 5,096
Additional expense due to
settlement of retiree
obligation .......................... 275 1,168
------- ---------- ------- -------
Net periodic benefit cost ............ $ 7,982 $ 2,590 $ 4,112 $ 6,264
======= ========== ======= =======
Weighted-average assumptions:
Discount rate ........................ 7.30% 6.83% 7.25% 7.65%
Expected return on plan assets ....... 8.50% 8.63% 8.40% 8.25%
Rate of compensation increase ........ 5.00% 5.02% 5.08% 5.17%
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
OTHER BENEFITS
----------------------------------------------------
FOR THE
FOR THE THREE MONTHS FOR THE YEARS ENDED
YEAR ENDED ENDED ------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------- -------------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost ......................... $1,421 $ 387 $ 727 $ 598
Interest cost ........................ 1,769 956 1,525 1,620
Expected return on assets ............
Prior service cost
amortization . ...................... (38) (1) 1
Actuarial loss (gain)
amortization ........................ (82) (268) (354) (210)
Transition amount
amortization ........................ 936 503 937 936
Special termination benefits .........
------ ------- ------ ------
Net periodic benefit cost ............ $4,006 $ 1,577 $2,836 $2,944
Additional expense due to
settlement of retiree
obligation ..........................
------ ------- ------ ------
Net periodic benefit cost ............ $4,006 $ 1,577 $2,836 $2,944
====== ======= ====== ======
Weighted-average assumptions:
Discount rate ........................ 7.30% 6.85% 7.42% 7.75%
Expected return on plan assets ....... N/A N/A N/A N/A
Rate of compensation increase ........ 5.00% 4.90% 5.13% 5.25%
</TABLE>
The aggregate projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were as follows as of August 31, 1999 and
1998, and May 31, 1998.
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Projected benefit obligation ........... $25,264 $22,268 $17,749
Accumulated benefit obligation ......... 19,746 17,002 13,387
Fair value of plan assets .............. 8,092 7,604 7,868
</TABLE>
The Company provides defined life insurance and health care benefits for
certain retired employees. The plan is contributory based on years of service
and family status, with retiree contributions adjusted annually.
The Company has other contributory defined contribution plans covering
substantially all employees. Total contributions by the Company to these plans
were approximately $4.5 million, $1.1 million, $4.2 million and $3.9 million for
the year ended August 31, 1999, for the three months ended August 31, 1998, and
for the years ended May 31, 1998 and 1997, respectively.
F-19
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in the
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% POINT 1% POINT
INCREASE DECREASE
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Effect on total of services and interest
cost components .................................... $ 327 $ (277)
Effect on postretirement benefit obligation ......... 2,111 (1,819)
</TABLE>
11. SEGMENT REPORTING
The Company's businesses are organized, managed and internally reported as
four segments. These segments, which are based on products and services, include
agronomy, energy, grain marketing and farm marketing & supply and processed
grain and consumer products. Due to cost allocations and intersegment activity,
management does not represent that these segments, if operated independently,
would report the income before income taxes and other financial information
presented.
Segment information for the year ended August 31, 1999, for the three
months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
PROCESSED
GRAIN MARKETING GRAIN AND
AND FARM CONSUMER
AGRONOMY ENERGY MARKETING & SUPPLY PRODUCTS OTHER TOTAL
------------ -------------- -------------------- ------------ ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
For the year ended August 31,
1999:
Net sales ............................. $ 593,927 $ 1,345,772 $ 3,857,042 $ 531,877 $ 6,328,618
Patronage dividends ................... 184 (1,236) 7,109 (492) $ 311 5,876
Other revenues ........................ (4,313) 924 72,506 12,197 18,717 100,031
--------- ----------- ----------- --------- --------- -----------
589,798 1,345,460 3,936,657 543,582 19,028 6,434,525
Cost of goods sold .................... 558,536 1,228,472 3,844,974 508,598 6,140,580
Marketing, general and
administrative ....................... 16,605 47,536 48,965 17,854 17,550 148,510
Interest .............................. 1,413 16,584 18,378 6,561 (498) 42,438
Minority interests .................... 9,889 128 10,017
--------- ----------- ----------- --------- --------- -----------
Income before income taxes ............ $ 13,244 $ 42,979 $ 24,340 $ 10,569 $ 1,848 $ 92,980
========= =========== =========== ========= ========= ===========
Total identifiable assets ............. $ 361,381 $ 1,112,127 $ 780,973 $ 293,499 $ 239,684 $ 2,787,664
========= =========== =========== ========= ========= ===========
For the three months ended
August 31, 1998:
Net sales ............................. $ 91,231 $ 343,747 $ 937,630 $ 145,645 $ 1,518,253
Patronage dividends ................... 51 4,913 $ 147 5,111
Other revenues ........................ 25 12,651 1,888 4,707 19,271
--------- ----------- ----------- --------- --------- -----------
91,231 343,823 955,194 147,533 4,854 1,542,635
Cost of goods sold .................... 86,377 306,768 941,380 138,718 1,473,243
Marketing, general and
administrative ....................... 3,813 12,340 10,633 3,937 4,275 34,998
Interest .............................. 78 4,389 6,193 1,208 443 12,311
Minority interests .................... 3,260 (72) 64 3,252
--------- ----------- ----------- --------- --------- -----------
Income (loss) before income taxes ..... $ 963 $ 17,066 $ (2,940) $ 3,670 $ 72 $ 18,831
========= =========== =========== ========= ========= ===========
Total identifiable assets ............. $ 314,469 $ 943,004 $ 693,567 $ 296,340 $ 221,723 $ 2,469,103
========= =========== =========== ========= ========= ===========
</TABLE>
F-20
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
PROCESSED
GRAIN MARKETING GRAIN AND
AND FARM CONSUMER
AGRONOMY ENERGY MARKETING & SUPPLY PRODUCTS OTHER TOTAL
------------ ------------- -------------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
For the year ended May 31, 1998:
Net sales .......................... $ 696,441 $1,858,069 $ 5,175,616 $ 615,049 $8,345,175
Patronage dividends ................ 57,552 1,276 11,136 $ 423 70,387
Other revenues ..................... 434 71,767 10,284 16,035 98,520
--------- ---------- ----------- --------- --------- -----------
753,993 1,859,779 5,258,519 625,333 16,458 8,514,082
Cost of goods sold ................. 662,238 1,739,809 5,179,290 568,268 8,149,605
Marketing, general and
administrative ................... 14,637 42,637 39,265 13,830 15,692 126,061
Interest ........................... 43 15,163 15,741 4,143 (470) 34,620
Minority interests ................. 6,749 131 6,880
--------- ---------- ----------- --------- --------- -----------
Income before income taxes ......... $ 77,075 $ 55,421 $ 24,223 $ 39,092 $ 1,105 $ 196,916
========= ========== =========== ========= ========= ==========
Total identifiable assets .......... $ 319,217 $ 988,674 $ 643,044 $ 287,399 $ 198,181 $2,436,515
========= ========== =========== ========= ========= ===========
For the year ended May 31, 1997:
Net sales .......................... $ 683,429 $1,676,842 $ 6,567,680 $ 730,101 $9,658,052
Patronage dividends ................ 55,615 2,114 12,738 $ 603 71,070
Other revenues ..................... 751 1,709 64,256 1,019 17,655 85,390
--------- ---------- ----------- --------- --------- -----------
739,795 1,680,665 6,644,674 731,120 18,258 9,814,512
Cost of goods sold ................. 652,552 1,578,503 6,573,160 671,467 9,475,682
Marketing, general and
administrative ................... 13,082 43,206 36,881 13,704 19,424 126,297
Interest ........................... 14 11,814 16,423 6,453 (1,336) 33,368
Minority interests ................. 7,854 130 7,984
--------- ---------- ----------- --------- --------- -----------
Income before income taxes ......... $ 74,147 $ 39,288 $ 18,210 $ 39,496 $ 40 $ 171,181
========= ========== =========== ========= ========= ===========
</TABLE>
Assets included in other primarily consisted of intercompany transactions
and corporate facilities.
12. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL -- The Company is required to comply with various
environmental laws and regulations incident to its normal business operations.
In order to meet its compliance requirements, the Company establishes reserves
for the future costs of remediation of identified issues, which are included in
cost of goods sold in the consolidated statements of operations. Additional
costs for matters which may be identified in the future cannot be presently
determined; while the resolution of any such matters may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes any such matters will not have a material adverse effect on
the consolidated financial position of the Company.
OTHER LITIGATION AND CLAIMS -- The Company is involved as a defendant in
various lawsuits, claims and disputes which are in the normal course of the
Company's business. The resolution of any such matters may have an impact on the
Company's consolidated financial results for a particular reporting period;
however, management believes any resulting liability will not have a material
adverse effect on the consolidated financial position of the Company.
INTERNAL REVENUE SERVICE -- Certain income tax returns have been reviewed
by the Internal Revenue Service and various state tax authorities. In connection
with these reviews, certain adjustments have been proposed which, if upheld,
could result in additional tax liability to the Company. While the
F-21
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
outcome of any proposed adjustments may have an impact on the Company's
consolidated financial results for a particular reporting period, management
believes that any tax assessment which may result from these adjustments will
not have a material adverse effect on the consolidated financial position of the
Company.
GRAIN STORAGE -- As of August 31, 1999 and 1998, and May 31, 1998, the
Company stored grain and processed grain products for others totaling $99.4
million, $111.5 million, and $81.6 million, respectively. Such stored
commodities and products are not the property of the Company and therefore are
not included in the Company's inventories.
LINES OF CREDIT -- The Company is a guarantor for lines of credit for
related companies totaling up to $28.1 million, of which $5.8 million was
outstanding as of August 31, 1999. All outstanding loans with respective
creditors are current as of August 31, 1999.
LEASE COMMITMENTS -- The Company leases approximately 4,200 rail cars with
remaining lease terms of one to 10 years. In addition, the Company has
commitments under other operating leases for various refinery, manufacturing and
transportation equipment, vehicles and office space. Some leases include
purchase options at not less than fair market value at the end of the leases.
Total rental expense for all operating leases, net of rail car mileage
credits received from the railroad and sublease income was approximately $29.8
million, $8.6 million, $30.5 million and $30.0 million for the year ended August
31, 1999, for the three months ended August 31, 1998, and for the years ended
May 31, 1998 and 1997, respectively. Mileage credits and sublease income were
approximately $12.8 million, $4.7 million, $14.2 million and $13.6 million for
the year ended August 31, 1999, for the three months ended August 31, 1998, and
for the years ended May 31, 1998 and 1997, respectively.
Minimum future lease payments required under noncancellable operating
leases as of August 31, 1999 are as follows:
<TABLE>
<CAPTION>
EQUIPMENT
RAIL CARS VEHICLES AND OTHER TOTAL
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
2000 ........................................ $17,734 $ 8,723 $11,498 $ 37,955
2001 ........................................ 12,551 6,670 11,091 30,312
2002 ........................................ 10,182 4,552 10,652 25,386
2003 ........................................ 7,136 2,851 9,487 19,474
2004 ........................................ 3,233 1,050 8,090 12,373
Thereafter .................................. 7,157 271 7,846 15,274
------- ------- ------- --------
Total minimum future lease payments ......... $57,993 $24,117 $58,664 $140,774
======= ======= ======= ========
</TABLE>
F-22
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the year ended August 31, 1999, for the three months ended August
31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash paid during the period for:
Interest ........................................... $ 42,765 $ 10,851 $ 36,632 $ 36,283
Income taxes ....................................... 8,161 8,248 21,409 16,448
Significant noncash transactions:
Noncash patronage refunds issued from prior
year's earnings ................................... 99,052 84,089 72,891
Noncash nonpatronage certificates issued from
prior year's earnings ............................. 7,998 6,863 6,115
Capital equity certificates issued in exchange for
elevator properties ............................... 14,714 911 10,561 4,986
Capital equity certificates exchanged for EPUs ..... 2,035
</TABLE>
Summarized financial information of Cenex for the period October 1, 1997
through May 31, 1998 is as follows (dollars in thousands):
Net sales ..................... $1,798,219
Net income .................... 62,776
Cash flows from:
Operating activities ......... 83,118
Investing activities ......... (49,666)
Financing activities ......... (18,718)
14. SUBSEQUENT EVENT
During September 1999, the Boards of Directors of Cenex Harvest States
Cooperatives and Farmland Industries, Inc. (Farmland) approved a Transaction
Agreement to unify the two cooperatives. The Transaction Agreement has not yet
been approved by the members of either cooperative.
On September 1, 1999, NCRA and Farmland formed Cooperative Refining, LLC,
(Cooperative Refining) a joint venture established to operate and manage the
refineries of NCRA and Farmland. In conjunction with the formation of
Cooperative Refining, NCRA contributed certain assets, primarily inventories, to
Cooperative Refining in exchange for its ownership interest and entered into
certain leases and product purchase agreements with Cooperative Refining.
F-23
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. UNAUDITED INTERIM INFORMATION
As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives
merged with Cenex, Inc. to form Cenex Harvest States Cooperatives. Prior to the
merger, Harvest States Cooperatives' year end was May 31. Cenex's year end was
September 30 and subsequent to the merger, the Company changed its fiscal year
end to August 31. Therefore, the transition period for the three months ended
August 31, 1998 has been included in the financial statements. Comparable
information for the three months ended August 31, 1997 is as follows:
<TABLE>
<CAPTION>
UNAUDITED
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Revenues:
Grain and oilseed ................................ $1,030,047
Energy ........................................... 414,948
Processed grain and oilseed ...................... 130,770
Feed and farm supplies ........................... 126,568
Agronomy ......................................... 138,673
----------
$1,841,006
----------
Cost of goods sold ................................ $1,780,171
Income taxes ...................................... 8,865
Net income ........................................ 35,211
Net cash provided by operating activities ......... 126,038
Net cash used in investing activities ............. (24,507)
Net cash used in financing activities ............. (130,251)
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members and Patrons of
Cenex Harvest States Cooperatives:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, equities and comprehensive income and cash flows present fairly,
in all material respects, the financial position of Cenex Harvest States
Cooperatives and subsidiaries as of August 31, 1999 and 1998, and May 31, 1998,
and the results of their operations and their cash flows for the year ended
August 31, 1999, for the three months ended August 31, 1998, and for the years
ended May 31, 1998 and 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated balance sheet as of May 31,
1998, and the consolidated statements of operations, equities and comprehensive
income and cash flows for the years ended May 31, 1998 and 1997, give
retroactive effect to the merger of Harvest States Cooperatives and CENEX, Inc.
on June 1, 1998, in a transaction accounted for as a pooling of interests, as
described in Note 1 to the consolidated financial statements. We did not audit
the financial statements of Harvest States Cooperatives, which statements
reflect approximately 38% of total assets as of May 31, 1998, and approximately
29% and 31% of net income for the years ended May 31, 1998 and 1997,
respectively. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Harvest States Cooperatives, is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 29, 1999
F-25
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31
-----------------------
MAY 31,
1999 1998 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Receivables ...................................... $24,650 $28,703 $32,585
Inventories ...................................... 17,084 18,569 23,759
Other current assets ............................. 185
------- ------- -------
Total current assets ........................... 41,734 47,272 56,529
Property, plant and equipment ..................... 39,001 35,596 34,953
------- ------- -------
TOTAL ASSETS ................................... $80,735 $82,868 $91,482
======= ======= =======
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $ 9,546 $15,071 $22,891
Accounts payable ................................. 5,768 7,547 8,867
Accrued expenses ................................. 4,227 1,773 1,660
------- ------- -------
Total current liabilities ...................... 19,541 24,391 33,418
Commitments and contingencies
Defined business unit equity ...................... 61,194 58,477 58,064
------- ------- -------
TOTAL LIABILITIES AND DEFINED BUSINESS
UNIT EQUITY ................................... $80,735 $82,868 $91,482
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Processed oilseed sales ....................... $358,042 $ 98,919 $410,386 $441,738
Other revenue (expense) ....................... 30 1,115 1,746 (1,660)
-------- -------- -------- --------
358,072 100,034 412,132 440,078
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 338,386 95,304 379,272 405,791
Marketing, general and administrative ......... 5,095 1,257 4,730 4,342
Interest ...................................... 557 251 380 322
-------- -------- -------- --------
344,038 96,812 384,382 410,455
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ..................... 14,034 3,222 27,750 29,623
PROVISIONS FOR INCOME TAXES .................... 800 525 1,825 2,100
-------- -------- -------- --------
NET INCOME ..................................... $ 13,234 $ 2,697 $ 25,925 $ 27,523
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF DEFINED BUSINESS UNIT
EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS
ENDED AUGUST 31, 1998 AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, MAY 31, 1996 ............................................ $ 53,391
Net and comprehensive income .................................... 27,523
Divisional equity distributed to the Company .................... (27,523)
---------
BALANCE, MAY 31, 1997 ............................................ 53,391
Net and comprehensive income .................................... 25,925
Defined Business Unit equity distributed to the Company ......... (21,252)
---------
BALANCE, MAY 31, 1998 ............................................ 58,064
Net and comprehensive income .................................... 2,697
Defined Business Unit equity distributed to the Company ......... (2,284)
---------
BALANCE, AUGUST 31, 1998 ......................................... 58,477
Net and comprehensive income .................................... 13,234
Defined Business Unit equity distributed to the Company ......... (10,517)
---------
BALANCE, AUGUST 31, 1999 ......................................... $ 61,194
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED -----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 13,234 $ 2,697 $ 25,925 $ 27,523
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ..................................... 2,330 551 2,021 1,777
Loss (gain) on sale of property, plant and
equipment ....................................... 204 (658) 2,045
Changes in operating assets and liabilities:
Receivables ...................................... 4,053 3,882 1,584 (11,374)
Inventories ...................................... 1,485 5,190 (908) 3,385
Other current assets ............................. 185 2,125 (1,999)
Accounts payable and accrued expenses ............ 675 (1,207) (2,913) 2,201
--------- --------- --------- ---------
Net cash provided by operating activities ........ 21,981 11,298 27,176 23,558
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant
and equipment ..................................... 10,723
Acquisition of property, plant and
equipment ......................................... (5,939) (1,195) (13,953) (12,137)
--------- --------- --------- ---------
Net cash used in investing activities ............ (5,939) (1,195) (3,230) (12,137)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to Cenex Harvest States
Cooperatives ...................................... (5,525) (7,819) (2,694) 16,102
Defined Business Unit equity distributed to
the Company ....................................... (10,517) (2,284) (21,252) (27,523)
--------- --------- --------- ---------
Net cash used in financing activities ............ (16,042) (10,103) (23,946) (11,421)
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ......................... -- -- -- --
CASH AT BEGINNING OF PERIOD ......................... -- -- -- --
--------- --------- --------- ---------
CASH AT END OF PERIOD ............................... -- -- -- --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS -- Cenex Harvest States Cooperatives'
Oilseed Processing and Refining Defined Business Unit (the Defined Business
Unit) is a defined business unit of Cenex Harvest States Cooperatives (the
Company) and is not organized as a separate legal entity. The purpose of the
Defined Business Unit is to carry on the operations of the Oilseed Processing
and Refining Division. The assets and liabilities of the Defined Business Unit
continue to be 100% owned by the Company. The Defined Business Unit operates a
single soybean crushing and oil refining plant in Mankato, Minnesota and serves
customers throughout the United States.
Effective June 1, 1998, Harvest States Cooperatives merged with CENEX, Inc.
to form Cenex Harvest States Cooperatives. As a result of the merger, the
Defined Business Unit became a defined business unit of Cenex Harvest States
Cooperatives at that date.
CASH MANAGEMENT -- The Defined Business Unit draws all of its cash
requirements from and deposits all cash generated with the Company's centralized
cash management system.
INVENTORIES AND HEDGING -- Oilseed and processed oilseed products are
stated at market, including adjustments for open purchase, sales and futures
contracts and deferral of profit on processed oilseed products.
The Defined Business Unit follows the general policy of hedging its oilseed
inventories and unfilled orders for oilseed products to the extent considered
practicable to minimize 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, may not be
completely hedged due, in part, to the absence of satisfactory hedging
facilities for certain commodities and geographical areas and, in part, to the
Defined Business Unit's assessment of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may expose the
Defined Business Unit to risk in the event that a counterparty to a transaction
is unable to fulfill its contractual obligation. The Defined Business Unit
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 applicable
creditworthiness, as internally evaluated.
In June 1998, Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, a new standard related to the
accounting for derivative transactions and hedging activities. In July 1999, the
FASB issued SFAS No. 137 which defers the effective date of SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. While
management does not believe this standard will materially impact the financial
results of the Defined Business Unit, it is currently evaluating the reporting
requirements under this new standard.
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. The cost and
related accumulated depreciation of assets sold or otherwise disposed of are
removed from the related accounts and resulting gains or losses are reflected in
operations.
Management periodically reviews the carrying value of property, plant 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 -- Net income generated on oilseed purchased by the Defined
Business Unit from nonmembers is characterized as nonpatronage income and is,
therefore, taxable. Net income generated on oilseed purchased from the Company
and holders of Equity Participation Units (EPUs) is considered
F-30
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to be patronage to the extent of the Company's patronage purchase percentage of
that particular commodity; the other portion of such income is considered
nonpatronage and is, therefore, taxable.
Results of operations of the Defined Business Unit are included in the
consolidated federal income tax return of the Company. The Company has a policy
that provides for the payment of taxes as calculated on an individual company
basis for each of its defined business units and divisions.
REVENUE RECOGNITION -- Sales of processed oilseeds are recognized upon
shipment to customers, net of freight charges.
USE OF 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 expenses
during the reporting period. Actual results could differ from those estimates.
2. RECEIVABLES
Receivables at August 31, 1999 and 1998, and May 31, 1998 are as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Trade ........................................ $25,045 $29,098 $32,980
Less allowance for doubtful accounts ......... 395 395 395
------- ------- -------
$24,650 $28,703 $32,585
======= ======= =======
</TABLE>
Sales to one customer accounted for 25% of total sales for the year ended
August 31, 1999. Sales to two customers accounted for 25% and 10% of total sales
for the three months ended August 31, 1998 and for the year ended May 31, 1998,
and 25% and 11% of total sales for the year ended May 31, 1997.
3. INVENTORIES
Inventories at August 31, 1999 and 1998, and May 31, 1998 are as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Processed oilseed products ......... $11,918 $17,857 $16,833
Oilseed ............................ 5,166 712 6,926
------- ------- -------
$17,084 $18,569 $23,759
======= ======= =======
</TABLE>
F-31
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment at August 31, 1999 and 1998,
and May 31, 1998 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31,
IN YEARS 1999 1998 1998
------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Land ........................................... $ 2,096 $ 763 $ 763
Elevators, crushing plant and refinery ......... 15 to 20 23,270 22,103 22,103
Machinery and equipment ........................ 5 to 18 56,266 51,565 51,565
Furniture and fixtures ......................... 3 to 12 424 379 379
Other .......................................... 5 to 12 71 103 103
Construction in progress ....................... 3,741 5,626 4,432
------- ------- -------
85,868 80,539 79,345
Less accumulated depreciation .................. 46,867 44,943 44,392
------- ------- -------
$39,001 $35,596 $34,953
======= ======= =======
</TABLE>
5. DUE TO CENEX HARVEST STATES COOPERATIVES
The Defined Business Unit satisfies its working capital needs through
borrowings, both long- and short-term, from the Company to the extent the
Company's borrowing capacity permits. Amounts outstanding under this arrangement
at August 31, 1999 and 1998, and May 31, 1998 totaled $9,546, $15,071 and
$22,891, respectively.
The Company charges the Defined Business Unit interest on its daily average
of short-term borrowings at a rate equivalent to the weighted average interest
rate on short-term borrowings of the Company. The weighted average borrowing
rate of the Company's short-term borrowings was 5.8% for the year ended August
31, 1999, for the three months ended August 31, 1998, and for each of the years
ended May 31, 1998 and 1997. Amounts due from the Company receive interest in
the same manner at the same rate.
Long-term borrowings, if needed, could be obtained at the Company's
long-term borrowing rate. No long-term borrowings were outstanding at August 31,
1999 and 1998, and at May 31, 1998.
6. DEFINED BUSINESS UNIT EQUITY
On May 31, 1997, the Company completed an offering for the sale of EPUs in
its Oilseed Processing and Refining Defined Business Unit to qualified
subscribers. Qualified subscribers are identified as Defined Members or
representatives of Defined Members which are persons or associations of
producers engaged in the production of agricultural products. The purchasers of
EPUs have the right and obligation to deliver annually the number of bushels of
soybeans equal to the number of units held. Unit holders participate in the net
patronage sourced income from operations of the Oilseed Processing and Refining
Defined Business Unit as patronage refunds distributed by the Company. EPUs
represent an ownership interest in the Company, not the Defined Business Unit.
7. RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all salaried and full-time hourly employees of the Defined
Business Unit. 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
F-32
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
7. RETIREMENT PLANS (CONTINUED)
assets consist principally of corporate obligations, U.S. government bonds,
money market funds and immediate participation guarantee contracts. Pension
costs billed to the Defined Business Unit for the year ended August 31, 1999,
for the three months ended August 31, 1998, and for the years ended May 31, 1998
and 1997, were approximately $538, $135, $120 and $147, respectively.
The Defined Business Unit's portion of the actuarial present value of
accumulated benefit obligations and net pension assets available for benefits
has not been determined. Selected information at August 31, 1999 and 1998, and
May 31, 1998 for the Company's plan is as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Projected benefit obligation for service rendered to date ......... $196,034 $92,854 $94,075
Plan assets at fair value ......................................... 175,376 84,961 86,889
</TABLE>
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.0% and a rate of
increase in future compensation of 5% for all periods. The expected long-term
rate of return on plan assets was 9.0% for the year ended August 31, 1999, and
8.5% for all other periods.
8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Company provides certain health care benefits for retired employees of
the Defined Business Unit. 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 the
Company that are not funded were as follows at August 31, 1999 and 1998, and May
31, 1998:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Total postretirement benefit obligation ........................ $ 23,290 $ 10,408 $ 10,261
Unrecognized transition obligation ............................. (10,158) (7,835) (7,970)
Unrecognized net gains ......................................... 2,026 1,864 1,850
--------- -------- --------
Accrued postretirement medical and other benefit costs ......... $ 15,158 $ 4,437 $ 4,141
========= ======== ========
</TABLE>
The net periodic costs billed to the Defined Business Unit for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997 were approximately $258, $87, $246 and $229,
respectively.
The calculations assumed a discount rate of 7.0% for the year ended August
31, 1999, and for the three months ended August 31, 1998, and 7.75% for the year
ended May 31, 1998, and a health care cost trend rate of 8.0% for the year
ending August 31, 1999, declining to 6.0% for 2004 and remaining at that level
thereafter.
F-33
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
9. INCOME TAXES
A reconciliation of the statutory federal tax rate to the effective rate
for the year ended August31, 1999, for the three months ended August 31, 1998,
and for the years ended May 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
Statutory federal income tax rate ................. 35.0% 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ..................................... 4.1 4.1 5.0 4.9
Patronage earnings ................................ (33.4) (23.2) (32.7) (32.6)
Other, net ........................................ .4 ( .7) ( .2)
----- ----- ----- -----
Effective rate .................................... 5.7% 16.3% 6.6% 7.1%
===== ===== ===== =====
</TABLE>
The Defined Business Unit has no significant deferred income tax assets or
liabilities.
10. COMMITMENTS AND CONTINGENCIES
Noncancellable operating leases for approximately 389 rail cars with
remaining lease terms of one to fifteen years are used by the Defined Business
Unit. In September 1997, the Defined Business Unit (the Lessee) entered into a
sales leaseback agreement. After 111 months, the Lessee has the option to: (i)
purchase the equipment at fair market value; (ii) continue the lease; or (iii)
return the equipment to the Lessor and pay a maximum termination fee of $719
contingent upon the Lessor's inability to recover the full value of the
equipment, as determined from the casualty loss value schedule in the lease
agreement. After 120months, the Lessee has the option to: (i) purchase the
equipment at fair market value, limited to 10% of the net equipment cost at
lease inception; (ii) renew the lease for a period of 36 months; or (iii) return
the equipment to the Lessor.
Total rent expense for all operating leases, net of rail car mileage
credits received from the railroad, was $3,326, $933, $2,717 and $1,945 for the
year ended August 31, 1999, for the three months ended August 31, 1998, and for
the years ended May 31, 1998 and 1997, respectively.
Minimum future rental payments due under noncancellable operating leases at
August 31, 1999 are as follows:
2000 .......................... $ 3,340
2001 .......................... 3,024
2002 .......................... 2,798
2003 .......................... 2,657
2004 .......................... 2,361
2005 and thereafter ........... 11,825
-------
$26,005
=======
There are various lawsuits and administrative proceedings incidental to the
business of the Defined Business Unit. It is impossible, at this time, to
estimate what the ultimate legal and financial liability of the Defined Business
Unit 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 Defined Business Unit taken as a whole.
At August 31, 1999, the operations of the Defined Business Unit had
outstanding oilseed purchase contracts of 686,563 bushels at prices ranging from
$4.39 per bushel to $5.63 per bushel, and outstanding
F-34
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
oil purchase contracts of 533,288,016 pounds at prices ranging from $0.1357per
pound to $0.2621 per pound. In addition, the operations of the Defined Business
Unit had outstanding sales contracts totaling approximately $125,369.
In connection with the Defined Business Unit's proposed construction of a
crushing plant in Fairmont, Minnesota, the City of Fairmont paid $897 to the
Defined Business Unit. The Defined Business Unit will have to repay this amount
to the City of Fairmont in the event it does not meet specified construction
target dates. Therefore, this payment has been included in accrued expenses on
the balance sheet at August 31, 1999.
11. RELATED PARTY TRANSACTIONS
Revenues for the year ended August 31, 1999, the three months ended August
31, 1998, and for the years ended May 31, 1998 and 1997, include $94,072,
$22,908, $101,440 and $110,679, respectively, to related parties, primarily the
Company.
The Defined Business Unit purchases a portion of its soybeans from the
Company. Included in cost of goods sold for the year ended August 31, 1999, for
the three months ended August 31, 1998, and for the years ended May 31, 1998 and
1997, were $18,180, $5,110, $19,875 and $5,726, respectively, of these
purchases.
Additionally, the Company performs various direct management services and
incurs certain costs for its defined business units and divisions. Such costs,
including data processing, office services and insurance, are charged directly
to the defined business units and divisions. Indirect expenses, such as
publications, board expense, executive management, legal, finance and human
resources, are allocated to the defined business units and divisions based on
approximate usage. Costs allocated to the Defined Business Unit for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997, were $900, $225, $900 and $825, respectively.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities are as follows for the year ended August 31, 1999, for the three
months ended August 31, 1998 and for the years ended May 31, 1998 and 1997:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ ------------ --------- --------
<S> <C> <C> <C> <C>
Net cash paid to the Company during the
period for:
Interest ............................. $557 $251 $380 $ 322
Income taxes ......................... 790 2,300
</TABLE>
13. UNAUDITED INTERIM FINANCIAL INFORMATION
As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives
merged with CENEX, Inc. to form Cenex Harvest States Cooperatives. Prior to the
merger, Harvest States Cooperatives' and the Defined Business Unit's year end
was May 31 and Cenex's year end was September 30. Subsequent to the merger, the
Company and the Defined Business Unit changed their fiscal year end to August
31.
F-35
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
13. UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
The transition period for the three months ended August 31, 1998 has been
included in the financial statements. Comparable information for the three
months ended August 31, 1997 is as follows:
<TABLE>
<CAPTION>
UNAUDITED
------------
<S> <C>
Processed oilseed sales ............................ $ 86,349
Cost of goods sold ................................. 62,481
Provision for income taxes ......................... 675
Net income ......................................... 3,160
Net cash provided by operating activities .......... 21,200
Net cash used in investing activities .............. (7,771)
Net cash used in financing activities .............. (13,429)
</TABLE>
14. SUBSEQUENT EVENT
During September 1999, the Boards of Directors of Cenex Harvest States
Cooperatives and Farmland Industries, Inc., approved a Transaction Agreement to
unify the two cooperatives. The Transaction Agreement has not yet been approved
by the members of either cooperative.
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Cenex Harvest States Cooperatives:
In our opinion, the accompanying balance sheets and the related statements
of operations, defined business unit equity and comprehensive income and cash
flows present fairly, in all material respects, the financial position of
Oilseed Processing and Refining Defined Business Unit (a Defined Business Unit
of Cenex Harvest States Cooperatives) as of August 31, 1999 and 1998, and the
results of its operations and its cash flows for the year ended August 31, 1999,
and for the three months ended August 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Defined Business Unit's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 29, 1999
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cenex Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the balance sheet of the Oilseed Processing and Refining
Defined Business Unit (the Defined Business Unit), formerly known as Honeymead
Products Company, a defined business unit of Cenex Harvest States Cooperatives
as of May 31, 1998 and the related statements of operations, defined business
unit equity and comprehensive income, and cash flows for each of the two years
in the period ended May 31, 1998. These financial statements are the
responsibility of the Defined Business Unit'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 Defined
Business Unit at May 31, 1998 and the results of its operations and its cash
flows for each of the two years in the period ended May 31, 1998, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, MN
July 24, 1998
F-38
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31
-----------------------
MAY 31,
1999 1998 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Receivables ...................................... $ 30,960 $ 35,228 $ 35,758
Inventories ...................................... 14,339 18,895 13,785
Other current assets ............................. 210 429 393
-------- -------- --------
Total current assets ........................... 45,509 54,552 49,936
Property, plant and equipment ..................... 110,547 97,428 85,627
Intangible assets ................................. 9,415 10,481 10,748
-------- -------- --------
TOTAL ASSETS ................................... $165,471 $162,461 $146,311
======== ======== ========
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $ 48,938 $ 33,238 $ 16,739
Accounts payable ................................. 7,238 11,003 8,836
Accrued expenses ................................. 4,440 1,667 1,569
Current portion of long-term debt ................ 10,005 10,005 10,005
-------- -------- --------
Total current liabilities ...................... 70,621 55,913 37,149
Long-Term Debt .................................... 28,510 38,515 41,204
Commitments and contingencies
Defined business unit equity ...................... 66,340 68,033 67,958
-------- -------- --------
TOTAL LIABILITIES AND DEFINED BUSINESS
UNIT EQUITY ................................... $165,471 $162,461 $146,311
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Processed grain sales ......................... $ 174,133 $46,914 $205,282 $199,079
Other revenue ................................. 1,820
--------- ------- -------- --------
174,133 46,914 207,102 199,079
--------- ------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 170,510 43,733 189,614 181,566
Marketing, general and administrative ......... 10,610 2,071 8,072 6,749
Interest ...................................... 5,184 843 3,122 5,230
Other ......................................... 826 162 2,000
--------- ------- -------- --------
187,130 46,647 200,970 195,545
--------- ------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES .............. (12,997) 267 6,132 3,534
PROVISION FOR INCOME TAXES ..................... (1,125) 25 475 300
--------- ------- -------- --------
NET (LOSS) INCOME .......................... $ (11,872) $ 242 $ 5,657 $ 3,234
========= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF DEFINED BUSINESS UNIT
EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS
ENDED AUGUST 31, 1998, AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, MAY 31, 1996 ............................................ $ 27,797
Net and comprehensive income .................................... 3,234
Defined Business Unit equity distributed to the Company ......... (3,234)
---------
BALANCE, MAY 31, 1997 ............................................ 27,797
Capital contributed from Harvest States Cooperatives ............ 38,800
Net and comprehensive income .................................... 5,657
Defined Business Unit equity distributed to the Company ......... (4,296)
---------
BALANCE, MAY 31, 1998 ............................................ 67,958
Net and comprehensive income .................................... 242
Defined Business Unit equity distributed to the Company ......... (167)
---------
BALANCE, AUGUST 31, 1998 ......................................... 68,033
Net and comprehensive loss ...................................... (11,872)
Defined Business Unit equity distributed to the Company ......... 10,179
---------
BALANCE, AUGUST 31, 1999 ......................................... $ 66,340
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ............................ $ (11,872) $ 242 $ 5,656 $ 3,234
Adjustments to reconcile net (loss) income
to net cash provided by (used in)
operating activities:
Depreciation and amortization .............. 5,928 1,257 4,717 4,137
Provision for doubtful accounts ............
Loss on disposal of property, plant and
equipment ................................. 757 162 2,000
Changes in operating assets and
liabilities:
Receivables ............................. 4,268 530 (8,896) 16,889
Inventories ............................. 4,556 (5,109) (1,513) (2,963)
Other current assets .................... 219 (37) 448 (691)
Accounts payable and accrued
expenses ............................... (992) 2,265 911 (2,987)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities ..................... 2,864 (852) 1,485 19,619
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment ................................... (18,738) (12,791) (20,310) (14,968)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to Cenex Harvest States
Cooperatives ................................ 15,700 16,499 (5,674) (8,631)
Long-term debt borrowings .................... 15,000
Principal payments on long-term debt ......... (10,005) (2,689) (10,005) (7,786)
Capital contributed from Harvest States
Cooperatives ................................ 38,800
Defined Business Unit equity distributed
to the Company .............................. 10,179 (167) (4,296) (3,234)
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities .................................. 15,874 13,643 18,825 (4,651)
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ................... -- -- -- --
CASH AT BEGINNING OF PERIOD ................... -- -- -- --
--------- --------- --------- ---------
CASH AT END OF PERIOD ......................... -- -- -- --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS -- Cenex Harvest States Cooperatives'
Wheat Milling Defined Business Unit (the Defined Business Unit) is a defined
business unit of Cenex Harvest States Cooperatives (the Company) and is not
organized as a separate legal entity. The purpose of the Defined Business Unit
is to carry on the operations of the Wheat Milling Division. The assets and
liabilities of the Defined Business Unit continue to be 100% owned by the
Company. The Defined Business Unit operates commercial bakery and semolina flour
milling facilities in Mount Pocono, Pennsylvania; Rush City, Minnesota; Huron,
Ohio; Kenosha, Wisconsin; and Houston, Texas. These mills produce semolina and
durum flour, which are the primary ingredients in pasta products and wheat flour
in the bakery industry. The Defined Business Unit serves customers throughout
the United States.
Effective June 1, 1998, Harvest States Cooperatives merged with Cenex, Inc.
to form Cenex Harvest States Cooperatives. As a result of the merger, the
Defined Business Unit became a defined business unit of Cenex Harvest States
Cooperatives at that date.
CASH MANAGEMENT -- The Defined Business Unit draws all of its cash
requirements from and deposits all cash generated with the Company's centralized
cash management system.
INVENTORIES AND HEDGING -- Grain and processed grain products are stated at
market, including adjustments for open purchase, sales and futures contracts and
deferral of normal profit on processed grain products.
The Defined Business Unit follows the general policy of hedging its grain
inventories and unfilled orders for grain products to the extent considered
practicable to minimize 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, may not be
completely hedged due, in part, to the absence of satisfactory hedging
facilities for certain commodities and geographical areas and, in part, to the
Defined Business Unit's assessment of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may expose the
Defined Business Unit to risk in the event that a counterparty to a transaction
is unable to fulfill its contractual obligation. The Defined Business Unit
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.
In June 1998, Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No.133, a new standard related to the
accounting for derivative transactions and hedging activities. In July 1999, the
FASB issued SFAS No.137 which defers the effective date of SFAS No.133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. While
management does not believe this standard will materially impact the financial
results of the Defined Business Unit, it is currently evaluating the reporting
requirements under this new standard.
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. The cost and
related accumulated depreciation of assets sold or otherwise disposed of are
removed from the related accounts and resulting gains or losses are reflected in
operations.
INTANGIBLE ASSETS -- Intangible assets, consisting primarily of goodwill
and leasehold rights, 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, plant and equipment, and other long-lived assets,
for potential impairment by comparing their carrying value to the estimated
undiscounted future cash flows expected to result from the use of these assets.
F-43
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 -- Net income generated on grain purchased by the Defined
Business Unit from nonmembers is characterized as nonpatronage income and is,
therefore, taxable. Net income generated on grain purchased from the Company and
holders of Equity Participation Units (EPUs) are considered to be patronage to
the extent of the Company's patronage purchase percentage of that particular
commodity; the other portion of such income is considered nonpatronage and is,
therefore, taxable.
Results of operations of the Defined Business Unit are included in the
consolidated federal income tax return of the Company. The Company has a policy
that provides for the payment of taxes as calculated on an individual company
basis for each of its defined business units and divisions.
REVENUE RECOGNITION -- Sales of processed grains are recognized upon
shipment to customers, net of freight charges.
USE OF 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 expenses
during the reporting period. Actual results could differ from those estimates.
2. RECEIVABLES
Receivables at August 31, 1999 and 1998, and May 31, 1998 are as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Trade ........................................ $32,274 $34,825 $35,703
Other ........................................ 454 1,074 738
------- ------- -------
32,728 35,899 36,441
Less allowance for doubtful accounts ......... 1,768 671 683
------- ------- -------
$30,960 $35,228 $35,758
======= ======= =======
</TABLE>
Sales to two customers accounted for 23% of total sales for the three
months ended August 31, 1998, and the years ended May 31, 1998 and 1997,
respectively.
3. INVENTORIES
Inventories at August 31, 1999 and 1998, and May 31, 1998 are as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Grain ............................ $11,915 $17,003 $11,618
Processed grain products ......... 1,815 1,270 1,395
Other ............................ 609 622 772
------- ------- -------
$14,339 $18,895 $13,785
======= ======= =======
</TABLE>
F-44
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
4. LONG-LIVED ASSETS
PROPERTY, PLANT AND EQUIPMENT -- Major classes of property, plant and
equipment at August 31, 1999 and 1998, and May 31, 1998 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31,
IN YEARS 1999 1998 1998
------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Land .................................. $ 398 $ 398 $ 398
Grain processing plants ............... 15 to 45 56,586 37,378 37,016
Machinery and equipment ............... 5 to 20 67,897 49,743 48,406
Construction in progress .............. 10,615 32,299 21,206
-------- -------- --------
135,496 119,818 107,026
Less accumulated depreciation ......... 24,949 22,390 21,399
-------- -------- --------
$110,547 $ 97,428 $ 85,627
======== ======== ========
</TABLE>
During the year ended August 31, 1999, the three months ended August 31,
1998, and for the years ended May 31, 1998 and 1997, the Defined Business Unit
capitalized interest of $797, $337, $339 and $589, respectively.
INTANGIBLE ASSETS -- Intangible assets at August 31, 1999 and 1998, and May
31, 1998 are as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Goodwill, less accumulated amortization of $2,103, $1,697,
$1,595 and $1,188, respectively ......................... $3,997 $ 4,403 $ 4,505
Leasehold rights and other intangibles, less accumulated
amortization of $6,496, $5,836, $5,671 and $5,145,
respectively ............................................ 5,418 6,078 6,243
------ ------- -------
$9,415 $10,481 $10,748
====== ======= =======
</TABLE>
5. BORROWINGS
DUE TO CENEX HARVEST STATES COOPERATIVES -- The Defined Business Unit
satisfies its working capital needs through borrowings, both long-and
short-term, from the Company to the extent the Company's borrowing capacity
permits. Amounts outstanding under this arrangement at August 31, 1999 and 1998,
and May 31, 1998 totaled $48,938, $33,238 and $16,739, respectively.
The Company charges the Defined Business Unit interest on its daily average
of short-term borrowings at a rate equivalent to the weighted average interest
rate on short-term borrowings of the Company. The weighted average borrowing
rate of the Company's short-term borrowings was 5.8%, for the year ended August
31, 1999, for the three months ended August 31, 1998, and for the years ended
May 31, 1998 and 1997. Amounts due from the Company receive interest in the same
manner at the same rate.
F-45
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
5. BORROWINGS (CONTINUED)
LONG-TERM DEBT
Long-term debt consisted of the following at August 31, 1999 and 1998, and
May 31, 1998:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Cenex Harvest States Cooperatives, with fixed and variable
interest rates from 6.41% to 8.75%, due in installments
through 2005 ............................................ $37,165 $46,920 $49,359
Industrial Development and Public Grain Elevator
Revenue Bonds, payable through July 2004, with an
interest rate of 7.4% ................................... 1,350 1,600 1,850
------- ------- -------
38,515 48,520 51,209
Less current portion ..................................... 10,005 10,005 10,005
------- ------- -------
Long-term portion ........................................ $28,510 $38,515 $41,204
======= ======= =======
</TABLE>
The principal maturities of long-term debt outstanding at August 31, 1999
are as follows:
2000 ........... $10,005
2001 ........... 7,410
2002 ........... 7,125
2003 ........... 7,125
2004 ........... 6,850
-------
$38,515
=======
6. DEFINED BUSINESS UNIT EQUITY
On May 31, 1997, the Company completed an offering for the sale of EPUs in
its Wheat Milling Defined Business Unit to qualified subscribers. Qualified
subscribers are identified as Defined Members or representatives of Defined
Members which have been defined as persons or associations of producers actually
engaged in the production of agricultural products. The purchasers of EPUs have
the right and obligation to deliver annually the number of bushels of wheat
equal to the number of units held. Unit holders participate in the net patronage
sourced income from operations of the Wheat Milling Defined Business Unit as
patronage refunds distributed by the Company. EPUs represent an ownership
interest in the Company, not the Defined Business Unit.
7. RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all salaried and full-time hourly employees of the Defined
Business Unit. 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 Defined Business
Unit for the year ended August 31, 1999, for the three months ended August 31,
1998, and for the years ended May 31, 1998 and 1997 were approximately $247,
$88, $127 and $136, respectively.
F-46
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
7. RETIREMENT PLANS (CONTINUED)
The Defined Business Unit's portion of the actuarial present value of
accumulated benefit obligations and net pension assets available for benefits
has not been determined. Selected information at August 31, 1999 and 1998, and
May 31, 1998 for the Company's plan is as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Projected benefit obligation for service rendered to date ......... $196,034 $92,854 $94,075
Plan assets at fair value ......................................... 175,376 84,961 86,889
</TABLE>
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.0% and a rate of
increase in future compensation of 5% for all periods. The expected long-term
rate of return on plan assets was 9.0% for the year ended August 31, 1999, and
8.5% for all other periods.
8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Company provides certain health care benefits for retired employees of
the Defined Business Unit. 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 the Company
that are not funded were as follows at August 31, 1999 and 1998, and May 31,
1998:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
<S> <C> <C> <C>
Total postretirement benefit obligation ........................ $ 23,290 $ 10,408 $ 10,261
Unrecognized transition obligation ............................. (10,158) (7,835) (7,970)
Unrecognized net gains and other ............................... 2,026 1,864 1,850
--------- -------- --------
Accrued postretirement medical and other benefit costs ......... $ 15,158 $ 4,437 $ 4,141
========= ======== ========
</TABLE>
The net periodic costs billed to the Defined Business Unit for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997 were approximately $78, $18, $72 and $65,
respectively.
The calculations assumed a discount rate of 7.0% for the year ended August
31, 1999 and for the three months ended August 31, 1998 and 7.75% for the year
ended May 31, 1998, and a health care cost trend rate of 8.0% for the year ended
August 31, 1999, declining to 6.0% for 2004 and remaining at that level
thereafter.
F-47
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
9. INCOME TAXES
A reconciliation of the statutory federal tax rate to the effective rate
for the year ended August 31, 1999, for the three months ended August 31, 1998,
and for the years ended May 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
Statutory federal income tax rate ................. 35.0% 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ..................................... 4.1 4.1 5.0 4.9
Patronage earnings ................................ (30.4) (30.8) (36.5) (31.2)
Other, net ........................................ 1.1 4.2 ( 0.2)
----- ----- ----- -----
Effective rate .................................... 8.7% 9.4% 7.7% 8.5%
===== ===== ===== =====
</TABLE>
The Defined Business Unit has no significant deferred income tax assets or
liabilities.
10. COMMITMENTS AND CONTINGENCIES
Noncancellable operating leases for approximately 301 rail cars with
remaining lease terms of one to ten years are used by the Defined Business Unit.
In addition, leases for a milling facility, grain elevator, certain vehicles and
various manufacturing equipment are used by the Defined Business Unit.
Total rent expense for all operating leases, net of rail car mileage
credits received from the railroad, was $2,261, $576, $2,108 and $2,145 for the
year ended August 31, 1999, for the three months ended August 31, 1998, and for
the years ended May 31, 1998 and 1997, respectively. Mileage credits were $226,
$22, $215 and $376 for the year ended August 31, 1999, for the three months
ended August 31, 1998, and for the years ended May 31, 1998 and 1997,
respectively. Minimum rental payments due under these noncancellable operating
leases at August 31, 1999 are as follows:
<TABLE>
<CAPTION>
MILLING HOUSTON
RAIL CARS FACILITY ELEVATOR OTHER TOTAL
----------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
2000 ........................ $2,279 $ 440 $ 33 $33 $ 2,785
2001 ........................ 1,902 440 33 28 2,403
2002 ........................ 1,110 440 33 21 1,604
2003 ........................ 260 467 33 9 769
2004 ........................ 8 480 33 521
2005 and thereafter ......... 1,480 688 2,168
------ ------ ---- --- -------
$5,559 $3,747 $853 $91 $10,250
====== ====== ==== === =======
</TABLE>
There are various lawsuits and administrative proceedings incidental to the
business of the Defined Business Unit. It is impossible, at this time, to
estimate what the ultimate legal and financial liability of the Defined Business
Unit 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 Defined Business Unit taken as a whole.
At August 31, 1999, the operations of the Defined Business Unit had
outstanding grain purchase contracts of 14,855,986 bushels at prices for durum
ranging from $3.75 per bushel to $4.55 per bushel and prices for spring wheat
ranging from $3.40 per bushel to $4.26per bushel and prices for winter wheat
ranging from $1.98 per bushel to $3.72 per bushel. In addition, the operations
of the Defined Business Unit had outstanding sales contracts of both semolina
and commercial baking flour totaling approximately $68,621.
F-48
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
11. RELATED PARTY TRANSACTIONS
Revenues for the year ended August 31, 1999, for the three months ended
August 31, 1998, and for the years ended May 31, 1998 and 1997, included $67,
$29, $99 and $754, respectively, to related parties, primarily the Company.
The Defined Business Unit purchases substantially all of its durum and
wheat from the Company. Included in cost of goods sold for the year ended August
31, 1999, for the three months ended August 31, 1998, and for the years ended
May 31, 1998 and 1997, were $115,571, $30,895, $141,454 and $138,000,
respectively, of these purchases.
Additionally, the Company performs various direct management services and
incurs certain costs for its defined business units and divisions. Such costs,
including data processing, office services and insurance, are charged directly
to the defined business units and divisions. Indirect expenses, such as
publications, board expense, executive management, legal, finance and human
resources, are allocated to the defined business units and divisions based on
approximate usage. Costs allocated to the Defined Business Unit for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997, were $1,020, $255, $1,020 and $1,000,
respectively.
On June 1, 1997, the Company contributed $38,800 in equity to the Defined
Business Unit for the purpose of constructing a mill at Mount Pocono,
Pennsylvania.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities are as follows for the year ended August 31, 1999, for the three
months ended August 31, 1998, and for the years ended May 31, 1998 and 1997:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ ------------ --------- --------
<S> <C> <C> <C> <C>
Net cash paid to the Company during the period for:
Interest ......................................... $5,184 $843 $3,122 $5,230
Income taxes ..................................... 475 300
</TABLE>
13. UNAUDITED INTERIM INFORMATION
As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives
merged with CENEX, Inc. to form Cenex Harvest States Cooperatives. Prior to the
merger, Harvest States Cooperatives' and the Defined Business Unit's year end
was May 31 and Cenex's year end was September 30. Subsequent to the merger, the
Company and the Defined Business Unit changed their fiscal year end to August
31. The transition period for the three months ended August 31, 1998 has been
included in the financial statements. Comparable information for the three
months ended August 31, 1997 is as follows:
<TABLE>
<CAPTION>
UNAUDITED
----------
<S> <C>
Processed grain sales .............................. $ 44,420
Cost of goods sold ................................. 40,570
Provision for income taxes ......................... 125
Net income ......................................... 1,291
Net cash used in operating activities .............. (1,275)
Net cash used in investing activities .............. (2,293)
Net cash provided by financing activities .......... 3,568
</TABLE>
14. SUBSEQUENT EVENT
During September 1999, the Boards of Directors of Cenex Harvest States
Cooperatives and Farmland Industries, Inc., approved a Transaction Agreement to
unify the two cooperatives. The Transaction Agreement has not yet been approved
by the members of either cooperatives.
F-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Cenex Harvest States Cooperatives:
In our opinion, the accompanying balance sheets and the related statements
of operations, defined business unit equity and comprehensive income and cash
flows present fairly, in all material respects, the financial position of Wheat
Milling Defined Business Unit (a Defined Business Unit of Cenex Harvest States
Cooperatives) as of August 31, 1999 and 1998, and the results of its operations
and its cash flows for the year ended August 31, 1999 and for the three months
ended August 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Defined
Business Unit's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 29, 1999
F-50
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cenex Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the balance sheet of the Wheat Milling Defined Business
Unit (the Defined Business Unit), formerly known as Amber Milling Company, a
defined business unit of Cenex Harvest States Cooperatives, as of May 31, 1998
and the related statements of operations, defined business unit equity and
comprehensive income, and cash flows for each of the two years in the period
ended May 31, 1998. These financial statements are the responsibility of the
Defined Business Unit'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 Defined Business Unit at
May 31, 1998 and the results of its operations and its cash flows for each of
the two years in the period ended May 31, 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, MN
July 24, 1998
F-51
EXHIBIT 10.33
TACOMA EXPORT MARKETING COMPANY
AMENDED AND RESTATED PARTNERSHIP AGREEMENT
BETWEEN
CARGILL, INCORPORATED
AND
CENEX HARVEST STATES COOPERATIVES
DATED AS OF JULY 12, 1999
<PAGE>
THIS AMENDED AND RESTATED PARTNERSHIP AGREEMENT made as of this 12th
day of July, 1999, between CENEX HARVEST STATES COOPERATIVES, a Minnesota
corporation ("Cenex Harvest States") and CARGILL, INCORPORATED, a Delaware
corporation ("Cargill").
WITNESSETH:
WHEREAS, Cenex Harvest States and Continental Grain Company
("Continental") formed this general partnership dated as of September 28, 1992
for the purpose of engaging in the buying, selling, storing and handling of
certain feedgrains and oilseeds for export from the Pacific Northwest, United
States primarily through Continental's leased facility at Tacoma, Washington
(the "Tacoma Facility") and such other business activities as were related
thereto; and
WHEREAS, the partnership formed thereby subleased the Tacoma Facility
from Continental; and
WHEREAS, Cenex Harvest States and Continental amended the Partnership
Agreement dated September 28, 1992 with that certain Amendment No. 1 dated June
1, 1997; and
WHEREAS, Cargill has purchased and taken an assignment of
Continental's interest in the partnership, the Tacoma Facility and the sublease
between Continental and the partnership; and
WHEREAS, the partnership desires to put grain through Cargill's leased
facility at Seattle, Washington (the "Seattle Facility"); and
WHEREAS, Cenex Harvest States and Cargill, as partners in the
partnership, wish to amend certain terms and conditions of the Agreement and to
restate the Agreement as amended.
NOW, THEREFORE, in consideration of the premises and covenants and
agreements hereinafter set forth, the Partners hereby agree as follows:
ARTICLE I
DEFINITIONS
Definitions. The following terms wherever used in this
Agreement shall have the meanings hereinafter assigned to them:
"Affiliate" means, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under common control
with such Person.
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"Agreement" means this Amended and Restated Partnership
Agreement as in effect on the date hereof and as the same may be modified or
amended by action of the Partners as provided herein.
"Control" (including "controlling", "controlled by" and
"under common control with") means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person by ownership of more than 50% of the voting securities of a corporation
or by contract or otherwise.
"Controlling Affiliate" means, with respect to any Person,
any Affiliate of such Person that Controls such Person.
"Encumbrance" means and includes any mortgage, pledge, lien,
charge, encumbrance, lease, sublease, security interest or trust interest; and
to "Encumber" an asset is to create an Encumbrance thereon.
"Feedgrains" means the corn and sorghum as provided in
Section 7.1.
"Fundamental Issues" means those issues which require the
vote of both of the Partners or the approval of the Management Committee, as
provided in Section 5.3.
"Management Committee" means the Management Committee
constituted as provided in Section 5.2.
"Net Income" and "Net Loss" shall mean the income and losses
of the Partnership, determined on an accrual basis in accordance with generally
accepted accounting principles consistently applied, after all expenses of the
Partnership have been taken into account (including allowances for depreciation
or amortization of Partnership assets) and shall include gain or loss realized
by the Partnership on the sale or the disposition of assets in connection with a
dissolution of the Partnership pursuant to Article XI.
"Oilseeds" means soybeans as provided in Section 7.1.
"Partner" or "Partners" means Cargill or Cenex Harvest States
or both Cargill and Cenex Harvest States, as the case may be, and their
permitted successors and assigns.
"Partner Account" means, with respect to each Partner, the
account maintained for such Partner in accordance with Section 10.10.
"Partner Interest" means the interest of a Partner in the
Partnership.
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"Partnership Law" means the Washington Uniform Partnership
Act, Ch. 25.04 RCW as amended from time to time.
"Person" means any natural person, firm, trust, partnership,
joint venture, unincorporated association, corporation, government or
governmental agency.
"Prime Rate" means the prime or base rate announced from time
to time by the Chase Manhattan Bank, N.A. The Prime Rate shall be adjusted on a
[daily] basis.
"Secretary" means the Secretary of the Partnership as
provided in Section 6.2.
"Share", when used with respect to either Partner means fifty
percent (50%) unless and until such percentage shall be changed by a vote of the
Partners.
"Treasurer" means the Treasurer of the Partnership as
provided in Section 6.3.
ARTICLE II
2.1 The Partnership. The Partners hereby form and constitute a
partnership as a general partnership (the "Partnership") under the Partnership
Law of the State of Washington upon the terms and conditions set forth in this
Agreement. Except as otherwise provided in this Agreement, the rights and
liabilities of the Partners shall be governed by the Partnership Law.
2.2 Name. The Partnership shall operate under the name of Tacoma
Export Marketing Company ("TEMCO").
2.3 Principal Office. The principal office of the Partnership shall be
located at 5500 Cenex Drive, Inver Grove Heights, Minnesota 55077 or at such
other place as may be designated by the Management Committee as hereinafter
defined.
2.4 Duration. The Partnership commenced on or about September 15, 1992
and shall continue for a term of five years after the date of this Agreement,
unless sooner terminated as provided herein. In the event Cargill and Cenex
Harvest States reach a written, executed agreement regarding additional areas of
potential synergies within twelve months of the date of this Agreement, the term
of the Partnership shall be extended automatically until the expiration or
termination of Cargill's lease of either the Tacoma Facility or the Seattle
Facility, as from time to time extended, whichever shall first occur, unless
sooner terminated as provided herein.
2.5 Purpose. The purpose of the Partnership is to engage in the
business of buying, trading, selling, handling and transporting for export and
exporting Feedgrains
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and Oilseeds, as defined in Section 7.1, from the Pacific Northwest, United
States through the Tacoma Facility and through the Seattle Facility pursuant to
a put through agreement with the operator of the Seattle Facilityto Pacific
Basin destinations and engaging in such other activities and business as may be
incidental or related thereto or necessary or desirable in furtherance of such
purpose. The Partnership shall establish or cause to be established such
business organizations and shall own, directly or indirectly, such assets as the
Partners shall agree are appropriate to achieve the purpose of the Partnership.
2.6 Scope. The Partnership is and shall be a partnership only for the
purposes specified in this Agreement and nothing contained in this Agreement
shall be deemed to create a general partnership between the Partners with
respect to any activities whatsoever other than activities within the proper
business purposes of the Partnership. Neither of the Partners shall have the
power to bind the other Partner or the Partnership except as specifically
provided in this Agreement. Neither of the Partners or the Partnership shall be
responsible or liable for any indebtedness, liability or obligation of the other
Partner incurred either before or after the execution of this Agreement except
for indebtedness, liabilities, and obligations incurred after the execution of
this Agreement in connection with authorized activities within the proper
business purposes of the Partnership. Each Partner, respectively, hereby
indemnifies and agrees to hold the other Partner, and its Affiliates and
directors and officers, and the Partnership harmless from and against all such
indebtedness, liabilities and obligations incurred by it which are not
authorized and within the proper business purposes of the Partnership.
ARTICLE III
3.1 Initial Capital Contributions. The initial capital of the
Partnership shall consist of $100.00 cash, contributed by the Partners in
proportion to their Shares. Each Partner shall make its initial capital
contribution contemporaneous with the execution of this Agreement.
3.2 Additional Capital Contributions.
(a) The Partners agree that the Partnership shall meet its capital
needs through the borrowing of funds as provided in Section 10.3 and that unless
specifically agreed to by the Partners and except as set forth in this Section
3.2, the Partners shall not be obligated to make any additional capital
contributions to the Partnership. If the Partners agree to make additional
capital contributions, the contributions shall be made at such times, in such
amounts and under such conditions as shall be determined by the Partners in
accordance with the provisions of this Agreement.
(b) No interest shall accrue on any Partner's Partner Account. A
Partner shall not be entitled to withdraw any part of its capital in the
Partnership or to receive any capital distribution from the Partnership except
as part of a distribution of capital agreed to by the Management Committee as
hereinafter defined or as provided in Article XI.
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(c) All capital contributions and other payments required or permitted
to be made by a Partner under this Agreement shall be either in cash or, at the
request of any Partner and if agreed to by the Management Committee, on such
conditions and for such fair value as the Management Committee as hereinafter
defined shall so determine, in kind.
(d) If a Partner (a "Delinquent Partner") shall fail to make when due
a contribution required pursuant to this Agreement, the other Partner (the
"Contributing Partner") may, in its sole discretion, advance all or part of that
amount to the Partnership. Such advance shall be deemed to be a demand loan by
the contributing Partner to the Delinquent Partner at an interest rate equal to
2% in excess of the Prime Rate for the period during which the advance is
outstanding. This loan shall be repaid, together with such interest, by the
Delinquent Partner promptly upon demand from any funds of the Delinquent
Partner, including, without limitation, any distribution from the Partnership
which would otherwise be payable to the Delinquent Partner. Unless and until the
Delinquent Partner makes such repayment, the Partnership shall make no cash
distribution to such Partner (except that a cash distribution shall be applied
to make such repayment and the balance then made to the formerly Delinquent
Partner) The Contributing Partner to which such debt is due (or to which a debt
pursuant to Article VIII is due) shall have a security interest in the Partner
Interest of the Delinquent Partner to secure such amounts owed to it, and such
security interest is hereby granted by each Partner. To the extent that the
principal amount of the delinquency is repaid, the principal amount of such
repayment (excluding any interest) shall be deemed a contribution to the capital
of the Partnership by the Delinquent Partner and shall be reflected as such in
the Partner Account of the Delinquent Partner.
ARTICLE IV
4.1 Allocation of Profits and Losses. Except as otherwise specifically
provided in Section 10.10; all items of Net Income and Net Loss shall be
allocated to the Partners in accordance with their respective Shares.
ARTICLE V
5.1 Voting and Meeting of the Partners. Each Partner shall have an
equal vote in the management of the Partnership. Meetings of the Partners may be
called by either Partner on ten (10) Business Days prior notice to discuss any
matter including, without limitation, any matter related to the finances,
operations, management, policies, or personnel of the Partnership. Notice of
meetings may be waived by the Partner entitled to such notice.
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5.2 Management Committee.
(a) The conduct of the business and affairs of the Partnership shall
be managed by a standing Management Committee consisting of four (4) members,
with each Partner appointing two (2) regular members and such alternate members
as such Partner deems advisable. Each of the Partners may initially appoint or
replace any or all of its members or alternate members of the Management
Committee by written notice to the Partnership and the other Partner. Each of
the Partners shall at all times maintain in effect the appointment of at least
one (1) member of the Management Committee. Each member of the Management
Committee shall serve for indefinite terms at the pleasure of the appointing
Partner.
(b) The Management Committee shall meet not less than quarterly at
such times and places as it may determine. Meetings of the Management Committee
may be called by one (1) member of the Management Committee. The General Manager
shall have the right to attend all meetings of the Management Committee but
shall not be entitled to participate in the voting on any decision or other
matter before the Management Committee. Notice of each meeting of the Management
Committee shall be telexed, telecopied, sent by mail or delivered personally, or
by telephone, to each regular and alternate member not later than ten (10)
Business Days before the date on which the meeting is to be held. Notice of
meetings may be waived by the member or members entitled to such notice.
(c) The attendance of one (1) member from each Partner shall
constitute a quorum for the transaction of business of the management Committee.
Each member at the meeting shall be entitled to one vote for each matter to be
voted upon by the Management Committee. Any decision or approval before the
Management Committee shall be taken by majority vote of those of the Management
Committee present or participating in a meeting at which a quorum is present;
provided, however, no action shall be authorized unless at least one (1) member
appointed by each Partner votes affirmatively on such action. The failure of the
Management Committee to authorize action with respect to any matter pursuant to
the foregoing sentence shall constitute a Deadlocked Matter pursuant to Section
5.4.
(d) Any decision or approval of the Management Committee may be made
without a meeting if either (i) such decision is first approved in writing by
one of the members or alternates of each of the Partners or (ii) such meeting is
held by means of a conference telephone or similar communications equipment
allowing all Persons participating in the meeting to hear each other at the same
time.
(e) The regular members of the Management Committee shall alternately
act as chairman of meetings of the Management Committee. Minutes of all meeting
shall be prepared by the Secretary and shall be distributed to all regular
members (and alternate members if present at a meeting) within thirty (30) days
following any meeting.
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5.3 Fundamental Issues. No action may be taken or decision made which
binds the Partnership by the General Manager, any Partner on behalf of the
Partnership, or the Partnership, with regard to any of the Fundamental Issues
without the vote (or written consent) of the Management Committee in accordance
with Section 5.2(c). Fundamental Issues shall include decisions and actions on
the following matters, and such other matters as may be deemed Fundamental
Issues, from time to time, by the Management Committee:
(a) calls for additional capital or guarantees hereunder;
(b) the issuance of any notes, bonds, debentures or other obligations
by the Partnership, or the incurrence of or assumption of any indebtedness if,
after giving effect thereto, the aggregate principal amount of all such
indebtedness of the Partnership, other than indebtedness previously approved by
the Management Committee (including, without limitation, the utilization by the
Partnership of lines of credit previously approved by the Management Committee
for the purpose of financing the business of the Partnership in the ordinary
course), would either (i) exceed the amounts specifically provided therefor and
sufficiently identified in the Partnership's current annual budgets referred to
in Sections 5.3(p) and 10.1, or (ii) result in direct or indirect liability on
either or both of the Partners for repayment of such indebtedness;
(c) any acquisition, disposition, sale, conveyance, lease, sublease,
exchange or other disposition of any interest in the Tacoma Facility other than
the subleases contemplated by Section 7.2 hereof;
(d) the acquisition, disposition, sale, conveyance, lease, sublease,
exchange or other disposition of real property having a value greater than a
threshold amount to be determined by the Management Committee;
(e) the acquisition, disposition, sale, conveyance, lease, sublease,
exchange or other disposition of personal property, other than agricultural
commodities traded in the ordinary course of business, with a value greater than
a threshold amount to be determined by the Management Committee;
(f) investing in any Person;
(g) the establishment of trading position limits for agricultural
commodities traded by the Partnership;
(h) the making of loans or provision of guaranties, or the extension
or pledge of credit to others, except endorsements and extensions of credit in
the ordinary course of business;
(i) the sale of any equity interests (or operation, warrant,
conversion in similar rights with respect thereto) in the Partnership;
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(j) the selection, appointment, remuneration, removal and
determination of the terms and conditions of employment agreements of officers,
executives and key employees of the Partnership;
(k) the payment of bonuses and perquisites to officers, executives and
key employees of the Partnership;
(l) the confession of any judgment against the Partnership or the
creation, assumption, incurrence, or suffering to be created, assumed or
incurred or to exist of, any encumbrance upon any of the assets or property of
the Partnership, or the acquisition or holding or agreement to acquire or hold
such property or assets subject to any encumbrance other than (i) liens for
taxes not yet due or which are being contested in good faith by appropriate
proceedings, and (ii) other minor encumbrances incidental to the conduct of the
business of the Partnership or the ownership of its property and assets which
are not incurred in connection with the borrowing of money or the obtaining of
advances or credit, and which do not in the aggregate materially detract from
the value of such property or assets or materially impair the use thereof in the
operation of the business of the Partnership;
(m) the compromise or submission to arbitration (other than contract
specifically providing for arbitration) or litigation of any claim due, or any
dispute or controversy involving the Partnership for any claim, dispute or
controversy in excess of any amount to be determined by the Management
Committee;
(n) the entering into of any contract or commitment (other than those
contracts made in the ordinary course of business) involving aggregate
expenditures in excess of an amount to be determined by the Management
Committee;
(o) the entering into any contract or commitment (other than those
commodity, sales and purchase contracts made in the ordinary course of the
Partnership's grain merchandising business) involving either Partner, or any of
their Affiliates;
(p) the approval of the annual business operating budget, capital
expenditure budget and business plan and the amount of cash for distribution and
adoption of other major financial policies of the Partnership;
(q) the approval of the opening financial statements of the
Partnership as referred to in Section 10.7;
(r) the appointment and removal of the independent accountants for the
Partnership;
(s) the appointment and removal of the Liquidator of the Partnership
pursuant to Section 11.2;
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(t) any material changes in the purposes of the Partnership beyond
that expressly contemplated by this Agreement as provided in Section 2.5;
(u) the voluntary dissolution and winding-up of the Partnership,
provided, however, that this provision shall in no way limit the rights of the
Partners under Article XI.
(v) any changes in the scope or method of operations or business
policies of the Partnership which is likely to materially increase the working
capital or cash requirements of the Partnership.
(w) approval of the credit policy applicable to export sales and any
material deviation therefrom.
5.4 Deadlock.
If the Management Committee cannot agree on any Fundamental Issue
within thirty (30) days following the Management Committee meeting at which a
decision on such Fundamental Issue was sought, or within thirty (30) days of any
such Fundamental Issue being submitted to the members of the Management
Committee for approval, then such matter shall be submitted to the Chief
Executive Officer of Cenex Harvest States and the Sector President of Cargill to
resolve. If the above mentioned executives of the Partners are unable to resolve
such deadlocked Fundamental Issue within thirty (30) days following submission
of the matter to them for resolution, and such Fundamental Issue has or will
have a material adverse effect on the business of the Partnership, then the
matter shall be submitted to arbitration in accordance with Section 12.2 of this
Agreement.
5.5 Subcommittees. The Management Committee may appoint such
subcommittees as it deems advisable, each with an equal number of
representatives from each Partner.
ARTICLE VI
OFFICERS AND EMPLOYEES
6.1 The General Manager.
(a) The General Manager shall be a Cargill employee so long as the
administration and trading functions of the Partnership are predominantly
operated out of Cenex Harvest States' facilities. If the Partnership's
administration and trading functions are moved to any Cargill facility, the
General Manager shall be an employee of Cenex Harvest States. The General
Manager is hereby vested with such executive and financial authority as to
enable him to direct the business and affairs of the Partnership, subject to the
directions of the Management Committee and in accordance
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with this Agreement and the annual budget adopted by the Management Committee.
The General Manager shall be authorized to execute documents within the scope of
his authority on behalf of the Partnership which will bind the Partnership
without the necessity of obtaining the signature of either of the Partners. The
General Manager shall be responsible for the implementation of the various
decisions of the Management Committee and for the day to day management and
operation of the Partnership. The General Manager shall regularly inform the
Management Committee of the Partnership's ongoing activities. The General
Manager shall report to and take direction from the Management Committee. The
General Manager shall enter into transactions on behalf of the Partnership
except that the General Manager is not authorized to take any action on a
Fundamental Issue unless such action shall have been approved by the Management
Committee pursuant to Section 5.2(c).
(b) The General Manager shall provide the following reports to the
Management Committee:
(i) daily position reports;
(ii) a weekly management report;
(iii) a monthly report on the financial condition and the
business prospects of the Partnership;
(iv) a monthly report summarizing all claims made and suits
filed against the Partnership, all potential claims and suits, and the
final settlement or other resolution of claims and suits; and
(v) other reports requested by the Management Committee or
one of the Partners.
6.2 Secretary. The Secretary shall be appointed by the Management
Committee and shall report to the General Manager. The Secretary shall act as
Secretary of all meetings of the Management Committee, shall keep the minutes
thereof in the proper book or books to be provided for that purpose, shall see
that all notices required to be given by the Partnership are duly given and
served, shall have charge of the books, records and papers of the Partnership
relating to its organization and management as a Partnership, and shall see that
the reports, statements and other documents required by law are properly kept
and filed; and shall, in general, perform all the duties incident to the office
of Secretary and such other duties as from time to time may be assigned to him
by the Management Committee and the General Manager.
6.3 Treasurer. The Treasurer shall be appointed by the Management
Committee. The Treasurer shall report to the Management Committee. The Treasurer
shall perform all the duties assigned to him by this Agreement including,
without limitation, (a) arranging for the Partnership to borrow funds pursuant
to Section 10.3; (b)
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submission to each Partner of quarterly comparisons pursuant to Section 10.1(b),
current cash estimates pursuant to Section 10.2, and statements relating to
Emergency Needs pursuant to Section 10.2(b); (c) determination of the amount of
Cash for Distribution and the distribution of such Cash for Distribution
pursuant to Section 10.4; (d) causing to be prepared and given to each Partner
unaudited financial statements pursuant to Section 10.8(b); (e) having charge
of, and being responsible for, all funds, securities and notes of the
Partnership; (f) receiving and giving receipts for moneys due and payable to the
Partnership from any sources whatsoever; (g) depositing all such moneys in the
name of the Partnership in such banks, trust companies or other depositaries as
shall be selected by the Management Committee; (h) against proper vouchers,
causing such funds to be disbursed by checks or drafts on the authorized
depositaries of the Partnership, and being responsible for accuracy of the
amounts of all moneys so disbursed; (i) regularly entering or causing to be
entered into books to be kept by him or under his discretion full and adequate
account of all moneys received or paid by him for the account of the
Partnership; (j) having the right to require, from time to time, reports or
statements giving such information as he may desire with respect to any and all
financial transactions of the Partnership from the officers or agents
transacting the same; and, (k) in general, all the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to him
by the Management Committee or the General Manager.
6.4 Other Persons. The Management Committee may appoint such other
executive and management employees, including Persons employed by Cargill or
Cenex Harvest States, as it shall from time to time deem appropriate, and may
approve a plan for hiring of other salaried employees including employees from
Cargill and Cenex Harvest States.
6.5 Appointment and Removal of Officers and Employees. The appointment
and removal of officers and employees of the Partnership shall be made by the
Management Committee. Either Partner may request the removal of any officer or
employee.
6.6 Affiliations. The officers, executives and other employees of the
Partnership may also be employees of the Partners or their Affiliates, and shall
not be required (except as may be determined by the Management Committee) to be
full-time employees of the Partnership. The Management Committee and the
Partners will agree on the designation of employees of the respective Partners
to be made available by the respective Partners for the purpose of providing
marketing, transportation, logistics, export administration, grain settlements,
accounting and other services, for and on behalf of the Partnership. Such
designated employees shall at all times remain employees of the respective
Partners. The duties performed by such designated employees for and on behalf of
the Partnership in conducting and performing Partnership business shall be
Partnership business activities. In consideration of each of the Partner's
making such employees available to the Partnership, the Partnership shall pay to
each of the Partners the charges for services by and other expenses
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incurred by such designated employees in performing Partnership business and
agreed by the Management Committee as reflected in the operating budget. The
Partnership shall have the right to direct the action of such designated
employees in performance of their duties for and on behalf of the Partnership.
If the Partnership does not desire to maintain the services of any such
designated employee, the Partnership may so advise the respective Partner
employing such designated employee and such Partner shall cause the designated
employee to cease performing such services for and on behalf of the Partnership.
Each Partner retains the right to fire its employees even if designated to the
Partnership or to transfer any such employee to other duties within the business
of such Partner; provided, however, that such Partner will cooperate with the
Partnership to provide a suitable replacement so that the services of like kind
provided by such dismissed or transferred employee will continue to be provided
to the Partnership.
6.7 Exculpation. Any regular or alternate member of the Management
Committee, the officers, executives and employees' of the Partnership which are
employed by either Partner or its Affiliate shall not be liable to the
Partnership or to the Partners for any action taken or omitted to be taken by
him with respect to the Partnership, except to the extent any such act or
omission was attributable to the willful misconduct, gross negligence or bad
faith of such member of the Management Committee, officer, executive or
employee.
ARTICLE VII
7.1 The Partnership business shall be limited to corn and sorghum
("Feedgrains") and soybeans ("Oilseeds") destined primarily for export from the
Pacific Northwest, United States. The Partnership intends to source Feedgrains
and Oilseeds from its Partners and its Partners intend to supply Feedgrains and
Oilseeds on market terms from their grain originating facilities and, in the
case of Cenex Harvest States, its affiliated cooperatives from which it
purchases such Feedgrains and Oilseeds, customarily tributary to the Pacific
Northwest export market.
7.2 In order to facilitate the ability of the Partnership to transport
and handle the Feedgrains and Oilseeds which it intends to market into export
channels, the Partnership desires to utilize the Tacoma Facility and has entered
into the Sublease Agreement between Continental and the Partnership dated
September 28, 1992 and amended by that certain Amendment No. 1 to Sublease dated
June 1, 1997 and amended and restated in that certain Amended and Restated
Sublease executed concurrently with the execution of this Agreement (the "Tacoma
Facility Sublease"). The Tacoma Facility Sublease shall terminate on the
termination, expiration or dissolution of the Partnership.
7.3 Each Partner agrees to commit all of its Feedgrains and Oilseeds
origination which is tributary to the Pacific Northwest United States (not to
include California) ("PNW") for export to the Partnership. Whether origination
is tributary to the
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PNW for export shall be based upon what is the best market (i.e., what is the
best net value to the Partner originating and selling the grain) for such grain
at the time the grain is to be liquidated. If markets offer equal value,
origination shall be split equally between the markets, unless doing so
negatively impacts the net value to the Partner. Grain shall be transferred to
the Partnership by the Partners at the Partnership's bid price for such grain.
The Partners further agree that the Partnership shall be the exclusive
export marketing vehicle for each of them and their Affiliates for Feedgrains
and Oilseeds exported through the PNW.
Upon request of either Partner, the other Partner shall provide
information reasonably requested to the requesting Partner to verify compliance
with the terms of this section.
7.4 The Partnership shall also provide throughput services for wheat,
barley or other commodities at the Tacoma Facility for either Partner from time
to time at market rates as determined by the parties.
ARTICLE VIII
NATURE OF OBLIGATIONS; INDEMNITIES; CHARGES
8.1 Obligations. As between the Partners, no Partner shall be liable
or bear responsibility for more than its Share of each and all of the costs,
expenses, liabilities and charges incurred or accrued by the Partnership. If any
Partner shall pay or be required to pay, discharge or otherwise bear
responsibility for any amount in excess of its share of the costs, expenses,
liabilities and charges incurred or accrued by the Partnership, (i) such payment
shall be deemed a demand loan by the advancing Partner to the other Partner, and
shall be treated in the same manner as a loan pursuant to Section 3.2(d), and
(ii) the other Partner covenants and agrees to indemnify, hold harmless and
reimburse such Partner against and for the amount of such excess.
8.2 Indemnities. Each Partner covenants and agrees to indemnify and
hold harmless the Partnership and the other Partner from and against any and all
damage, losses and expenses caused by or arising out of any and all of the
following: (i) any failure to perform any obligation required to be performed by
such Partner hereunder and (ii) any wrongful or negligent act or omission by
such Partner in connection with the Partnership's property or the ownership or
operation thereof.
8.3 Charges. Upon the request of the General Manager or the Management
Committee, either Partner, without charge, shall provide to the Partnership
basic management and administrative advice and consultation of the kind
generally provided by corporate staff to operating line functions and, including
but not limited to, legal services, loss prevention and safety counseling,
transportation and human resources
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counseling, and insurance counseling (but excluding management information
services), so long as that Partner is providing those services to its other
business segments.
8.4 Nature of Obligations; Indemnities; Charges. The expenses incurred
by Cargill in its Portland, Oregon office to provide the Partnership with export
administration support shall be provided at no cost to the Partnership.
Similarly, the expenses incurred by Cenex Harvest States in its St. Paul,
Minnesota office to provide the Partnership with accounting and trading
administration support shall be provided at no cost to the Partnership. The
Management Committee shall oversee the provision of these services as well as
those covered by Section 8.3, and in the event the contribution by the Partners
is not generally equal, the Management Committee shall take such action as it
deems necessary, such as having the Partnership pay one or both Partners for
some or all of such services.
8.5 Insurance. The Partnership shall purchase and maintain commercial
general liability and property insurance on the Tacoma Facility and other
insurance coverages, with deductibles and limits, as established and approved by
the Management Committee. Initially, the Management Committee establishes and
approves the insurance with the coverages, limits and deductibles set forth on
the Certificates of Insurance attached hereto as Exhibit A. The coverages,
limits and deductibles shall not be changed without the approval of the
Management Committee.
ARTICLE IX
TRANSFER OF INTERESTS
9.1 No Transfer of Interest. Except as hereinafter otherwise provided
in this Article IX, during the term of this Agreement, no Partner (or any
successor) shall, directly or indirectly in any manner, sell, transfer, assign,
encumber or otherwise dispose of any interest in the Partnership, nor shall any
such interest be subject, in whole or in part, directly or indirectly, to sale,
transfer, assignment, encumbrance or other disposition by operation of law or
agreement, without the prior written consent of the other Partner, and any
attempt so to do shall be void.
9.2 Transfer to Affiliates. Notwithstanding anything in Section 9.1 to
the contrary, any Partner may sell, transfer or otherwise dispose of its Partner
Interest to any entity which is an Affiliate of such Partner or of the ultimate
Controlling Affiliate of such Partner, subject, however, to the conditions that
(i) in the opinion of counsel to the Partnership, such sale, transfer or other
disposition would not (a) constitute a default under any material agreement to
which the Partnership is a party or (b) result in the termination of the
Partnership for Federal income tax purposes, (ii) the transferee may not be a
debtor subject to any proceeding under Title 7 or 11 of the United States
Bankruptcy Code or any successor legislation or similar state legislation
(unless otherwise consented to in writing by the other Partner) , and (iii) the
transferor and its
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Affiliates shall not be released from any of its or their obligations under this
Agreement or the Subleases.
9.3 Reasonableness of Restrictions. Each Partner acknowledges and
agrees that the restrictions on the transfer of interests herein are reasonable
in view of the purpose and intent of the Partners.
9.4 Certain Encumbrances Permitted. Anything in this Agreement to the
contrary notwithstanding, any Partner (and the Affiliates of any Partner) may
encumber all or part of such Partner's Partner Interest to the extent and in the
manner which may be required pursuant to financing agreements contemplated by
Section 10.3.
ARTICLE X
FINANCIAL MATTERS
10.1 Programs and Budgets.
(a) The General Manager shall, not later than one (1) month prior to
the commencement of the next succeeding fiscal year of the Partnership, prepare
and submit to the Management Committee for its review and approval a business
operating budget and a capital expenditure budget for such fiscal year.
(b) Not later than the 25th calendar day after the close of each
fiscal quarter, the Controller shall submit to each Partner a comparison, for
the immediately preceding quarter and for the year to date, of the results of
operations of the Partnership with the applicable fiscal year budget.
10.2 Estimates on Cash Needs.
(a) Based on the budgets referred to in Section 10.1(a) and the
quarterly comparisons referred to in Section 10.1(b), the Treasurer will, at
such time and for such periods as requested by the Management Committee, submit
to the Management Committee a current cash estimate showing: (i) the estimated
cash disbursements which the Partnership will be required to make during the
next succeeding calendar period for operating costs; (ii) estimated receipts;
(iii) amounts needed for additional working capital; and (iv) the amount of
funds ("Cash Needs") that will be required to cover the amount, if any, by which
estimated cash disbursements and amounts needed for additional working capital
exceed estimated receipts available to cover such cash disbursements and
additional working capital. The current cash estimate shall also specify the
dates on which the Partnership must receive the necessary funds.
(b) In the event an emergency requires cash payments ("Emergency
Needs") not provided for by such current cash estimates, the General Manager or
the Treasurer, may at any time furnish a statement thereof to the Management
Committee, giving the maximum period of notice for any such additional cash
payments as is practicable in
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the circumstances, specifying in detail the reasons for such emergency cash
payment and the amount thereof. Upon receipt of such emergency cash statement,
the Management Committee shall promptly decide, taking into account the
circumstances, how the Emergency Needs shall be met.
(c) Unless otherwise agreed by the Management Committee, the Cash
Needs and the Emergency Needs shall be made through borrowings of the
Partnership in accordance with Section 10.3.
10.3 Partnership Borrowings and Partner Loans. In the event that the
Management Committee decides at any time during the term of this Agreement that
it is desirable for the Partnership to borrow funds to acquire significant
inventories or to meet the Cash Needs, Emergency Needs or other requirements of
the Partnership, the Treasurer shall, within the limits of his authority as
defined by the Management Committee, negotiate on behalf of the Partnership to
borrow such funds from financial institutions. The Management Committee may
approve, reject, or modify the terms negotiated by the Treasurer and may
negotiate or authorize others to negotiate borrowings on behalf of the
Partnership in order to find terms more beneficial to the Partnership. The
Partnership may, upon approval of the Management Committee, also borrow from the
Partners, based on their respective Shares, on terms to be separately agreed.
The parties agree to use their best efforts to obtain Partnership borrowings
from financing institutions who will agree to limit recourse to each Partner to
50% of any sums financed.
10.4 Cash for Distribution. The Treasurer shall determine, at such
times as requested by the Management Committee, the amount of cash for
distribution and shall distribute such cash for distribution, if any, to the
Partners, in accordance with their Shares; provided, however, that (a) if any
Partner has advanced loans to a Delinquent Partner, the distributions otherwise
payable to the Delinquent Partner shall be made to the other Partner up to an
amount sufficient to repay such loans in full with interest, and (b) if any
Partner is in default or delinquent in respect of an obligation to the
Partnership, no distribution shall be made to such Partner until such default is
cured or such delinquent obligation is paid.
10.5 Deposits and Investments. The funds of the Partnership shall be
deposited in the name of the Partnership in accounts designated by the
Management Committee in banks or banking institutions to be selected by the
Management Committed or invested in such manner as shall be authorized by the
Management Committee. The Management Committee shall prescribe such procedures
as its shall deem necessary with respect to making such investments.
10.6 Fiscal Year. The fiscal year of the Partnership shall end on
August 31 in each year.
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10.7 Books of Account.
(a) The Management Committee shall approve the opening financial
statements for the Partnership as of the date hereof.
(b) Accurate books of account of the Partnership shall be maintained
in accordance with generally accepted accounting principles consistently
applied. In those instances in which more than one generally accepted accounting
principle can be applied, the Management Committee shall determine, in
consultation with the Partnership's independent accountants, which principle
will be adopted by the Partnership. Such books shall at any reasonable time be
available for examination by either Partner or Persons acting on its behalf at
the sole expense of such Partner.
10.8 Financial Statements.
(a) Within ninety (90) days after the close of each fiscal year of the
Partnership there shall be prepared and submitted to each Partner the following
financial statements, accompanied by the report thereon of the independent
accountants for the Partnership:
(1) a balance sheet of the Partnership as at the end of such
fiscal year;
(2) a statement of profit and loss for such fiscal year;
(3) a statement of changes in financial position; and
(4) a statement of the respective Partner Accounts and
changes therein for such fiscal year.
(b) Within twenty (20) Business Days after the close of each fiscal
month the Treasurer will cause to be prepared and given to each Partner
unaudited financial statements comparable to those referred to in Section
10.8(a)(1) and (2).
10.9 Tax Matters.
(a) The Partners hereby agree that the Partnership shall be treated as
a partnership for purposes of United States, Federal, state and local income tax
or other taxes, and further agree not to take any position or make any election,
in a tax return or otherwise, inconsistent therewith.
(b) The Management Committee shall cause all required United States
Federal, state and local partnership income, franchise, property or other tax
returns, including information returns, to be filed with the appropriate office
of the Internal Revenue Service or any other relevant taxing jurisdiction, as
the case may be. As promptly as practicable, and in any event in sufficient time
to permit timely preparation and filing by
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each Partner of its respective state and Federal tax returns, the Partnership
shall deliver to each Partner a copy of each state and Federal tax return or tax
report filed by the Partnership.
(c) All elections for Federal income tax purposes, except as stated in
Section 10.9(a), required or permitted to be made by the Partnership, and all
material decisions with respect to the calculation of its income or loss for tax
purposes, shall be made in such manner as the Management Committee shall
determine.
10.10 Partner Accounts.
(a) An individual partner account ("Partner Account") shall be
maintained for each Partner and shall be adjusted as set forth herein.
(b) The Partner Account maintained for each Partner (X) shall be
credited with the sum of (a) the fair market value at the time of contribution
of all capital contributions made by such Partner to the Partnership and the
amount of all Net Income credited to the Partner account of such Partner
pursuant to Section 4 and decreased by the sum of (i) the amount of all
distributions made to such Partner and (ii) the amount of Net Loss charged to
the Partner Account of such Partner pursuant to Section 4.1;
(c) Partnership income, gains, losses and deductions shall, solely for
income tax purposes, be allocated among the Partners in accordance with Section
704(c) of the Internal Revenue Code of 1986, as amended.
ARTICLE XI
DISSOLUTION AND WINDING UP
11.1 Dissolution Events. The Partnership shall be dissolved in case
any of the following events shall occur:
(a) The term of the Partnership shall expire pursuant to Section 2.4
of this Agreement.
(b) The sale, abandonment or disposal by the Partnership of all or
substantially all of its assets not in the ordinary course of business.
(c) If the Partnership incurs a net loss for any fiscal year in excess
of $10 million, and either Partner requests dissolution in writing within thirty
(30) days of receipt of the financial statements referred to in Section 10.8(a)
of this Agreement.
(d) If Cargill assigns, subleases or in any manner transfers its
rights under its lease of the Seattle Facility to Cenex Harvest States.
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(e) If Cargill assigns, subleases or in any manner transfers its
rights under its lease of the Seattle Facility to Tomen, Marubeni, Mitsui,
Zennoh, Itochu, KFA (Korean Feed Assoc) or COFCO (Chinese Oil) (such parties are
hereafter referred to collectively as the "First Tier Third Parties") and
executes a put through agreement with such party giving Cargill access to 40% or
more of the capacity of the Seattle Facility on an annual basis, and (i)
Cargill, Cenex Harvest States and the Partnership cannot agree upon the terms
and conditions under which said put through agreement will be assigned to the
Partnership, or (ii) the terms and conditions of such put through agreement are
unacceptable to Cenex Harvest States.
(f) If Cargill assigns, subleases or in any manner transfers its
rights under its lease of the Seattle Facility to one of the First Tier Third
Parties but does not execute a put through agreement with such party giving
Cargill access to 40% or more of the capacity of the Seattle Facility on an
annual basis, then either Cargill or Cenex Harvest States can elect to dissolve
the Partnership within thirty (30) days of such assignment, sublease or
transfer.
(g) If Cargill assigns, subleases or in any manner transfers its
rights under its lease of the Seattle Facility to any third party other than the
First Tier Third Parties or Cenex Harvest States, and (i) Cargill executes a put
through agreement with such party giving Cargill access to 40% or more of the
capacity of the Seattle Facility on an annual basis and (aa) Cargill, Cenex
Harvest States and the Partnership cannot agree upon the terms and conditions
under which said put through agreement will be assigned to the Partnership, or
(bb) the terms and conditions of such put through agreement are unacceptable to
Cenex Harvest States, or (ii) Cargill does not execute a put through agreement
with such party giving Cargill access to 40% or more of the capacity of the
Seattle Facility on an annual basis, then either Cargill or Cenex Harvest States
can elect to dissolve the Partnership within thirty (30) days of such
assignment, sublease or transfer.
(h) The Partnership or either Partner shall (i) file a petition in
bankruptcy, (ii) petition or apply to any tribunal for the appointment of a
receiver or any trustee for it or a substantial part of its assets, (iii)
commence any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect, or (iv) make an assignment for
the benefit of creditors or take any other similar action for the protection or
benefit of creditors; or if there shall have been filed any such petition or
application, or any such petition shall have been commenced against it, in which
an order for relief is entered or which remains undismissed for a period of
forty-five (45) days or more; or the Partnership or either Partner by any act or
omission shall indicate its consent to, approval of or acquiescence in any such
petition, application or proceeding or order for relief or the appointment of a
receiver or any trustee for it or any substantial part of any of its properties,
or shall suffer any such receivership or trusteeship to continue undischarged
for a period of forty-five (45) days or more.
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No Partner shall have the right to dissolve or terminate the
Partnership for any reason other than as set forth above or to withdraw from the
Partnership other than as set forth in Article IX, and each Partner hereby
waives any other right it may have with respect thereto.
11.2 Winding Up. Upon dissolution of the Partnership pursuant to
Section 11.1, the Partnership shall be wound up and liquidated in accordance
with law and the following provisions:
(a) Each Partner shall pay to the Partnership all amounts owing by it
to the Partnership.
(b) The Partnership shall continue with the business necessary to
complete and perform existing contracts until the distribution of the
Partnership's assets as hereinafter provided. No new business or contracts shall
be undertaken except as necessary to wind up and liquidate the Partnership.
(c) The property and business of the Partnership shall be wound up and
liquidated under the direction of the Management Committee or a Person duly
appointed by the Management Committee (in any such case, the "Liquidator"). Upon
the dissolution of the Partnership, the Liquidator shall cause a statement
setting forth the assets and liabilities of the Partnership as of the date of
dissolution of the Partnership (the "Dissolution Date") (including the fair
market value of all of the assets of the Partnership) to be prepared promptly
and furnished to each of the Partners, or upon the written request of either
Partner, by the independent auditors of the Partnership. In preparing such a
statement, the Liquidator may retain such independent appraisers or other
advisors as the Liquidator deems advisable. All fees, costs, and expenses
incurred in connection therewith shall be borne by the Partnership.
(d) Following the preparation and distribution of such statement, the
Liquidator shall distribute all the assets and assign all the liabilities of the
Partnership to the Partners in the ratio of the Partner Account balances of the
Partners after adjustment of the Partner Accounts for any profit or loss in the
year of liquidation, any profit or loss realized or to be realized on any
property sold or disposed of as part of the liquidation, and any profit which
would be realized if any property distributed in kind had been sold at its fair
market value by the Partnership.
(e) In conjunction with dissolution and liquidation of the
Partnership, Cargill shall pay to the Partnership the then book value (net of
accumulated depreciation) of all capital improvements and/or repairs made by the
Partnership to the Tacoma Facility during the term of the Partnership and which
have been authorized to be made by the Management Committee.
(f) In conjunction with dissolution and liquidation of the
Partnership, the shares of the Bank of Cooperatives (the "COBANK") held by the
Partnership shall be
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distributed equally to the Partners; provided, however, that in the even that
COBANK will not transfer the Partnership's shares in COBANK stock to Cargill,
then Cenex Harvest States will purchase all of the COBANK shares owned by the
Partnership from the Partnership at the Net Present Value (NPV) of the stated
carrying value of such shares as expressed on the Partnership's financial
statements. It being understood that the NPV would be computed based upon the
cash payout formula for stock redemption in use by COBANK at the date of the
dissolution. The discount factor to be used for calculating the NPV would be 100
basis points over the applicable United States Treasury Note rate for the cash
payout period.
11.3 Put-through Agreement. Upon dissolution of the Partnership
pursuant to Section 11.01(g), Cargill and Cenex Harvest States shall enter into
a put-through agreement giving Cenex Harvest States the right to access the
Tacoma Facility for put-through of Feedgrains and Oilseeds until May 31, 2000 at
market put-through rates. The put-through agreement shall be substantially in
accordance with the terms of the Put-Through Agreement attached hereto as
Exhibit B. The term of the put-through agreement shall be likewise extended for
any extensions which Cargill receives from the United States Department of
Justice beyond six (6) months to divest its operation of the Seattle Facility.
11.4 Put-through Agreement. Upon dissolution of the Partnership
pursuant to Section 11.01(a), (b), (c), (e), (f) or (h), Cargill and Cenex
Harvest States shall enter into a put-through agreement giving Cenex Harvest
States the right to access the Tacoma Facility for put-through of Feedgrains and
Oilseeds for the balance of the term of Cargill's lease of the Tacoma Facility
(including any extensions, renewals or amendments thereof) at market put-through
rates. The put-through agreement shall be substantially in accordance with the
terms of the Put-Through Agreement attached hereto as Exhibit C.
ARTICLE XII
DISPUTES; ARBITRATION
12.1 Resolution of Controversies. Any dispute, controversy or claim
between the Partners arising from this Agreement or the performance thereof
shall be settled solely by arbitration in accordance with the provisions of
Section 12.2.
12.2 Method of Arbitration. The arbitration shall be effected by
arbitrators selected as hereinafter provided and shall be conducted by the
American Arbitration Association in Minneapolis, Minnesota applying the
Commercial Arbitration Rules in effect on the date thereof. The dispute shall be
submitted to three arbitrators, each of who shall have had at least five (5)
years' experience in connection with the business of the Partnership, one
arbitrator being selected by the Partner submitting the controversy or dispute
to arbitration, the second arbitrator being selected by the other Partner and
the third arbitrator being selected by the two arbitrators so selected.
Conditions of any such arbitration shall include (a) that the arbitrators shall
not have the authority to
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modify, amend or supplement the terms of this Agreement, and shall interpret
this Agreement strictly in accordance with its terms; (b) that the amount of
capital required to be contributed by a Partner to the partnership shall not be
increased; and (c) that the Partner submitting such controversy or dispute to
arbitration shall appoint its arbitrator within fifteen (15) Business Days after
the date of such submission. The failure of the Partner requesting arbitration
to timely appoint such arbitrator shall void the effectiveness of the notice of
submission of the matter to arbitration. The second arbitrator to be selected by
the other Partner as hereinbefore provided shall be selected within fifteen (15)
Business Days after receipt of notice by such Partner of the selection of the
submitting arbitrator and, if the second arbitrator is not so selected, the
determination of the single arbitrator selected by the submitting Partner shall
be binding and conclusive. If the non-submitting Partner shall have timely
selected the second arbitrator, then the two selected arbitrators shall select
the third arbitrator within five (5) Business Days following the selection of
the second arbitrator. The meetings of the arbitrators shall be held at such
place or places as may be agreed upon by the arbitrators, and each Partner shall
bear the cost of the fees and expenses of the arbitrator selected by or for it,
with the fees and expenses of the third arbitrator to be borne equally. Upon
making any order or award, which order may include an order to dissolve the
Partnership pursuant to the provisions of Article X, the arbitrators shall
retain jurisdiction to determine any subsequent claim that a defaulting Partner
has failed to comply with terms of any such order or award. The arbitrators
shall have no authority to impose a fine or penalty.
ARTICLE XIII
CONFIDENTIAL INFORMATION
13.1 Confidential Information. During the continuance of the
Partnership and for a period of three (3) years after its termination, no
Partner or its Affiliates or any officer or employee thereof shall divulge to
any Person (except an Affiliate of such Person which shall undertake to be bound
to the provisions of this Article XIII) any trade secret, or secret process,
method or means or any other confidential information concerning the business or
properties of the Partnership, the Partners or their Affiliates, or the
manufacture, sale or licensing of products, processes and designs made or owned
by the Partnership, the Partners, or their Affiliates, that come to the
knowledge of such Partner, Affiliate, officer or employee by reason of the
relationship of such Partner, Affiliate, officer or employee with the
Partnership. The obligations under this Article XIII shall not apply to any
information to the extent that (a) such information is or shall become part of
the public domain, by publication or otherwise, through no fault of the Partner
seeking to use or disclose such information, or (b) the receiving Partner,
Affiliate, officer or employee shall be able to show such information to have
been in its or his possession prior to the receipt thereof from the Partnership
or other Partner or Affiliate or to have been received from a third party which
shall not itself have received such information on a confidential basis from the
Partnership or any Partner or Affiliate of a Partner.
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13.2 Non-Solicitation Clause. During the duration of this Agreement
each Partner represents that it will not initiate employment discussions with
personnel employed by the other Partner by direct contact or through executive
search firms, employment agencies, or other indirect means, for so long as such
personnel is employed by the Partner and for an additional six (6) months after
such personnel leaves that Partner's employ. It being understood that this would
not apply in instances where personnel from either Partner are responding to
general advertisements of job openings.
ARTICLE XIV
SECURITY INTEREST
14.1 Security for Indemnity. To secure their respective indemnity
obligations hereunder, each Partner hereby grants to the partnership and to the
other Partner, pursuant to Article IX of the Uniform Commercial Code, a security
interest in their respective right, title and interest in and to the
Partnership, and under the Partnership Agreement, including all present and
future rights to any profits, payments, distributions, or other rights to
payment arising under or in connection with the Partnership Agreement (the
"Collateral"); provided, however, that for so long as a Partner is not in
default of any of its indemnity obligations hereunder, that Partner may receive
all payments or distributions to which its is entitled as Partner of the
Partnership. In the event a Partner is in default under its indemnity
obligation, to the extent such default may be cured by the payment of money, the
Partnership may, at the request of the non-defaulting Partner, make such payment
and pay to the non-defaulting Partner the next available funds which would
otherwise have been distributed to the defaulting Partner, up to an amount which
will make the non-defaulting Partner whole, together with interest thereon from
the date paid by the Partnership until reimbursed to the other Partner at the
rate of 2% in excess of the Prime Rate.
Alternatively, if such loss is incurred by the other Partner, such
other Partner shall be entitled to receive all subsequent distributions
otherwise payable to the defaulting Partner until the non-defaulting Partner has
recovered the full amount of its loss together with interest at the rate of 2%
in excess of the Prime Rate.
Neither Partner will transfer or assign, grant a security interest in
or otherwise dispose of its respective interests as debtor in and to the
Collateral and will maintain the Collateral free and clear of all other liens,
claims and security interests whatsoever. Provided that a Partner has discharged
its respective obligations under and is not otherwise in default of its
obligations hereunder, and is not the subject of any bankruptcy or insolvency
proceeding, this security interest shall terminate only upon the settlement of
all debts and claims outstanding with respect to the dissolution of the
Partnership. Each Partner shall furnish to the Partnership and the other
Partner, upon request, duly executed UCC1 financing statements covering the
Collateral and such other documents, certifications and instruments as requested
by the Partnership or the
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other Partner, to evidence, grant, perfect and prioritize the security interest
granted in the Collateral.
ARTICLE XV
GOVERNING LAW
15.1 Governing Law. The Partnership is formed pursuant to and shall be
governed by and construed in accordance with the Partnership Law and laws of the
State of Washington, exclusive of Washington's conflict of laws rules.
ARTICLE XVI
AMENDMENTS
16.1 Amendments. The terms of this Agreement cannot be modified,
varied or amended orally but only by a written instrument executed by all the
Partners.
ARTICLE XVII
NOTICES
17.1 Notices.
(a) All notices, consents, demands, requests, reports and other
documents authorized or required to be given pursuant to this Agreement shall be
given in writing and either personally served to an officer or a member of the
Management Committee of the Partner to whom it is given or mailed by registered
or certified first class mail, postage prepaid, or sent by facsimile or
telegram, addressed as follows:
If to Cargill:
CARGILL, INCORPORATED
North American Grain/Lake
15615 McGinty Road West
Wayzata, MN 55391-2398
Attn: President
Facsimile No: (612) 404-6025
With a copy to:
CARGILL, INCORPORATED
Law Department/24
15407 McGinty Road West
Wayzata, MN 55391-2399
Attn: North American Grain Attorney
Facsimile No: (612) 742-6349
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If to Cenex Harvest States:
CENEX HARVEST STATES COOPERATIVES
5500 Cenex Drive
Inver Grove Heights, MN 55077
Attention: Legal Department
Facsimile No.: (651) 451-4554
(b) Any Partner may change the address to which notices and other
communications to it shall be sent by giving to the other Partner written notice
of such change, in which case notices and other communications to the Partner
giving the notice of the change of address shall not be deemed to have been
sufficiently given or delivered unless addressed to it at the new address as
stated in said notice. Notices shall be deemed to have been given (except as
otherwise expressly set forth in this Agreement) (i) when delivered, if given by
personal delivery or actual delivery during normal business hours, (ii) three
(3) Business Days after posting, if given by registered or certified mail,
return receipt requested, (iii) two (2) Business Days after dispatch if given by
telegram, or (iv) upon receipt, if given by facsimile.
ARTICLE XVIII
SUCCESSORS AND ASSIGNS
18.1 Successors and Assigns. Subject to the provisions of Article IX,
this Agreement shall inure to the benefit of and be binding upon the permitted
successors and assigns of the respective parties hereto in all respects as if
they were mentioned throughout by words of proper designation.
ARTICLE XIX
MISCELLANEOUS
19.1 Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the Partners with respect to the formation and operation of
the Partnership and related transactions contemplated by this Agreement, and
supersedes all prior agreements and understandings, written or oral, between the
Partners with respect thereto.
19.2 Severability. The unenforceability, invalidity, or illegality of
any provision of this Agreement shall not affect or impair any other provision
hereof or render it unenforceable, invalid or illegal.
19.3 Interpretation. Wherever used in this Agreement, unless the
context clearly indicates otherwise, the use of the singular includes the
plural, and vice versa; and the use of any gender is applicable to any other
gender.
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19.4 Captions. Captions contained in this Agreement are inserted only
as a matter of convenience and in no way define, limit, extend or describe the
scope of this Agreement or the intent of any provision hereof.
19.5 Partition Waived. The Partners agree that the Partnership's
interest, properties and investments are not and will not be suitable for
partition. Accordingly, each of the Partners hereby irrevocable waives any and
all rights that it may have to maintain any action for partition of any of such
interests, properties or investments.
19.6 Waiver and Consent. No consent or waiver, express or implied, by
any Partner to or of any breach or default by any other Partner in the
performance by such other Partner of its obligations hereunder shall be deemed
or construed to be a consent or waiver to or of any other breach or default in
the performance by such other Partner of the same or any other obligations of
such Partner hereunder. Failure on the part of any Partner to complain of any
act or failure to act of the other Partner or to declare such other Partner in
default, irrespective of how long such failure continues, shall not constitute a
waiver by such Partner of its right hereunder.
19.7 Commercial Efficacy. The Partners shall take all reasonable
actions to give commercial efficacy to the terms and conditions of this
Agreement and to promote the business of the Partnership, including, but not
limited to, taking or causing the members of the Management Committee appointed
by them to take all necessary actions in a timely fashion, in order for the
Partnership to pursue the business contemplated by this Agreement, entering into
all the agreements contemplated hereby and any additional agreements or
instruments of further assurance, as on advice from legal counsel, the Partners
shall reasonably deem necessary, and seeking all necessary governmental
approvals.
19.8 Counterparts. This Agreement may be executed in any number of
counterpart copies, each of which shall constitute an original and all of which
shall constitute one agreement.
19.9 GAAP Basis. In the event the auditors of the Partnership are
required hereunder to determine the values, accounts, give opinions or make, any
other valuation of any nature, the auditors shall employ generally accepted
accounting principles consistently applied unless the context otherwise requires
the application of the principles of tax accounting (or differing regulatory
rules).
19.10 First Right on Tacoma Facility. In the event Cargill wishes to
sell, transfer or assign its lease of the Tacoma Facility to a third party
during the term of the Partnership, Cargill shall provide Cenex Harvest States
with thirty (30) days prior written notice of its desire to do so. During such
thirty day period Cenex Harvest States shall have the first right to acquire the
Tacoma Facility, and the Partners shall negotiate in good faith the terms and
conditions of such proposed transaction. In the event the Partners cannot reach
a mutually acceptable agreement for such transaction in the
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thirty day period, Cargill shall be free to pursue and consummate the sale,
transfer or assignment of the Tacoma Facility to and with any third party,
provided that such sale, transfer or assignment is on no less favorable terms
and conditions to Cargill than the last offer of Cenex Harvest States to Cargill
for same and Cenex Harvest States is still willing to agree to such terms and
conditions (i.e., Cargill cannot sell, transfer or assign the Tacoma Facility to
a third party on terms and conditions less favorable to Cargill than the last
offer of Cenex Harvest States to Cargill for same). This section 19.10 shall not
apply in the event Cargill is also transferring its interest in the Partnership
to a third party.
IN WITNESS WHEREOF, the Partners have executed this Agreement as of
the date first above written.
CARGILL, INCORPORATED
By: /s/ Frank L. Sims
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
CENEX HARVEST STATES COOPERATIVES
By: /s/ Mark L. Palmquist
-------------------------------------
Name: Mark L. Palmquist
-----------------------------------
Title: Senior Vice President
----------------------------------
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EXHIBIT B
PUT-THROUGH AGREEMENT
THIS Put-Through Agreement, dated ______________________ by and
between CENEX HARVEST STATES COOPERATIVES ("CHS"), a Minnesota corporation; and
CARGILL, INCORPORATED ("Cargill"), a Delaware corporation is made with reference
to the following:
WITNESSETH:
WHEREAS, CHS desires to enter into a put through agreement with
respect to various commodities to be stored and handled at Cargill's Tacoma,
Washington grain elevator ("Facility") all as described herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreement set forth herein, the parties hereto, intending to be legally
bound, mutually agree as follows:
1. SERVICES PROVIDED. Cargill agrees to use its elevator facility, office
space, personnel and support equipment currently located at the Facility to
provide put through services for CHS in accordance with the terms of this
Agreement for corn, sorghum and soybeans. CHS and Cargill may, but shall not be
obligated to, agree to the put through of other commodities from time to time.
2. PAYMENT FOR SERVICES. As consideration for providing the put through
services and necessary elevator facilities, office space, personnel and support
equipment, Cargill will be paid a put through fee equal to the fair market put
through fee charged by elevators similarly situated for the applicable
commodities. The fee shall be established upon commencement of this Agreement.
If the parties are unable to agree upon what is the fair market put through fee
at the time such fee is to be established, either party may submit the matter to
the American Arbitration Association in Minneapolis, Minnesota. The decision of
the arbitrators shall be binding upon the parties and enforceable in a court of
law having jurisdiction over the parties.
3. OPERATING EXPENSES. In consideration of payment received hereunder,
Cargill will be responsible for all fixed and variable operating expenses with
regard to the Facility (including labor), including, without limitation,
depreciation, taxes, insurance, repairs and utilities.
4. CARGILL FUNCTIONS. Cargill will be responsible for performing the
normal day-to-day functions of the grain elevator business, including, without
limitation, weighing, grading and binning inbound grain deliveries and loading
outbound shipments.
5. INSURANCE. Cargill will maintain the property and casualty insurance
on the Facility as it sees fit. CHS shall be responsible for insuring its
inventory.
6. INDEMNITY. CHS, its respective affiliates, officers, directors and
employees, successors and assigns shall be indemnified and held harmless by
Cargill from any and all liabilities, losses, damages, costs and expenses,
interest, awards, judgments and penalties (including, without limitation,
reasonable legal costs and expenses) actually suffered or incurred by it to the
extent arising out of or resulting from the negligent acts of any of Cargill,
its employees or agents hereunder. In no event shall Cargill be liable under
this paragraph for CHS's lost profits, lost business or damage to the goodwill
or reputation of CHS; provided, however, that nothing herein shall be construed
as limiting Cargill's liability for, and the preceding limitations shall not
apply to, breach of this Agreement.
<PAGE>
7. TERM. [LENGTH OF TERM DETERMINED IN ACCORDANCE WITH PARAGRAPH 11.3 OF
THE TEMCO PARTNERSHIP AGREEMENT BETWEEN CHS AND CARGILL]. Cargill covenants and
agrees to keep such lease in full force and effect for the term of this
Agreement and covenants and agrees not to voluntarily terminate such lease
before expiration or termination of this Agreement without the prior written
consent of CHS. If Cargill sells or otherwise transfers its interest in the
Facility during the term of this Agreement, Cargill shall obtain the written
agreement of the transferee to be bound by the terms of this Agreement.
8. MISCELLANEOUS PROVISIONS.
8.1 BINDING EFFECT. This Agreement shall be binding on and inure to
the benefit of the parties and their heirs, personal representatives,
successors, and, to the extent permitted by Section 8.2, assigns.
8.2 ASSIGNMENT. Except with the other party's prior written consent, a
party may not assign any rights or delegate any duties under this Agreement.
8.3 NOTICES. Any notice or other communication required or permitted
to be given under this Agreement shall be in writing and shall be mailed by
certified mail, return receipt requested, postage prepaid, addressed to the
parties as follows:
(a) To CHS: Cenex Harvest States Cooperatives
Attention: Senior Vice President, Grain Marketing
5500 Cenex Drive
Inver Grove Heights, MN 55077
with a copy to: Cenex Harvest States Cooperatives
Attention: Legal Department
5500 Cenex Drive
Inver Grove Heights, MN 55077
(b) To Cargill: Cargill, Incorporated
Attention: N.A. Grain President/Lake
15615 McGinty Road West
Wayzata, MN 55391-2398
with copies to: Cargill, Incorporated
Attention: Law Department/N.A. Grain Attorney
P.O. Box 5624
Minneapolis, MN 55440-5624
Any notice or other communication shall be deemed to be given at the expiration
of the day after the date of deposit in the United States mail. The addresses to
which notices or other communications shall be mailed may be changed from time
to time by giving written notice to the other party as provided in this Section.
2
<PAGE>
8.4 ATTORNEY FEES. If any suit, action or arbitration proceeding is
filed by any party to enforce this Agreement or otherwise with respect to the
subject matter of this Agreement, the prevailing party shall be entitled to
recover reasonable attorney fees incurred in preparation or in prosecution or
defense of such suit, action or arbitration proceeding as fixed by the trial
court, or the arbitrator(s) and if any appeal is taken from the decision of the
trial court or the arbitrator(s), reasonable attorney fees as fixed by the
appellate court.
8.5 AMENDMENTS. This Agreement may be amended only by an instrument in
writing executed by all the parties.
8.6 HEADINGS. The headings used in this Agreement are solely for
convenience of reference, are not part of this Agreement, and are not to be
considered in construing or interpreting this Agreement.
8.7 ENTIRE AGREEMENT. This Agreement (including the exhibits) sets
forth the entire understanding of the parties with respect to the subject matter
of this Agreement and supersedes any and all prior understandings and
agreements, whether written or oral, between the parties with respect to such
subject matter.
8.8 COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when executed and delivered shall be an
original, but all of which together shall constitute one and the same
instrument.
8.9 SEVERABILITY. If any provision of this Agreement shall be invalid
or unenforceable in any respect for any reason, the validity and enforceability
of any such provision in any other respect and of the remaining provisions of
this Agreement shall not be in any way impaired.
8.10 WAIVER. A provision of this Agreement may be waived only by a
written instrument executed by the party waiving compliance. No waiver of any
provision of this Agreement shall constitute a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
Failure to enforce any provision of this Agreement shall not operate as a waiver
of such provision or any other provision.
8.11 GENDER. Any indication of gender of a party in this Agreement
shall be modified, as required, to fit the gender of the party or parties in
question.
8.12 FURTHER ASSURANCES. From time to time, each of the parties shall
execute, acknowledge, and deliver any instruments or documents necessary to
carry out the purposes of this Agreement.
8.13 TIME OF ESSENCE. Time is of the essence for each and every
provision of this Agreement.
8.14 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express
or implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
8.15 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Washington.
3
<PAGE>
8.16 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, including, without limitation, the making, performance, or
interpretation of this Agreement, shall be settled by arbitration before the
American Arbitration Association in Minneapolis, Minnesota.
8.17 FORCE MAJEURE. Neither party shall be liable to the other for
failure or delay in performance of its obligations by a cause not within its
reasonable control, including, but not limited to, acts of God, acts of public
disturbance, riots, war, fire, windstorm, flood, strikes, destruction of
facilities, or other labor disputes or government intervention, provided,
however, that the party experiencing the force majeure condition shall use
commercially reasonable efforts to remove such condition as soon as possible,
and upon such removal, the terms of this Agreement shall become fully in effect.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
date and year first above written.
CENEX HARVEST STATES COOPERATIVES, a Minnesota
corporation
By:
-----------------------------------------
Its
CARGILL, INCORPORATED, a Delaware corporation
By:
-----------------------------------------
Its
4
<PAGE>
EXHIBIT C
PUT-THROUGH AGREEMENT
THIS Put-Through Agreement, dated ___________________________ by and
between CENEX HARVEST STATES COOPERATIVES ("CHS"), a Minnesota corporation; and
CARGILL, INCORPORATED ("Cargill"), a Delaware corporation is made with reference
to the following:
WITNESSETH:
WHEREAS, CHS desires to enter into a put through agreement with
respect to various commodities to be stored and handled at Cargill's Tacoma,
Washington grain elevator ("Facility") all as described herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreement set forth herein, the parties hereto, intending to be legally
bound, mutually agree as follows:
1. SERVICES PROVIDED. Cargill agrees to use its elevator facility, office
space, personnel and support equipment currently located at the Facility to
provide put through services for CHS in accordance with the terms of this
Agreement for corn, sorghum and soybeans. CHS and Cargill may, but shall not be
obligated to, agree to the put through of other commodities from time to time.
2. PAYMENT FOR SERVICES. As consideration for providing the put through
services and necessary elevator facilities, office space, personnel and support
equipment, Cargill will be paid a put through fee equal to the fair market put
through fee charged by elevators similarly situated for the applicable
commodities. The fee shall be established upon commencement of this Agreement
and shall be adjusted annually during the term of this Agreement to reflect the
then current fair market put through fee. If the parties are unable to agree
upon what is the fair market put through fee at the time such fee is to be
established or adjusted, either party may submit the matter to the American
Arbitration Association in Minneapolis, Minnesota. The decision of the
arbitrators shall be binding upon the parties and enforceable in a court of law
having jurisdiction over the parties.
3. OPERATING EXPENSES. In consideration of payment received hereunder,
Cargill will be responsible for all fixed and variable operating expenses with
regard to the Facility (including labor), including, without limitation,
depreciation, taxes, insurance, repairs and utilities.
4. CARGILL FUNCTIONS. Cargill will be responsible for performing the
normal day-to-day functions of the grain elevator business, including, without
limitation, weighing, grading and binning inbound grain deliveries and loading
outbound shipments.
5. INSURANCE. Cargill will maintain the property and casualty insurance
on the Facility as it sees fit. CHS shall be responsible for insuring its
inventory.
6. INDEMNITY. CHS, its respective affiliates, officers, directors and
employees, successors and assigns shall be indemnified and held harmless by
Cargill from any and all liabilities, losses, damages, costs and expenses,
interest, awards, judgments and penalties (including, without limitation,
reasonable legal costs and expenses) actually suffered or incurred by it to the
extent arising out of or resulting from the negligent acts of any of Cargill,
its employees or agents hereunder. In no event shall Cargill be liable under
this paragraph for CHS's lost profits, lost business or damage to the goodwill
or
<PAGE>
reputation of CHS; provided, however, that nothing herein shall be construed as
limiting Cargill's liability for, and the preceding limitations shall not apply
to, breach of this Agreement.
7. TERM. The term of this Agreement shall continue until expiration of
the term of the Cargill's lease of the Facility, including any extensions,
renewals or amendments thereof. Cargill covenants and agrees to keep such lease
in full force and effect for the term thereof and covenants and agrees not to
voluntarily terminate such lease before its expiration without the prior written
consent of CHS. If Cargill sells or otherwise transfers its interest in the
Facility, Cargill shall obtain the written agreement of the transferee to be
bound by the terms of this Agreement.
8. MISCELLANEOUS PROVISIONS.
8.1 BINDING EFFECT. This Agreement shall be binding on and inure to
the benefit of the parties and their heirs, personal representatives,
successors, and, to the extent permitted by Section 8.2, assigns.
8.2 ASSIGNMENT. Except with the other party's prior written consent, a
party may not assign any rights or delegate any duties under this Agreement.
8.3 NOTICES. Any notice or other communication required or permitted
to be given under this Agreement shall be in writing and shall be mailed by
certified mail, return receipt requested, postage prepaid, addressed to the
parties as follows:
(a) To CHS: Cenex Harvest States Cooperatives
Attention: Senior Vice President, Grain Marketing
5500 Cenex Drive
Inver Grove Heights, MN 55077
with a copy to: Cenex Harvest States Cooperatives
Attention: Legal Department
5500 Cenex Drive
Inver Grove Heights, MN 55077
(b) To Cargill: Cargill, Incorporated
Attention: N.A. Grain President/Lake
15615 McGinty Road West
Wayzata, MN 55391-2398
with copies to: Cargill, Incorporated
Attention: Law Department/N.A. Grain Attorney
P.O. Box 5624
Minneapolis, MN 55440-5624
Any notice or other communication shall be deemed to be given at the expiration
of the day after the date of deposit in the United States mail. The addresses to
which notices or other communications shall be mailed may be changed from time
to time by giving written notice to the other party as provided in this section.
2
<PAGE>
8.4 ATTORNEY FEES. If any suit, action or arbitration proceeding is
filed by any party to enforce this Agreement or otherwise with respect to the
subject matter of this Agreement, the prevailing party shall be entitled to
recover reasonable attorney fees incurred in preparation or in prosecution or
defense of such suit, action or arbitration proceeding as fixed by the trial
court, or the arbitrator(s) and if any appeal is taken from the decision of the
trial court or the arbitrator(s), reasonable attorney fees as fixed by the
appellate court.
8.5 AMENDMENTS. This Agreement may be amended only by an instrument in
writing executed by all the parties.
8.6 HEADINGS. The headings used in this Agreement are solely for
convenience of reference, are not part of this Agreement, and are not to be
considered in construing or interpreting this Agreement.
8.7 ENTIRE AGREEMENT. This Agreement (including the exhibits) sets
forth the entire understanding of the parties with respect to the subject matter
of this Agreement and supersedes any and all prior understandings and
agreements, whether written or oral, between the parties with respect to such
subject matter.
8.8 COUNTERPARTS. This Agreement may be executed by the parties in
separate counterparts, each of which when executed and delivered shall be an
original, but all of which together shall constitute one and the same
instrument.
8.9 SEVERABILITY. If any provision of this Agreement shall be invalid
or unenforceable in any respect for any reason, the validity and enforceability
of any such provision in any other respect and of the remaining provisions of
this Agreement shall not be in any way impaired.
8.10 WAIVER. A provision of this Agreement may be waived only by a
written instrument executed by the party waiving compliance. No waiver of any
provision of this Agreement shall constitute a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
Failure to enforce any provision of this Agreement shall not operate as a waiver
of such provision or any other provision.
8.11 GENDER. Any indication of gender of a party in this Agreement
shall be modified, as required, to fit the gender of the party or parties in
question.
8.12 FURTHER ASSURANCES. From time to time, each of the parties shall
execute, acknowledge, and deliver any instruments or documents necessary to
carry out the purposes of this Agreement.
8.13 TIME OF ESSENCE. Time is of the essence for each and every
provision of this Agreement.
8.14 NO THIRD-PARTY BENEFICIARIES. Nothing in this Agreement, express
or implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
8.15 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Washington.
3
<PAGE>
8.16 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, including, without limitation, the making, performance, or
interpretation of this Agreement, shall be settled by arbitration before the
American Arbitration Association in Minneapolis, Minnesota.
8.17 FORCE MAJEURE. Neither party shall be liable to the other for
failure or delay in performance of its obligations by a cause not within its
reasonable control, including, but not limited to, acts of God, acts of public
disturbance, riots, war, fire, windstorm, flood, strikes, destruction of
facilities, or other labor disputes or government intervention, provided,
however, that the party experiencing the force majeure condition shall use
commercially reasonable efforts to remove such condition as soon as possible,
and upon such removal, the terms of this Agreement shall become fully in effect.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
date and year first above written.
CENEX HARVEST STATES COOPERATIVES, a Minnesota
corporation
By:
-----------------------------------------
Its
CARGILL, INCORPORATED, a Delaware corporation
By:
-----------------------------------------
Its
4
EXHIBIT 10.34
COOPERATIVE REFINING, LLC
LIMITED LIABILITY COMPANY AGREEMENT
SEPTEMBER 1, 1999
<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
COOPERATIVE REFINING, LLC
THIS LIMITED LIABILITY COMPANY AGREEMENT made and entered into
as of this 1st day of September, 1999, by and between the persons named on
Schedule A attached hereto (hereinafter, such persons are referred to
collectively as the "Members" and individually as a "Member");
WITNESSETH THAT:
WHEREAS, the undersigned have caused the formation of
Cooperative Refining, LLC, a Delaware limited liability company (the "Company"),
of which the undersigned constitute all of the initial Members; and
WHEREAS, the undersigned have received and approved the
business plan of the Company;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Members agree as follows:
ARTICLE I.
GENERAL
The parties hereto hereby agree that this Agreement
constitutes the "limited liability company agreement" of the Company within the
meaning of Section 18-101(7) of the Delaware Limited Liability Company Act, as
amended (the "Act"), and hereby adopt, approve and ratify the execution and
filing in the office of the Secretary of State of the State of Delaware of the
certificate of formation of the Company by Theodore D. Herzog, an individual
resident of the State of Minnesota, on August 6, 1999 (the "Certificate of
Formation") in the form attached hereto as Exhibit 1 and acknowledge, approve
and ratify his designation as an "authorized person" of the Company in the
Certificate of Formation as contemplated by Section 18-201(a) of the Act. The
parties agree that the Agreement shall be effective as of the date hereof and
that they shall comply with the provisions and requirements of the Act and that
the Act shall govern the rights, duties and obligations of the Members, except
as otherwise expressly stated herein.
SECTION 1.1. NAME. The name of the Company shall be and the
business shall be conducted under the name of "Cooperative Refining, LLC."
SECTION 1.2. PRINCIPAL PLACE OF BUSINESS. The location of the
principal place of business of the Company shall be 1391 Iron Horse Road, P.O.
Box 1404, McPherson,
<PAGE>
Kansas 67460 or such other place as the Board of Managers may from time to time
determine (the "Principal Office").
SECTION 1.3. NAMES AND ADDRESSES OF MEMBERS. The names and
addresses of the Members are as set forth in Schedule A.
SECTION 1.4. TERM OF EXISTENCE. The Company shall be formed as
of the time of the filing of the Certificate of Formation in the Office of the
Secretary of State of Delaware and its term of existence shall be perpetual,
unless earlier terminated, dissolved or liquidated in accordance with the
provisions of this Agreement or the Refinery Agreement.
SECTION 1.5. AGENT FOR SERVICE OF PROCESS. The name and
address of the agent for service of process is, until changed by the Board of
Managers, The Corporate Trust Company, located at Corporation Trust Center, 1209
Orange Street, Wilmington, New Castle County, Delaware 19801.
SECTION 1.6. DUTIES OF MEMBERS. The only duties of the Members
to the Company or to each other in respect of the Company shall be those
expressly set forth in this Agreement, and there shall be no other express or
implied duties of the Members to the Company or to each other in respect of the
Company.
SECTION 1.7. DUTIES OF MANAGERS. Each Manager shall owe duties
of care and loyalty to the Company and the Members equivalent to those duties
owed by a director of a Delaware corporation to the corporation and its
stockholders. A Manager shall not be personally liable to the Company or the
Members for monetary damages for breach of fiduciary duty as a Manager except
(a) for any breach of the Manager's duty of loyalty to the Company or the
Members; (b) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; or (c) for any transaction from which
such Manager derived an improper personal benefit. Notwithstanding the
foregoing, each Manager shall have the right to take action in a manner such
Manager believes to be in the best interest of the entity by whom such Manager
was designated in accordance with Section 6.3.
ARTICLE II.
DEFINITIONS
Unless the context otherwise specifies or requires, the terms
defined in this Article II shall, for the purposes of this Agreement, have the
meanings herein specified.
"Act" means the Delaware Limited Liability Company Act, as
amended from time to time.
"Adjusted Capital Account Deficit" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of the
end of the relevant Fiscal
2
<PAGE>
Year, after giving effect to the following adjustments: (i) credit to such
Capital Account any amounts which such Member is obligated to restore pursuant
to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and
1.704-2(i)(5); and (ii) debit to such Capital Account the items describe in
Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5)
and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital
Account Deficit is intended to comply with the provisions of Section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be interpreted
consistently therewith.
"Agreement" means this Limited Liability Company Agreement, as
it may be amended or supplemented from time to time.
"Approval Date" is defined in Section 5.2.
"Assets" shall have the meaning assigned to such term in the
Refinery Agreement.
"Board of Managers" means the Board of Managers of the Company
established pursuant to Article VI.
"Capital Account" is defined in Section 11.7 below.
"Capital Contribution" means the amount of money or the fair
market value of any property (as agreed by the Members as of the date of
contribution) contributed to the Company by any Member or such Member's
predecessor in interest.
"CHS" means Cenex Harvest States Cooperatives, a cooperative
corporation organized under the laws of Minnesota.
"Code" means the Internal Revenue Code of 1986, as amended,
and the Treasury Regulations promulgated thereunder. Any reference in this
Agreement to a Section of the Code or the Treasury Regulations shall be
considered also to include any subsequent amendment or replacement of that
Section.
"Company" means Cooperative Refining, LLC, the Delaware
limited liability company formed pursuant to the filing of the Certificate of
Formation in Delaware.
"Deadlock" is defined in Section 6.19.
"Depreciation" means, for each Fiscal Year, an amount equal to
the depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year, except that if the Gross Asset Value
of an asset differs from its adjusted basis for federal income tax purposes at
the beginning of such Fiscal Year, Depreciation shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such Fiscal
Year bears to such beginning
3
<PAGE>
adjusted tax basis; PROVIDED, HOWEVER, that if the adjusted basis for federal
income tax purposes of an asset at the beginning of such Fiscal Year is zero,
Depreciation shall be determined with reference to such beginning Gross Asset
Value using any reasonable method selected by the Members.
"Farmland" means Farmland Industries, Inc., a cooperative
corporation organized under the laws of Kansas.
"Fiscal Year" means the 12-month accounting period of the
Company ending on August 31 of each year, or such other date as the Board of
Managers may determine from time to time.
"Gross Asset Value" means, with respect to any asset, the
asset's adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by
a Member to the Company shall be the gross fair market value of such
asset, as determined by the contributing Member and the other Member;
(ii) The Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross fair market values (taking
into account Section 7701(g) of the Code), as determined by the
Members, as of the following times: (a) the acquisition of an
additional interest in the Company by any new or existing Member in
exchange for more than a de minimis Capital Contribution; (b) the
distribution by the Company to a Member of more than a de minimis
amount of Company property as consideration for an interest in the
Company; and (c) the liquidation of the Company within the meaning of
Treasury Regulations Section 1.704-1(b)(2)(ii)(g); PROVIDED HOWEVER,
that adjustments pursuant to clauses (a) and (b) above shall be made
only if the Board of Managers by vote of a Manager Supermajority
determines that such adjustments are necessary or appropriate to
reflect the relative economic interests of the Members in the Company;
(iii) The Gross Asset Value of any Company asset distributed
to any Member shall be adjusted to equal the gross fair market value
(taking into account Section 7701(g) of the Code) of such asset on the
date of distribution as determined by the distributee and the other
Member; and
(iv) The Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations Section
1.704-1(b)(2)(iv)(m); PROVIDED, HOWEVER, that Gross Asset Values shall
not be adjusted pursuant to this paragraph to the extent the Members
determine that an adjustment pursuant to
4
<PAGE>
paragraph (ii) hereof is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to
this paragraph (iv).
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to paragraphs (i), (ii), or (iv) hereof, such Gross Asset
Value shall thereafter be adjusted by the Depreciation taken into account with
respect to such asset for purposes of computing income, gains, profits and
losses of the Company.
"Growmark" means Growmark, Inc., a Delaware corporation.
"Indemnitee" is defined in Section 8.1.
"Manager" is defined in Section 6.3.
"Manager Supermajority" means 5/6 of the total number of
Managers specified in Section 6.3; provided, however, that if any Manager is
disqualified from voting according to the terms of this Agreement, "Manager
Supermajority" shall mean a unanimous vote of all Managers not so disqualified.
"Membership Interest" means the entire ownership interest of a
Member in the Company at any particular time, including, without limitation, the
right of such Member to any and all benefits to which a Member may be entitled
as provided in this Agreement and under law, together with the obligations of
such Member to comply with all of the terms and provisions set forth in this
Agreement and under law.
"Members" means the Persons executing this Agreement and the
Persons that are hereafter admitted to the Company and designated as Members in
accordance with this Agreement until such Persons shall cease to be members of
the Company pursuant to this Agreement.
"MFA" means MFA Oil Company, a Missouri farm marketing
cooperative association.
"NCRA" means National Cooperative Refinery Association, a
cooperative marketing association organized under the laws of Kansas.
"Named Officer" is defined in Section 7.1.
"Net Cash Flow" means the gross cash proceeds from Company
operations (including sales and dispositions of property), including, dividends,
interest and royalties, if any, less the portion thereof used to pay or
establish reserves for all Company expenses, debt payments, replacements, and
contingencies, all as determined by the Board of Managers by vote of a Manager
Supermajority.
5
<PAGE>
"Person" means any natural person, cooperative association,
cooperative marketing association, corporation, limited liability company,
association, partnership (whether general or limited), joint venture,
proprietorship, governmental agency, trust, estate, association, custodian,
nominee or any other individual or entity, whether acting in an individual,
fiduciary, representative or other capacity.
"Personnel Lease Agreement" means that certain Personnel Lease
Agreement of even date herewith by and among NCRA, Farmland and the Company, as
amended or supplanted from time to time.
"Principal Office" is defined in Section 1.2.
"Profits" or "Losses" mean, for each Fiscal Year, an amount
equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the
adjustments indicated in the Tax Matters Exhibit or otherwise specifically
allocated under Article XII hereof.
"Refinery Agreement" means that certain Refinery Operating and
Product Output Purchase Agreement of even date herewith by and among NCRA,
Farmland and the Company, as amended or supplemented from time to time.
"Regulatory Allocation" is defined in Section 12.3.
"Reorganization" means (x) any consolidation or merger of the
Company with or into any other Person, whether or not the Company is the
surviving entity, (y) any exchange or other transaction pursuant to which
outstanding Units are converted into other securities, property or money or (z)
any sale, transfer or other disposition of all or substantially all of the
Company's assets in a single transaction or a series of related transactions. A
dissolution or liquidation of the Company pursuant to Article XIV will not
constitute a "Reorganization" within the meaning of this Agreement.
"Securities Act" is defined in Section 16.1.
"Successor" is defined in Section 6.3.
"Tax Matters Exhibit" means Exhibit 2 to this Agreement.
"Tax Matters Partner" or "TMP" shall mean NCRA.
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"Transfer" means the sale, assignment, transfer, withdrawal,
mortgage, pledge, hypothecation, exchange or other disposition of any part or
all of a Member's Membership Interest, whether or not for value and whether
voluntarily, by operation of law or otherwise.
"Transferee" is defined in Section 9.2.
"Treasury Regulations" or "Treas. Reg." refers to the
regulations promulgated by the United States Treasury Department under the Code.
"Unit" means an ownership interest of a Member or a Transferee
in the Company representing a fractional part of the ownership interests of all
Members and Transferees.
ARTICLE III.
PURPOSE AND CHARACTER OF THE BUSINESS
The purpose and character of the business of the Company shall
be the management and operation of the Assets and any lawful business or
activity ancillary thereto permitted under the Act and approved by the Board of
Managers.
ARTICLE IV.
MEMBERS
The Members shall have no voting rights under this Agreement,
and instead all voting rights shall be vested in the Board of Managers. Members
shall have the power and authority, as set out in the terms of Section 11.3 of
this Agreement, to require the Members to contribute to the capital of the
Company upon the unanimous agreement of the Members.
ARTICLE V.
NEW MEMBERS; UNITS; CERTIFICATES
SECTION 5.1. ADMISSION OF NEW MEMBERS; UNITS. The Managers by
vote of a Manager Supermajority may from time to time admit additional Members
to the Company upon the issuance of new Units pursuant to Section 5.2 or upon a
transfer in compliance with Section 9.2. All Members shall be required to have
an interest in the Company represented by one or more Units. Unless otherwise
authorized by vote of a Manager Supermajority in accordance with this Article V,
all Units shall be of one class and series and with equal rights and preferences
in all matters, and the Profits and Losses, and distributions of cash or other
assets, of the Company shall be allocated among the Members of the Company in
proportion to the number of Units held by the Members except as otherwise
provided herein. The Managers, by amendment to this Agreement as provided in
Article XV of this Agreement, (i) may fix the relative rights and preferences of
different classes and series of the Units and (ii) may authorize the issuance of
securities convertible into, or exchangeable for, and options, warrants and
rights to purchase Units.
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SECTION 5.2. ISSUANCE OF UNITS. The Company shall have the
authority to issue 100,000 Units. The Company shall initially issue a total of
100,000 Units to NCRA and Farmland according to the terms set forth in Schedule
A and in Section 11.1. The Managers by vote of a Manager Supermajority may issue
additional Units from time to time to existing or new Members. Units may be
issued for any consideration, including, without limitation, cash or other
property, tangible or intangible, received or to be received by the Company or
services rendered or to be rendered to the Company. At the time of authorization
of the issuance of additional Units, the Managers shall state, by resolution,
their determination of the fair value to the Company in monetary terms of any
consideration other than cash for which Units are to be issued.
Unless otherwise determined by a vote of a Manager Supermajority, in
the event the Company proposes to issue and subsequently issues additional
Units, securities convertible into or exchangeable for Units or options,
warrants and rights to purchase Units, then each of the Members as of the date
on which the Board of Manager approved such issuance (the "Approval Date") shall
have the preemptive right to subscribe for and purchase at the same issue price
fixed therefor by the Board of Managers that number of Units or other securities
that bears the same proportion to the total amount of Units or other securities
proposed to be issued as the number of Units held by such Member on the Approval
Date bears to the total number of Units outstanding on the Approval Date. Upon
any proposed issuance of additional Units or other securities, the Board of
Managers shall give notice of the proposed issuance and the issue price fixed
therefor to all Members, and the Members shall have thirty (30) days from the
date of such notice to exercise the preemptive rights granted to the Members
pursuant to this Section 5.2. In the event that a portion of the Units or other
securities with respect to which the Members have preemptive rights pursuant to
this Section 5.2 remain unsubscribed after thirty (30) days, then each of the
Members that fully exercised their preemptive rights with respect to the
additional Units or other securities pursuant to this Section 5.2 shall have the
right for a period of 10 days thereafter to subscribe for and purchase at the
issue price therefor that number of additional Units or other securities that
bears the same proportion to the total amount of Units or other securities that
remained unsubscribed as the number of Units held by such Member on the Approval
Date bears to the total number of Units held on the Approval Date by Members
that fully exercised their preemptive rights with respect to the additional
Units or other securities pursuant to this Section 5.2. Any Units or other
securities remaining unsubscribed after such 10 day period may be sold by the
Company at a purchase price that is not less than the issue price fixed by the
Board of Managers.
SECTION 5.3. NO CERTIFICATES FOR UNITS. The Units of the
Company shall not be certificated Units unless otherwise determined by the Board
of Managers.
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ARTICLE VI.
MANAGEMENT AND OPERATION OF COMPANY BUSINESS
SECTION 6.1. AUTHORITY OF THE MEMBERS. Except as otherwise
expressly provided herein, no Member shall have any authority to act for, or to
assume any obligations or responsibility on behalf of, or to bind any other
Member or the Company.
SECTION 6.2. BOARD OF MANAGERS. The business and affairs of
the Company shall be managed by or under the authority of the Board of Managers,
except as otherwise required by the Act or this Agreement.
SECTION 6.3. NUMBER, QUALIFICATION; TERM OF OFFICE; VOTE. The
number of members of the Board of Managers shall be six (each a "Manager"). The
Managers shall be designated from time to time as follows: two Managers shall be
designated by Farmland, two Managers shall be designated by CHS, one Manager
shall be designated by Growmark, and one Manager shall be designated by MFA.
Each of the Managers shall hold office until such Manager's successor has been
designated by the entity by whom such Manager was designated, or until the
earlier death, resignation, removal or disqualification of such Manager. In the
event that any of CHS, Growmark or MFA sell, assign, transfer or convey their
respective ownership interests in NCRA, the transferee of such ownership
interest (the "Successor") shall thereafter have the right to designate that
number of Managers that were previously designated by CHS, Growmark or MFA, as
applicable. Each Manager shall have one vote in all matters to come before the
Board of Managers.
SECTION 6.4. INITIAL BOARD. The initial Board of Managers
shall be comprised of the following individuals:
Robert W. Honse, as Farmland Representative;
Stanley A. Riemann, as Farmland Representative;
John Johnson, as CHS Representative;
Leon Westbrock, as CHS Representative;
Dale H. Creach, as MFA Representative; and
D. William Davisson, as Growmark Representative.
SECTION 6.5. PLACE OF MEETINGS. Meetings of the Board of
Managers shall be held at the Principal Office of the Company or at such other
place as may be agreed by the members of such Board from time to time.
SECTION 6.6. SPECIAL MEETINGS. A special meeting of the Board
of Managers may be called for any purpose or purposes at any time by the Chair
or by any two Managers who shall demand such special meeting by written notice
given to the Chair specifying the purposes of such meeting.
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SECTION 6.7. MEETINGS HELD UPON MANAGER DEMAND. Within five
(5) business days after the Chair receives a valid demand for a meeting of the
Board of Managers from two Managers, it shall be the duty of the Chair to cause
a special or regular meeting of Board of Managers, as the case may be, to be
duly called and held on notice given no later than five (5) business days after
receipt of such demand. If the Chair fails to cause such a meeting to be called
and held as required by this Section 6.7, the Managers making the demand may
call the meeting by giving notice as provided in Section 6.9 at the expense of
the Company.
SECTION 6.8. ADJOURNMENTS. Any meeting of the Board of
Managers may be adjourned from time to time to another date, time and place. If
any meeting of the Board of Managers is so adjourned, no notice as to such
adjourned meeting need be given if the date, time and place at which the meeting
will be reconvened are announced at the time of adjournment.
SECTION 6.9. NOTICE OF MEETINGS. Unless otherwise required by
law, written notice of each meeting of the Board of Managers, stating the date,
time and place and, in the case of a special meeting, the purpose or purposes,
shall be given at least five (5) days and not more than ninety (90) days prior
to the meeting to every member of the Board of Managers. A member of the Board
of Managers may waive notice of the date, time, place and purpose or purposes of
a meeting of the Board of Managers. A waiver of notice is effective whether
given before, at or after the meeting, and whether given in writing, orally or
by attendance. Attendance by a member of the Board of Managers at a meeting is a
waiver of notice of that meeting, unless the member objects at the beginning of
the meeting to the transaction of business because the meeting is not lawfully
called or convened, or objects before a vote on an item of business because the
item may not lawfully be considered at that meeting and does not participate in
the consideration of the item at that meeting.
SECTION 6.10. QUORUM. A majority of the members of the Board
of Managers constitutes a quorum for the transaction of business at each meeting
of the Board of Managers.
SECTION 6.11. ABSENT MEMBERS. A member of the Board of
Managers may give advance written consent or opposition to a proposal to be
acted on at a meeting of the Board of Managers. If such member is not present at
the meeting, such consent or opposition to a proposal does not constitute
presence for purposes of determining the existence of a quorum, but such consent
or opposition shall be counted as a vote in favor of or against the proposal and
shall be entered in the minutes or other record of action at the meeting, if the
proposal acted on at the meeting is substantially the same or has substantially
the same effect as the proposal to which the member has consented or objected.
SECTION 6.12. CONFERENCE COMMUNICATIONS. Any or all of the
members of the Board of Managers may participate in any meeting of the Board of
Managers by any means of communication through which such members may
simultaneously hear each other during such meeting. For the purposes of
establishing a quorum and taking any action at the meeting,
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members of the Board of Managers participating pursuant to this Section 6.12
shall be deemed present in person at the meeting; and the place of the meeting
shall be the place of origination of the conference telephone conversation or
other comparable communication technique.
SECTION 6.13. REMOVAL; VACANCIES. Any member of the Board of
Managers may be removed from office at any time, with or without cause, by the
entity by whom such Manager was designated in accordance with Section 6.3 by
giving notice of such removal to the Company. A vacancy among the Managers by
death, resignation, removal or otherwise shall be filled by the designation of
the entity by whom such Manager was designated in accordance with Section 6.3.
SECTION 6.14. ACTS OF MANAGERS. Except as otherwise provided
herein, the Board of Managers shall take action by the affirmative vote of a
majority of the total number of Managers, and any such act shall be deemed to be
the action of the Board of Managers for all purposes of this Agreement and the
Act.
SECTION 6.15. WRITTEN ACTION. Any action which might be taken
at a meeting of the Board of Managers may be taken without a meeting if done in
writing and signed by a number of the members of the Board of Managers, or
committee members, whose approval would be sufficient to approve the action at a
meeting at which all of the members of the Board of Managers were present.
SECTION 6.16. PROXIES. A member of the Board of Managers may
cast or authorize the casting of a vote by filing a written appointment of a
proxy with the Chair at or before the meeting at which the appointment is to be
effective. The member may sign or authorize the written appointment by telegram,
cablegram or other means of electronic transmission setting forth or submitted
with information sufficient to determine that the member authorized such
transmission. Any copy, facsimile, telecommunication or other reproduction of
the original of either the writing or transmission may be used in lieu of the
original, provided that it is a complete and legible reproduction of the entire
original.
SECTION 6.17. VOTING. Each member of the Board of Managers
entitled to vote at a meeting of the Board of Managers or entitled to express
consent in writing to action without a meeting shall have one vote. All
questions at a meeting shall be decided by a majority vote of the total number
of Managers except where otherwise required by the Act or this Agreement.
SECTION 6.18. CERTAIN ACTIONS. The following actions shall
require the approval or authorization of a Manager Supermajority:
(a) The approval of any Reorganization, any other merger,
consolidation or sale of substantially all Company assets to which the
Company or a Subsidiary is a party or the acquisition of another
business by the Company;
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(b) The authorization or issuance of any additional Units;
(c) The purchase by the Company of any Unit or an agreement to
do so; PROVIDED, HOWEVER, that the board member or members of the Board
of Managers designated by the Member whose Units are subject to
purchase, if such is the case, shall have no vote in such matter;
(d) The making of any distributions to the Members, except as
permitted according to Section 13.1;
(e) The termination, assignment or material amendment of the
Refinery Agreement;
(f) The approval of the transfer of Units by any Member;
(g) Recommendations to the Members to incur capital
expenditures with respect to the Assets as described in Section 6 of
the Refinery Agreement;
(h) The appointment or removal of the President of the
Company;
(i) The commencement of any Reorganization or other
proceedings or the filing of any petition seeking relief under Title 11
of the United States Code, as now constituted or hereafter amended, or
any other federal or state bankruptcy, insolvency or similar law;
(j) The execution by the TMP of a settlement agreement binding
any Member without obtaining the written concurrence of the Member who
would be bound by such agreement;
(k) The approval and adoption of a business plan for each
fiscal year of the Company (other than the initial fiscal year of the
Company) pursuant to Section 9.1 of the Refinery Agreement, and any
material modifications to or deviations from such business plan;
(l) The disposition of any assets in excess of $250,000 other
than in the ordinary course of business, except as authorized in the
then current approved business plan;
(m) The entering into, or the amendment or modification of,
any agreement between the Company and any Member, Manager or Named
Officer (or any entity in which a Member, Manager or Named Officer has
a financial interest); PROVIDED, HOWEVER, that any member of the Board
Managers that is a party to, has a financial interest in a
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party to, or was designated by a Member who is a party to, such
agreement shall not be entitled to vote with respect to such matter;
(n) The determination of whether to repair or replace any
Asset in excess of $2,000,000 in the event that such Asset is subject
to a Casualty Occurrence (as that term is defined in Section 5.3 of the
Refinery Agreement) as described in Section 5.3 of the Refinery
Agreement.
SECTION 6.19. DISPUTES; GOVERNING LAW.
(a) Management Escalation. In the event that a dispute among
the Members shall arise during the term of this Agreement regarding the
interpretation of this Agreement, the Refinery Agreement or the Personnel Lease
Agreement, the Board of Managers shall first make a good faith effort to
promptly resolve such dispute. If the Board of Managers is unable to reach
agreement with respect to such dispute within thirty (30) days, then the dispute
shall be submitted to officers of Farmland, MFA, Growmark and CHS selected by
such parties, or, if applicable, of the Successor or Successors thereof, who
shall meet within thirty (30) days to attempt in good faith to resolve the
dispute. If the above mentioned officers have not resolved the dispute within
thirty (30) days of the submission of the dispute to such officers, then the
dispute shall be resolved in accordance with the provisions of Sections 6.19(b).
(b) Mediation and Arbitration. In the event that the Members
are unable to resolve any dispute pursuant to the provisions of Section 6.19(a)
hereof, such dispute shall be submitted to non-binding mediation administered by
the American Arbitration Association in accordance with its Commercial Mediation
Rules. If the Member initiating the mediation is NCRA, the mediation shall take
place in Kansas City, Missouri, and if the Member initiating the mediation is
Farmland, the mediation shall take place in Wichita, Kansas. The Members shall
share the expenses of the mediation on an equal basis. If such dispute is not
resolved by non-binding mediation, the dispute shall be resolved by binding
arbitration administered by the American Arbitration Association in accordance
with its Commercial Arbitration Rules (as modified hereby). If the Member
initiating the arbitration proceeding is NCRA, the arbitration shall be
conducted in Kansas City, Missouri, and if the Member initiating the arbitration
proceeding is Farmland, the arbitration shall be conducted in Wichita, Kansas.
Any award rendered in the arbitration proceeding shall be final and binding upon
the Members and a judgment thereon may be entered in any court having competent
jurisdiction. The Member initiating the arbitration shall request, and the
American Arbitration Association shall: (i) appoint as the arbitrator a single
retired trial judge in the state where the arbitration takes place who is
familiar with the business conducted by the Company; (ii) direct the arbitrator
to follow substantive rules of law and the Federal Rules of Evidence; (iii)
allow the parties to conduct discovery pursuant to the rules then in effect
under the Federal Rules of Civil Procedure (excluding confidential records of
NCRA or Farmland that are not relevant to the issues being arbitrated) for a
period not to exceed 60 days; (iv) require the testimony to be transcribed; and
(v) require the award to be accompanied by findings of fact and a statement of
reasons for the
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decision. If a Member is determined to be liable in any dispute that is
determined and/or settled by arbitration pursuant to this Section 6.19(b), then
all costs and expenses, including reasonable attorney's fees and expert's fees,
of all parties incurred with respect to such dispute shall be borne by the
Member determined to be liable in respect of such dispute; PROVIDED, HOWEVER,
that if complete liability is not assessed against only one member, the Members
shall share the expenses in proportion to their respective amounts of liability
so determined. In the event that no Member is determined to be liable in a
dispute that is determined and/or settled by arbitration pursuant to this
Section 6.19(b), then the expenses of arbitration shall be shared equally by the
parties unless otherwise decided by the arbitrator(s). The Members agree to
continue performing their respective obligations under this Agreement while the
dispute is being resolved, except to the extent such obligations are clearly the
subject of the dispute. Notwithstanding any provision of this Section 6.19(b),
any Member may seek injunctive relief from any judicial or administrative
authority of competent jurisdiction to enjoin the other Member from breaching
any provision of this Agreement, the Refinery Agreement or the Personnel Lease
Agreement pending resolution of a dispute by mediation or arbitration pursuant
to this Section 6.19(b).
(c) This Agreement shall be governed by, and construed and
interpreted in accordance with, the law of the State of Delaware, which shall be
the proper law of this Agreement notwithstanding any rules of conflict of laws
therein contained under which any other law would be made applicable.
SECTION 6.20. COMPENSATION. Members of the Board of Managers
shall not be compensated by the Company for serving in such capacity. The
Company shall bear the expenses, if any, incurred by each Member's respective
representatives in attending meetings of the Board of Managers.
ARTICLE VII.
OFFICERS
SECTION 7.1. NUMBER. The officers of the Company, all of whom
shall be natural persons, shall consist of a Chair, a President, a Secretary and
a Chief Financial Officer ("Named Officers"), and any other officers and agents
as the Board of Managers by a majority vote of all Managers may designate from
time to time upon recommendation of the President.
Any person may hold two or more offices.
SECTION 7.2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The
President shall be elected by a vote of a Manager Supermajority and all other
officers shall be elected by a vote of the majority of the Managers. All
officers shall serve at the pleasure of the Board of Managers and shall hold
office until their successors are elected and qualified, or until such office is
eliminated by amendment of this Agreement, in the case of the Named Officers, or
a vote of the Board of Managers, in the case of officers other than Named
Officers. An officer who is a Manager shall hold office until the election and
qualification of his or her successor even though he or she may cease to be a
Manager.
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SECTION 7.3. REMOVAL AND VACANCIES. Any officer may be removed
from his or her office with or without cause upon a vote of the Board of
Managers, subject to the provisions of Section 6.18. Such removal shall be
without prejudice to the contract rights of the person so removed. A vacancy
among the officers by death, resignation, removal or otherwise shall be filled
for the unexpired term by the Board of Managers, unless such office is
eliminated or held vacant at the discretion of the Board of Managers.
SECTION 7.4. CHAIR. The Chair shall preside at all meetings of
the Managers and shall have such other duties as may be prescribed, from time to
time, by the Board of Managers. The Chair shall be a Manager and shall be
elected by the Board of Managers.
SECTION 7.5. PRESIDENT.
(a) Day-to-Day Operations. The day-to-day operations and
affairs of the Company shall be managed by a President. The Board of Managers
delegates to the President the authority to oversee and supervise the Company's
business. Except as otherwise provided in this Agreement, the President shall be
authorized to determine all questions relating to the day-to-day conduct,
operation and management of the business of the Company within the authority
granted under the business plan then in effect. The President shall be
responsible to the Board of Managers.
(b) General. The President shall be entitled to delegate such
part of his or her duties as he or she may deem reasonable or necessary in the
conduct of the business of the Company to one or more employees of the Company,
who shall each have such duties and authority as shall be determined from time
to time by the President or as may be set forth in any agreement between such
employee and the Company.
(c) Election. The President shall be elected by the Board of
Managers and shall receive such compensation as may be determined from time to
time by the Board of Managers or as shall be set forth in any written agreement
approved by the Board of Managers.
SECTION 7.6. SECRETARY. The Secretary shall be secretary of
and shall attend all meetings of the Members and Board of Managers and shall
record all proceedings of such meetings in the minute book of the Company. He or
she shall give proper notice of meetings of Members and the Board of Managers.
He or she shall perform such other duties as may from time to time be prescribed
by the Board of Managers.
SECTION 7.7. CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall keep or cause to be kept accurate accounts of all moneys of the
Company received or disbursed. He or she shall deposit or cause to be deposited
all moneys, drafts and checks in the name of and to the credit of the Company in
such banks and depositaries as the Board of Managers shall from time to time
designate. He or she shall have power to endorse or cause to be endorsed for
deposit
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or collection all notes, checks and drafts received by the Company. He or she
shall disburse or cause to be disbursed the funds of the Company as ordered by
the President, making proper vouchers therefor. He or she shall render to the
Board of Managers whenever required an account of all his or her transactions as
Chief Financial Officer and of the financial condition of the Company and shall
perform such other duties as may from time to time be prescribed by the Board of
Managers.
SECTION 7.8. DUTIES OF OTHER OFFICERS. The duties of such
other officers and agents as the Board of Managers may designate shall be set
forth in the resolution creating such office or agency or by subsequent
resolution.
SECTION 7.9. COMPENSATION. The officers, agents and employees
of the Company shall receive such compensation for their services as may be
determined from time to time by the Board of Managers or as shall be set forth
in a written agreement.
ARTICLE VIII.
INDEMNIFICATION
SECTION 8.1. INDEMNIFICATION.
(a) To the fullest extent permitted by law, each Manager,
Named Officer, officer and employee of the Company (individually, an
"Indemnitee") shall be indemnified, held harmless and defended by the Company
from and against any and all losses, claims, damages, liabilities, whether joint
or several, expenses (including legal fees and expenses), judgments, fines and
other amounts paid in settlement, incurred or suffered by such Indemnitee, as a
party or otherwise, in connection with any threatened, pending or completed
claim, demand, action, suit or proceeding, whether civil, criminal,
administrative or investigative, and whether formal or informal, arising out of
or in connection with the business or the operation of the Company and by reason
of the Indemnitee's status as a Manager, Named Officer, officer or employee of
the Company regardless of whether the Indemnitee continues to be a Manager,
Named Officer, officer or employee of the Company at the time any such loss,
claim, damage, liability or other expense is paid or incurred if (i) the
Indemnitee acted in good faith and in a manner he or she reasonably believed to
be in the best interests of the Company and, with respect to any criminal
proceeding, had no reasonable cause to believe that his or her conduct was
unlawful, (ii) the Indemnitee's conduct did not constitute intentional
misconduct or a material breach of the terms of this Agreement and (iii) the
Indemnitee's conduct did not involve a transaction from which the Manager, Named
Officer, officer or employee of the Company derived an improper personal
benefit. The termination of any action, suit or proceeding by judgment, order,
settlement or upon a plea of NOLO CONTENDERE, or its equivalent, shall not, of
itself, create a presumption that the Indemnitee acted in a manner contrary to
the standards specified in clauses (i), (ii) or (iii) of this Section 8.1(a).
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(b) To the fullest extent permitted by law, expenses incurred
by an Indemnitee in defending any claim, demand, action, suit or proceeding
subject to this Section 8.1 shall, from time to time, be advanced by the Company
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by the Company of an undertaking by or on behalf of the Indemnitee
to repay such amount unless it is determined that such Indemnitee is entitled to
be indemnified therefor pursuant to this Section 8.1.
(c) The indemnification provided by this Section 8.1 shall be
in addition to any other rights to which any Indemnitee may be entitled under
any other agreement, pursuant to any vote of the Managers, as a matter of law or
otherwise, and shall inure to the benefit of the heirs, legal representatives,
successors, assigns and administrators of the Indemnities.
(d) Any indemnification under this Section 8.1 shall be
satisfied solely out of the assets of the Company and no Indemnitee shall have
any recourse against any Member with respect to such indemnification.
(e) An Indemnitee shall not be denied indemnification in whole
or in part under this Section 8.1 merely because the Indemnitee had an interest
in the transaction with respect to which the indemnification applies, if the
transaction was not otherwise prohibited by the terms of this Agreement and the
conduct of the Indemnitee satisfied the conditions set forth in Section 8.1(a).
(f) The Company may, but shall have no obligation to, purchase
and maintain insurance covering any potential liability of the Indemnitees for
any actions or omissions for which indemnification is permitted hereunder,
including such types of insurance (including extended coverage liability and
casualty and workers' compensation) as would be customary for any person engaged
in a similar business, and may name the Indemnitees as additional insured
parties thereunder.
SECTION 8.2. INDEMNIFICATION PROCEDURES; SURVIVAL.
(a) Promptly after receipt by an Indemnitee of notice of the
commencement of any action that may result in a claim for indemnification
pursuant to Section 8.1, the Indemnitee shall notify the Company in writing
within thirty (30) days thereafter; PROVIDED, HOWEVER, that any omission so to
notify the Company will not relieve it of any liability for indemnification
hereunder as to the particular item for which indemnification may then be sought
(except to the extent that the failure to give notice shall have been materially
prejudicial to the Company) nor from any other liability that it may have to any
Indemnitee. The Company shall have the right to assume sole and exclusive
control of the defense of any claim for indemnification pursuant to Section 8.1,
including the choice and direction of any legal counsel.
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(b) An Indemnitee shall have the right to employ separate
counsel in any action as to which indemnification may be sought under any
provision of this Agreement and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Indemnitee
unless (i) the Company has agreed in writing to pay such fees and expenses, (ii)
the Company has failed to assume the defense thereof and employ counsel within a
reasonable period of time after being given the notice required above or (iii)
the Indemnitee shall have been advised by its counsel that representation of
such Indemnitee and other parties by the same counsel would be inappropriate
under applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or potential
differing interests between them. It is understood, however, that to the extent
more than one Indemnitee is entitled to employ separate counsel at the Company's
expense pursuant to clause (iii) above, the Company shall, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys at any time for all such Indemnitees having actual or
potential differing interests with the Company, unless but only to the extent
the Indemnitees have actual or potential differing interests with each other.
(c) The Company shall not be liable for any settlement of any
such action effected without its written consent, but if settled with such
written consent, or if there is a final judgment against the Indemnitee in any
such action, the Company agrees to indemnify and hold harmless the Indemnitee to
the extent provided above from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(d) The indemnification obligations set forth in Section 8.1
and this Section 8.2 shall survive the termination of this Agreement.
ARTICLE IX.
TRANSFERS
SECTION 9.1. REGISTRATION, TRANSFER AND EXCHANGE.
(a) The Company shall keep at the Principal Office a register
in which shall be entered the names and addresses of the Members, the number of
Units owned by each Member and all Transfers of outstanding Units.
(b) Subject to this Article IX, each Unit, whether originally
or in substitution for, or upon transfer, exchange or other issuance of any Unit
shall be registered in the register on the effective date of the Transfer,
exchange or other issuance of such Unit; PROVIDED, HOWEVER, that no registration
of any Transfer not made in compliance with this Article IX shall be made in the
register.
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(c) Transfer of Units on the books of the Company may be
authorized only by the person or persons in whose name Units are registered on
the books of the Company named in the certificate, such person's legal
representative or such person's duly authorized attorney-in-fact.
SECTION 9.2. RESTRICTION ON TRANSFERS. In addition to any
restrictions imposed by the federal securities laws and any applicable state
securities or "blue-sky" laws, no Member may sell, assign, pledge, transfer,
convey or otherwise dispose of (including through any merger, share exchange or
consolidation) (collectively, "Transfer") all or any part of any Unit, whether
for consideration or not, to any Person who is not a Member at the time of such
Transfer. No recipient of such Transfer to a Person other than a Member (each
such nonMember recipient, a "Transferee") shall have any rights in the Company
or be or have any rights as a Member with respect to all or any part of any such
Unit attempted to be Transferred, and any such attempted Transfer of all or any
part of a Unit shall be entirely null and void, unless the Board of Managers by
vote of a Manager Supermajority consents to the Transfer and the admission of
such Transferee as a Member if such Transfer is to a Person, other than the
Company, who is not then a Member. The appropriate Company records and any
certificates representing the Units shall be noted to prevent any Transfers in
violation of this Section 9.2. Notwithstanding anything to the contrary
contained in this Section 9.2, in the event that the proposed merger between
Farmland and CHS is consummated, Farmland shall have the right to transfer all
or any part of its Units to the resulting merged entity, and such merged entity
shall, automatically upon such transfer, be admitted as a Member and have all
the rights of a Member with respect to such transferred Units, including, but
not limited to, rights of appointment to the Board of Managers. Further, in the
event that CHS, Growmark or MFA transfers its respective interest in NCRA to a
Person other than a corporation doing business as a cooperative or effects such
transfer without the prior written consent of Farmland, the successor to the
transferee's interest shall have no right to appoint a Manager to the Board of
Managers pursuant to Section 6.3 of this Agreement.
SECTION 9.3. TRANSFER BY LEGAL PROCESS. Upon any involuntary
Transfer of all or any portion of the Units of a Member pursuant to a levy of
execution, foreclosure of pledge, garnishment, attachment, divorce decree,
bankruptcy or other legal process (or by operation of law resulting from the
death, disability, liquidation, dissolution or winding-up of a Member), such
Member shall cease to be a Member, but any successor in title to the transferred
Units shall have no right to become a Member or vote in any Company matters
unless admitted as a Member by affirmative vote of a Manager Supermajority,
subject to the provisions of Section 9.4. If such successor does not become a
Member, such successor shall be merely an assignee within the meaning of Section
18-702(b) of the Act.
SECTION 9.4. CONDITIONS TO PERMITTED TRANSFERS. No Transfer
otherwise permitted by any provisions of this Agreement shall be valid unless
and until the following conditions are satisfied (any of which may be waived by
the Board of Managers in its discretion):
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(a) The transferor and Transferee shall execute and deliver to
the Company such documents and instruments of conveyance as may be necessary or
appropriate in the opinion of counsel to the Company to effect such Transfer and
confirm the agreement of the Transferee to be bound by the provisions of this
Agreement; PROVIDED, HOWEVER, that in the case of a Transfer of Units at death
or involuntarily by operation of law, the Transfer shall be confirmed by
presentation to the Company of legal evidence of such Transfer, in form and
substance satisfactory to counsel of the Company.
(b) Except in the case of a Transfer of Units involuntarily by
operation of law in which case no opinion of counsel is required, the transferor
shall furnish to the Company an opinion of counsel, which counsel and opinion
shall be satisfactory to the Company, to the effect that:
(i) The Transfer will not cause the Company to
terminate for federal income tax purposes under Section 708 of the
Code;
(ii) The Transfer is either exempt from all
applicable registration requirements and such Transfer will not
violate any applicable federal and state laws regulating the Transfer
of securities, or the Company Units to be transferred are duly and
properly registered under all applicable federal and state securities
laws; and
(iii) The Transfer will not cause the Company to be
deemed to be an "investment company" under the Investment Company Act
of 1940.
(c) The transferor and Transferee shall furnish the Company
with the Transferee's taxpayer identification number, sufficient information to
determine the Transferee's initial tax basis in the Units transferred and any
other information reasonably necessary to permit the Company to file all
required federal and state tax returns and other legally required information
statements or returns. The Company shall not be required to make any
distribution otherwise provided for in this Agreement with respect to any
Transferred Units until it has received such information.
SECTION 9.5. WITHDRAWAL. No Member shall be entitled to
withdraw from the Company prior to the dissolution and winding up of the Company
pursuant to Article XIV hereof without the unanimous consent of the other
Members of the Company.
ARTICLE X.
BOOKS OF ACCOUNT; REPORTS AND FISCAL MATTERS
SECTION 10.1. BOOKS; PLACE; ACCESS. The Chief Financial
Officer shall maintain books of account on behalf of the Company at the
Principal Office or such other place as may be designated by the Board of
Managers. The Chief Financial Officer shall account for all inventories on the
books and records of the Company using the LIFO method of accounting,
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as such term is understood according to generally accepted accounting
principles. All Members shall at all reasonable times have access to and the
right to inspect the books and records of the Company.
SECTION 10.2. FINANCIAL INFORMATION. The Chief Financial
Officer shall cause to be prepared and delivered to each of the Members summary
financial information with respect to each of the first eleven months of each
Fiscal Year. Such monthly financial information shall be provided to the Members
not later than twenty (20) days following the end of each month of the Fiscal
Year. The Chief Financial Officer also shall cause to be prepared and delivered
to each of the Members an annual financial report that shall describe in
reasonable detail the financial and business activities of the Company and
include the financial statements of the Company for the previous Fiscal Year.
Such annual financial report shall be provided to the Members not later than one
hundred twenty (120) days following each Fiscal Year-end and shall be audited by
a nationally recognized public accounting firm.
SECTION 10.3. TAX INFORMATION. Within one hundred twenty (120)
days after the close of each Fiscal Year, all necessary tax information shall be
transmitted to all Members.
SECTION 10.4. TAX ELECTIONS. All elections required or
permitted to be made by the Company under the Code, shall be made by the TMP. In
the event of a transfer of all or part of the Membership Interest of any Member,
the Company may, by vote of a Manager Supermajority, elect pursuant to Section
754 of the Code to adjust the basis of the assets of the Company.
SECTION 10.5. TAX MATTERS PARTNER. For as long as the TMP is a
Member, the TMP shall act as the tax matters partner, as such term is defined in
Section 6231(a)(7) of the Code, and the TMP is hereby authorized to and shall
represent the Company in connection with all examinations of the Company's
affairs by tax authorities, including resulting administrative and judicial
proceedings. The Members and the TMP shall use all reasonable efforts to comply
with the responsibilities outlined in the Tax Matters Exhibit and in Sections
6222 through 6231 of the Code (including any Treasury Regulations thereunder and
any successor or amendatory provisions thereto for which a tax matters partner
is designated).
ARTICLE XI.
CAPITAL
SECTION 11.1. INITIAL CAPITAL CONTRIBUTIONS. On the date of
the execution of this Agreement, the Members shall make the Capital
Contributions or contributions of inventory that reflect the ownership interest
indicated opposite their respective names on Schedule A.
SECTION 11.2. NO RIGHT TO RETURN OF CONTRIBUTION. No Member
shall have the right to the withdrawal or to the return of his, her or its
Capital Contribution, except upon the dissolution and liquidation of the Company
pursuant to Article XIV.
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SECTION 11.3. ADDITIONAL CAPITAL CONTRIBUTIONS. In the event
that the Members unanimously determine that additional contributions to the
capital of the Company are necessary to the conduct of the Company's activities,
each of the Members shall promptly make a cash contribution to the capital of
the Company equal to his share (determined in proportion to the number of Units
held by each Member) of such additional funds, which contribution shall
constitute a Capital Contribution. If one Member fails to contribute its share
of such funds to the Company, then (i) the funds advanced by the other Members
shall be regarded as a loan in accordance with Section 11.4, and (ii) in the
event that such failure is not cured within thirty (30) days after the date upon
which such capital contribution was to be made pursuant to the determination of
the Members, each of such other Members shall have the right to cause the
dissolution of the Company upon giving thirty (30) days' notice to the other
Members. Members shall be required to contribute in proportion to the number of
Units held in the event that the Company is unable to meet any obligation
arising from environmental liabilities under the Refinery Agreement.
SECTION 11.4. LOANS TO THE COMPANY; NO INTEREST ON CAPITAL;
LOANS TO MEMBERS.
(a) The Members may, but are not obligated to, make loans to
the Company from time to time, as authorized by the Board of Managers in
accordance with Section 6.18(m). Any such loans shall not be treated as Capital
Contributions to the Company for any purpose hereunder nor entitle such Member
to any increase in its share of the Profits and Losses and cash distributions of
the Company, but the Company shall be obligated to such Member for the amount of
any such loans pursuant to the terms thereof, as the same are determined by the
Board of Managers and such Member. The outstanding amount of any loans made by a
Member to the Company shall accrue interest at the applicable semi-annual,
short-term federal interest rate on the date of such loan, which interest shall
be payable at such times as shall be determined by the Board of Managers and
such Member. All scheduled principal and interest payments with respect to any
loans from a Member to the Company pursuant to this Section 11.4 shall be repaid
prior to any distributions to any Members pursuant to Sections 13.1, 13.2 or
14.3(d). No interest shall be paid on any Capital Contribution to the Company or
on any balance in any Capital Account.
(b) The Company may extend loans to Members according to terms
and conditions approved by the Board of Managers in accordance with Section
6.18(m).
SECTION 11.5. CREDITOR'S INTEREST IN THE COMPANY. No creditor
who makes a loan to the Company shall have or acquire at any time as a result of
making the loan any direct or indirect interest in the profits, capital or
property of the Company, other than such interest as may be accorded to a
secured creditor. Notwithstanding the foregoing, this provision shall not
prohibit in any manner whatsoever a secured creditor from participating in the
profits of operation or gross or net sales of the Company or in the gain on sale
or refinancing of the Company, all as may be provided in its loan or security
agreements.
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SECTION 11.6. LIABILITY OF MEMBERS. Except as otherwise
provided in the Act, no Member, as such, shall have any personal liability
whatsoever for the debts, liabilities, contracts or other obligations of the
Company, for any of the Company's losses or for the acts or omissions of any
other Member, Manager or employee of the Company beyond, with respect to a
Member, such Member's Capital Contribution and, solely to the extent and for the
period required by applicable law, the amount of such Member's Capital
Contribution which is returned to it. Each Unit, on issuance, shall be fully
paid and, except as set forth in Section 11.3, not subject to assessment for
additional Capital Contributions. No Member shall be required to lend any funds
to the Company as a condition to admission or continued membership of such
Member in the Company. It is the intent of the Members that (i) no distribution
to any Member (other than a distribution upon the dissolution and liquidation of
the Company) shall be deemed a withdrawal of capital, even if such distribution
represents, for Federal income tax purposes or otherwise (in full or in part), a
distribution of depreciation or any other non-cash item accounted for as a loss
or deduction from or offset to the Company's income, and (ii) no Member shall be
obligated to pay any such amount to or for the account of the Company or any
creditor of the Company. However, if any court of competent jurisdiction holds
that, notwithstanding the provisions of this Agreement, any distribution made by
the Company to a Member constitutes a withdrawal of capital, any obligation
under applicable law to return the same or any portion thereof to or for the
account of the Company or its creditors shall be the obligation of such Member.
SECTION 11.7. CAPITAL ACCOUNTS. A separate capital account
("Capital Account") shall be maintained by the Company for each Member as
described in the Tax Matters Exhibit.
SECTION 11.8. NCRA LEASE ADJUSTMENTS. NCRA shall remain
responsible for all lease, residual and other payments (excluding operating,
maintenance and repair payments) under all applicable leases thereof and incur
all expenses necessary to allow the Company the continued use of the leased
assets listed on Schedule B hereto (the "Leased Assets") during and beyond terms
of all such leases (the "Lease Expenses"). Within thirty (30) days of delivery
of proof of payment of any of the Lease Expenses (other than any residual
payments or other payments made to purchase the Leased Assets), the Company
shall reimburse NCRA for 100% of all such Lease Expenses (such reimbursement,
the "Lease Reimbursement"); PROVIDED, HOWEVER, that NCRA shall upon receipt of
any Lease Reimbursement direct a portion of such Lease Reimbursement to all
Members in proportion to the Members' respective ownership interests indicated
opposite their respective names on Schedule A. Any other assets under lease
shall be handled in like manner.
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ARTICLE XII.
ALLOCATION OF PROFITS AND LOSSES
SECTION 12.1. ALLOCATION OF PROFITS AND LOSSES. After giving
effect to the special allocations set forth in Sections 12.3, 12.4 and 12.5
hereof, and subject to Section 12.2 hereof, all Profits and Losses shall be
allocated to each of the Members in proportion to their respective Units.
SECTION 12.2. LIMITATION ON LOSS ALLOCATION. Notwithstanding
anything in Section 12.1 above, Losses allocated pursuant to Section 12.1 shall
not exceed the maximum amount of Losses that can be so allocated without causing
a Member to have an Adjusted Capital Account Deficit at the end of any Fiscal
Year. In the event one of the Members would have an Adjusted Capital Account
Deficit as a consequence of an allocation of Losses pursuant to Section 12.1,
the limitation set forth herein shall be applied on a Member by Member basis so
as to allocate the maximum permissible Losses to each Member under Section
1.704-1(b)(2)(ii)(D) of the Regulations. All Losses in excess of the foregoing
limitation shall be allocated to the Members in proportion to their Units.
SECTION 12.3. REGULATORY ALLOCATIONS. Notwithstanding anything
to the contrary contained in Section 12.1 or 12.2 or elsewhere in this
Agreement, it is the intention of the Members that Profits and Losses be
allocated in accordance with the "partnership minimum gain chargeback" (Treasury
Regulations Sections 1.704-2(f) and 1.704-2(g)(2)), "partner minimum gain
chargeback" (Treasury Regulations Sections 1.704-2(f)(5), 1.704-2(i)(4), 1.704-
2(i)(5) and 1.704-2(j)(2)), "qualified income offset" and "alternate test for
economic effect" (Treasury Regulations Section 1.704-1(b)(2)(ii)(d)),
"partnership nonrecourse deductions" (Treasury Regulations Section
1.704-2(b)(1)) and "partner non-recourse deductions" (Treasury Regulations
Section 1.704-2(i)(1)) provisions of Treasury Regulations Section 1.704-1(b) and
Section 1.704-2 and any successor regulations (collectively, the "Regulatory
Allocations") and, to the extent any provisions of this Agreement do not comply
therewith, the Members desire and intend that such provisions be modified or
stricken in such respects as are necessary in order to cause compliance
therewith. The Regulatory Allocations that shall govern this Agreement are set
forth in the Tax Matters Exhibit.
SECTION 12.4. TAX ALLOCATIONS: SECTION 704(C) OF THE CODE. In
accordance with Section 704(c) of the Code, income, gain, loss and deduction
with respect to any property contributed to the Company shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for income tax
purposes and its book value, in the same manner as such variations are treated
under Section 704(c) of the Code. Any elections or other decisions related to
such allocations shall be made by the Board of Managers in any manner that
reasonably reflects the purpose and intention of this Agreement. Allocations
pursuant to this Section 12.4 are solely for purposes of federal, state and
local taxes and shall not affect, or in any way be taken into account in
computing, any
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Member's Capital Account or share of income, gain, loss or deduction pursuant to
any provision of this Agreement.
SECTION 12.5. SPECIAL ALLOCATIONS. The Company shall allocate
to Farmland as income or loss, as the case may be, an amount equal to 73.72% of
the amount of NCRA's share of all net income or loss of those NCRA subsidiaries
listed on Schedule C hereto. Such allocations shall not be limited to the net
income of the Company and, notwithstanding the provisions of Sections 12.2 and
12.3 hereof, may create an Adjusted Capital Account Deficit to the extent of
such allocation.
SECTION 12.6. OTHER ALLOCATION RULES. In the event of any
changes in Units during a Fiscal Year, all Profits and Losses from operations of
the Company during such Fiscal Year, using such methods of accounting for
depreciation and other items as the Board of Managers determines to use for
federal income tax purposes, shall be allocated to each Member based on its
varying interest in the Company during such operating year in accordance with
Section 706 of the Code. The Board of Managers shall determine in accordance
with Section 706 of the Code whether to prorate items of income and deduction
according to the portion of the Fiscal Year for which a Member held Units or
whether to close the books on an interim basis and divide such operating year
into two or more segments. All tax credits shall be allocated among the Members
in accordance with applicable law.
ARTICLE XIII.
DISTRIBUTIONS
SECTION 13.1. DISTRIBUTIONS. The Board of Managers shall,
unless otherwise prohibited by vote of a Manager Supermajority and provided the
Company has Net Cash Flow (i) distribute monthly one percent (1%) of the gross
revenue received from sales to Members of gasoline and distillate, to the
Members in proportion to such Member's ownership interest in the Company, (ii)
distribute to Farmland, to the extent of any undistributed special income
allocation under Section 12.5, an amount equal to 73.72% of the cash received by
NCRA as a result of its ownership interest in the NCRA subsidiaries listed on
Schedule C, such distribution to be made promptly following NCRA's receipt of
such cash, and (iii) distribute to NCRA, to the extent not previously
distributed under this clause (iii), an amount equal to 73.72% of the cash
invested by NCRA in such NCRA subsidiaries to cover net losses of such NCRA
subsidiaries, such distribution to be made promptly following such investment by
NCRA. After taking into account the distributions described in clauses (i)
through (iii) of this Section 13.1, the Board of Managers may distribute Net
Cash Flow to the Members at such times and in such amounts as it may determine
by vote of a Manager Supermajority. All distributions of Net Cash Flow shall be
distributed to the Members in proportion to such Members' respective ownership
interests in the Company.
SECTION 13.2. LIMITATIONS ON DISTRIBUTIONS. Notwithstanding
any provision to the contrary in this Article XIII:
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(a) All distributions made in connection with the liquidation
and winding up of the Company shall be made in the manner provided in Section
14.3 hereof.
(b) No distribution shall be made that would result in a
violation of Section 18-607 of the Act.
SECTION 13.3. SETOFF. All distributions to a Member made
pursuant to Section 13.1 shall be subject to setoff by the Company for any past
due obligations of such Member (or its predecessor in interest) to the Company.
ARTICLE XIV.
DISSOLUTION AND LIQUIDATION
SECTION 14.1. EVENTS CAUSING DISSOLUTION. The Company shall be
dissolved only upon the occurrence of any of the following events:
(a) The sale, exchange or other disposition of all or
substantially all of the assets and properties of the Company;
(b) The written agreement of a Manager Supermajority;
(c) The entry of a decree of judicial dissolution under
Section 18-802 of the Act;
(d) Upon notice given by a Member to the other Members
pursuant to Section 11.3 in the event of a failure of a Member to make a
required capital contribution; PROVIDED, HOWEVER, that the Company shall be
dissolved on the date specified in such notice, which date shall be at least
thirty (30) days after the date of such notice; or
(e) The termination or expiration of the Refinery Agreement.
SECTION 14.2. CONTINUATION OF BUSINESS. Upon the expulsion,
bankruptcy, retirement, resignation or dissolution of a Member or the occurrence
of any other event which terminates the continued membership of a Member in the
Company as provided in Section 18-801 of the Act, the Company shall not be
dissolved and its business shall continue.
SECTION 14.3. LIQUIDATION AND WINDING UP. If dissolution of
the Company should be caused by reason of the events set forth in Section 14.1,
the Company shall be liquidated and the Managers (or other person or persons
designated by a decree of court) shall wind up the affairs of the Company. The
Managers or other persons winding up the affairs of the Company shall promptly
proceed to the liquidation of the Company and, in settling the accounts of the
Company, the assets and the property of the Company shall be distributed in the
following order of priority:
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(a) To the payment of all debts and liabilities of the Company
in the order of priority as provided by law (other than outstanding loans from a
Member);
(b) To the establishment of any reserves deemed necessary by
the Managers or the person winding up the affairs of the Company for any
contingent liabilities or obligations of the Company;
(c) To the repayment of any outstanding loans from a Member to
the Company;
(d) To the Members in proportion to and to the extent of their
respective Capital Account balances, after giving effect to all contributions,
distributions, and allocations for all periods; and
(e) The balance, if any, to the Members pro rata in accordance
with the number of Units owned by each Member.
SECTION 14.4. COMPLIANCE WITH TIMING REQUIREMENTS OF
REGULATIONS. In the event the Company is liquidated within the meaning of
Treasury Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made
pursuant to this Article XIV to the Members who have positive Capital Account
balances in compliance with Treasury Regulations Section 1.704-
1(b)(2)(ii)(b)(2), and (b) if a Member has a deficit balance in its Capital
Account (after giving effect to all contributions, distributions and allocations
for all taxable years), such Member shall have no obligation to contribute to
the capital of the Company and such deficit shall not be considered a debt owed
to the Company or to any other Person for any purpose whatsoever.
ARTICLE XV.
AMENDMENT
The Certificate of Formation and this Agreement may be amended
by a unanimous vote of the Managers; PROVIDED, HOWEVER, that the Managers may
not amend this Agreement to modify the requirement that the unanimous agreement
of the Members be obtained in order to require additional contributions to the
capital of the Company.
ARTICLE XVI.
REPRESENTATIONS, WARRANTIES OF THE MEMBERS
SECTION 16.1. REPRESENTATIONS AND WARRANTIES OF THE MEMBERS.
Each of the Members represents and warrants as of the date of this Agreement to
each of the other Members and the Company as follows:
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(a) The Units being acquired by such Member are being
purchased for such Member's own account and not with a view to, or for sale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"). Such Member
understands that such Units have not been registered under the Securities Act or
any state securities laws by reason of their contemplated issuance in
transactions exempt from the registration and prospectus delivery requirements
thereof and that the reliance of the Company and others upon such exemptions is
predicated in part by the representations and warranties of such Member
contained herein.
(b) Such Member has the requisite power and authority (whether
corporate or otherwise) and legal capacity to enter into, and to carry out its
obligations under, this Agreement.
(c) The execution and delivery by such Member of this
Agreement and the consummation by such Member of the transactions contemplated
hereby have been duly authorized prior to the date of this Agreement by all
necessary action on the part of such Member.
(d) This Agreement has been duly executed and delivered by
such Member and constitutes a valid and binding obligation enforceable against
such Member in accordance with its terms.
(e) Such Member is not subject to, or obligated under, any
provision of (i) any agreement, arrangement or understanding, (ii) any license,
franchise or permit or (iii) any law, regulation, order, judgment or decree that
would be breached or violated, or in respect of which a right of termination or
acceleration or any encumbrance on any of such Member's assets would be created,
by such Member's execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, except for such agreements
as to which a Member has previously obtained the consent of the other party or
parties thereto.
(f) No authorization, consent or approval of, waiver or
exemption by, or filing or registration with, any public body, court, third
party or authority is necessary on such Member's part, which has not previously
been obtained by such Member for the consummation of the transactions
contemplated by this Agreement.
(g) No person or entity has or will have, as a result of any
act or omission by such Member any right, interest or valid claim against the
Company or any other Member for any commission, fee or other compensation as a
finder or broker, or in any similar capacity, in connection with the
transactions contemplated by this Agreement.
(h) Such Member has, and will transfer to the Company, good
and marketable title to the assets being contributed to the Company by such
Member pursuant to the provisions of Section 11.1, free and clear of all liens,
pledges, charges, claims, leases, restrictions, obligations and encumbrances of
any nature whatsoever.
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ARTICLE XVII.
MISCELLANEOUS PROVISIONS
SECTION 17.1. ADDITIONAL ACTIONS AND DOCUMENTS. Each of the
Members hereby agrees to take or cause to be taken such further actions, to
execute, acknowledge, deliver and file, or cause to be executed, acknowledged,
delivered and filed such further documents and instruments, and to use all
reasonable efforts to obtain such consents, as may be necessary or as may be
reasonably requested in order to fully effectuate the purposes, terms and
conditions of this Agreement.
SECTION 17.2. NOTICE. Any notice or other communication to any
party in connection with this Agreement shall be in writing and shall be sent by
manual delivery, telegram, telex, facsimile transmission, overnight courier or
United States mail (postage prepaid) addressed, if to the Company, to the
Principal Office of the Company set forth in Section 1.2 hereof or to such other
address as the Company shall notify the Members in writing; and if to the
Members, to their respective addresses set forth in Schedule A hereof or to such
other address as any such Member may hereafter designate by notice in writing to
the Chair and Company. All periods of notice shall be measured from the date of
delivery thereof if manually delivered, from the date of sending thereof if sent
by telegram, telex or facsimile transmission, from the first business day after
the date of sending if sent by overnight courier, or from four days after the
date of mailing if mailed.
SECTION 17.3. SEVERABILITY. The invalidity of any one or more
provisions hereof or of any other agreement or instrument given pursuant to or
in connection with this Agreement shall not affect the remaining portions of
this Agreement or any such other agreement or instrument or any part thereof;
and in the event that one or more of the provisions contained herein or therein
should be invalid, or should operate to render this Agreement or any such other
agreement or instrument invalid, this Agreement and such other agreements and
instruments shall be construed as if such invalid provisions had not been
inserted.
SECTION 17.4. SURVIVAL. It is the express intention and
agreement of the Members that all covenants, agreements, statements,
representations, warranties and indemnities made in this Agreement shall survive
the execution and delivery of this Agreement.
SECTION 17.5. WAIVERS; EXERCISE OF RIGHTS. Neither the waiver
by a Member of a breach of or a default under any of the provisions of this
Agreement, nor the failure or delay on the part of a Member or the Company in
exercising any right, power or privilege hereunder and no course of dealing
between the Members or between a Member and the Company shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
expressly provided are cumulative and
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not exclusive of any other rights or remedies which a Member or the Company
would otherwise have at law or in equity or otherwise.
SECTION 17.6. BINDING EFFECT. Subject to any provisions hereof
restricting assignment, this Agreement shall be binding upon and shall inure to
the benefit of the Members and their respective successors and permitted
assigns.
SECTION 17.7. LIMITATION ON BENEFITS OF THIS AGREEMENT. It is
the explicit intention of the Members that no person or entity other than the
Members and the Company is or shall be entitled to bring any action to enforce
any provision of this Agreement against any Member or the Company, and that the
covenants, undertakings and agreements set forth in this Agreement shall be
solely for the benefit of, and shall be enforceable only by, the Members (or
their respective heirs, legal representatives, successors and assigns as
permitted hereunder) and the Company; PROVIDED, HOWEVER, that the Indemnitees
shall, as intended third-party beneficiaries thereof, be entitled to the
enforcement of Sections 8.1 and 8.2 hereof, but only as insofar as the
obligations sought to be enforced thereunder are those of the Company.
SECTION 17.8. WAIVER OF PARTITION. The Members agree that the
assets of the Company are not and will not be suitable for partition. The
Members hereby waive any right of partition or any right to take any action that
otherwise might be available to them for the purpose of severing their
relationship with the Company or interest in assets held by the Company from the
interest of the other Members.
SECTION 17.9. ENTIRE AGREEMENT. This Agreement, together with
the Refinery Agreement and the Personnel Lease Agreement, contains the entire
agreement among the Members with respect to the matters contained herein, and
supersedes all prior oral or written agreements, commitments or understandings
with respect to the matters provided for herein.
SECTION 17.10. PRONOUNS. All pronouns shall be deemed to refer
to the masculine, feminine, neuter, singular or plural, as the identity of the
antecedent may require.
SECTION 17.11. HEADINGS. Article and Section headings
contained in this Agreement are inserted for convenience of reference only,
shall not be deemed to be a part of this Agreement for any purpose, and shall
not in any way define or affect the meaning, construction or scope of any of the
provisions hereof.
30
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SECTION 17.12. EXECUTION IN COUNTERPARTS. To facilitate
execution, this Agreement may be executed in as many counterparts as may be
required; and it shall not be necessary that the signatures of, or on behalf of,
each party, or that the signatures of all Persons required to bind any party,
appear on each counterpart; but it shall be sufficient that the signature of, or
on behalf of, each party, or that the signatures of the Persons required to bind
any party, appear on one or more of the counterparts. All counterparts shall
collectively constitute a single agreement. It shall not be necessary in making
proof of this Agreement to produce or account for more than a number of
counterparts containing the respective signatures of, or on behalf of, all of
the parties hereto.
SECTION 17.13. LIMITATION OF MEMBER LIABILITIES. The aggregate
of any and all liabilities and obligations of any Member to any other Member or
Members or the Company under this Agreement, the Refinery Agreement an the
Personnel Lease Agreement shall in no event exceed $150 million per Member.
31
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first above written.
FARMLAND INDUSTRIES, INC.
By: John W. Fuehring
---------------------------------------------
Name: John W. Fuehring
-----------------------------------------
Title: Controller - Crop Production
----------------------------------------
NATIONAL COOPERATIVE REFINERY ASSOCIATION
By: James S. Loving
---------------------------------------------
Name: James S. Loving
-----------------------------------------
Title: President
----------------------------------------
32
<PAGE>
Exhibit 1
CERTIFICATE OF FORMATION
OF
COOPERATIVE REFINING, LLC
This Certificate of Formation of Cooperative Refining, LLC
(the "Company") is executed and filed by the undersigned, as authorized person,
to form a limited liability company under the Delaware Limited Liability Company
Act (the "Act").
1. The name of the Company is Cooperative Refining, LLC.
2. The address of the registered office of the Company in the
State of Delaware is The Corporation Trust Company, located at Corporation Trust
Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
3. The name and address of the registered agent for service of
process on the Company in the State of Delaware is The Corporation Trust
Company, located at Corporation Trust Center, 1209 Orange Street, Wilmington,
New Castle County, Delaware 19801.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate of Formation this 6th day of August, 1999.
/s/ Theodore D. Herzog
-------------------------------------------
Theodore D. Herzog
Authorized Person
<PAGE>
Exhibit 2
TAX MATTERS EXHIBIT
SECTION 1. CAPITAL ACCOUNT MAINTENANCE. It is intended that
the Capital Account of each Member will be maintained in accordance with the
capital accounting rules of Treasury Regulations Section 1.704-1(b)(2)(iv) and
the provisions of this Agreement relating to the maintenance of Capital Accounts
shall be interpreted and applied in a manner consistent therewith. In the event
the Members shall determine that it is prudent to modify the manner in which the
Capital Accounts, or any debits or credits thereto, are computed in order to
comply with such Treasury Regulations, the TMP may make such modification,
provided that it is not likely to have a material effect on the amounts
distributable to any Member pursuant to Article XIII hereof. In general, the
Capital Account of each Member shall be initially credited with the amount of
such Member's initial Capital Contribution. The Capital Account of each Member
shall further be credited by the amount of any additional Capital Contribution
made by such Member from time to time, shall be debited by the amount of any
cash distributions made by the Company or the fair market value of any property
distributed in kind to such Member and shall be credited with the amount of
income and gains and debited with the amount of losses of the Company allocated
to such Member. In all instances the capital accounting rules in Treasury
Regulations Section 1.704-1(b)(2)(iv) will determine the proper debits or
credits to each Member's Capital Account. The Members may, at their option,
increase or decrease the Capital Accounts of the Members to reflect a
revaluation of Company property on the Company's books at the times when,
pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv), such adjustments may
occur. The adjustments, if made, will be made in accordance with such Treasury
Regulation, including allocating taxable items, as computed for book purposes,
to the Capital Accounts as prescribed in such Treasury Regulation, with
appropriate adjustments as contemplated by Section 12.4 of the Agreement. In the
case of the transfer of all or a part of an interest in the Company, the Capital
Account of the transferor Member attributable to the transferred interest will
carry over to the transferee Member. In the case of termination of the Company
pursuant to Section 708 of the Code, the rules of Treasury Regulations Section
1.704-1(b)(2)(iv) shall govern adjustments to the Capital Accounts. If there
are any adjustments to Company property as a result of Sections 732, 734 or 743
of the Code, the Capital Accounts of the Members shall be adjusted as provided
in Treasury Regulations Section 1.704-1(b)(2)(iv)(m).
SECTION 2. ADJUSTMENTS TO PROFITS AND LOSSES. In the
determination of Profits and Losses with respect to any period, the Company's
taxable income or loss for such period shall be adjusted as follows:
(i) Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits
and Losses pursuant to this paragraph shall be added to such taxable
income or loss;
(ii) Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not
otherwise taken into account in computing Profits and Losses pursuant
to this paragraph shall be subtracted from such taxable income or loss;
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<PAGE>
(iii) In the event the Gross Asset Value of any Company asset
is adjusted pursuant to sub paragraphs (ii) or (iii) under the
definition "Gross Asset Value" below, the amount of such adjustment
shall be taken into account as gain or loss from the disposition of
such asset for purposes of computing Profits and Losses;
(iv) Gain or loss resulting from any disposition of Company
property with respect to which gain or loss is recognized for federal
income tax purposes shall be computed by reference to the Gross Asset
Value of the property disposed of, notwithstanding that the adjusted
tax basis of such property differs from its Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income
or loss, there shall be taken into account Depreciation for such fiscal
year;
(vi) To the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Code Section 734(b) or Code Section
743(b) is required pursuant to Regulations Sections
1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4) to be taken into
account in determining Capital Accounts as a result of a distribution
other than in liquidation of a Member's interest in the Company, the
amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases the basis of the asset) from the disposition of the asset and
shall be taken into account for purposes of computing Profits and
Losses;
(vii) Notwithstanding any other provision of this paragraph,
any items which are specially allocated pursuant to Section 3 hereof
shall not be taken into account in computing Profits and Losses.
The amounts of the items of Company income, gain, loss, or deduction available
to be specially allocated pursuant to Section 3 hereof shall be determined by
applying rules analogous to those set forth in subparagraphs (i) through (vi)
above.
SECTION 3. REGULATORY ALLOCATIONS. The following Regulatory
Allocations shall be made in the following order:
(a) Minimum Gain Chargeback. Except as otherwise provided in
Section 1.704-2(f) of the Treasury Regulations, notwithstanding any other
provision of these Regulatory Allocations, if there is a net decrease in Company
minimum gain during any Company Fiscal Year, each Member shall be specially
allocated items of Company income and gain for such year (and, if necessary,
subsequent years) in an amount equal to that Member's share of the net decrease
in Company minimum gain (within the meaning of Treasury Regulations Sections
1.704-2(b)(2) and 1.704-2(d)) determined in accordance with Treasury Regulations
Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made
in proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Treasury Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This
Paragraph (a) is intended to comply with the minimum gain chargeback
2
<PAGE>
requirement in Treasury Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith.
(b) Member Minimum Gain Chargeback. Except as otherwise
provided in Treasury Regulations Section 1.704-2(i)(4), notwithstanding any
other provision of these Regulatory Allocations, if there is a net decrease in
Member nonrecourse debt minimum gain, as defined in Treasury Regulations Section
1.704-2(i)(2) and determined pursuant to Treasury Regulations Section
1.704-2(i)(3), attributable to a Member nonrecourse debt, as defined in Treasury
Regulations Section 1.704-2(b)(4), during any Company Fiscal Year, each Member
who has a share of the Member nonrecourse debt minimum gain attributable to such
Member nonrecourse debt, determined in accordance with Treasury Regulations
Section 1.704-2(i)(5), shall be specially allocated items of Company income and
gain for such year (and if necessary, subsequent years) in an amount equal to
such Member's share of the net decrease in Member nonrecourse debt minimum gain
attributable to such Member nonrecourse debt, determined in accordance with
Treasury Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Member pursuant thereto. The items to be so allocated shall be
determined in accordance with Treasury Regulations 1.704-2(i)(4) and
1.704-2(j)(2). This Paragraph (b) is intended to comply with the minimum gain
chargeback requirement in Treasury Regulations Section 1.704-2(i)(4) and shall
be interpreted consistently therewith.
(c) Qualified Income Offset. If a Member unexpectedly receives
an adjustment, allocation or distribution described in Treasury Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), and such unexpected adjustment,
allocation or distribution puts such Member's Capital Account into a deficit
balance or increases such deficit balance determined after such account is
credited by any amounts which the Member is obligated to restore or is deemed to
be obligated to restore pursuant to the penultimate sentence of Treasury
Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and debited by the items
described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6)
and for all other allocations tentatively made pursuant to these Regulatory
Allocations as if this Paragraph (c) were not in this Agreement, such Member
shall be allocated items of Company income and gain in an amount and manner
sufficient to eliminate such deficit or increase as quickly as possible. It is
intended that this Paragraph (c) shall meet the requirement that this Agreement
contain a "qualified income offset" as defined in Treasury Regulations Section
1.704-1(b)(2)(ii)(d) and this Section shall be interpreted and applied
consistently therewith.
(d) Gross Income Allocation. In the event any Member has a
deficit Capital Account at the end of any Fiscal Year which is in excess of the
sum of (i) the amount such Member is obligated to restore pursuant to any
provision of this Agreement, and (ii) the amount such Member is deemed to be
obligated to restore pursuant to the penultimate sentences of Treasury
Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be
specially allocated items of Company income and gain in the amount of such
excess as quickly as possible, provided that an allocation pursuant to this
Paragraph (d) shall be made only if and to the extent that such Member would
have a deficit Capital Account in excess of such sum after all other allocations
provided for in these Regulatory Allocations have been made as if Paragraph (c)
and this Paragraph (d) were not in the Agreement.
3
<PAGE>
(e) Nonrecourse Deductions. Nonrecourse deductions, within the
meaning of Treasury Regulations Section 1.704-2(b)(1), for any Fiscal Year or
other period shall be specially allocated to the Members in proportion to their
Units.
(f) Member Nonrecourse Deductions. Any Member nonrecourse
deductions, within the meaning of Treasury Regulations Sections 1.704-2(i)(1)
and 1.704-2(i)(2), for any Fiscal Year or other period shall be specially
allocated to the Member who bears the economic risk of loss with respect to the
Member nonrecourse debt to which such Member nonrecourse deductions are
attributable in accordance with Treasury Regulations Section 1.704-2(i).
(g) Section 754 Adjustment. To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Code Sections 732, 734(b) or
743(b) is required, pursuant to Treasury Regulations Sections
1.704-1(b)(2)(iv)(m)(2) or (4), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be treated
as an item of gain (if the adjustment increases the basis of the asset) or loss
(if the adjustment decreases such basis) and such gain or loss shall be
specially allocated to the Members in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Sections of the Treasury Regulations.
The Regulatory Allocations are intended to comply with certain
requirements of the Treasury Regulations. It is the intent of the Members that
to the extent possible, all Regulatory Allocations shall be offset either with
other Regulatory Allocations or with special allocations of other items of
Company income, gain, loss, or deduction pursuant to this paragraph. Therefore,
notwithstanding any other provision of this Exhibit or Article XII (other than
the Regulatory Allocations), the Board of Managers shall make such offsetting
special allocations of Company income, gain, loss, or deduction in whatever
manner they determine appropriate so that, after such offsetting allocations are
made, each Member's Capital Account balance is, to the extent possible, equal to
the Capital Account balance such Member would have had if the Regulatory
Allocations were not part of the Agreement and all Company items were allocated
pursuant to Section 12.1 and Section 12.2. In exercising their discretion under
this paragraph, the Board of Managers shall take into account future Regulatory
Allocations under Sections Paragraphs (a) and (b) that, although not yet made,
are likely to offset other Regulatory Allocations previously made under
Paragraphs (e) and (f).
SECTION 4. TAX MATTERS PARTNER.
(a) TMP Notices. Each Member shall furnish the TMP with such
information (including information specified in Section 6230(e) of the Code) as
the TMP may reasonably request to permit the TMP to provide the Internal Revenue
Service with sufficient information to allow proper notice to the Members in
accordance with Section 6223 of the Code. The TMP shall keep each Member
informed of those administrative and judicial proceedings for the adjustment at
the Company level of Company items required by Section 6223(g) of the Code and
the Treasury Regulations thereunder, and such other matters as the TMP, in its
sole discretion, deems appropriate.
4
<PAGE>
(b) Inconsistent Tax Treatment. Each Member shall notify the
TMP in the event its treatment of any Company item on its federal income tax
return is inconsistent with the treatment of that item on any return filed by or
in any records of the Company within thirty (30) days of the date such Member's
return is filed.
(c) Requests for Tax Adjustments. No Member shall file,
pursuant to Section 6227 of the Code, a request for an administrative adjustment
of limited liability company items for any Company taxable year without first
notifying each other Member. If each other Member agrees with the requested
adjustment, the TMP shall file the request for administrative adjustment on
behalf of the Company. If unanimous consent of the Members is not obtained
within thirty (30) days, or within the period required to file timely the
request for administrative adjustment, if shorter, any Member, including the TMP
(on behalf of the Company), may file a request for administrative adjustment on
its own behalf.
(d) Tax Proceedings. The TMP, in its sole discretion, shall
negotiate with the Internal Revenue Service on behalf of the Company during all
aspects of the tax proceeding, including without limitation the examination,
appeals and litigation process. Any Member who intends to file a petition under
Sections 6226, 6228, or other sections of the Code with respect to any Company
item, or other tax matters involving the Company, shall give reasonable notice
to each of the other Members of such intention and the nature of the
contemplated proceeding. In the case where the TMP is the Member intending to
file such petition, the TMP, in its sole discretion, shall choose the forum in
which such petition will be filed. If any Member intends to seek review of any
court decision rendered as a result of a proceeding instituted under the
preceding part of this paragraph (d) of Section 4, such Member shall notify each
of the other Members of such intended action. In accordance with its duty to act
in good faith, the TMP may choose to pursue or forego settlement, litigation or
any other proceedings.
(e) Tax Settlements. The TMP may bind a Member to a settlement
agreement without obtaining the written concurrence of such Member who would be
bound by such agreement only upon the approval of such settlement agreement by
vote of a Manager Supermajority. Any Member who enters into a settlement
agreement with the Secretary of the Treasury with respect to any partnership
items, as defined by Section 6231(a)(3) of the Code, shall notify the Members of
such settlement agreement and its terms within ninety (90) days from the date of
settlement.
(f) TMP Expenditures, Fees and Indemnification. The TMP may
engage such legal counsel, certified public accountants, or others (including,
without limitation, experts) on behalf of the Company as it may determine to be
necessary and appropriate. Any other Member may engage other legal counsel,
certified public accountants, or others on such other Member's own behalf and at
such other Member's sole cost and expense. Any reasonable item of expense,
including but not limited to fees and expenses for legal counsel, certified
public accountants, and others (including, without limitation, experts) that the
TMP incurs on behalf of the Company in connection with any audit, assessment,
litigation, or other proceeding regarding any partnership item, shall constitute
expenses of the Company. In the event that the Company does not have adequate
cash or other assets to pay such items of expense, the TMP shall not be
obligated to make capital contributions or loans to fund such expenses, and the
TMP shall be free to resign as
5
<PAGE>
the tax matters partner of the Company pursuant to Section 4(g) hereof. The
Company shall indemnify the TMP pursuant to Article VIII hereof.
(g) Resignation of TMP. The TMP may resign as tax matters
partner at any time upon the filing of a signed statement with the Internal
Revenue Service in accordance with Temp. Treas. Reg. ss. 301.6231(a)(7)-1T(i)
(or any successor provision thereto). The successor tax matters partner shall be
determined pursuant to Temp. Treas. Reg. ss.ss. 301.6231(a)(7)-1T (or any
successor provision thereto).
(h) Survival of TMP Provisions. The provisions of this Section
4, including without limitation the obligation to pay fees and expenses and the
indemnification obligations described in Section 4 hereof, shall survive the
termination of the Company or the termination of any Member's interest in the
Company and shall remain binding on the Company for a period of time necessary
to resolve with the Internal Revenue Service, the Department of the Treasury or
any state taxing authority any and all matters regarding the federal or state
income taxation of the Company for the applicable tax year(s).
SECTION 5. DEFINITIONS.
"Adjusted Capital Account Deficit" means, with respect to any
Member, the deficit balance, if any, in such Member's Capital Account as of the
end of the relevant Fiscal Year, after giving effect to the following
adjustments: (i) credit to such Capital Account any amounts which such Member is
obligated to restore pursuant to the penultimate sentences of Treasury
Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) debit to such
Capital Account the items describe in Treasury Regulations Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Treasury
Regulations and shall be interpreted consistently therewith.
"Depreciation" means, for each Fiscal Year, an amount equal to
the depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year, except that if the Gross Asset Value
of an asset differs from its adjusted basis for federal income tax purposes at
the beginning of such Fiscal Year, Depreciation shall be an amount which bears
the same ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such Fiscal
Year bears to such beginning adjusted tax basis; PROVIDED, HOWEVER, that if the
adjusted basis for federal income tax purposes of an asset at the beginning of
such Fiscal Year is zero, Depreciation shall be determined with reference to
such beginning Gross Asset Value using any reasonable method selected by the
Members.
"Gross Asset Value" means, with respect to any asset, the
asset's adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by
a Member to the Company shall be the gross fair market value of such
asset, as determined by the contributing Member and the other Member;
6
<PAGE>
(ii) The Gross Asset Values of all Company assets shall be
adjusted to equal their respective gross fair market values (taking
into account Section 7701(g) of the Code), as determined by the
Members, as of the following times: (a) the acquisition of an
additional interest in the Company by any new or existing Member in
exchange for more than a de minimis Capital Contribution; (b) the
distribution by the Company to a Member of more than a de minimis
amount of Company property as consideration for an interest in the
Company; and (c) the liquidation of the Company within the meaning of
Treasury Regulations Section 1.704-1(b)(2)(ii)(g); PROVIDED, HOWEVER,
that adjustments pursuant to clauses (a) and (b) above shall be made
only if the TMP reasonably determines that such adjustments are
necessary or appropriate to reflect the relative economic interests of
the Members in the Company;
(iii) The Gross Asset Value of any Company asset distributed
to any Member shall be adjusted to equal the gross fair market value
(taking into account Section 7701(g) of the Code) of such asset on the
date of distribution as determined by the distributee and the other
Member; and
(iv) The Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations Section
1.704-1(b)(2)(iv)(m); PROVIDED, HOWEVER, that Gross Asset Values shall
not be adjusted pursuant to this paragraph to the extent the Members
determine that an adjustment pursuant to paragraph (ii) hereof is
necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this paragraph (iv).
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to paragraphs (i), (ii), or (iv) hereof, such Gross Asset
Value shall thereafter be adjusted by the Depreciation taken into account with
respect to such asset for purposes of computing income, gains, profits and
losses of the Company.
7
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SCHEDULE A
MEMBERS OF COOPERATIVE REFINING, LLC
Name and Address of
Member Units
- ------ -----
Farmland Industries, Inc. 42,435
NCRA 57,565
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SCHEDULE B
LEASED ASSETS
As enumerated in the Operating Lease between NCRA and General Electric dated
October 12, 1983:
Coker Unit Revamp Equipment
As enumerated in the Operating Lease between NCRA and Beatrice dated August 1,
1984:
Sour Crude Unit Equipment
Sour Water Stripper Equipment
Kerley ATS Plant Equipment
Amine Unit Equipment
Diesel Hydrotreater Equipment
2
<PAGE>
SCHEDULE C
NCRA SUBSIDIARIES
Clear Creek Transportation, LLC
Jayhawk Pipeline, L.L.C.
Kaw Pipeline Company
Osage Pipeline Company
3
EXHIBIT 10.35
APPENDIX A
===============================
TRANSACTION AGREEMENT
between
CENEX HARVEST STATES COOPERATIVES,
a Minnesota cooperative association
and
FARMLAND INDUSTRIES, INC.,
a Kansas cooperative corporation
Dated as of September 23, 1999
===============================
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE TRANSACTION............................................................1
Section 1.01 Overview of Transaction.....................................1
Section 1.02 The Closing.................................................2
Section 1.03 Actions at the Closing......................................2
Section 1.04 Effect of Transaction.......................................3
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CHSC.....................................5
Section 2.01 Organization and Good Standing..............................6
Section 2.02 Financial Statements........................................6
Section 2.03 Absence of Liabilities......................................6
Section 2.04 Title to Property...........................................6
Section 2.05 Intellectual Property.......................................7
Section 2.06 Compliance with Laws, etc...................................7
Section 2.07 Pending Litigation, Claims, Actions, Proceedings or
Investigations..............................................7
Section 2.08 Absence of Defaults.........................................7
Section 2.09 Authorization...............................................8
Section 2.10 Insurance...................................................8
Section 2.11 Governmental Authorization..................................8
Section 2.12 Subsidiaries................................................8
Section 2.13 SEC Filings.................................................9
Section 2.14 Absence of Certain Changes..................................9
Section 2.15 Taxes.......................................................9
Section 2.16 Employee Benefit Plans.....................................10
Section 2.17 Environmental Matters......................................11
Section 2.18 Pooling; Tax Treatment.....................................12
Section 2.19 No Dissenters' Rights......................................12
Section 2.20 Acquisition Co.............................................12
Section 2.21 Full Disclosure............................................13
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FARMLAND................................13
Section 3.01 Organization and Good Standing.............................13
Section 3.02 Financial Statements.......................................14
Section 3.03 Absence of Liabilities.....................................14
Section 3.04 Title to Property..........................................14
Section 3.05 Intellectual Property......................................14
Section 3.06 Compliance with Laws, etc..................................15
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Section 3.07 Pending Litigation, Claims, Actions, Proceedings or
Investigations.............................................15
Section 3.08 Absence of Defaults........................................15
Section 3.09 Authorization..............................................15
Section 3.10 Insurance..................................................16
Section 3.11 Governmental Authorization.................................16
Section 3.12 Subsidiaries...............................................16
Section 3.13 SEC Filings................................................16
Section 3.14 Absence of Certain Changes.................................17
Section 3.15 Taxes......................................................17
Section 3.16 Employee Benefit Plans.....................................18
Section 3.17 Environmental Matters......................................19
Section 3.18 Pooling; Tax Treatment.....................................19
Section 3.19 No Dissenters' Rights......................................19
Section 3.20 Full Disclosure............................................20
ARTICLE IV
PRE-CLOSING COVENANTS.....................................................20
Section 4.01 Selection of Structure.....................................20
Section 4.02 Good Faith Efforts.........................................20
Section 4.03 Preservation of Business...................................21
Section 4.04 Conduct of Business........................................21
Section 4.05 Meetings of Members........................................22
Section 4.06 Full Access................................................22
Section 4.07 Notice of Developments.....................................23
Section 4.08 Exclusive..................................................23
Section 4.09 Hart-Scott-Rodino Filings..................................23
Section 4.10 Tax and Accounting Treatment...............................23
ARTICLE V
CLOSING CONDITIONS........................................................23
Section 5.01 Conditions to Obligations of Each Party....................24
Section 5.02 Additional Conditions to Obligation of CHSC................24
Section 5.03 Additional Conditions to Obligation of Farmland............25
ARTICLE VI
POST-CLOSING AGREEMENTS...................................................26
Section 6.01 Consolidation of Benefit Plans.............................26
Section 6.02 Patronage Distributions....................................26
Section 6.03 Indemnification of Former Officers; Insurance..............26
ARTICLE VII
TERMINATION...............................................................27
Section 7.01 Termination of Agreement...................................27
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Section 7.02 Effect of Termination......................................27
ARTICLE VIII
MISCELLANEOUS.............................................................28
Section 8.01 Waiver of Conditions.......................................28
Section 8.02 Amendment..................................................28
Section 8.03 Binding Nature.............................................28
Section 8.04 Counterparts...............................................28
Section 8.05 Entire Agreement...........................................28
Section 8.06 Notices....................................................28
Section 8.07 Non-Survival of Representations and Warranties.............29
Section 8.08 Captions...................................................29
Exhibits
Exhibit A-1 - Structure A Plan of Merger
Exhibit A-2 - Structure A Surviving Entity Bylaws
Exhibit B-1 - Structure B Plans of Merger
Exhibit B-2 - Structure B Surviving Entity Bylaws
Exhibit C - Senior Management Reporting Relationships
Exhibit D - Capital Plan
CHSC Disclosure Schedule
Farmland Disclosure Schedule
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TRANSACTION AGREEMENT
THIS TRANSACTION AGREEMENT (this "Agreement") is made and entered into
as of September 23, 1999, by and between CENEX HARVEST STATES COOPERATIVES, a
Minnesota cooperative association ("CHSC"), and FARMLAND INDUSTRIES, INC., a
Kansas cooperative corporation ("Farmland").
WHEREAS, each of CHSC and Farmland is an agricultural cooperative
organized for the purposes of benefitting and serving its members and patrons;
and
WHEREAS, the parties believe that the unification of their respective
business operations and assets will be in the best interest of their respective
members; and
WHEREAS, on May 6, 1999, the parties entered into a Memorandum of
Intent pursuant to which both parties agreed to negotiate in good faith to reach
agreement on the principal terms of a transaction pursuant to which they would
combine their respective assets and business operations into a single entity,
through a form of business combination to be determined by the parties, and
WHEREAS, the parties have now reached agreement as to the final terms
and conditions of such business combination, and wish to reduce such agreement
to writing as more particularly described herein.
NOW THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants herein contained, the parties hereto
agree as follows:
ARTICLE I
THE TRANSACTION
SECTION 1.01 OVERVIEW OF TRANSACTION.
At the Effective Time (as such term is defined in section 1.04 hereof),
CHSC and Farmland will combine into a single entity named "United Country
Brands, Inc." (the "Surviving Entity"). The combination will be in the form of
either (a) Structure A, which will be a merger of Farmland with and into CHSC,
with CHSC as the Surviving Entity, such merger to become effective at the
Effective Time ("Structure A"), or (b) a merger, prior to the Effective Time, of
CHSC into UCB Acquisition Co., an Ohio cooperative corporation and wholly-owned
subsidiary of CHSC ("Acquisition Co."), with Acquisition Co. as the survivor in
such merger (the "CHSC/Acquisition Co. Merger"), and immediately thereafter, the
merger of Farmland into Acquisition Co., with Acquisition Co. as the Surviving
Entity ("Structure B"). The parties anticipate and agree that Structure A
constitutes the structure that is preferred by the parties and the default
structure to accomplish the combination, and agree that Structure A shall be
used (and that the parties will use their best efforts to resolve any issues
relating to the use of Structure A) unless, prior to the Closing
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(as defined herein), either party obtains an opinion of counsel to the effect
that use of such Structure A would have a Material Adverse Effect (as defined
herein) on the Surviving Entity. If Structure A is used to accomplish the
combination, then (i) the parties shall execute, deliver and file the Agreement
and Plan of Merger attached hereto as Exhibit A-1 to effectuate the merger
therein contemplated; and (ii) effective as of the Effective Time, the Surviving
Entity will be governed by Articles of Incorporation in the form attached hereto
as Schedule I to such Plan of Merger and Bylaws in the form attached hereto as
Exhibit A-2, and will otherwise continue to operate and exist as a cooperative
association organized under the laws of the State of Minnesota. If Structure B
is used to accomplish the combination, then (i) CHSC shall take appropriate
action to effectuate the CHSC/Acquisition Co. Merger, and in connection
therewith, shall execute, deliver and file the appropriate Agreement and Plan of
Merger attached hereto as Exhibit B-1 and shall redeem all of its outstanding
Equity Participation Units in the Defined Business Units; (ii) thereafter the
parties shall execute, deliver and file the appropriate Agreement and Plan of
Merger attached hereto as Exhibit B-1 as required by law to effectuate the
merger of Farmland into Acquisition Co.; and (iii) effective as of the Effective
Time, the Surviving Entity will be governed by Articles of Incorporation in the
form attached hereto as Schedule I to such Plan of Merger and Bylaws in the form
attached hereto as Exhibit B-2, and will (subject to Section 4.01 hereof)
continue to operate and exist as a cooperative association organized under the
laws of the State of Ohio. The Agreement and Plan of Merger so used and
executed, delivered and filed as hereinabove provided is referred to herein as
the "Plan of Merger", the Articles of Incorporation which serve as the Articles
of Incorporation of the Surviving Entity are referred to herein as the
"Surviving Entity Articles", the Bylaws which serve as the Bylaws of the
Surviving Entity are referred to herein as the "Surviving Entity Bylaws", and
the merger transaction therein contemplated, together with all actions,
consents, agreements and transactions described herein or otherwise necessary or
desirable in connection therewith, are referred to collectively herein as the
"Transaction."
SECTION 1.02 THE CLOSING.
Unless this Agreement is terminated and the Transaction is abandoned as
provided in Article VII hereof, the closing for the Transaction (the "Closing")
shall take place on or before February 29, 2000, or such other date as the
parties may mutually determine (the "Closing Date"), subject to the satisfaction
or waiver of all conditions to the obligations of each of the parties to
consummate the Transaction (other than conditions with respect to actions which
the respective parties will take at the Closing itself).
SECTION 1.03 ACTIONS AT THE CLOSING.
At the Closing, the parties shall (a) execute and deliver the Agreement
and Plan of Merger pursuant to Section 1.01 above, (b) deliver the various
certificates, instruments and documents referred to in the Plan of Merger or in
Article V of this Agreement, and (c) cause to be filed with the Secretary of
State of the appropriate states the Plan of Merger, certificate of merger or
such other documents as may be required by the applicable laws to effectuate the
Transaction pursuant to the terms of the Plan of Merger and this Agreement.
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SECTION 1.04 EFFECT OF TRANSACTION.
The Transaction shall become fully effective at 12:02 a.m. Central Time
on March 1, 2000 (the "Effective Time"). The Transaction shall have the effect
set forth in the Plan of Merger, this Agreement and applicable state law. At any
time after the Effective Time, the Surviving Entity may take any action
(including executing and delivering any document) in the name and on behalf of
either party to this Agreement in order to carry out and effectuate the
Transaction contemplated by this Agreement. At the Effective Time, without any
further action on the part of the members or the boards of directors of either
CHSC or Farmland:
(a) ARTICLES AND BYLAWS. The Surviving Entity Articles and the
Surviving Entity Bylaws shall become the articles of incorporation and
bylaws of the Surviving Entity, as provided in the Plan of Merger.
(b) BOARD OF DIRECTORS.
(i) TRANSITION BOARD. Each of the then current
directors of Farmland and the then current directors of CHSC
will become directors of the Surviving Entity, to serve
according to the Surviving Entity Bylaws, so that the board of
directors of the Surviving Entity as of the Effective Time
will consist of all of the then current directors of both
Farmland and CHSC. Each party agrees to take all actions
necessary to reduce, as of the Effective Time, the number of
directors on the Board of Directors of such party to seventeen
(17).
(ii) PRODUCER DIRECTORS AFTER DECEMBER 2001.
Effective for and after the annual meeting of the members of
the Surviving Entity to be held in December 2001, for purposes
of Section 4.4(b) of the Surviving Entity Bylaws and subject
to review and reapportionment by the Board of Directors of the
Surviving Entity pursuant to Section 4.4(c) of the Surviving
Entity Bylaws from time to time, the numbers of producer
directors in each director district shall be as follows:
District 1 -- one (1) producer director; District 2 -- two (2)
producer directors; District 3 -- four (4) producer directors;
District 4 -- five (5) producer directors; District 5 -- two
(2) producer directors; District 6 -- one (1) producer
director; and District 7 -- three (3) producer directors.
(c) BOARD OFFICERS. For the period from the Effective Time to
the annual meeting of the members of the Surviving Entity to be held in
December 2000 (the "Transition Period"), Elroy Webster will serve as
Chairman of the Board and Albert Shivley will serve as the Vice
Chairman of the Board. In addition, effective as of the Effective Time,
there shall be established an Executive Committee of the Board, and the
following Standing Committees of the Board: Capital, Finance/Audit,
Governance and Corporate Responsibility (including compensation). For
the Transition Period the Capital Committee will be chaired
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by Merlin Van Walleghen, the Finance/Audit Committee of the Board will
be chaired by Monte Romohr, the Governance Committee will be chaired by
Gerald Kuster and the Corporate Responsibility Committee will be
chaired by Jody Bezner. For the Transition Period, the Chairman and
Vice Chairman of the Board, together with the Chairs of the Standing
Committees, shall make up the Executive Committee.
(d) OFFICE OF LEADERSHIP. The "Office of Leadership" will
consist of the Chief Executive Officer and the President of the
Surviving Entity. Robert Honse ("Honse") will serve as Chief Executive
Officer of the Surviving Entity, reporting to the board of directors of
the Surviving Entity. It is anticipated that Honse shall serve in that
capacity through no later than December 31, 2003; and John D. Johnson
("Johnson") will serve as the President of the Surviving Entity,
reporting to the Chief Executive Officer of the Surviving Entity. Upon
expiration of Honse's service as Chief Executive Officer, it is
anticipated that Johnson shall assume the role of President and Chief
Executive Officer of the Surviving Entity. Both the Chief Executive
Officer and the President will serve at the pleasure of the Board of
Directors of the Surviving Entity at all times, subject, however, to
the monetary provisions of any applicable employment contract. Such
employment contracts will provide that Honse, as Chief Executive
Officer, may not demote, discharge, change the senior management
reporting relationships (described in paragraph (e) below) of, or
otherwise materially adversely change the status of, Johnson, as
President, without the agreement of the Executive Committee of the
Board of Directors.
(e) SENIOR MANAGEMENT. Senior management will be as designated
by the Office of Leadership from time to time in accordance with the
Surviving Entity Bylaws. The reporting relationships between senior
management and the Office of Leadership are identified in Exhibit C
attached hereto and will be incorporated into employment contracts with
the Chief Executive Officer and the President.
(f) EXCHANGE AND CONVERSION OF STOCK, NON-STOCK EQUITY AND
PATRONAGE EQUITIES. At and as of the Effective Time, without any
further action by the parties or any of their respective members, and
as further described in the Plan of Merger, (i) each member of CHSC and
each member of Farmland shall become a member of the Surviving Entity,
to the extent they are eligible for membership under the Surviving
Entity Articles and the Surviving Entity Bylaws, and (ii) except for
any stock and equity interests of Farmland in CHSC or any stock
interest of CHSC in Farmland (which shall, in each case, be
extinguished), the stock, non-stock equity and patronage equity
interests of each member, patron and former patron of Farmland shall be
exchanged for non-stock equity and patronage equity interests in the
Surviving Entity at their stated value amount on a dollar-for-dollar
basis, as further described in the Plan of Merger.
(g) CAPITAL PLAN. From and after the Effective Time, the
Surviving Entity will operate pursuant to a capital plan that adheres
to the principles set forth on Exhibit D attached hereto and the
Surviving Entity shall use its best efforts to adopt and implement a
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capital plan that incorporates such principles (the "Capital Plan").
The Capital Plan may be adopted and amended from time to time, by the
board of directors of the Surviving Entity, provided that amendment of
any provisions of the Capital Plan relating to disposition of the Terra
tax case shall require a vote of three-fourths (3/4) of the full board
of directors of the Surviving Entity, and provided further that any
such amendment shall, as far as feasible, adhere to the "Key Terra
Principles" described on Exhibit D attached hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CHSC
CHSC represents and warrants to Farmland and the Surviving Entity that
the statements contained in this Article II are correct and complete in all
material respects as of the date of this Agreement, except as set forth in the
CHSC Disclosure Schedule delivered by CHSC to Farmland attached hereto (the
"CHSC Disclosure Schedule"). Nothing in the CHSC Disclosure Schedule shall be
deemed adequate to disclose an exception to a representation or warranty made
herein unless the CHSC Disclosure Schedule identifies the exception with
particularity and describes the relevant facts in detail. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein (unless the representation or warranty
has to do with the existence of the document or other item itself). For purposes
of this Agreement (a) the word "Subsidiary" when used with respect to any Person
(as herein defined) means any other Person, whether incorporated or
unincorporated (i) of which fifty percent or more of the securities or other
ownership interests is directly owned or controlled by such Person or by any one
or more of its Subsidiaries, or (ii) of which securities or other interests
having by their terms ordinary voting power to elect fifty percent or more of
the board of directors or others performing similar functions with respect to
such corporation or other organization is directly owned or controlled by such
Person or by any one or more of its Subsidiaries, or (iii) when such Person is
CHSC, the entities listed on the CHSC Disclosure Schedule, or (iv) when such
Person is Farmland, the entities listed on the Farmland Disclosure Schedule (as
herein defined), (b) "Person" means an individual, a corporation, a limited
liability company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or any agency or
instrumentality thereof, and (c) a "Material Adverse Effect" with respect to any
Person means a material adverse effect on the financial condition, business,
liabilities, properties, assets or results of operations, taken as a whole, of
such Person and its Subsidiaries, taken as a whole, except to the extent
resulting from (w) any changes in general United States or global economic
conditions, (x) any changes affecting the agricultural industry in general, (y)
matters whose significance or impact would reasonably be expected to be
primarily short term (i.e., under one year) or (z) matters disclosed on the
Person's Disclosure Schedule.
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SECTION 2.01 ORGANIZATION AND GOOD STANDING.
CHSC is a cooperative association duly organized and existing under
Chapter 308A of the Minnesota Statutes, is in good standing under the laws of
the State of Minnesota, and has all requisite corporate power and authority to
own its properties and conduct its business as it is presently being conducted.
CHSC is duly qualified to do business and is in good standing in each
jurisdiction in which it conducts business or owns or leases properties of a
nature which would require such qualification, except for those jurisdictions
where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on CHSC. CHSC has heretofore delivered
to Farmland true and complete copies of the CHSC articles of incorporation and
bylaws as currently in effect.
SECTION 2.02 FINANCIAL STATEMENTS.
CHSC has delivered to Farmland (a) its audited financial statements as
of August 31, 1998, accompanied by the opinion of PricewaterhouseCoopers, (b)
the audited financial statements of CENEX, Inc. for the year ended September 30,
1997 and the eight months ended May 31, 1998, (c) the audited financial
statements of Harvest States Cooperatives for the year ended May 31, 1998, and
(d) the unaudited financial statements of CHSC for the nine months ended May 31,
1999. Such financial statements fairly present the financial position of CHSC at
the dates indicated therein and the results of its operation for the periods
indicated therein, in conformity with generally accepted accounting principles
consistently applied ("GAAP"). There has been no material adverse change in the
financial condition or results of operations of CHSC since May 31, 1999.
SECTION 2.03 ABSENCE OF LIABILITIES.
Neither CHSC nor any Subsidiary of CHSC has any liabilities or
obligations, absolute or contingent, except for liabilities and obligations
which are (i) reflected in the financial statements referred to in Section 2.02,
(ii) fully covered by insurance, except for reasonable deductibles or
self-insured retention levels, (iii) incurred in the ordinary course of business
since May 31, 1999 and not materially different in type or amount from those
reflected in the financial statements referred to in Section 2.02, or (iv) would
not in the aggregate reasonably be expected to have a Material Adverse Effect on
CHSC.
SECTION 2.04 TITLE TO PROPERTY.
Except as reflected in the notes accompanying the audited financial
statements of CHSC, CHSC has good and marketable title to all real and personal
property reflected as owned on the books and records of CHSC as of the date of
this Agreement and owns outright all other assets, properties or property
interests acquired since that date, in each case free of all mortgages, liens,
charges and encumbrances, other than (i) easements, rights-of-way and other
encumbrances which do not materially impair the use of such real or personal
property for the same or similar purposes as such real or personal property has
been used by CHSC prior to the Effective Time, (ii) liens for
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current taxes that are not yet due and payable, (iii) liens related to the
acquisition of inventory or otherwise arising in the normal course of business,
and (iv) other liens, encumbrances and title defects which would not reasonably
be expected to have a Material Adverse Effect on CHSC.
SECTION 2.05 INTELLECTUAL PROPERTY.
CHSC owns or possesses, is licensed under or otherwise has lawful
access to, all patents, trade secrets, know-how, other confidential information,
trademarks, service marks, copyrights, trade names, logos and other intellectual
property, whether registered or unregistered, necessary for the lawful conduct
of its business as currently conducted, without any infringement of or conflict
with the industrial or intellectual property rights of any third party, except
as would not reasonably be expected to have a Material Adverse Effect on CHSC.
CHSC does not know or have reason to know of any unauthorized use or disclosure
or misappropriation of any of its intellectual property, which disclosure, use,
or misappropriation would reasonably be expected to have a Material Adverse
Effect on CHSC.
SECTION 2.06 COMPLIANCE WITH LAWS, ETC.
CHSC is in compliance with all applicable laws and regulations the
violation of which would reasonably be expected to have a Material Adverse
Effect on CHSC. CHSC has all governmental authorizations, consents, licenses and
permits required by law or otherwise necessary for the proper operation of its
business as currently conducted, all of such licenses and permits are in full
force and effect and no action to terminate, withdraw, not renew or materially
limit or otherwise change any such license or permit is pending or has been
threatened by any governmental agency or other party, except as would not
reasonably be expected to have a Material Adverse Effect on CHSC.
SECTION 2.07 PENDING LITIGATION, CLAIMS, ACTIONS, PROCEEDINGS OR
INVESTIGATIONS.
There is no action, proceeding or investigation pending against, or to
the best of the knowledge of CHSC after reasonable inquiry, is threatened
against CHSC or any Subsidiary of CHSC or any of the assets which are owned by
CHSC or any Subsidiary of CHSC which would reasonably be expected to have a
Material Adverse Effect on CHSC.
SECTION 2.08 ABSENCE OF DEFAULTS.
CHSC is not in default under any provision of its Articles of
Incorporation or Bylaws or any indenture, mortgage, loan agreement or other
material agreement to which it is a party or by which it is bound, and CHSC is
not in violation of any statute, order, rule or regulation of any court or
governmental agency having jurisdiction over it or its properties, which, in
each case, could have a Material Adverse Effect on CHSC, and, except for any
consent or approval identified on the CHSC Disclosure Schedule, neither the
execution and delivery of this Agreement nor the consummation of the Transaction
in accordance with this Agreement will in any respect conflict with or result in
a breach of any of the foregoing, which could have a Material Adverse Effect on
CHSC.
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SECTION 2.09 AUTHORIZATION.
CHSC has the corporate power and authority to enter into and to perform
its obligations under this Agreement (subject to the approval of its members as
required by Section 5.01(a)). This Agreement and the Transaction have been duly
and validly authorized by the Board of Directors of CHSC, and (except for the
approvals of its members, as required by Section 5.01(a)) no other corporate
action is required by CHSC in connection with this Agreement or the Transaction.
This Agreement constitutes the valid and binding agreement of CHSC, enforceable
against CHSC in accordance with its terms, except to the extent such enforcement
may be limited by the application of equitable principles where equitable relief
is sought or bankruptcy and other laws relating to the enforcement of creditors'
rights generally.
SECTION 2.10 INSURANCE.
CHSC has secured appropriate insurance policies which (i) are issued by
sound and reputable insurance companies duly authorized to write said insurance,
(ii) are in full force and effect, (iii) are sufficient for compliance with all
requirements of law and all agreements to which CHSC is a party, and (iv)
provide reasonable insurance coverage for the assets and operations of CHSC and
all liabilities related thereto.
SECTION 2.11 GOVERNMENTAL AUTHORIZATION.
The execution, delivery and performance by CHSC of this Agreement and
the consummation of the Transaction by CHSC require no action by or in respect
of, or filing with, any governmental body, agency, official or authority other
than (a) the filing of appropriate documents to effect the Plan of Merger under
applicable law, (b) compliance with any applicable requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (c)
compliance with applicable requirements of U.S. state and federal securities
laws and (d) other actions or filings which if not taken or made would not,
individually or in the aggregate, have a Material Adverse Effect on CHSC or the
Surviving Entity following the Effective Time.
SECTION 2.12 SUBSIDIARIES.
Each Subsidiary of CHSC is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, has all powers and
all governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted, except for those the absence of which
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on CHSC. Each Subsidiary of CHSC is duly qualified to do
business and is in good standing in each jurisdiction where the character of the
property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where failure to be so
qualified would not, individually or in the aggregate, have a Material Adverse
Effect on CHSC.
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SECTION 2.13 SEC FILINGS.
(a) CHSC has delivered to Farmland (i) its annual report on Form 10-K
for its fiscal year ended August 31, 1998, (ii) its quarterly reports on Form
10-Q for its fiscal quarters ended after August 31, 1998, (iii) all of its other
reports, statements, schedules and registration statements filed with the SEC
since August 31, 1998 (the documents referred to in this Section 2.13(a) being
referred to collectively as the "CHSC SEC Documents").
(b) As of its filing date, each CHSC SEC Document complied as to form
in all material respects with the applicable requirements of the Securities
Exchange Act of 1934 (the "Exchange Act").
(c) As of its filing date, each CHSC SEC Document filed pursuant to the
Exchange Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
SECTION 2.14 ABSENCE OF CERTAIN CHANGES.
Except as set forth in the CHSC Disclosure Schedule, since May 31,
1999, CHSC and its Subsidiaries have conducted their business in the ordinary
course consistent with past practice and there has not been: (a) any event,
occurrence or development of a state of circumstances or facts which has had or
reasonably would be expected to have, individually or in the aggregate, a
Material Adverse Effect on CHSC; (b) any transaction or commitment made, or any
contract, agreement or settlement entered into, by (or judgment, order or decree
affecting) CHSC or any of its Subsidiaries relating to its assets or business
(including the acquisition or disposition of any assets) or any relinquishment
by CHSC or any of its Subsidiaries of any contract or other right, in either
case, material to CHSC and its Subsidiaries taken as a whole, other than
transactions, commitments, contracts, agreements or settlements (including
without limitation settlements of litigation and tax proceedings) in the
ordinary course of business consistent with past practice, those contemplated by
this Agreement, or as agreed to in writing by Farmland; (c) any change in any
method of accounting or accounting practice (other than any change for tax
purposes) by CHSC or any of its Subsidiaries, except for any such change which
is not significant or which is required by reason of a concurrent change in
GAAP; or (d) any increase in (or amendments to the terms of) compensation, bonus
or other benefits payable to directors, officers or employees of CHSC or any of
its Subsidiaries, other than in the ordinary course of business consistent with
past practice, as permitted by this Agreement, or as agreed to in writing by
Farmland.
SECTION 2.15 TAXES.
Except as set forth in the CHSC Balance Sheet dated May 31, 1999
(including the notes thereto) and except as would not, individually or in the
aggregate, have a Material Adverse Effect on CHSC, (i) all CHSC Tax Returns
required to be filed with any taxing authority by, or with respect
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to, CHSC and its Subsidiaries have been filed in accordance with all applicable
laws; (ii) CHSC and its Subsidiaries have timely paid all Taxes shown as due and
payable on the CHSC Tax Returns that have been so filed, and, as of the time of
filing, the CHSC Tax Returns correctly reflected the facts regarding the income,
business, assets, operations, activities and the status of CHSC and its
Subsidiaries (other than Taxes which are being contested in good faith and for
which adequate reserves are reflected on the CHSC Balance Sheet); (iii) CHSC and
its Subsidiaries have made provision for all Taxes payable by CHSC and its
Subsidiaries for which no CHSC Tax Return has yet been filed; (iv) the charges,
accruals and reserves for Taxes with respect to CHSC and its Subsidiaries
reflected on the CHSC Balance Sheet are adequate under GAAP to cover the Tax
liabilities accruing through the date thereof; (v) there is no action, suit,
proceeding, audit or claim now proposed or pending against or with respect to
CHSC or any of its Subsidiaries in respect of any Tax where there is a
reasonable possibility of an adverse determination; and (vi) to the best of
CHSC's knowledge and belief, neither CHSC nor any of its Subsidiaries is liable
for any Tax imposed on any entity other than such Person, except as the result
of the application of Treas. Reg. Section 1.1502-6 (and any comparable provision
of the tax laws of any state, local or foreign jurisdiction) to the affiliated
group of which CHSC is the common parent. For purposes of this Agreement,
"Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, all net income, gross income, gross
receipts, excise, stamp, real or personal property, ad valorem, withholding,
social security (or similar), unemployment, occupation, use, service, service
use, license, net worth, payroll, franchise, severance, transfer, recording,
employment, premium, windfall profits, environmental (including taxes under
Section 59A of the Internal Revenue Code of 1986, as amended (the "Code")),
customs duties, capital stock, profits, disability, sales, registration, value
added, alternative or add-on minimum, estimated or other taxes, assessments or
charges imposed by any federal, state, local or foreign governmental entity and
any interest, penalties, or additions to tax attributable thereto. For purposes
of this Agreement, "Tax Returns" shall mean any return, report, form or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
SECTION 2.16 EMPLOYEE BENEFIT PLANS.
(a) Prior to the date hereof, CHSC has provided Farmland with a list
identifying each material "employee benefit plan," as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974 ("ERISA"), each material
employment, severance or similar contract, plan, arrangement or policy
applicable to any director, former director, employee or former employee of CHSC
and each material plan or arrangement (written or oral), providing for
compensation, bonuses, profit-sharing, stock option or other stock related
rights or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, workers' compensation, supplemental unemployment
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance benefits)
which is maintained, administered or contributed to by CHSC and covers any
employee or director or former employee or director of CHSC, or under which CHSC
has any liability. Such material plans (excluding any such plan that is a
"multiemployer
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plan", as defined in Section 3(37) of ERISA) are referred to collectively herein
as the "CHSC Employee Plans".
(b) Each CHSC Employee Plan has been maintained in compliance with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations (including but not limited to ERISA and the Code) which
are applicable to such Plan, except where failure to so comply would not,
individually or in the aggregate, have a Material Adverse Effect on CHSC.
(c) Neither CHSC nor any affiliate of CHSC has incurred a liability
under Title IV of ERISA that has not been satisfied in full, and no condition
exists that presents a material risk to CHSC or any affiliate of CHSC of
incurring any such liability other than liability for premiums due the Pension
Benefit Guaranty Corporation (which premiums have been paid when due).
(d) Each CHSC Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from federal income tax pursuant to Section 501(a) of the Code.
(e) No director or officer or other employee of CHSC or any of its
Subsidiaries will become entitled to any retirement, severance or similar
benefit or enhanced or accelerated benefit solely as a result of the
transactions contemplated hereby.
(f) Each CHSC Employee Plan that provides for post-retirement health
and medical, life or other insurance benefits for retired employees of CHSC or
any of its Subsidiaries has been adequately reserved for in CHSC's financial
statements.
(g) There has been no amendment to, written interpretation or
announcement (whether or not written) by CHSC or any of its affiliates relating
to, or change in employee participation or coverage under, any CHSC Employee
Plan which would increase materially the expense of maintaining such CHSC
Employee Plan above the level of the expense incurred in respect thereof for the
12 months ended May 31, 1999.
SECTION 2.17 ENVIRONMENTAL MATTERS.
(a) Except as set forth in the CHSC SEC Documents filed prior to the
date hereof and with such exceptions as, individually or in the aggregate, have
not had, and would not reasonably be expected to have, a Material Adverse Effect
on CHSC (i) no notice, notification, demand, request for information, citation,
summons, complaint or order has been received by, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of CHSC or any
of its Subsidiaries, threatened by any Person against, CHSC or any of its
Subsidiaries, and no penalty has been assessed against CHSC or any of its
Subsidiaries, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) CHSC and its Subsidiaries are and have been
in compliance with all Environmental Laws; (iii) there are no liabilities of
CHSC or any of its
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Subsidiaries relating to or arising out of any Environmental Law of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, and there is no existing condition, situation or set of circumstances
which could reasonably be expected to result in such a liability; and (iv) there
has been no environmental investigation, study, audit, test, review or other
analysis conducted of which CHSC has knowledge in relation to the current or
prior business of CHSC or any of its Subsidiaries or any property or facility
now or previously owned, leased or operated by CHSC or any of its Subsidiaries
which has not been delivered to Farmland at least five days prior to the date
hereof. All liabilities of CHSC or any of its Subsidiaries relating to or
arising out of any Environmental Law of any kind whatsoever have been adequately
reserved for on the financial statements of CHSC, or for unconsolidated
Subsidiaries, on the financial statements of such Subsidiaries.
(b) For purposes of this Agreement, the term "Environmental Laws" means
any federal, state, local and foreign statutes, laws (including, without
limitation, common law), judicial decisions, regulations, ordinances, rules,
judgments, orders, codes, injunctions, permits, governmental agreements or
governmental restrictions relating to human health and safety, the environment
or to pollutants, contaminants, wastes, or chemicals.
SECTION 2.18 POOLING; TAX TREATMENT.
The parties intend that the Transaction be accounted for under the
"pooling of interests" method under the requirements of Opinion No. 16 (Business
Combinations) of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board, and the
rules and regulations of the Securities and Exchange Commission. Neither CHSC
nor any of its affiliates has taken or agreed to take any action or is aware of
any fact or circumstance that would prevent the Transaction from qualifying (i)
for "pooling of interests" accounting treatment as described above or (ii) as a
reorganization within the meaning of Section 368 of the Code (a "368
Reorganization").
SECTION 2.19 NO DISSENTERS' RIGHTS.
No member of CHSC or any other holder of equity of CHSC, other than the
holders of Equity Participation Units as defined in CHSC's Bylaws and as further
defined in resolutions of the CHSC board of directors establishing the defined
business units to which such Equity Participation Units relate, have the right
to dissent from the Transaction and receive payment for their interest in cash
or otherwise receive any property or other interest in the Transaction, other
than as provided in the Plan of Merger.
SECTION 2.20 ACQUISITION CO.
Acquisition Co. has been formed by CHSC solely for the purpose of
carrying out the Transaction if Structure B is selected. Acquisition Co. is a
"Subsidiary" of CHSC for purposes hereof. Acquisition Co. has no assets or
liabilities, other than nominal assets to comply with any organizational
requirements of Ohio law.
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SECTION 2.21 FULL DISCLOSURE.
CHSC has disclosed to Farmland all facts material to the transactions
contemplated in this Agreement, including disclosure of all material contracts
(as such term is described in Item 601 of Regulation S-K under the Securities
Act of 1933, as amended ("Regulation S-K")). No representation, warranty, or
covenant by CHSC contained in this Agreement or the Plan of Merger, and no
statement contained in any certificate, schedule, or other documents or
instrument furnished to Farmland pursuant hereto or in connection with the
transactions contemplated hereby, including responses to Farmland inquiries put
to CHSC in the course of its investigation to confirm the warranties and
representations of CHSC in this Agreement, when taken as a whole, contains or
will contain any untrue statement of a material fact or omits or will omit a
material fact which would make it misleading as to CHSC.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FARMLAND
Farmland represents and warrants to CHSC and the Surviving Entity that
the statements contained in this Article III are correct and complete in all
material respects as of the date of this Agreement, except as set forth in the
Farmland Disclosure Schedule attached hereto (the "Farmland Disclosure
Schedule"). Nothing in the Farmland Disclosure Schedule shall be deemed adequate
to disclose an exception to a representation or warranty made herein unless the
Farmland Disclosure Schedule identifies the exception with particularity and
describes the relevant facts in detail. Without limiting the generality of the
foregoing, the mere listing (or inclusion of a copy) of a document or other item
shall not be deemed adequate to disclose an exception to a representation or
warranty made herein (unless the representation or warranty has to do with the
existence of the document or other item itself).
SECTION 3.01 ORGANIZATION AND GOOD STANDING.
Farmland is a cooperative corporation duly organized and existing under
Chapter 17, Article 16 of the Kansas Statutes, is in good standing under the
laws of the State of Kansas, and has all requisite corporate power and authority
to own its properties and conduct its business as it is presently being
conducted. Farmland is duly qualified to do business and is in good standing in
each jurisdiction in which it conducts business or owns or leases properties of
a nature which would require such qualification, except for those jurisdictions
where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on Farmland. Farmland has heretofore
delivered to Farmland true and complete copies of the Farmland articles of
incorporation and bylaws as currently in effect.
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SECTION 3.02 FINANCIAL STATEMENTS.
Farmland has delivered to CHSC (a) its audited financial statements as
of August 31, 1998, accompanied by the opinion of KPMG-Peat Marwick, and (b) its
unaudited financial statements for the nine months ended May 31, 1999. Such
financial statements fairly present the financial position of Farmland at the
dates indicated therein and the results of its operation for the periods
indicated therein, in conformity with GAAP. There has been no material adverse
change in the financial condition or results of operations of Farmland since May
31, 1999.
SECTION 3.03 ABSENCE OF LIABILITIES.
Neither Farmland nor any Subsidiary of Farmland has any liabilities or
obligations, absolute or contingent, except for liabilities and obligations
which are (i) reflected in the financial statements referred to in Section 3.02,
(ii) fully covered by insurance, except for reasonable deductibles or
self-insured retention levels, (iii) incurred in the ordinary course of business
since May 31, 1999 and not materially different in type or amount from those
reflected in the financial statements referred to in Section 3.02, or (iv) would
not in the aggregate reasonably be expected to have a Material Adverse Effect on
Farmland.
SECTION 3.04 TITLE TO PROPERTY.
Except as reflected in the notes accompanying the audited financial
statements of Farmland, Farmland has good and marketable title to all real and
personal property reflected as owned on the books and records of Farmland as of
the date of this Agreement and owns outright all other assets, properties or
property interests acquired since that date, in each case free of all mortgages,
liens, charges and encumbrances, other than (i) easements, rights-of-way and
similar encumbrances which do not materially impair the use of such real or
personal property for the same or similar purposes as such real or personal
property has been used by Farmland prior to the Effective Time, (ii) liens for
current taxes that are not yet due and payable, (iii) liens related to the
acquisition of inventory or otherwise arising in the normal course of business,
and (iv) other liens, encumbrances and title defects which would not reasonably
be expected to have a Material Adverse Effect on Farmland.
SECTION 3.05 INTELLECTUAL PROPERTY.
Farmland owns or possesses, is licensed under or otherwise has lawful
access to, all patents, trade secrets, know-how, other confidential information,
trademarks, service marks, copyrights, trade names, logos and other intellectual
property, whether registered or unregistered, necessary for the lawful conduct
of its business as currently conducted, without any infringement of or conflict
with the industrial or intellectual property rights of any third party, except
as would not reasonably be expected to have a Material Adverse Effect on
Farmland. Farmland does not know or have reason to know of any unauthorized use
or disclosure or misappropriation of any of its intellectual property. which
disclosure, use, or misappropriation would reasonably be expected to have a
Material Adverse Effect on Farmland.
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SECTION 3.06 COMPLIANCE WITH LAWS, ETC.
Farmland is in compliance with all applicable laws and regulations the
violation of which would reasonably be expected to have a Material Adverse
Effect on Farmland. Farmland has all governmental authorizations, consents,
licenses and permits required by law or otherwise necessary for the proper
operation of its business as currently conducted, all of such licenses and
permits are in full force and effect, and no action to terminate, withdraw, not
renew or materially limit or otherwise change any such license or permit is
pending or has been threatened by any governmental agency or other party, except
as would not reasonably be expected to have a Material Adverse Effect on
Farmland.
SECTION 3.07 PENDING LITIGATION, CLAIMS, ACTIONS, PROCEEDINGS OR
INVESTIGATIONS.
There is no action, proceeding or investigation pending against, or to
the best of the knowledge of Farmland after reasonable inquiry, is threatened
against Farmland or any Subsidiary of Farmland or any of the assets which are
owned by Farmland or any Subsidiary of Farmland which would reasonably be
expected to have a Material Adverse Effect on Farmland.
SECTION 3.08 ABSENCE OF DEFAULTS.
Farmland is not in default under any provision of its Articles of
Incorporation or Bylaws or any indenture, mortgage, loan agreement or other
material agreement to which it is a party or by which it is bound, and Farmland
is not in violation of any statute, order, rule or regulation of any court or
governmental agency having jurisdiction over it or its properties, which, in
each case, could have a Material Adverse Effect on Farmland, and, except for any
consent or approval identified on the Farmland Disclosure Schedule, neither the
execution and delivery of this Agreement nor the consummation of the Transaction
in accordance with this Agreement will in any respect conflict with or result in
a breach of any of the foregoing, which could have a Material Adverse Effect on
Farmland.
SECTION 3.09 AUTHORIZATION.
Farmland has the corporate power and authority to enter into and to
perform its obligations under this Agreement (subject to the approvals of its
members as required by Section 5.01(b)). This Agreement and the Transaction have
been duly and validly authorized by the Board of Directors of Farmland, and
(except for the approvals of its members as required by Section 5.01(b)) no
other corporate action is required by Farmland in connection with this Agreement
or the Transaction. This Agreement constitutes the valid and binding agreement
of Farmland, enforceable against Farmland in accordance with its terms, except
to the extent such enforcement may be limited by the application of equitable
principles where equitable relief is sought or bankruptcy and other laws
relating to the enforcement of creditors' rights generally.
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SECTION 3.10 INSURANCE.
Farmland has secured appropriate insurance policies which (i) are
issued by sound and reputable insurance companies duly authorized to write said
insurance, (ii) are in full force and effect, (iii) are sufficient for
compliance with all requirements of law and all agreements to which Farmland is
a party, and (iv) provide reasonable insurance coverage for the assets and
operations of Farmland and all liabilities related thereto.
SECTION 3.11 GOVERNMENTAL AUTHORIZATION.
The execution, delivery and performance by Farmland of this Agreement
and the consummation of the Transaction by Farmland require no action by or in
respect of, or filing with, any governmental body, agency, official or authority
other than (a) the filing of appropriate documents to effect the Plan of Merger
under applicable law, (b) compliance with any applicable requirements of the HSR
Act, and (c) other actions or filings which if not taken or made would not,
individually or in the aggregate, have a Material Adverse Effect on Farmland or
the Surviving Entity following the Effective Time.
SECTION 3.12 SUBSIDIARIES.
Each Subsidiary of Farmland is duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization, has all powers
and all governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted, except for those the absence of which
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on Farmland. Each Subsidiary of Farmland is duly
qualified to do business and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where failure
to be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on Farmland.
SECTION 3.13 SEC FILINGS.
(a) Farmland has delivered to CHSC (i) its annual report on Form 10-K
for its fiscal year ended August 31, 1998, (ii) its quarterly reports on Form
10-Q for its fiscal quarters ended after August 31, 1998, (iii) all of its other
reports, statements, schedules and registration statements filed with the SEC
since August 31, 1998 (the documents referred to in this Section 3.13(a) being
referred to collectively as the "Farmland SEC Documents").
(b) As of its filing date, each Farmland SEC Document complied as to
form in all material respects with the applicable requirements of the Exchange
Act.
(c) As of its filing date, each Farmland SEC Document filed pursuant to
the Exchange Act did not contain any untrue statement of a material fact or omit
to state any material fact
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necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
SECTION 3.14 ABSENCE OF CERTAIN CHANGES.
Except as set forth in the Farmland Disclosure Schedule, since May 31,
1999, Farmland and its Subsidiaries have conducted their business in the
ordinary course consistent with past practice and there has not been: (a) any
event, occurrence or development of a state of circumstances or facts which has
had or reasonably would be expected to have, individually or in the aggregate, a
Material Adverse Effect on Farmland; (b) any transaction or commitment made, or
any contract, agreement or settlement entered into, by (or judgment, order or
decree affecting) Farmland or any of its Subsidiaries relating to its assets or
business (including the acquisition or disposition of any assets) or any
relinquishment by Farmland or any of its Subsidiaries of any contract or other
right, in either case, material to Farmland and its Subsidiaries taken as a
whole, other than transactions, commitments, contracts, agreements or
settlements (including without limitation settlements of litigation and tax
proceedings) in the ordinary course of business consistent with past practice,
those contemplated by this Agreement, or as agreed to in writing by CHSC; (c)
any change in any method of accounting or accounting practice (other than any
change for tax purposes) by Farmland or any of its Subsidiaries, except for any
such change which is not significant or which is required by reason of a
concurrent change in GAAP; or (d) any increase in (or amendments to the terms
of) compensation, bonus or other benefits payable to directors, officers or
employees of Farmland or any of its Subsidiaries, other than in the ordinary
course of business consistent with past practice, as permitted by this
Agreement, or as agreed to in writing by CHSC.
SECTION 3.15 TAXES.
Except as set forth in the Farmland Balance Sheet dated May 31, 1999
(including the notes thereto) and except as would not, individually or in the
aggregate, have a Material Adverse Effect on Farmland, (i) all Farmland Tax
Returns required to be filed with any taxing authority by, or with respect to,
Farmland and its Subsidiaries have been filed in accordance with all applicable
laws; (ii) Farmland and its Subsidiaries have timely paid all Taxes shown as due
and payable on the Farmland Tax Returns that have been so filed, and, as of the
time of filing, the Farmland Tax Returns correctly reflected the facts regarding
the income, business, assets, operations, activities and the status of Farmland
and its Subsidiaries (other than Taxes which are being contested in good faith
and for which adequate reserves are reflected on the Farmland Balance Sheet);
(iii) Farmland and its Subsidiaries have made provision for all Taxes payable by
Farmland and its Subsidiaries for which no Farmland Tax Return has yet been
filed; (iv) the charges, accruals and reserves for Taxes with respect to
Farmland and its Subsidiaries reflected on the Farmland Balance Sheet are
adequate under GAAP to cover the Tax liabilities accruing through the date
thereof; (v) there is no action, suit, proceeding, audit or claim now proposed
or pending against or with respect to Farmland or any of its Subsidiaries in
respect of any Tax where there is a reasonable possibility of an adverse
determination; and (vi) to the best of Farmland's knowledge and belief, neither
Farmland nor any of its Subsidiaries is liable for any Tax imposed on any entity
other than such Person, except as the
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result of the application of Treas. Reg. Section 1.1502-6 (and any comparable
provision of the tax laws of any state, local or foreign jurisdiction) to the
affiliated group of which Farmland is the common parent.
SECTION 3.16 EMPLOYEE BENEFIT PLANS.
(a) Prior to the date hereof, Farmland has provided CHSC with a list
identifying each material "employee benefit plan," as defined in Section 3(3) of
ERISA, each material employment, severance or similar contract, plan,
arrangement or policy applicable to any director, former director, employee or
former employee of Farmland and each material plan or arrangement (written or
oral), providing for compensation, bonuses, profit-sharing, stock option or
other stock related rights or other forms of incentive or deferred compensation,
vacation benefits, insurance coverage (including any self-insured arrangements),
health or medical benefits, disability benefits, workers' compensation,
supplemental unemployment benefits, severance benefits and post-employment or
retirement benefits (including compensation, pension, health, medical or life
insurance benefits) which is maintained, administered or contributed to by
Farmland and covers any employee or director or former employee or director of
Farmland, or under which Farmland has any liability. Such material plans
(excluding any such plan that is a "multiemployer plan", as defined in Section
3(37) of ERISA) are referred to collectively herein as the "Farmland Employee
Plans".
(b) Each Farmland Employee Plan has been maintained in compliance with
its terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations (including but not limited to ERISA and the Code) which
are applicable to such Plan, except where failure to so comply would not,
individually or in the aggregate, have a Material Adverse Effect on Farmland.
(c) Neither Farmland nor any affiliate of Farmland has incurred a
liability under Title IV of ERISA that has not been satisfied in full, and no
condition exists that presents a material risk to Farmland or any affiliate of
Farmland of incurring any such liability other than liability for premiums due
the Pension Benefit Guaranty Corporation (which premiums have been paid when
due).
(d) Each Farmland Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from federal income tax pursuant to Section 501(a) of the Code.
(e) No director or officer or other employee of Farmland or any of its
Subsidiaries will become entitled to any retirement, severance or similar
benefit or enhanced or accelerated benefit solely as a result of the
transactions contemplated hereby.
(f) Each Farmland Employee Plan that provides for post-retirement
health and medical, life or other insurance benefits for retired employees of
Farmland or any of its Subsidiaries has been adequately reserved for in
Farmland's financial statements.
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(g) There has been no amendment to, written interpretation or
announcement (whether or not written) by Farmland or any of its affiliates
relating to, or change in employee participation or coverage under, any Farmland
Employee Plan which would increase materially the expense of maintaining such
Farmland Employee Plan above the level of the expense incurred in respect
thereof for the 12 months ended May 31, 1999.
SECTION 3.17 ENVIRONMENTAL MATTERS. Except as set forth in the Farmland
SEC Documents filed prior to the date hereof and with such exceptions as,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Material Adverse Effect on Farmland (i) no notice,
notification, demand, request for information, citation, summons, complaint or
order has been received by, and no investigation, action, claim, suit,
proceeding or review is pending or, to the knowledge of Farmland or any of its
Subsidiaries, threatened by any Person against, Farmland or any of its
Subsidiaries, and no penalty has been assessed against Farmland or any of its
Subsidiaries, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) Farmland and its Subsidiaries are and have
been in compliance with all Environmental Laws; (iii) there are no liabilities
of Farmland or any of its Subsidiaries relating to or arising out of any
Environmental Law of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability; and (iv) there has been no environmental investigation,
study, audit, test, review or other analysis conducted of which Farmland has
knowledge in relation to the current or prior business of Farmland or any of its
Subsidiaries or any property or facility now or previously owned, leased or
operated by Farmland or any of its Subsidiaries which has not been delivered to
CHSC at least five days prior to the date hereof. All liabilities of Farmland or
any of its Subsidiaries relating to or arising out of any Environmental Law of
any kind whatsoever have been adequately reserved for on the financial
statements of Farmland, or for unconsolidated Subsidiaries, on the financial
statements of such Subsidiaries.
SECTION 3.18 POOLING; TAX TREATMENT.
The parties intend that the Transaction be accounted for under the
"pooling of interests" method under the requirements of Opinion No. 16 (Business
Combinations) of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board, and the
rules and regulations of the Securities and Exchange Commission. Neither
Farmland nor any of its affiliates has taken or agreed to take any action or is
aware of any fact or circumstance that would prevent the Transaction from
qualifying (i) for "pooling of interests" accounting treatment as described
above or (ii) as a 368 Reorganization.
SECTION 3.19 NO DISSENTERS' RIGHTS.
No member of Farmland or any other holder of equity of Farmland have
the right to dissent from the Transaction and receive payment for their interest
in cash or otherwise receive any property or other interest in the Transaction,
other than as provided in the Plan of Merger.
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SECTION 3.20 FULL DISCLOSURE.
Farmland has disclosed to CHSC all facts material to the transactions
contemplated in this Agreement, including disclosure of all material contracts
(as such term is described in Item 601 of Regulation S-K). No representation,
warranty, or covenant by Farmland contained in this Agreement or the Plan of
Merger, and no statement contained in any certificate, schedule, or other
documents or instrument furnished to CHSC pursuant hereto or in connection with
the transactions contemplated hereby, including responses to CHSC inquiries put
to Farmland in the course of its investigation to confirm the warranties and
representations of Farmland in this Agreement, when taken as a whole, contains
or will contain any untrue statement of a material fact or omits or will omit a
material fact which would make it misleading as to Farmland.
ARTICLE IV
PRE-CLOSING COVENANTS
The parties agree as follows with respect to the period between the
execution of this Agreement and the Closing Date:
SECTION 4.01 SELECTION OF STRUCTURE.
The board of directors of each of CHSC and Farmland shall work together
to determine whether Structure A or Structure B shall be selected as the most
appropriate structure for the Transaction. If Structure B is selected, CHSC
agrees to take such action as the sole member of Acquisition Co., or otherwise,
to permit Acquisition Co. to take such actions as may be necessary to effect the
CHSC/Acquisition Co. Merger pursuant to applicable law, it being understood that
following such Merger the Surviving Entity shall be reincorporated as a
cooperative association under Chapter 308A of the Minnesota Statutes as soon as
practicable after the issue or issues that precluded use of Structure A have
been resolved, unless the board of directors of the Surviving Entity, by a
three-fourths (3/4) vote, determines otherwise.
SECTION 4.02 GOOD FAITH EFFORTS.
Each party will use its good faith efforts (i) to take all action
necessary to render accurate, as of the Closing Date, its representations and
warranties contained herein, and to refrain from taking any action which would
render any such representation or warranty inaccurate as of the Closing Date,
(ii) to perform or cause to be satisfied each covenant or condition to be
performed or satisfied by it pursuant to this Agreement or the Plan of Merger,
and to cause the Transaction to be consummated, and (iii) to obtain all licenses
or other approvals required to be obtained by it from any appropriate
governmental or regulatory body or other person in connection with the carrying
out of the Transaction and the continued operation of business by the Surviving
Entity after the Closing Date, including without limitation the consents and
approvals identified in each party's Disclosure Schedule.
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SECTION 4.03 PRESERVATION OF BUSINESS.
Each party shall, and shall cause each of its Subsidiaries to, conduct
its business in the ordinary course and in a manner consistent with its past
practices (except as expressly contemplated hereby), and shall use good faith
efforts to preserve intact its business organization, properties (except as they
may be sold, used or otherwise disposed of in the ordinary course) and the good
will of its members, suppliers, customers and others having business
relationships with it.
SECTION 4.04 CONDUCT OF BUSINESS.
Each Party agrees to not engage in, and agrees to cause each of its
Subsidiaries not to engage in, any practice, take any action, or enter into any
transaction outside of the ordinary course of business without the prior consent
of the other party to this Agreement. Without limiting the generality of the
foregoing, each party shall not and each party agrees to cause each of its
Subsidiaries to not:
(a) grant to any person any option to purchase, or other right
to acquire, capital stock or other equity interests, except for
allocation of patronage equities in a manner consistent with past
practice;
(b) issue any capital stock or other equity interests, except
in the ordinary course of business;
(c) make any material amendment to enter into or terminate any
material contract, lease or understanding;
(d) amend its Articles of Incorporation, Bylaws, or any board
policies;
(e) incur any indebtedness for borrowed money or make any
commitment to borrow money, except indebtedness incurred in the
ordinary course of business pursuant to credit arrangements existing as
of the date of this Agreement (including any renewals thereof);
(f) make any material capital expenditures other than in the
ordinary course of business;
(g) mortgage any of its assets, or except in the ordinary
course of business, sell any of its assets having an aggregate value
which would be material to its business;
(h) pay any dividends or make any distributions with respect
to its capital stock or equity interests, except in the ordinary course
of business;
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(i) reclassify, combine, subdivide, split-up, or amend its
capital stock or equity interests;
(j) purchase, acquire or redeem any shares of capital stock or
other equity interests (other than in satisfaction of allocated
losses), except pursuant to the existing equity redemption/base capital
plans of the party; or
(k) agree or commit to do any of the foregoing.
SECTION 4.05 MEETINGS OF MEMBERS.
The parties will take all steps necessary to call special meetings of,
and/or mail votes by, the members of Farmland and CHSC, to be held on or around
November 23, 1999 for purposes of considering and voting on the Transaction and
other matters covered by this Agreement in accordance with their respective
Articles of Incorporation, Bylaws and applicable law. The parties will cooperate
with each other in connection with the special member meetings and/or mail votes
and will develop a mutually agreed upon plan for disseminating information
concerning the Transaction to their members (including holding member
information meetings and preparation of a joint statement of terms and
conditions to be mailed to members).
SECTION 4.06 FULL ACCESS.
Each party will permit the authorized representatives of the other
party to have full access at all reasonable times, and in a manner so as not to
interfere with the normal business operations of such party, to all premises,
properties, personnel, books, records (including tax records), contracts, and
documents of or pertaining to such party. The obligations of each party with
respect to any "Confidential Information" (as such term is defined in that
certain Confidentiality Agreement between the parties dated April 8, 1999 (the
"Confidentiality Agreement")) furnished by the other party shall be governed in
all respects by the Confidentiality Agreement, the terms of which are
incorporated herein by this reference. If for any reason the Transaction is not
consummated, each party will promptly return all documents, papers, books,
records and other materials (and all copies thereof) embodying any Confidential
Information obtained in the course of its investigation and evaluation.
SECTION 4.07 NOTICE OF DEVELOPMENTS.
Each party will give prompt written notice to the other of any
development which could reasonably be expected to result in a Material Adverse
Effect on such party or which would cause a breach of any of its representations
and warranties contained herein. Except as specified in such written notice, no
disclosure by a party pursuant to this Section 4.07 shall be deemed to amend or
supplement such party's Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
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SECTION 4.08 EXCLUSIVE.
Neither party will (i) solicit, initiate, or encourage the submission
of any proposal or offer from any person relating to the acquisition of any
capital stock or other voting securities, or any substantial portion of the
assets of, such party (including any acquisition structured as a merger,
consolidation, or share exchange) or (ii) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
person to do or seek any of the foregoing. Each party will notify the other
party immediately if any person makes any proposal, offer, inquiry, or contact
with respect to any of the foregoing.
SECTION 4.09 HART-SCOTT-RODINO FILINGS.
CHSC and Farmland shall prepare and file with the Antitrust Division of
the U.S. Justice Department (the "Antitrust Division") and the Federal Trade
Commission (the "FTC"), all reports required to be filed in connection with the
Transaction pursuant to the HSR Act. Each of CHSC and Farmland shall cooperate
fully with each other in preparation of such reports. If either the Antitrust
Division or the FTC requests that additional information be filed pursuant to
the HSR Act, CHSC and HSR shall prepare and file such additional information as
soon as practicable after the request, and shall cooperate fully with each other
in preparation of such additional information. With respect to preparation or
filing of any of the reports or additional information described in this Section
4.09, each party shall bear its own costs.
SECTION 4.10 TAX AND ACCOUNTING TREATMENT.
Each of the parties shall not take any action and shall not fail to
take any action, which action or failure to act would prevent, or would be
reasonably likely to prevent, the Transaction from qualifying (a) for "pooling
of interests" accounting treatment as described in Sections 2.19 and 3.19, or
(b) as a 368 Reorganization.
ARTICLE V
CLOSING CONDITIONS
SECTION 5.01 CONDITIONS TO OBLIGATIONS OF EACH PARTY.
The respective obligations of CHSC and Farmland to consummate the
Transaction and other matters described in this Agreement are, at their
respective options, subject to the satisfaction or waiver of each of the
following conditions on or before the Closing Date:
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(a) The members of CHSC shall have approved this Agreement,
the Plan of Merger, and the Transaction, all in accordance with the
requirements of applicable law and the Articles of Incorporation and
Bylaws of CHSC;
(b) The members of Farmland shall have approved this
Agreement, the Plan of Merger, and the Transaction, all in accordance
with the requirements of applicable law and the Articles of
Incorporation and Bylaws of Farmland;
(c) If Structure B is to be used to effect the combination,
all steps then legally feasible to reincorporate the Surviving Entity
as a Minnesota cooperative association (as described in Section 4.01
hereof) shall have been taken;
(d) The parties shall have made the filings required by
Section 4.09 above under the HSR Act, and all applicable time periods
under the HSR Act shall have expired;
(e) No injunction, restraining order or order of any nature
issued by any court of competent jurisdiction, government or
governmental agency enjoining the Transaction shall have been issued
and remain in effect;
(f) All consents, approvals and waivers which are necessary in
connection with the Transaction, or any part thereof, shall have been
obtained, including the consents and approvals referred to in Section
4.02 above, other than any such consents, approvals or waiver as do
not, individually or in the aggregate, have a Material Adverse Effect
on the Surviving Entity; and
(g) No action shall have been threatened or instituted by any
governmental agency or any other person challenging the legality of the
Transaction, seeking to prevent or delay consummation of the
Transaction or seeking to obtain divestiture or other relief in the
event of consummation of the Transaction. It is understood in the event
that such an action is threatened or instituted, the parties will first
attempt for a period of 90 days to obtain dismissal or other favorable
resolution of such threatened or actual action prior to exercise of
their right to terminate hereunder.
SECTION 5.02 ADDITIONAL CONDITIONS TO OBLIGATION OF CHSC.
The obligation of CHSC to consummate the Transaction is, at its option,
subject to the satisfaction or waiver of each of the following additional
conditions at the Closing Date.
(a) All the representations and warranties of Farmland
contained in this Agreement shall be true and correct in all material
respects on the Closing Date as though such representations and
warranties were made on and as of the Closing Date, and Farmland shall
have performed all of its obligations and complied with all of its
covenants contained
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in this Agreement and in the Plan of Merger to be performed or complied
with prior to the Closing Date;
(b) There shall have occurred no change since the date hereof
in the assets, liabilities, financial condition or operations of
Farmland which, in the reasonable judgment of CHSC, has or is likely to
have a Material Adverse Effect on the Surviving Entity; provided,
however, that an adverse ruling in the Terra tax case referred to on
Exhibit D hereto shall not be considered as such a change;
(c) CHSC shall have received a certificate, dated as of the
Closing Date, and executed by the President of Farmland, certifying in
such detail as CHSC may reasonably request as to the accuracy of such
representations and warranties, the fulfillment of such obligations,
compliance with such covenants and satisfaction of the conditions to
CHSC's obligation as of the Closing Date; and
(d) All actions, proceedings and documents necessary to carry
out the Transaction shall be reasonably satisfactory to CHSC
SECTION 5.03 ADDITIONAL CONDITIONS TO OBLIGATION OF FARMLAND.
The obligation of Farmland to consummate the Transaction is, at its
option, subject to the satisfaction or waiver of each of the following
additional conditions on or before the Closing Date:
(a) All the representations and warranties of CHSC contained
in this Agreement shall be true and correct in all material respects on
the Closing Date as though such representations and warranties were
made on and as of the Closing Date, and CHSC shall have performed all
of its obligations and complied with all of its covenants contained in
this Agreement and in the Plan of Merger to be performed or complied
with prior to the Closing Date;
(b) There shall have occurred no change since the date hereof
in the assets, liabilities, financial condition or operations of CHSC
which, in the reasonable judgment of Farmland, has or is likely to have
a Material Adverse Effect on the Surviving Entity;
(c) Farmland shall have received a certificate, dated as of
the Closing Date, executed by the President of CHSC, certifying in such
detail as Farmland may reasonably request as to the accuracy of such
representations and warranties, the fulfillment of such obligations,
compliance with such covenants and satisfaction of the conditions to
Farmland's obligations as of the Closing Date; and
(d) All actions, proceedings and documents necessary to carry
out the Transaction shall be reasonably satisfactory to Farmland,
including the effectiveness of the CHSC/Acquisition Co. Merger, if
Structure B is selected.
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ARTICLE VI
POST-CLOSING AGREEMENTS
With respect to issues relating to the Surviving Entity subsequent to
the Effective Time, CHSC and Farmland agree as follows:
SECTION 6.01 CONSOLIDATION OF BENEFIT PLANS.
Within a reasonable period of time after the Effective Time, the
Surviving Entity shall take steps to consolidate the various benefit plans
provided to the employees of the respective parties in accordance with the
applicable provisions of the Code and ERISA. This consolidation of plans shall
be accomplished in a manner to be determined by the Surviving Entity.
SECTION 6.02 PATRONAGE DISTRIBUTIONS.
Following the Effective Time and within the time period required by
Subchapter T of the Code, the Surviving Entity will make patronage allocations
to the former members of each party (a) based on patronage transactions with the
respective parties during each party's respective fiscal year or portion thereof
immediately preceding the Effective Time and (b) in accordance with the terms of
the bylaws of the party that are in effect during the period such patronage
transaction occurred. The distributions of such allocation shall be in the form
of cash and equity credits in a manner consistent with the previous patronage
distributions of each party.
SECTION 6.03 INDEMNIFICATION OF FORMER OFFICERS; INSURANCE.
The surviving Entity shall indemnify each director, officer, manager,
employee or agent of CHSC or Farmland, and each person serving at the request of
CHSC or Farmland as a director, officer, manager, employee or agent of any other
entity, partnership, joint venture, trust or enterprise, against any losses,
claims or expenses incurred by such person prior to the Effective Time that
would be indemnifiable under Bylaws of the Surviving Entity as in force on the
Effective Time and otherwise to the fullest extent provided or permitted by any
statute which applies to any type of corporation of the state of incorporation
of the Surviving Entity as in effect at such time. The Surviving Entity shall
maintain insurance coverage against any such loss, claim or expense in an amount
of at least $20,000,000, subject to standard exclusions and exceptions to
coverage, for a period of not less than six (6) years after the Effective Time,
subject to the right of the Board of Directors to discontinue such coverage on
grounds of unreasonable cost.
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ARTICLE VII
TERMINATION
SECTION 7.01 TERMINATION OF AGREEMENT.
This Agreement shall be terminated and the Transaction abandoned if at
any time prior to the Closing:
(a) The members of CHSC at the CHSC member meeting called for
the purpose of voting on the Transaction, fail to approve the
Transaction as required by Section 5.01(a), or the members of Farmland
at the Farmland member meeting called for the purpose of voting on the
Transaction, fail to approve the Transaction as required by Section
5.01(b); or
(b) The parties mutually agree in writing to terminate this
Agreement; or
(c) Either party delivers a written notice to the other to the
effect that (i) one or more of the conditions to its obligations as set
forth herein cannot be met, (ii) the other party has defaulted in a
material respect under one or more of its covenants or agreements
contained herein, or (iii) any of the representations or warranties of
the other party are or have become materially untrue or incorrect as of
the date of such notice, and in any case such condition or conditions
have not been satisfied, such default or defaults have not been
remedied or such representation or warranty has not been rendered true
and correct within thirty (30) days after such notice is mailed; or
(d) The Closing has not occurred on or before December 31,
2000, or such later date as the parties may mutually agree upon.
SECTION 7.02 EFFECT OF TERMINATION.
If this Agreement is terminated pursuant to Section 7.01 above, all
rights and obligations of the parties hereunder shall terminate without any
liability of either party to the other (except for any liability of a party for
breach of this Agreement); provided, however, that the confidentiality and
return of documents provisions contained in or referred to Section 4.06 above
shall survive any such termination.
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ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 WAIVER OF CONDITIONS.
Any party may, at its option, waive in writing any and all of the
conditions herein contained to which its obligations hereunder are subject. A
party, by consummating the transactions contemplated herein, shall be deemed to
have waived any breach of a warranty, representation, covenant or condition of
which such party received written notice prior to the Closing Date if the notice
specifically referred to this Section 8.01 and described the breach in
reasonable detail.
SECTION 8.02 AMENDMENT.
The parties by mutual consent may, before or after approval of this
Agreement by the members, amend, modify or supplement this Agreement in such
manner as may be agreed upon in writing.
SECTION 8.03 BINDING NATURE.
This Agreement shall be binding upon and inure only to the benefit of
the parties hereto and their respective successors and assigns, provided that
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned or delegated by any of the parties hereto without the prior
written consent of the other parties hereto.
SECTION 8.04 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
SECTION 8.05 ENTIRE AGREEMENT.
Except for the Confidentiality Agreement (the terms of which are
incorporated herein by reference pursuant to Section 4.06 hereof), this
Agreement, the Plan of Merger and the other documents referred to herein and
therein set forth the entire understanding of the parties hereto with respect to
the matters provided for herein and therein and supersede all prior agreements,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of either party.
SECTION 8.06 NOTICES.
All notices, requests, demands and other communications hereunder shall
be deemed to have been duly given if delivered or mailed, certified or
registered mail, with postage prepaid:
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If to CHSC:
Cenex Harvest States Cooperatives
5500 CENEX Drive
Inver Grove Heights, MN 55077-1733
Attn: Vice President and General Counsel
If to Farmland:
Farmland Industries, Inc.
Department 62
3315 North Oak Trafficway
Kansas City, Missouri 64116
Attn: General Counsel
SECTION 8.07 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the parties contained in Articles
II and III of this Agreement shall form the basis for closing conditions only,
shall not survive the Closing Date and, except to the extent of the principles
for the Capital Plan in Exhibit D hereto, shall not form the basis for any
action by or on behalf of either party or any third party for breach,
misrepresentation or indemnity at any time after the Closing Date.
SECTION 8.08 CAPTIONS.
The article and section headings of this Agreement are for convenience
only and shall not affect the meaning or construction of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
CENEX HARVEST STATES FARMLAND INDUSTRIES, INC.
COOPERATIVES
By /s/ Noel K. Estenson By /s/ Harry D. Cleberg
--------------------------------- --------------------------------------
Its Chief Executive Officer Its President and Chief Executive Officer
-------------------------------- -------------------------------------
Attest: /s/ Bernard L. Sanders
---------------------------------
Corporate Secretary
The undersigned, UCB Acquisition Co., an Ohio cooperative corporation,
the only member of which is Cenex Harvest States Cooperatives, hereby joins in
the foregoing Transaction Agreement and agrees to take all actions required to
effect Structure B, as therein defined, if said structure is selected pursuant
to Section 1.01 of said Transaction Agreement.
UCB ACQUISITION CO.
By /s/ Noel K. Estenson Date: September 23, 1999
--------------------------------- --------------------------------------
President
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EXHIBIT A-1
STRUCTURE A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Plan") is dated as of _______
__, 2000, and is by and between CENEX HARVEST STATES COOPERATIVES ("CHSC") and
FARMLAND INDUSTRIES, INC. ("Farmland"), each of which may be referred to herein
as a "Constituent Cooperative"' and both of which may be collectively referred
to herein as the "Constituent Cooperatives".
RECITALS
WHEREAS, CHSC is a cooperative association organized under Chapter 308A
of the Minnesota Statutes (as amended, the "Minnesota Act"), and Farmland is a
cooperative corporation organized under Article 16 of Chapter 17 of the Kansas
Statutes (as amended, the "Kansas Act"); and
WHEREAS, the respective Boards of Directors of CHSC and Farmland and
the respective members of CHSC and Farmland have approved and adopted this Plan
and the transactions contemplated hereby in the manner required by Section
308A.801 of the Minnesota Act and Sections 17-1637 and 17-1638 of the Kansas
Act, and in the manner required by their respective Articles of Incorporation
and Bylaws;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements of the parties contained herein, the parties hereto
agree as follows:
AGREEMENT
SECTION 1. THE MERGER. As of the Effective Time (as defined in Section
8), CHSC and Farmland shall combine through merger (the "Merger"), in accordance
with the applicable provisions of the Minnesota Act and the Kansas Act; and
CHSC, whose name shall change to "United Country Brands, Inc." and whose
Articles of Incorporation and Bylaws each shall be amended and restated in their
entirety as further provided herein, shall be the surviving cooperative and
shall continue to exist by virtue of, and shall be governed by, the Minnesota
Act.
SECTION 2. ARTICLES OF MERGER. On or before the Effective Time, CHSC
and Farmland each shall execute articles of merger (the "Articles of Merger")
and/or a certificate of merger (the "Certificate of Merger") setting forth the
information required by and otherwise in compliance with Section 308A.801 of the
Minnesota Act and Sections 17-1637 and 17-1638 of the Kansas Act. The Articles
of Merger and/or the Certificate of Merger shall be filed with the Secretary of
State of the State of Minnesota or as otherwise required by the Minnesota Act,
and with the Secretary of State
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of the State of Kansas or as otherwise required by the Kansas Act, and shall
provide that the Merger shall become effective on the Effective Time.
SECTION 3. EFFECT OF THE MERGER. From and after the Effective Time,
without any further action by the Constituent Cooperatives or any of their
respective members:
(a) United Country Brands, Inc., as the surviving
cooperative in the Merger, shall have all of the
rights, privileges, immunities and powers, and shall
be subject to all the duties and liabilities, of a
cooperative organized under the Minnesota Act;
(b) United Country Brands, Inc., as the surviving
cooperative in the Merger, shall possess all of the
rights, privileges, immunities and franchises, of a
public as well as a private nature, of each
Constituent Cooperative, and all property, real,
personal and mixed, and all debts due on whatever
account, including all choses in action, and each and
every other interest of or belonging to or due to
each Constituent Cooperative, shall be deemed to be
and hereby is vested in United Country Brands, Inc.,
without further act or deed, and the title to any
property, or any interest therein, vested in either
Constituent Cooperative, shall not revert or be in
any way impaired by reason of the Merger;
(c) United Country Brands, Inc. shall be responsible and
liable for all of the liabilities and obligations of
each Constituent Cooperative, and any claim existing
or action or proceeding pending by or against one of
the Constituent Cooperatives may be prosecuted as if
the Merger had not taken place and United Country
Brands, Inc. may be substituted in its place;
(d) neither the rights of creditors nor any liens upon
the property of either of the Constituent
Cooperatives shall be impaired by the Merger; and
(e) the Merger shall have any other effect set forth in
the Minnesota Act and the Transaction Agreement dated
September __, 1999, by and between CHSC and Farmland
(the "Transaction Agreement"), all with the effect
and to the extent provided in the applicable
provisions of the Minnesota Act and the Kansas Act.
SECTION 4. ARTICLES OF INCORPORATION; BYLAWS. From and after the
Effective Time, pursuant to the Articles of Merger and without any further
action by the Constituent Cooperatives or any of their respective members:
(a) the name of CHSC, as the surviving cooperative in the
Merger, shall be changed to "United Country Brands,
Inc."; and
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(b) the Articles of Incorporation of United Country
Brands, Inc., as the surviving cooperative in the
Merger, shall be amended and restated in their
entirety to read as set forth in SCHEDULE I attached
hereto and made a part hereof (the "Surviving Entity
Articles").
From and after the Effective Time, without any further action by the
Constituent Cooperatives or any of their respective members, the Bylaws of
United Country Brands, Inc., as the surviving cooperative in the Merger, shall
be amended and restated in their entirety to read as set forth in EXHIBIT A-2
attached to the Transaction Agreement and made a part hereof (the "Surviving
Entity Bylaws").
SECTION 5. BOARD OF DIRECTORS. From and after the Effective Time,
without any further action by the Constituent Cooperatives or any of their
respective members, each person serving as a director of one of the Constituent
Cooperatives immediately prior to the Effective Time shall become a director of
United Country Brands, Inc., as the surviving cooperative in the Merger, to
serve in accordance with the Surviving Entity Bylaws.
SECTION 6. EXCHANGE, REDESIGNATION AND CONVERSION AND CONTINUATION OF
CAPITAL STOCK, NON-STOCK EQUITY INTERESTS, PATRONS' EQUITIES AND MEMBERSHIPS. As
of the Effective Time, the manner and basis of exchanging and continuing the
shares of capital stock, non-stock equity interests, patronage equity interests
(including all entitlements to patronage refunds), any other allocated equity
interests, and unallocated and capital reserves of CHSC and Farmland (all such
interests referred to herein as "CHSC Equity Interests" or "Farmland Equity
Interests", respectively), and membership interests in CHSC and Farmland, for
equal Equity Interests and membership interests in United Country Brands, Inc.,
shall be as set forth in this Section 6:
(a) CONTINUATION OF CHSC MEMBERSHIPS. As of the Effective
Time, without any further action by the Constituent
Cooperatives or any of their respective members, each
member of CHSC shall be and continue as a member of
United Country Brands, Inc., to the extent such
member is eligible for membership under the Surviving
Entity Articles and the Surviving Entity Bylaws, in
such class and with such incidents of membership as
are set forth in the Surviving Entity Articles and
the Surviving Entity Bylaws.
(b) CONTINUATION OF FARMLAND MEMBERSHIPS. As of the
Effective Time, without any further action by the
Constituent Cooperatives or any of their respective
members, each member of Farmland shall become and be
a member of United Country Brands, Inc., to the
extent such member is eligible for membership under
the Surviving Entity Articles and the Surviving
Entity Bylaws, in such class and with such incidents
of membership as are set forth in the Surviving
Entity Articles and the Surviving Entity Bylaws.
(c) CONTINUATION OF CHSC EQUITY INTERESTS. As of the
Effective Time, without any further action by the
Constituent Cooperatives or any of their respective
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members, all CHSC Equity Interests standing on the
books of CHSC immediately prior to the Effective Time
shall be determined and continued as like and equal
Equity Interests in United Country Brands, Inc. at
their stated dollar amount on a dollar-for-dollar
basis, year of issue (as determined necessary), and
with the other rights and preferences of such CHSC
Equity Interests; provided, however, that as of the
Effective Time, an amount equal to the unallocated
capital reserves of CHSC, minus an amount equal to
the deferred patronage equity of CHSC (as computed
from the books and records of CHSC as of the
Effective Time, in accordance with generally accepted
accounting principles, consistently applied), and
minus $100 million, shall be allocated and
distributed to the CHSC members (in such manner and
to such members as the CHSC board of directors shall
specify prior to the Effective Time) in the form of
allocated nonpatronage equity of United Country
Brands, Inc.
(d) CONVERSION OF FARMLAND EQUITY INTERESTS. As of the
Effective Time, without any further action by the
Constituent Cooperatives or any of their respective
members or equity holders, all Farmland Equity
Interests standing on the books of Farmland
immediately prior to the Effective Time shall be
converted into equal Equity Interests in United
Country Brands, Inc. at their stated dollar amount on
a dollar-for-dollar basis, as follows:
(i) Common Stock and Associate Member Common
Stock. Each share of common stock and
associate member common stock of Farmland
issued and outstanding or otherwise standing
on the books of Farmland immediately prior
to the Effective Time shall be exchanged for
allocated patronage equity or allocated
nonpatronage equity of United Country
Brands, Inc. in a face amount of $25.00, and
in such designations or series so as to
preserve the year of issue (as United
Country Brands, Inc. deems necessary) and
other terms and conditions of the original
issuance.
(ii) Patronage Equity Interests. All capital
credits, patronage refunds and any other
allocated or to be allocated equity
interests (including all entitlements to
patronage refunds) as of the Effective Time
which are not included in clause (i) above
shall be exchanged for allocated patronage
equity or allocated nonpatronage equity of
United Country Brands, Inc. in a face amount
equal to such capital credits, patronage
refunds, allocated or to be allocated equity
interests, entitlements to patronage
refunds, or other equity interests in such
denominations or other designations or
series so as to preserve the year of issue
(as United Country Brands, Inc. deems
necessary) and other terms and conditions of
the original issuance.
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(iii) SF Services Warrants. The outstanding
Warrants for Equity Interests of Farmland
issued in the acquisition of SF Services,
Inc. shall, from and after the Effective
Time, represent warrants to convert into
United Country Brands, Inc. allocated
patronage equity or allocated nonpatronage
equity in the same face amount as the
Warrants could have been converted into face
amount Farmland Equity Interests.
(iv) Unallocated Surplus. There shall be
allocated to the Farmland members (in such
manner and to such members as the Farmland
board of directors shall specify prior to
the Effective Time) an amount equal to the
amount by which Farmland's earned surplus
account (as computed from the books and
records of Farmland as of the Effective
Time, in accordance with generally accepted
accounting principles, consistently applied)
exceeds $100 million, and United Country
Brands, Inc. allocated nonpatronage equity
shall be so issued to such Farmland members
as of the Effective Time; provided, however,
that the United Country Brands, Inc.
allocated nonpatronage equity issued
hereunder shall be registered in the name of
United Country Brands, Inc. to be held by it
in escrow and disposed of as provided in the
Capital Plan of United Country Brands, Inc.
(v) Preferred Stock. Each share of 8% Series A
Cumulative Redeemable Preferred Stock of
Farmland issued and outstanding or otherwise
standing on the books of Farmland
immediately prior to the Effective Time
shall be converted into one share of 8%
Series A Cumulative Redeemable Preferred
Stock of United Country Brands, Inc.
(vi) Net Effect. The net effect of the conversion
of Farmland Equity Interests for equal
Equity Interests in United Country Brands,
Inc. shall be that the holders of Farmland
Equity Interests standing on the books of
Farmland immediately prior to the Effective
Time shall hold and will have equal Equity
Interests in United Country Brands, Inc.
immediately following the Effective Time, in
terms of stated dollar amount on a
dollar-for-dollar basis, year of issue (as
determined necessary) and any other rights
and preferences.
(e) Notwithstanding the foregoing provisions, the
following shall be canceled and extinguished as of
the Effective Time:
(i) any membership interest which Farmland has
in CHSC;
(ii) any CHSC Equity Interest held by Farmland;
(iii) any membership interest which CHSC has in
Farmland; and
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(iv) any Farmland Equity Interest held by CHSC.
(f) SURVIVING ENTITY ARTICLES AND BYLAWS TO GOVERN.
Membership in United Country Brands, Inc. and all
Equity Interests in United Country Brands, Inc.
issued or credited in exchange for Farmland Equity
Interests and continued and credited with respect to
CHSC Equity Interests as described above, shall in
all instances be governed by the provisions of the
Surviving Entity Articles and the Surviving Entity
Bylaws.
(g) FURTHER ASSURANCES OF HOLDERS OF EQUITY. Each holder
of CHSC Equity Interests and each holder of Farmland
Equity Interests shall take such action or cause to
be taken such action as United Country Brands, Inc.
may reasonably deem necessary or appropriate to
effect the exchange and continuation of the equity
interests hereunder, including without limitation the
indorsement and delivery of any stock certificates or
other evidences of equity being exchanged or
continued hereunder.
SECTION 7. FURTHER ASSURANCES. From time to time and after the
Effective Time, as and when requested by United Country Brands, Inc., or its
successors or assigns, CHSC and Farmland shall execute and deliver or cause to
be executed and delivered all such deeds and other instruments, and shall take
or cause to be taken all such further action or actions, as United Country
Brands, Inc., or its successors or assigns, may deem necessary or desirable in
order to vest in and confirm to United Country Brands, Inc., or its successors
or assigns, title to and possession of all of the properties, rights,
privileges, powers and franchises referred to in Section 3 of this Plan, and
otherwise to carry out the intent and purposes of this Plan. If United Country
Brands, Inc. shall at any time deem that any further assignments or assurances
or any other acts are necessary or desirable to vest, perfect or confirm of
record or otherwise the title to any property or to enforce any claims of CHSC
or Farmland vested in United Country Brands, Inc. pursuant to this Plan, the
officers of United Country Brands, Inc., or its successors or assigns, are
hereby specifically authorized as attorneys-in-fact of each of CHSC and Farmland
(which appointment is irrevocable and coupled with an interest), to execute and
deliver any and all such deeds, assignments and assurances and to do all such
other acts in the name and on behalf of each of CHSC and Farmland, or otherwise,
as such officer shall deem necessary or appropriate to accomplish such purpose.
SECTION 8. EFFECTIVE TIME. The Merger shall become effective at 12:02
a.m. Central Time on March 1, 2000 (the "Effective Time").
SECTION 9. TERMINATION AND AMENDMENT.
(a) TERMINATION. At any time prior to the filing of this
Plan, or a certificate or articles of merger in lieu
thereof, with the Secretaries of State of the State
of Minnesota and the State of Kansas, this Plan may
be terminated by the mutual consent of the boards of
directors of CHSC and Farmland notwithstanding
approval of this Plan by the members or stockholders
of such entities.
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(b) AMENDMENT. In addition, the boards of directors of
CHSC and Farmland may amend this Plan at any time
prior to the filing of this Plan, or a certificate or
articles of merger in lieu thereof, with the
Secretaries of State of the State of Minnesota and
the State of Kansas, provided that an amendment made
subsequent to the adoption of this Plan by the
members or stockholders of CHSC and Farmland shall
not:
(i) alter or change the amount or kind of
shares, securities, cash, property or
rights, or any of the proceedings, in
exchange for or on conversion of all or any
of the shares of any class or series thereof
of such entities;
(ii) alter or change any term of the articles of
incorporation of United Country Brands,
Inc.; or
(iii) alter or change any of the terms and
conditions of this Plan if such alteration
or change would adversely affect the members
or holders of any class or series thereof of
such entities.
SECTION 10. GOVERNING LAW. This Plan shall be governed by and construed
in accordance with the laws of the States of Minnesota and Kansas.
IN WITNESS WHEREOF, this Plan has been agreed to and executed by the
duly authorized representatives of CHSC and Farmland, as of the date first set
forth above.
CENEX HARVEST STATES FARMLAND INDUSTRIES, INC.
COOPERATIVES
By By
--------------------------------- --------------------------------------
Its Its
-------------------------------- -------------------------------------
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SCHEDULE I
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
UNITED COUNTRY BRANDS, INC.
ARTICLE I
NAME, REGISTERED AGENT, REGISTERED OFFICE
AND PRINCIPAL PLACE OF BUSINESS
SECTION 1.1 NAME. The name of this cooperative association shall be
United Country Brands, Inc. (this "Cooperative").
SECTION 1.2 REGISTERED AGENT AND REGISTERED OFFICE. The registered
agent of this Cooperative shall be CT Corporation System. The registered office
for this Cooperative shall be located at [to be inserted].
SECTION 1.3 PRINCIPAL PLACE OF BUSINESS. The principal place of
business for this Cooperative shall be in the city of Kansas City, Missouri, and
in the county of Clay County, Missouri.
ARTICLE II
PURPOSES AND POWERS
SECTION 2.1 PURPOSES. This Cooperative is organized for the
following purposes:
(a) to receive, handle, store, warehouse, manufacture, process,
market, purchase, sell and otherwise deal in the agricultural products and
services of its members, nonmember patrons and others;
(b) to manufacture, buy, sell, market, store, warehouse, acquire,
transport, distribute, process, produce, drill, mine, refine, and otherwise deal
in and procure for its members, nonmember patrons and others, fertilizer,
petroleum products, feed, grain, livestock, machinery, equipment, supplies, and
other goods, products, merchandise and services used or useful in farming and
the agricultural industry;
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(c) to engage in activities involving agricultural education,
research and development, legislation and economic or social conditions
pertaining to the agricultural industry;
(d) to engage in the financing of the activities described above;
and
(e) to engage in any activity connected with or related to any such
purposes, and to engage in any other lawful purpose.
To this end, the business and activities of this Cooperative shall be conducted
on a cooperative basis, as provided in the Bylaws of this Cooperative
("Bylaws").
SECTION 2.2 AUTHORIZATION; POWERS. In addition to other powers, this
Cooperative may perform every act and thing necessary, proper, incidental or
convenient to the conduct of its business or the accomplishment of its purposes.
This Cooperative shall have all powers, privileges and rights conferred by
applicable law. Without limiting the foregoing, this Cooperative shall have the
power to:
(a) borrow money from and to loan money to its members, nonmember
patrons and others;
(b) guarantee or stand as surety on loans made to its members,
nonmember patrons and others by lenders;
(c) issue bonds, deeds of trust, debentures, notes, and other
obligations and to secure the same by pledge, mortgage, or trust deed on any
property; and draw, make, accept, endorse, guarantee, execute, and issue
promissory notes, bills of exchange, drafts, warrants, warehouse receipts,
certificates and other obligations, and negotiable or transferable instruments
for any purpose deemed necessary to further the objectives for which this
Cooperative is formed;
(d) acquire, purchase, hold, lease, encumber, sell, exchange, and
convey such real estate, buildings, and personal property as this Cooperative
may require;
(e) purchase, acquire, own, mortgage, pledge, sell, assign, transfer
or otherwise dispose of, equity or debt securities created by any other
corporation or other legal entity wherever organized, with all the rights,
powers and privileges of ownership thereof;
(f) borrow money, to incur obligations and to assume obligations of
any other person, individual, corporation or other legal entity, in any amount;
and make contracts for hire;
(g) issue equity and debt securities, whether certificated or
uncertificated, as further provided in these Articles of Incorporation
("Articles") and in the Bylaws;
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(h) join with other cooperatives, limited liability companies,
corporations, partnerships, associations or other entities to form district,
state, or national marketing, manufacturing, purchasing and service
organizations and other organizations engaged in the general purposes for which
this Cooperative is formed, and to purchase, acquire, and hold the capital stock
or other equity interest and the notes, bonds, and other obligations of such
organizations;
(i) have one or more offices, and to conduct any or all of its
operations and business, and promote its purposes without restriction as to
places or amounts; and
(j) carry on any other business in connection with the foregoing and
to engage in any of such activities on its own account or as agent for others,
or alone or in association with others, and to employ agents, consultants and
nominees to perform any or all of the powers described herein.
The powers, privileges and rights specified herein shall, except where otherwise
expressed, be in no way limited or restricted by reference to or inference from
the terms of any other provision of these Articles. The enumeration of powers,
privileges and rights herein shall not be held to limit or restrict in any
manner the general powers, privileges and rights conferred upon this Cooperative
under applicable law.
ARTICLE III
DURATION
This Cooperative shall have perpetual existence.
ARTICLE IV
MEMBERSHIP AND AUTHORIZED CAPITAL INSTRUMENTS
SECTION 4.1 MEMBERSHIP BASIS. This Cooperative is organized on a
membership basis with capital stock.
SECTION 4.2 QUALIFICATION OF MEMBERS. Membership in this Cooperative
shall be restricted to producers of agricultural products and associations of
such producers who patronize this Cooperative in accordance with terms and
conditions prescribed by the Board of Directors (the "Board") and only such
producers and associations of such producers shall be eligible voting members of
this Cooperative. For purposes of this Article, "producers of agricultural
products" shall mean persons (including individuals and joint ventures,
corporations, partnerships, limited liability companies, unincorporated
associations or other legal entities owned or controlled by individual farmers,
ranchers or their family groups) that are engaged in the production of one or
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more agricultural products, including tenants of land used for the production of
such products and lessors of land that receive as rent therefor any part of the
product of such land.
The Board may establish minimum levels of business that cooperative
associations and producers must transact with or through this Cooperative to be
eligible for membership in this Cooperative, and also may adopt such additional
conditions, qualifications, methods of acceptance, duties, rights and privileges
of membership in this Cooperative as it may from time to time deem advisable.
The Board may refuse membership or provide conditional membership to an
applicant in its sole and absolute discretion. A membership in this Cooperative
is transferable only with the consent and approval of the Board .
SECTION 4.3 MEMBER, CLASSES. This Cooperative shall have three (3)
classes of members, which are hereby designated as the "Cooperative Association
Member" class, the "Defined Member" class, and the "Individual Member" class, as
more particularly described in the Bylaws. This Cooperative may have such
additional classes of members, with such designations, and such relative rights,
preferences, privileges and limitations, as may be provided in the Bylaws of
this Cooperative.
SECTION 4.4 VOTING RIGHTS. Voting rights in this Cooperative arise
solely by virtue of membership and only members shall have voting power. Each
member shall have a minimum of one (1) vote in the affairs of this Cooperative,
and may otherwise be entitled to additional votes as further authorized in the
Bylaws. This Cooperative has affiliated cooperative members and additional votes
are provided based on the amount of business transacted, the amount of equity
held and the number of members in the affiliated cooperative member.
SECTION 4.5 NON-MEMBER PATRONAGE. Associations of producers of
agricultural products and producers of agricultural products described in the
first paragraph of Section 4.2 and other individuals and entities who patronize
this Cooperative under conditions established by the Board or as provided in the
Bylaws, but who are otherwise not eligible to be members of this Cooperative may
nevertheless conduct business with this Cooperative on a patronage basis as a
nonmember patron, as more particularly provided in the Bylaws or by Board
policy. Such nonmember patrons are not members and are not entitled to voting
rights or other privileges incident to membership.
SECTION 4.6 BOARD OF DIRECTORS. In addition to and not by way of
limitation of the powers granted to the Board by applicable law or elsewhere in
these Articles or the Bylaws, the Board shall have the following authority and
powers, which may be exercised from time to time at its sole and absolute
discretion:
(a) DEFINED BUSINESS UNITS. The Board by resolution may establish
and organize separate defined business units of this Cooperative ("Defined
Business Unit") with respect to the operations of this Cooperative, on such
terms and conditions and having such rights, preferences, privileges and
limitations as the Board deems appropriate, as may be further provided in the
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Bylaws. The Board may sell, liquidate, dissolve or wind up any Defined Business
Unit, in which event, subject to the rights of holders of preferred stock of
this Cooperative, the excess of assets over liabilities of such Defined Business
Unit shall be used first to redeem the Equity Participation Units (as defined
below) of the Defined Business Unit on a pro rata basis.
(b) EQUITY PARTICIPATION UNITS. The Board by resolution may
establish and issue one or more than one class or series of equity participation
units ("Equity Participation Units") in connection with each Defined Business
Unit, may set forth the designation of classes or series of Equity Participation
Units, and may fix the relative rights, preferences, privileges and limitations
of each class or series of Equity Participation Units, as may be further
provided in the Bylaws. Equity Participation Units shall not entitle the holder
to voting rights and may be issued to and held only by Defined Members. Equity
Participation Units may only be sold or transferred with the approval of the
Board.
(c) ISSUANCE OF DEBT AND/OR EQUITY. The Board by resolution may
establish and issue to any person (whether member, nonmember patron, or other
person) one or more than one class or series of debt or equity, may set forth
the designation of classes or series of such debt or equity, and may fix the
relative rights, preferences, privileges and limitations of each class or series
of debt or equity, including, without limitation, one or more than one class or
series of preferred stock, including specifically, the 8% Series A Cumulative
Redeemable Preferred Shares, par value $25.00 per share, described in the
Appendix to these Articles. Dividends may be paid on the equity capital of this
Cooperative established pursuant to this Section 4.6(c); provided, however, that
dividends on such equity capital may not exceed eight percent (8%) per annum.
Debt or equity established pursuant to this Section 4.6(c) shall not entitle the
holder to voting rights. Unless otherwise expressly authorized by the Board,
equity established and issued pursuant to this Section 4.6(c) may only be sold
or transferred with the approval of the Board of Directors.
ARTICLE V
NET INCOME AND LOSS
The net income of this Cooperative in excess of dividends on equity
capital and additions to reserves shall be distributed to members and nonmember
patrons annually or more often on the basis of patronage. The records of this
Cooperative may show the interest of members and equity holders in the reserves.
Net income may be accounted for and distributed on the basis of allocation units
that may be functional, divisional, departmental, geographic, or otherwise. Net
income may be distributed in cash, allocated patronage equities (including
without limitation patrons equities), revolving fund certificates, securities of
this Cooperative, other securities, or any combination thereof. Any such
allocated equity shall be redeemable only at the option of the Board. The net
loss of an allocation unit or allocation units may be offset against the net
income of other allocation units to the extent permitted by applicable law. The
foregoing provisions of this Article V shall be implemented as more particularly
provided in the Bylaws.
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ARTICLE VI
FIRST LIEN
This Cooperative shall have a first lien on all equity interests
standing on its books for all indebtedness of the respective holders or owners
thereof to this Cooperative. This Cooperative shall also have the right,
exercisable at the option of the Board, to set off such indebtedness against the
face amount of such equity interests; provided, however, that nothing contained
herein shall give the holder of such equity interests any right to have such set
off made.
ARTICLE VII
CERTAIN CORPORATE ACTIONS; DISSOLUTION
SECTION 7.1 SUPERMAJORITY VOTE. A merger, consolidation, liquidation
or dissolution involving this Cooperative, or the sale of all or substantially
all of the assets and property of this Cooperative, may be authorized by the
members in accordance with applicable law; provided, however, in the event the
Board declares, by resolution adopted by a majority of the Board present and
voting, that the action involves or is related to a hostile takeover, then, to
the extent permitted by applicable law, the action may be adopted only upon the
approval of eighty percent (80%) of the total voting power of the members of
this Cooperative, whether or not present and voting on the action.
Notwithstanding Article X of these Articles of Incorporation, this Article may
be amended only upon the approval of eighty percent (80%) of the total voting
power of the members of this Cooperative, whether or not present and voting on
the amendment.
SECTION 7.2 DISSOLUTION, LIQUIDATION, AND WINDING UP. In the event
of any dissolution, liquidation or winding up of this Cooperative, whether
voluntary or involuntary, all debts and liabilities of this Cooperative shall be
paid first according to their respective priorities. As more particularly
provided in the Bylaws, the remaining assets shall then be paid to the holders
of equity capital to the extent of their interests therein and any excess shall
be paid to the patrons of this Cooperative on the basis of their past patronage.
The Bylaws may provide more particularly for the allocation among the members
and nonmember patrons of this Cooperative of the consideration received in any
merger or consolidation to which this Cooperative is a party.
ARTICLE VIII
BOARD OF DIRECTORS
The business and affairs of this Cooperative shall be managed
by a Board of Directors of not less than twenty-five (25) directors, with the
exact number of directors as shall be specified in the Bylaws.
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ARTICLE IX
LIMITATION OF DIRECTOR LIABILITY
No director of this Cooperative shall be personally liable to this
Cooperative or its members for monetary damages for breach of fiduciary duty as
a director, except for liability: (a) for a breach of the director's duty of
loyalty to this Cooperative or its members; (b) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law;
(c) for a transaction from which the director derived an improper personal
benefit; or (d) for an act or omission occurring prior to the date when the
provisions of this Article (or predecessor thereto) became effective.
It is the intention of the members of this Cooperative to limit or
eliminate the personal liability of the directors of this Cooperative to the
greatest extent permitted under applicable law. If amendments to applicable law
are passed after the effective date of this Article which authorize cooperatives
to act to further limit or eliminate the personal liability of directors, then
the liability of the directors of this Cooperative shall be limited or
eliminated to the greatest extent permitted by applicable law, as so amended.
Any repeal or modification of this Article by the members of this Cooperative
shall not adversely affect any right of or any protection available to a
director of this Cooperative serving prior to or at the time of such repeal or
modification.
ARTICLE X
AMENDMENT
These Articles of Incorporation may be amended in accordance with
applicable law; provided, however, in the event the Board declares, by
resolution adopted by a majority of the Board present and voting, that the
amendment involves or is related to a hostile takeover, then, to the extent
permitted by applicable law, the amendment may be adopted only upon the approval
of eighty percent (80%) of the total voting power of the members, whether or not
present and voting on the amendment.
# # #
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APPENDIX
RIGHTS, PREFERENCES, LIMITATIONS, RESTRICTIONS AND DESIGNATIONS
OF THE
8% SERIES A CUMULATIVE REDEEMABLE PREFERRED SHARES
OF
UNITED COUNTRY BRANDS, INC.
(i) DESIGNATION. The Series of Preferred Stock is hereby designated
as "8% Series A Cumulative Redeemable Preferred Shares" (hereinafter referred to
as the "Series A Preferred Shares").
(ii) NUMBER. The maximum number of authorized shares of the Series A
Preferred Shares shall be 2,000,000.
(iii) RELATIVE SENIORITY.
(A) In respect of rights to receive dividends and to
participate in distribution of payments in the event of any liquidation,
dissolution or winding up of United Country Brands, Inc. (the "Corporation"),
the Series A Preferred Shares shall rank (x) senior to the common shares,
associate member common shares and all other capital credits, equity interests
and shares of capital stock of the Corporation which, by their terms, rank
junior to the Series A Preferred Shares and (y) on a parity with all other
preferred shares of the Corporation which are not, by their terms, junior to the
Series A Preferred Shares.
(B) So long as the Series A Preferred Shares remain
outstanding, the Corporation will not authorize or issue any preferred shares
which rank senior to the Series A Preferred Shares.
(iv) DIVIDENDS.
(A) The holders of the then outstanding Series A Preferred
Shares shall be entitled to receive, when and as declared by the Board of
Directors of the Corporation, out of funds legally available for the payment of
dividends, cumulative cash dividends at the rate of 8.0% of the liquidation
preference of $50 per share per annum (equivalent to $4.00 per share per annum).
Such dividends shall accumulate from December 19, 1997 (which is the date of the
original issue of the Series A Preferred Shares by a predecessor entity of the
Corporation), and shall be payable quarterly in arrears on the 1st day of each
February, May, August and November or, if not a Business Day (as defined below),
the succeeding business day (each, a "Dividend Payment Date"). Any dividends
payable on the Series A Preferred Shares will be computed on the basis of a
360-day year consisting of twelve 30-day months. Dividends will be payable to
holders of record as they appear in the share records of the Corporation at the
close of business on the applicable record date, which shall be the 15th day of
the calendar month immediately
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prior to the month in which the applicable Dividend Payment Date falls or such
other date designated by the Board of Directors of the Corporation that is not
more than 30 nor less than 10 days prior to such Dividend Payment Date (each, a
"Dividend Record Date").
"Business Day" means any day other than a Saturday, a Sunday,
or a day on which banking institutions in The City of New York are authorized or
required by law or executive order to remain closed.
(B) The amount of any dividends accumulated on any Series A
Preferred Shares at any Dividend Payment Date shall be the amount of any unpaid
dividends accumulated thereon to but excluding such Dividend Payment Date and
the amount of dividends accumulated on any shares of Series A Preferred Shares
at any date other than a Dividend Payment Date shall be equal to the sum of the
amount of any unpaid dividends accumulated thereon to but excluding the last
preceding Dividend Payment Date, plus an amount calculated on the basis of the
annual dividend rate of $4.00 per share for the period after such last preceding
Dividend Payment Date to and including the date as of which the calculation is
made based on a 360-day year of twelve 30-day months. Dividends on the Series A
Preferred Shares will accumulate whether or not the Corporation has earnings,
whether or not there are funds legally available for the payment of such
dividends and whether or not such dividends are authorized or declared.
(C) Except as otherwise expressly provided herein, the Series
A Preferred Shares will not be entitled to any dividends in excess of full
cumulative dividends as described above and shall not be entitled to participate
in the earnings or assets of the Corporation, and no interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series A Preferred Shares which may be in arrears.
(D) No dividends on the Series A Preferred Shares shall be
authorized by the Board of Directors of the Corporation or be paid or set apart
for payment by the Corporation at such time as the terms and provisions of any
agreement of the Corporation, including any agreement relating to its
indebtedness, prohibits such authorization, payment or setting apart for payment
or provides that such authorization, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such authorization or
payment shall be restricted or prohibited by law.
(E) Except as provided in the immediately following paragraph,
unless full cumulative dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment therefor set apart for such payment on the Series A Preferred Shares for
all past dividend periods and the then current dividend period, no dividends
(other than in common shares, associate member common shares or other capital
stock, capital credits or equity interests ranking junior to the Series A
Preferred Shares as to dividends and upon liquidation) shall be declared or paid
or set aside for payment upon any preferred shares, common shares, associate
member common shares or any other
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capital stock, capital credits or equity interests of the Corporation ranking
junior to or on a parity with the Series A Preferred Shares as to dividends or
upon liquidation, nor shall any preferred shares, common shares, associate
member common shares or any other capital stock, capital credits or equity
interests of the Corporation ranking junior to or on a parity with the Series A
Preferred Shares as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid or made
available for a sinking fund for the redemption of such shares) by the
Corporation (except by conversion into or exchange for other capital stock,
capital credits or equity interests of the Corporation ranking junior to the
Series A Preferred Shares as to dividends and upon liquidation).
(F) Notwithstanding the foregoing paragraph, the Corporation
shall be permitted to declare and pay or set apart for payment patronage
dividends or refunds, subject to the limitation that, whenever the terms
described in the foregoing paragraph would operate to restrict dividends, not
more than 20% of such aggregate patronage dividends or refunds for any fiscal
year shall be in cash, with the remainder to be paid in the form of common
stock, associate member common stock, capital credits or equity interests. In
addition, when dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the Series A Preferred Shares and other
preferred shares of the Corporation ranking on a parity as to dividends with the
Series A Preferred Shares, dividends may be declared on the Series A Preferred
Shares and such other preferred shares provided that such dividends shall be
declared pro rata so that the amount of dividends declared per Series A
Preferred Share and per each other preferred share shall in all cases bear to
each other the same ratio that the accumulated dividends per Series A Preferred
Share and per such other preferred share bear to each other.
(G) Any dividend payment made on the Series A Preferred Shares
shall first be credited against the earliest accumulated but unpaid dividend due
with respect to such shares which remains payable.
(v) LIQUIDATION RIGHTS.
(A) Upon the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation (collectively, a "liquidation"), the holders of
the Series A Preferred Shares then outstanding shall be entitled to be paid out
of the assets of the Corporation legally available for distribution to its
shareholders or members liquidating distributions in cash or property at its
fair market value as determined by the Corporation's Board of Directors in the
amount of a liquidation preference equal to $50 per share plus accumulated and
unpaid dividends, if any, thereon to the date of such liquidation, before any
distribution of assets is made to holders of common shares, associate member
common shares or any other capital stock, capital credits or equity interests of
the Corporation ranking junior to the Series A Preferred Shares as to
liquidation rights.
(B) After payment to the holders of the Series A Preferred
Shares of the full amount of the liquidating distributions to which they are
entitled as provided in paragraph
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(v) (A), the holders of Series A Preferred Shares, as such, shall have no right
or claim to any of the remaining assets of the Corporation.
(C) If upon any voluntary or involuntary liquidation, the
legally available assets of the Corporation are insufficient to pay the amount
of the liquidating distributions on the Series A Preferred Shares and the
corresponding amounts payable on all other preferred shares of the Corporation
ranking on a parity with the Series A Preferred Shares in the distribution of
assets upon liquidation, then the holders of the Series A Preferred Shares and
such other preferred shares shall share ratably in any such distribution of
assets in proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.
(D) Neither the sale, lease, transfer or conveyance of all or
substantially all of the property or business of the Corporation, nor the merger
or consolidation of the Corporation into or with any other entity or the merger
or consolidation of any other entity into or with the Corporation, shall be
deemed to be a dissolution, liquidation or winding up, voluntary or involuntary,
for the purposes of this paragraph (v).
(vi) REDEMPTION.
(A) Optional Redemption. The Series A Preferred Shares are not
redeemable prior to December 15, 2022. On and after December 15, 2022, the
Corporation may, at its option (subject to the provisions of this
paragraph(vi)), redeem at any time all or, from time to time, part of the Series
A Preferred Shares, payable in cash at a per share redemption price (the
"Redemption Price") set forth in the table below plus, in each case, accumulated
and unpaid dividends, if any, thereon to and including the date fixed for
redemption (the "Redemption Date"), without interest, to the extent the
Corporation will have funds legally available therefor.
If redeemed during the twelve month period,
Beginning December 15, Redemption Price
---------------------- ----------------
2022 ......................................... $52.00
2023 ......................................... 51.60
2024 ......................................... 51.20
2025 ......................................... 50.80
2026 ......................................... 50.40
2027 and thereafter........................... 50.00
(B) Procedures for Redemption.
(1) Notice of redemption will be given by publication in
a newspaper of general circulation in The City of New York, such publication to
be made once a week for two successive weeks commencing not less than 30 nor
more than 60 days prior to the
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Redemption Date. A similar notice furnished by the Corporation will be mailed by
the registrar, postage prepaid, not less than 30 nor more than 60 days prior to
the Redemption Date, addressed to each holder of record of the Series A
Preferred Shares to be redeemed at the address set forth in the share transfer
records of the registrar. No failure to give such notice or any defect thereto
or in the mailing thereof shall affect the validity of the proceedings for the
redemption of any Series A Preferred Shares except as to the holder to whom
notice was defective or not given. In addition to any information required by
law or by the applicable rules of any exchange upon which Series A Preferred
Shares may be listed or admitted to trading, such notice shall state: (i) the
Redemption Date; (ii) the Redemption Price; (iii) the number of Series A
Preferred Shares to be redeemed; (iv) the place or places where the Series A
Preferred Shares are to be surrendered for payment of the Redemption Price; and
(v) that dividends on the Series A Preferred Shares to be redeemed will cease to
accumulate on such redemption date. If fewer than all the Series A Preferred
Shares held by any holder are to be redeemed, the notice mailed to such holder
shall also specify the number of Series A Preferred Shares to be redeemed from
such holder.
(2) If notice of redemption of any Series A Preferred
Shares has been given in accordance with paragraph (vi)(B)(1) above and provided
that on or before the Redemption Date specified in such notice all funds
necessary for such redemption shall have been irrevocably set aside by the
Corporation in trust for the benefit of the holders of any Series A Preferred
Shares so called for redemption, then from and after the Redemption Date
dividends will cease to accumulate on such Series A Preferred Shares, and such
shares shall no longer be deemed outstanding and all rights of the holders of
such Series A Preferred Shares will terminate, except the right to receive the
Redemption Price. Upon surrender, in accordance with such notice, of
certificates for any Series A Preferred Shares so redeemed (properly endorsed or
assigned for transfer, if the Corporation shall so require and the notice shall
so state), such Series A Preferred Shares shall be redeemed by the Corporation
at the Redemption Price. In case fewer than all the Series A Preferred Shares
represented by any such certificate are redeemed, a new certificate or
certificates shall be issued representing the unredeemed Series A Preferred
Shares without cost to the holder thereof.
(3) Any funds deposited with a bank or trust company for
the purpose of redeeming Series A Preferred Shares shall be irrevocable except
that:
(a) the Corporation shall be entitled to receive
from such bank or trust company the interest or other earnings, if any, earned
on any money so deposited in trust, and the holders of any Series A Preferred
Shares redeemed shall have no claim to such interest or other earnings; and
(b) any balance of monies so deposited by the
Corporation and unclaimed by the holders of the Series A Preferred Shares
entitled thereto at the expiration of two years from the applicable Redemption
Date shall be repaid, together with any interest or other earnings earned
thereon, to the Corporation, and after any such repayment, the
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holders of the Series A Preferred Shares entitled to the funds so repaid to the
Corporation shall look only to the Corporation for payment without interest or
other earnings.
(4) Unless full cumulative dividends on the Series A
Preferred Shares shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment therefor set apart for such
payment on the Series A Preferred Shares for all past dividend periods and the
then current dividend period, no Series A Preferred Shares shall be redeemed
unless all outstanding Series A Preferred Shares are simultaneously redeemed;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of Series A Preferred Shares pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding Series A Preferred
Shares. In addition, unless full cumulative dividends on the Series A Preferred
Shares shall have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment therefor set apart for such payment on the
Series A Preferred Shares for all past dividend periods and the then current
dividend period, the Corporation shall not purchase or otherwise acquire,
directly or indirectly, any Series A Preferred Shares; provided, however, that
the foregoing shall not prevent the purchase or acquisition of Series A
Preferred Shares pursuant to a purchase or exchange offer made on the same terms
to holders of all outstanding Series A Preferred Shares.
(5) If the Redemption Date is after a Dividend Record
Date and before the related Dividend Payment Date, the dividend payable on such
Dividend Payment Date shall be paid to the holder in whose name the Series A
Preferred Shares to be redeemed are registered at the close of business on such
Dividend Record Date notwithstanding the redemption thereof between such
Dividend Record Date and the related Dividend Payment Date or the Corporation's
default in the payment of the dividend due. Except as provided in this paragraph
(vi), the Corporation will make no payment or allowance for unpaid dividend,
whether or not in arrears, on Series A Preferred Shares to be redeemed.
(6) In case of redemption of less than all Series A
Preferred Shares at the time outstanding, the Series A Preferred Shares to be
redeemed shall be selected pro rata from the holders of record of such Series A
Preferred Shares in proportion to the number of Series A Preferred Shares held
by such holders (with adjustments to avoid redemption of fractional shares) or
by any other equitable method determined by the Corporation.
(vii) VOTING RIGHTS. Except as required by law, and as set forth
below, the holders of the Series A Preferred Shares shall not be entitled to
vote at any meeting of the shareholders or members or otherwise or to
participate in any action taken by the Corporation or the shareholders or
members thereof.
(A) So long as any Series A Preferred Shares remain
outstanding, the Corporation will not, without the affirmative vote or consent
of the holders of at least a majority of the Series A Preferred Shares
outstanding at the time, given in person or by proxy, either in writing or at a
meeting, alter or change the powers, preferences or special rights of the Series
A
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Preferred Shares so as to affect them adversely; provided, however, that (1) any
increase in the amount of the authorized preferred shares of the Corporation or
the creation or the issuance of any other preferred shares of the Corporation,
or (ii) any increase in the amount of authorized Series A Preferred Shares, in
each case ranking on a parity with or junior to the Series A Preferred Shares
with respect to the payment of dividends and the distribution of assets upon
liquidation, shall not be deemed to adversely affect such powers, preferences or
special rights.
The foregoing voting provisions will not apply if, at or
prior to the time when the act with respect to such vote or consent would
otherwise be required shall be effected, all outstanding Series A Preferred
Shares shall have been redeemed or called for redemption and sufficient funds
shall have been irrevocably deposited in trust to effect such redemption.
(B) On each matter submitted to a vote of the holders of
Series A Preferred Shares in accordance with this paragraph (vii), or as
otherwise required by law, each Series A Preferred Share shall be entitled to
one vote. With respect to each Series A Preferred Share, the holder may
designate a proxy, with each such proxy having the right to vote on behalf of
the holder.
(viii) CONVERSION. The Series A Preferred Shares are not convertible
into or exchangeable for any other property or securities of the Corporation.
(ix) RESTRICTIONS ON TRANSFER.
(A) The Series A Preferred Shares have not been registered
under the Securities Act of 1933, as amended (the "Securities Act") and, until
so registered, may not be offered or sold except to (i) "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act) in reliance upon the
exemption from the registration requirements of the Securities Act provided by
Rule 144A, and (ii) institutional "accredited investors" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act) in transactions exempt from
the registration requirements of the Securities Act.
(B) Until registered under the Securities Act, the Series A
Preferred Shares may not be sold or otherwise transferred in an amount that is
less than $100,000 in aggregate liquidation preference. Any such transfer of
Series A Preferred Shares in an amount less than $100,000 in aggregate
liquidation preference shall be deemed to be void and of no legal effect
whatsoever. Any such transferee shall be deemed not to be the holder of such
Series A Preferred Shares for any purpose, including, but not limited to, the
receipt of dividends on such Series A Preferred Shares, and such transferee
shall be deemed to have no interest whatsoever in such Series A Preferred
Shares.
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(C) Until the Series A Preferred Shares are registered under
the Securities Act, all certificates representing such Series A Preferred Shares
will bear a legend referring to the restrictions described above.
# # #
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EXHIBIT A-2
AMENDED AND RESTATED
BYLAWS
OF
UNITED COUNTRY BRANDS, INC.
ARTICLE I
OFFICES AND RECORDS
SECTION 1.1 CORPORATE OFFICES. This Cooperative (this "Cooperative")
may have such corporate offices and places of business anywhere as the Board of
Directors (the "Board") may from time to time designate or the business of this
Cooperative may require.
SECTION 1.2 REGISTERED OFFICE AND REGISTERED AGENT. The location of
the registered office and the name of the registered agent of this Cooperative
shall be as stated in the Articles of Incorporation of this Cooperative (the
"Articles") or as shall be determined from time to time by resolution of the
Board and on file in the appropriate public offices.
SECTION 1.3 BOOKS, ACCOUNTS AND RECORDS, AND INSPECTION RIGHTS. The
books, accounts and records of this Cooperative, except as may be otherwise
required by applicable law, may be kept at such place or places as the Board may
from time to time determine. The Board shall determine whether, to what extent
and the conditions upon which the books, accounts and records of this
Cooperative, or any of them, shall be open to the inspection of the members, and
no member shall have any right to inspect any book, account or record of this
Cooperative, except as conferred by law or by resolution of the members or
Board.
ARTICLE II
MEMBERSHIP
SECTION 2.1 QUALIFICATIONS. Producers of agricultural products and
associations of producers of agricultural products who are eligible and who
patronize this Cooperative under conditions established by the Board or as
elsewhere provided in these Bylaws (these "Bylaws") may, upon approval or
pursuant to the authorization of the Board, become members of this Cooperative.
Each transaction between this Cooperative and each member shall be subject to
and shall include as a part of its terms each provision of the Articles and
these Bylaws, whether or not the same be expressly referred to in said
transaction.
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SECTION 2.2 CLASSES OF MEMBERS. In accordance with the Articles,
there shall be three classes of members of this Cooperative, which are hereby
designated as the "Cooperative Association" class, "Individual Member" class and
the "Defined Member" class. Membership in a particular class of members shall be
determined as follows:
(a) COOPERATIVE ASSOCIATION MEMBERS. All members which are
cooperative associations shall belong to and be part of the Cooperative
Association class of members and shall become known and be designated as
"Cooperative Association Members;"
(b) INDIVIDUAL MEMBERS. All members who are directly engaged in
production agriculture, including individuals operating as sole proprietors,
farm corporations, farm partnerships or other legal entities, shall belong to
and be part of the Individual Member class of members, and shall become known
and be designated as "Individual Members;" and
(c) DEFINED MEMBERS. All members who are holders of Equity
Participation Units (as described in the Articles) shall belong to and be part
of the Defined Member class of members, and shall become known and be designated
as "Defined Members."
SECTION 2.3 DEFINED MEMBERS AND DEFINED BUSINESS UNITS.
(a) DEFINED BUSINESS UNITS. Each Defined Member holding Equity
Participation Units in a Defined Business Unit (as defined in the Articles)
shall be eligible to receive patronage distributions from the Defined Business
Unit as a separate allocation unit.
(b) DELIVERY RIGHTS AND OBLIGATIONS. The delivery rights and
obligations of each Defined Member shall be as specified in a written agreement
("DBU Agreement") by and between the Defined Member and this Cooperative. A
modification to a DBU Agreement must receive prior written approval from the
Defined Members who (i) hold a majority of the voting power of the Defined
Business Unit that is a party to the subject DBU Agreement, and (ii) who are
present and voting at a meeting of Defined Members holding Equity Participation
Units in such Defined Business Unit. The notice of such meeting must contain the
proposed modification to the DBU Agreement.
(c) DEFINED MEMBER BOARDS. Each Defined Business Unit shall be
represented by a Defined Member Board. The initial members of each Defined
Member Board shall be selected by the Board. Subsequently, the members of the
Defined Business Unit in question shall be entitled to elect, on a one Defined
Member/one vote basis, the members of the Defined Member Board. Each Defined
Member Board shall be made up of at least five (5) but not more than ten (10)
individuals. Each member of a Defined Member Board must be either a Defined
Member in good standing, or a representative of a Defined Member in good
standing and in full compliance with its delivery obligations; provided,
however, that no employee of this Cooperative may serve as a member of any
Defined Member Board. Each Defined Member Board shall be headed by a Chairperson
selected by and from the Board of this Cooperative. Each Defined Member Board
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shall meet at least quarterly (one of which meetings may be its annual meeting),
and shall be charged with reflecting Defined Member concerns and providing
direct communication to the Board. Individuals serving on a Defined Member Board
shall serve for staggered terms of three (3) years and until their successors
are elected and have qualified. The policies and procedures governing all other
aspects of such Defined Member meetings and Defined Member Boards shall be
established and amended from time to time at the discretion of the Board.
SECTION 2.4 TERMINATION OF MEMBERSHIP. If the Board determines that
a member has become ineligible for membership in this Cooperative, such member
shall have no rights or privileges on account of such membership in the
management of the affairs of this Cooperative, and the membership of such member
may be terminated by the Board. Membership may, at the discretion of the Board,
be terminated whenever the Board by resolution finds that a member has:
(a) intentionally or repeatedly violated any provision of
the Articles, Bylaws or Board policies of this
Cooperative;
(b) failed to patronize this Cooperative during the last two
completed fiscal years;
(c) breached any contract with or duty to this Cooperative;
(d) willfully obstructed any lawful purpose or activity of
this Cooperative;
(e) remained indebted to this Cooperative for ninety (90)
days after such indebtedness becomes payable;
(f) died or legally dissolved; or
(g) failed in the judgment of the Board to comply with the
qualifications and standards adopted by the Board from
time to time;
provided, however, that termination of any member's membership as a result of
any of the circumstances listed in paragraphs (a) through (g) above shall not be
deemed to revoke such member's consent contained in Article IX hereof but rather
such member may only revoke such consent in writing. Upon termination of
membership such member shall thereafter have no voting rights in this
Cooperative. No action taken hereunder shall impair the obligations or
liabilities of a member under any contract with this Cooperative. Redemption of
the equities held by terminated members shall remain at the sole discretion of
the Board.
ARTICLE III
MEETINGS OF MEMBERS
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SECTION 3.1 ANNUAL AND SPECIAL MEETINGS. The annual meeting of the
members of this Cooperative shall be held at a time and place fixed by the
Board. The Chairman of the Board shall call a special meeting of the members
upon the written petition of at least twenty percent (20%) of the members or
upon a majority vote of the directors present and voting at a Board meeting. The
special members' meeting shall be held at the time and place specified in the
notice of the meeting, and the notice shall also state the purpose of the
special members' meeting. No business shall be considered at the special
members' meeting except as specified in the notice of the meeting. Members'
meetings shall be directed and governed pursuant to rules, procedures and
guidelines set forth from time to time by the Board.
SECTION 3.2 NOTICE OF MEETINGS. Notice of the annual meeting or of a
special meeting of the members shall be published or mailed as prescribed by
law. The notice of a meeting must be published at least two weeks before the
date of the meeting or mailed at least 15 days before the date of the meeting.
The notice shall state the date, time, and place of the meeting, and in the case
of a special meeting, the purposes for which the meeting is called. The
Secretary shall execute a certificate which contains a copy of the notice, shows
the date of mailing or publication (as the case may be), and states the notice
was mailed or published (as the case may be) as prescribed by these Bylaws. The
certificate shall be made a part of the meeting. The failure of any member to
receive notice shall not invalidate any action which may be taken by the members
at a meeting.
SECTION 3.3 VOTING POWER. The voting power of the members of this
Cooperative shall be exercised as follows:
(a) for transactions involving dissolution of this
Cooperative, sale of eighty percent (80%) or more of
this Cooperative's assets or mergers or consolidations
where this Cooperative's members would receive less than
50% of the membership equity of the surviving entity,
the following shall apply:
(i) each Cooperative Association Member shall have one
(1) vote for each producer of agricultural products registered and
accepted as a member of such Cooperative Association Member who
patronized such Member within the preceding fiscal year by
purchasing or marketing goods or services supplied by or marketed by
this Cooperative, including, as applicable, Individual Members and
Defined Members; and
(ii) each Individual Member and Defined Member shall
have one (1) vote; provided, however, that Individual Members and
Defined Members may be grouped with other such members in local
units ("Patrons Associations") as may be established from time to
time pursuant to Section 3.3(b)(ii) below.
(b) for all other matters to be voted on by the membership
of this Cooperative:
(i) each Cooperative Association Member shall have:
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(A) one (1) vote for each $10,000, or major
fraction thereof, of the average annual business
transacted on a patronage basis with this Cooperative or
with any predecessor cooperative associations during the
three years ending on the last day of this Cooperative's
fiscal year last ended prior to the meeting; and
(B) one (1) vote for each $1,000, or major
fraction thereof, of equity issued by this Cooperative
or by any predecessor cooperative associations as the
initial purchased equity by a member or patron or as a
patronage refund and standing on the books of this
Cooperative in the name of such member; and
(ii) each Individual Member and Defined Member shall
have one (1) vote; provided, however, that Individual Members and
Defined Members may be grouped with other such members in Patrons
Associations as may be established from time to time, and each such
Patrons Association shall have:
(A) one (1) vote for each Individual Member
and Defined Member grouped in such Patrons Association
(minus one vote for any Individual Member or Defined
Member in such Patrons Association who elects to cast a
vote personally under procedures approved by the Board);
plus
(B) one (1) vote for each $10,000, or major
fraction thereof, of the average annual business
transacted with this Cooperative or with any predecessor
cooperative associations (combined sales to and
purchases from) by the Individual Members and Defined
Members grouped in such Patrons Associations, during the
three years ending on the last day of this Cooperative's
fiscal year last ended prior to the meeting; plus
(C) one (1) vote for each $1,000, or major
fraction thereof, of equity issued by this Cooperative
as the initial purchased equity by a member or patron or
as a patronage refund and standing on the books of this
Cooperative in the name of the Individual Members and
Defined Members grouped in such Patrons Associations,
calculated on an aggregate basis.
Provided, however, that no member shall be entitled to vote more
than 5% of the total votes of this Cooperative eligible to be cast.
The most recently completed fiscal year shall be used for
determining each member's number of votes unless otherwise specified by the
Board.
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For purposes of Section 3.3(b)(i), the dollar value of commodities
delivered by a Defined Member to a Cooperative Association Member for handling
by and on behalf of this Cooperative shall be included in the calculation for
determining the number of permitted votes of the Cooperative Association Member.
For purposes of Section 3.3(b)(ii), the face amount of any Equity Participation
Units issued to and held by a member shall be included in the determination of
the amount of equity in this Cooperative held by such member. In determining the
number of permitted votes of a member, the Board shall give due consideration to
the membership eligibility criteria set forth in these Bylaws and the Articles.
The Board shall have the authority to suspend or adjust voting power to reflect
such criteria, including without limitation the authority to establish
reasonable procedures to address special circumstances. (Such procedures might
include, for example, the following: (a) procedures to equitably adjust the
calculation of the average annual business of members having less than three
full years of business included in the averaging period, and (b) procedures to
equitably measure the business transacted by Cooperative Association Members
that have acquired or merged with other entities that did business with this
Cooperative or with any predecessor cooperative association within the averaging
period.)
(c) Individual Members and Defined Members who are grouped in
Patrons Associations who intend to vote individually hereunder shall be entitled
to do so after complying with procedures established by the Board.
(d) Each Cooperative Association Member or Patrons Association shall
be represented at the members' meetings of this Cooperative by an elected or
appointed delegate or an alternate, which delegate or alternate shall exercise
the voting rights of such Cooperative Association Member or Patrons Association
at such meetings as hereinafter provided.
Each delegate or alternate representing a Cooperative Association
Member shall be selected at the discretion of the Cooperative Association
Member.
Each delegate or alternate representing Individual Members and
Defined Members in a Patrons Association shall be elected on a one member/one
vote basis by the Individual Members and the Defined Members grouped in the
Patrons Association, at an annual meeting of such Patrons Association held
following reasonable notice, and pursuant to such other procedures as the Board
may establish from time to time. In no instance shall managers or other
employees of this Cooperative appoint such delegates or alternates. Such
delegates shall exercise the same powers at such members' meetings as the
delegates of Cooperative Association Members may exercise.
SECTION 3.4 MANNER OF VOTING. At annual and special meetings of
members of this Cooperative, the designated number of permitted votes of members
as provided above shall be cast in the following manner:
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(a) Each Individual Member and each Defined Member who has provided
notice to vote individually under procedures established by the Board shall be
entitled to cast such member's own vote.
(b) Each Cooperative Association Member and each Patrons Association
representing groups of Individual Members and Defined Members shall cast its
votes through its duly selected delegate or alternate.
(c) Mail voting is permitted where, in the notice of the meeting,
the Board shall have designated that mail voting is permitted for a specific
issue or issues. Any such mail voting shall be conducted pursuant to procedures
adopted by the Board and consistent with applicable law. Nothing in this section
shall, however, prevent the members at an annual or special meeting of this
Cooperative from considering and acting upon issues in addition to those
submitted for mail voting, provided that applicable notice requirements are met.
(d) There shall be no voting by proxy or under power of attorney at
any annual or special meeting of this Cooperative other than through Patrons
Associations as described herein, or in the case of a spouse voting on behalf of
a member.
SECTION 3.5 QUORUM.
(a) A quorum necessary to the transaction of business at any annual
or special meeting of this Cooperative shall be at least 50 members as long as
there are more than 500 members of this Cooperative, or at least ten percent
(10%) of the total number of members if there are 500 or less members of this
Cooperative. A majority of the votes cast in person, by mail vote or by other
approved means, at any meeting of the members, shall decide all questions except
where a greater vote is required by the Articles, by these Bylaws or by law.
(b) Each Cooperative Association Member and Patrons Association
shall certify its delegates and alternates to this Cooperative, in the manner
prescribed by the Board. No individual shall serve as a delegate for more than
one Cooperative Association Member or Patrons Association. A delegate
representing a Patrons Association must be an Individual Member or Defined
Member of the Patrons Association. The Board may establish such additional
eligibility criteria, procedures, standards and structure with respect to the
delegate system of this Cooperative as it from time to time deems advisable. No
employee of this Cooperative shall serve as a delegate or alternate at any
meeting of this Cooperative.
SECTION 3.6 PRESIDING OFFICER. The Chairman of the Board shall
preside at all meetings of the members.
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ARTICLE IV
BOARD OF DIRECTORS
SECTION 4.1 BOARD OF DIRECTORS. The business and affairs of this
Cooperative shall be governed by the Board. Until the annual meeting of the
members of this Cooperative to be held following the close of the fiscal year
ending in calendar year 2001 (the "2001 annual meeting"), the Board shall
consist of 34 directors, 17 of which shall be individuals serving on the Board
of Directors of Cenex Harvest States Cooperatives and 17 of which shall be
individuals serving on the Board of Directors of Farmland Industries, Inc. at
the effective time of the combination of these two cooperatives. Such Board
shall be designated in the Articles and these Bylaws as the "Transition Board."
Commencing upon the election and qualification of directors at the 2001 annual
meeting of members of this Cooperative, the Board shall consist of twenty-five
(25) directors, eighteen (18) of whom shall be producers as defined herein and
seven (7) of whom shall be local executives as defined herein.
SECTION 4.2 DIRECTOR QUALIFICATIONS. The qualifications for the
office of director shall be as follows:
(a) For producer directors:
(1) At the time of the election, the individual
must be less than the age of 65.
(2) The individual must be a voting member of
this Cooperative or a voting member of a
Cooperative Association Member of this
Cooperative.
(3) The individual must reside in the district
from which he or she is to be elected.
(4) At the time of the election, the
individual's primary occupation must be
farming or ranching.
(5) The individual may not be a full time
employee of this Cooperative or of a
Cooperative Association Member of this
Cooperative.
(6) The qualifications set forth in this Section
4.2(a) shall not apply to any individual
serving on the Transition Board.
(b) For local executive directors:
(1) At the time of the election, the individual
must be less than the age of 65.
(2) The individual must be a full-time executive
employee of a Cooperative Association Member
of this Cooperative.
(3) The Cooperative Association Member employing
the individual must have its primary
headquarters located in the district from
which he or she is to be elected.
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SECTION 4.3 TRANSITION BOARD, 2001 ELECTIONS.
(a) The terms of each director serving on the Transition Board shall
expire at the 2001 annual meeting. Elections will be held for each of the
twenty-five (25) positions of the new Board at such annual meeting. In advance
of such meeting, the Transition Board shall designate nine (9) of the Board
positions as having three-year terms (to expire at the 2004 annual meeting),
eight of the Board positions as having two-year terms (to expire at the 2003
annual meeting) and eight of the Board positions as having one-year terms (to
expire at the 2002 annual meeting). The determination of the staggered terms
shall be made in an impartial manner using any fair and equitable method as the
Transition Board may determine.
(b) The procedure for electing directors at the 2001 annual meeting
shall be in accordance with Section 4.4 herein.
(c) If a director's position on the Transition Board becomes vacant,
the remaining directors may fill the director's position until the next annual
meeting, at which point a director will be elected by the members pursuant to a
procedure established by the Transition Board.
SECTION 4.4 ELECTION OF DIRECTORS.
(a) At the 2001 annual meeting and at each annual meeting of the
members thereafter, directors shall be elected to fill vacancies created by
expired terms. Beginning at the 2002 annual meeting, the term of office of such
directors shall be three (3) years and until their respective successors are
elected and qualified.
(b) The nomination and election of directors of this Cooperative
shall be by district. The territory served by this Cooperative shall be divided
into districts and each such district shall be represented by at least one (1)
producer director and one (1) local executive director. Each district shall be
represented by one or more producer directors apportioned to the districts on
the basis of eligible votes. In districts with three (3) or more producer
directors, not all of the producer directors may be residents of the same state.
The districts shall be as follows:
DISTRICT 1 includes the States of Washington, Oregon,
California, Nevada, Utah, Idaho, Arizona, New Mexico, Alaska and
Hawaii, the Canadian province of British Columbia and Mexico;
DISTRICT 2 includes the States of Nebraska, Wyoming and
Colorado.
DISTRICT 3 includes the States of North Dakota, South
Dakota and Montana and the Canadian provinces of Alberta,
Saskatchewan and Manitoba.
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DISTRICT 4 includes the States of Minnesota, Wisconsin
and Michigan and the Canadian provinces of Ontario, Quebec,
Newfoundland, New Brunswick, Nova Scotia and Prince Edward Island.
DISTRICT 5 includes the States of Iowa, Illinois,
Indiana, Ohio, Pennsylvania, Maryland, Delaware, New York, New
Jersey, Connecticut, Massachusetts, Rhode Island, New Hampshire,
Vermont and Maine.
DISTRICT 6 includes the States of Missouri, Arkansas,
Louisiana, Mississippi, Tennessee, Kentucky, Alabama, Georgia,
Florida, South Carolina, North Carolina, Virginia and West Virginia.
DISTRICT 7 includes the States of Kansas, Oklahoma and
Texas.
(c) From time to time, the Board shall review member representation
on the Board. The Board shall have the responsibility and authority to maintain
equitable representation of the members as determined by relative voting power
by reapportioning the number of producer director positions per district (with
each district to have at least one producer director). The Board shall have the
power to finally approve all such reapportionment plans by a majority vote of
those directors present and voting. The membership shall be promptly informed of
any such approved reapportionment plan. Any such reapportionment plan shall be
implemented for each district in which a director position is lost at the first
subsequent annual meeting of this Cooperative which corresponds to the
expiration of the term of office of one or more of such district's producer
directors.
(d) The various districts shall, by caucus, elect directors as
provided herein. The Chairman of the Board may appoint a nominating committee to
facilitate elections in district caucuses for any district where a caucus is to
be held. Candidate nominations for directors may be made from the floor by any
official delegate or eligible voting Individual Member or Defined Member at the
district caucus.
(e) When multiple director positions are to be filled within a
district, each director position will be subject to a separate election. Such
district shall elect each director by a majority of votes cast by members
eligible to vote and voting. If, on the first ballot for a director position, no
candidate receives a majority, there shall be a runoff election between the two
candidates who received the most votes on the first ballot. In the district
caucus, each member entitled to vote shall have the number of votes as
determined under these Bylaws for each election held. The Board may establish at
its discretion quorum requirements and further procedures not inconsistent with
these Bylaws for the nomination and election of directors and the conduct and
timing of district caucuses.
SECTION 4.5 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Any director
of this Cooperative may resign at any time by submitting a written resignation
to the Chairman of the
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Board or this Cooperative's Secretary. Vacancies and newly created directorships
may be filled by a majority of the directors then in office, even if less than a
quorum, until the next annual or special meeting of the members, when the
members shall elect a director to serve the unexpired term.
SECTION 4.6 MEETINGS. The Board shall meet regularly at such times
and places as the Board may determine. Special meetings may be called by the
Chairman or by any three directors. All meetings shall be held on such notice as
the Board may prescribe; provided, however, that any business may be transacted
at any meeting without specification of such business in the notice of such
meeting. Directors may participate in any such meeting by means of a conference
telephone conversation or other comparable method of communication by which all
persons participating in the meeting can hear and communicate with each other.
For purposes of taking any action at the meeting, any such directors shall be
deemed present in person at the meeting.
SECTION 4.7 QUORUM AND VOTING. For both the Board and the Executive
Committee of the Board, a quorum shall consist of a majority of the directors
serving on the Board or the Executive Committee as the case may be. A majority
vote of the directors present shall decide all questions except where a greater
vote is required by the Articles, by these Bylaws or by law.
SECTION 4.8 ACTION WITHOUT MEETING. Any action required or permitted
to be taken at a meeting of the Board may be taken without a meeting if all
directors consent thereto in writing and the writing or writings are held with
the minutes or proceedings of the Board.
ARTICLE V
DUTIES OF DIRECTORS
SECTION 5.1 GENERAL POWERS. The business and affairs of this
Cooperative shall be governed by the Board. The Board shall exercise all of the
powers of this Cooperative except as such are by law, the Articles, or these
Bylaws conferred upon or reserved to the members. The Board shall adopt such
policies, rules, regulations, and actions not inconsistent with law, the
Articles or these Bylaws, as it may deem advisable. The day-to-day business
affairs of this Cooperative shall be in the management and control of the Chief
Executive Officer, selected by the Board.
SECTION 5.2 EXECUTIVE COMMITTEE; OTHER COMMITTEES. An executive
committee of six, which shall include the Chairman, Vice Chairman, and four
other members to be elected by the Board from among its own members at its first
meeting after each annual meeting, shall have all the powers and exercise all
the functions of the Board when the Board is not in session, subject to the
Board's general control and direction. The Board may in its discretion also
establish other committees (including, but not limited to, a Capital Committee,
a Finance/Audit Committee, a Governance Committee, and a Corporate
Responsibility Committee). The rules pertaining to such committees shall be
determined by the Board in its sole and absolute discretion.
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SECTION 5.3 BONDS. The Board may require the officers, agents, or
employees charged by this Cooperative with responsibility for the custody of any
of its funds or property to give adequate bonds. Such bonds, unless cash
security is given, shall be furnished by a responsible bonding company and
approved by the Board and the cost thereof shall be paid by this Cooperative.
SECTION 5.4 AUDITS. As often as the Board may consider necessary,
but at least once a year, the Board shall obtain the services of a competent and
independent auditor, who shall make a careful audit of the books and accounts of
this Cooperative and render a report in writing thereon. The annual auditors'
report shall be available at the next annual meeting of the members.
SECTION 5.5 COMPENSATION. The Board may fix the compensation of
directors for serving as directors of this Cooperative.
SECTION 5.6 RESIGNATIONS AND REMOVALS. To the extent permitted by
applicable law, any director of this Cooperative may be removed for cause by
vote of not less than two-thirds (2/3) of the votes cast at any annual meeting
or at any special meeting of the members called for that purpose. In addition,
to the extent permitted by applicable law, any director of this Cooperative may
be removed for cause by vote of not less than three-fourths (3/4) of the full
Board at any regular Board meeting or special Board meeting called for that
purpose. Any director subject to removal shall be informed in writing of the
charges proffered against him or her at least fifteen (15) days before the
membership meeting or Board meeting, as the case may be, and at such meeting
shall have an opportunity to be heard in person or by counsel. Any such meeting
shall be conducted under procedures established at the sole discretion of the
Chairman of the Board. If any director is removed, and there are more than 180
days until the next annual meeting of members, the Board shall arrange for, and
prescribe the procedures of a special election through which the members in the
affected district will fill the vacancy. Officers or agents of the Board may be
removed from office or employment at any time by action of the Board.
ARTICLE VI
OFFICERS
SECTION 6.1 ELECTION OF OFFICERS. Promptly following each annual
meeting of the members, the Board shall elect from its membership a Chairman and
a Vice Chairman. The Board shall also elect a Chief Executive Officer, a
President (who may also be the Chief Executive Officer), one or more
Vice-Presidents (with such designations as recommended by the Chief Executive
Officer), a Secretary and a Treasurer, none of whom need be a director or member
of this Cooperative. The Board may also elect, from time to time, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other officers
as it shall deem necessary, none of whom need be a director or member. Other
than the office of Chairman and Vice
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Chairman, one person may hold one or more of the offices provided for above, if
eligible to hold each such office. If any vacancy shall occur among the offices
set forth above, it shall be filled by the Board at its next regular meeting
following the vacancy. Officers shall be elected annually unless otherwise
provided by the Board. In addition to the authority granted to the officers in
these Bylaws, the officers shall have such powers and authority, including the
power to delegate any responsibility, as the Board may grant such officers from
time to time.
SECTION 6.2 CHAIRMAN. The Chairman shall preside at all meetings of
the members and the Board. Except where the signature of the Chief Executive
Officer is required, the Chairman shall possess the same power as the Chief
Executive Officer to sign all certificates, contracts and other instruments of
this Cooperative which may be authorized by the Board.
SECTION 6.3 VICE CHAIRMAN. In the absence or disability of the
Chairman, the Vice Chairman shall perform the duties and exercise the powers of
the Chairman. The Vice Chairman shall have such other duties as may be assigned
from time to time by the Board.
SECTION 6.4 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall have general supervision of the day-to-day business affairs of this
Cooperative, shall sign or countersign all certificates, contracts or other
instruments of this Cooperative as authorized by the Board, shall make reports
to the Board and members, shall recommend the officers of this Cooperative to
the Board for election (except the offices of Chairman and Vice Chairman), and
shall perform such other duties as are incident to the Chief Executive Officer's
office or are properly required by the Board. In the event the office of
President is not separately filled, the Chief Executive Officer shall also serve
as the President and may exercise the authority of the office of Chief Executive
Officer in either or both capacities.
SECTION 6.5 PRESIDENT. In the event the office of President is
separately filled, the President shall report to the Chief Executive Officer,
and shall perform such duties as the Board may prescribe upon the recommendation
of the Chief Executive Officer. In the absence or disability of the Chief
Executive Officer, the President shall perform the duties and exercise the
powers of the Chief Executive Officer.
SECTION 6.6 VICE PRESIDENTS. In the absence or disability of the
Chief Executive Officer and the President, the Vice Presidents, in the order
designated by the Board, shall perform the duties and exercise the powers of the
President. Each Vice President shall have such other duties as are assigned to
such Vice President from time to time by the Chief Executive Officer or the
President.
SECTION 6.7 SECRETARY. The Secretary shall keep complete minutes of
each meeting of the members and of the Board, and shall, to the extent required
by law, sign with the Chairman or the Chief Executive Officer all notes,
conveyances and encumbrances of real estate, capital securities and instruments
requiring the corporate seal; provided, however, that the Secretary, in writing,
may authorize any other officer or employee to execute or sign the Secretary's
name to any or all such instruments. The Secretary shall keep a record of all
business of this Cooperative, prepare
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and submit to the annual meeting of the members a report of the previous fiscal
year's business, and give all notice as required by law. The Secretary shall
perform such other duties as may be required by the Board. The Board may
delegate, or authorize the Secretary to delegate, to any other officer or
employee, under the supervision of the Secretary, all or any of the duties
enumerated in this section.
SECTION 6.8 TREASURER. The Treasurer shall supervise the safekeeping
of all funds and property of this Cooperative, supervise the books and records
of all financial transactions of this Cooperative, and perform such other duties
as may be required by the Board. The Board may delegate, or authorize the
Treasurer to delegate, to any other officer or employee, under the supervision
of the Treasurer, all or any of the duties enumerated in this section.
ARTICLE VII
INDEMNIFICATION AND INSURANCE
Section 7.1 INDEMNIFICATION. This Cooperative shall indemnify each
person who is or was a director, officer, manager, employee, or agent of this
Cooperative, and any person serving at the request of this Cooperative 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 provided or permitted by
any statute of the state of incorporation of this Cooperative which applies to
any type of corporation.
Section 7.2 INSURANCE. This Cooperative shall have power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, manager, employee, or agent of this Cooperative, or is or was serving
at the request of this Cooperative as a director, officer, manager, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against any liability asserted against that person and incurred by
that person in any such capacity.
ARTICLE VIII
METHOD OF OPERATION - PATRONAGE REFUNDS
SECTION 8.1 COOPERATIVE OPERATION. This Cooperative shall be
operated on a cooperative basis in carrying out its business within the scope of
the powers and purposes defined in the Articles. The net earnings of this
Cooperative shall be computed under generally accepted accounting principles,
unless otherwise determined by the Board, provided, however, that any change
shall be on a prospective basis only. The net earnings of this Cooperative in
excess of amounts credited by the Board to Capital Reserves and amounts of
dividends, if any, paid with respect to equity capital shall be accounted for
and distributed annually on the basis of allocation units as provided in this
Article VIII.
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Each transaction between this Cooperative and each member shall be
subject to and shall include as a part of its terms each provision of the
Articles and Bylaws, whether or not the Articles or Bylaws are expressly
referred to in such transaction. Each member for whom this Cooperative markets
or procures goods or services shall be entitled to the net income arising out of
such transaction as provided in this Article VIII, unless such member and this
Cooperative have expressly agreed to conduct such business on a nonpatronage
basis. No nonmember for whom this Cooperative markets or procures goods or
services shall be entitled to the net income arising out of said transactions as
provided in this Article VIII unless this Cooperative agrees to conduct said
business on a patronage basis.
SECTION 8.2 PATRONS; PATRONAGE BUSINESS; NONPATRONAGE BUSINESS. As
used in this Article VIII, the following definitions shall apply:
(a) The term "patron" shall refer to any member or nonmember with
respect to business conducted with this Cooperative on a patronage basis in
accordance with Section 8.1.
(b) The term "patronage business" shall refer to business done by
this Cooperative with or for patrons.
(c) The term "nonpatronage business" shall refer to business done by
this Cooperative that does not constitute "patronage business."
SECTION 8.3 ESTABLISHMENT OF ALLOCATION UNITS. Allocation units
shall be established by the Board on a reasonable and equitable basis and they
may be functional, divisional, departmental, geographic, or otherwise; provided,
that each Defined Business Unit shall be accounted for as a separate allocation
unit.
SECTION 8.4 CURRENT YEAR'S NET EARNINGS (LOSSES) AND DETERMINATION
OF THE PATRONAGE INCOME OR LOSS OF AN ALLOCATION UNIT. This Cooperative's
overall net earnings or loss shall be determined using generally accepted
accounting principles, unless otherwise determined by the Board; provided,
however, that any change shall be on a prospective basis only, and shall be
divided into (i) a patronage sourced portion, determined on the basis of the
quantity or value of business done by this Cooperative with or for its patrons
who are eligible to receive patronage refunds and (ii) a non-patronage sourced
portion which shall include amounts determined on the basis of the quantity or
value of business done with or for persons who are not eligible to receive
patronage refunds from this Cooperative, plus such net amounts of income,
expenses, or loss which are unrelated to the operations carried on by this
Cooperative for its patrons on a cooperative basis. The net income or net loss
of an allocation unit from patronage business for each fiscal year shall be the
sum of (1) the gross revenues directly attributable to goods or services
marketed or procured for patrons of such allocation unit, plus (2) an equitably
apportioned share of other items of income or gain attributable to this
Cooperative's patronage business, less (3) all expenses and costs of goods or
services directly attributable to goods or
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services marketed or procured for patrons of such allocation unit, less (4) an
equitably apportioned share of all other expenses or losses attributable to this
Cooperative's patronage business, dividends on equity capital and distributable
net income from patronage business that is credited to the Capital Reserve
pursuant to Section 8.8(c). Expenses and cost of goods or services shall include
without limitation any unit retentions provided in Section 8.9. Such net income
or net loss shall be subject to adjustment as provided in Section 8.6 relating
to losses.
SECTION 8.5 ALLOCATION OF PATRONAGE INCOME WITHIN ALLOCATION UNITS.
The net income of an allocation unit from patronage business for each fiscal
year, less any amounts thereof that are otherwise allocated in dissolution
pursuant to Article X, shall be allocated among the patrons of such allocation
unit in the ratio that the quantity or value of the business done with or for
each such patron bears to the quantity or value of the business done with or for
all patrons of such allocation unit. The Board shall reasonably and equitably
determine whether allocations within any allocation unit shall be made on the
basis of quantity or value.
SECTION 8.6 TREATMENT OF PATRONAGE LOSSES OF AN ALLOCATION UNIT.
(a) METHODS FOR HANDLING PATRONAGE LOSSES. The Board shall have
complete discretion to determine the handling and ultimate disposition of this
Cooperative's patronage-sourced net losses (including allocation unit losses)
and the form, priority and manner in which such losses or portions thereof shall
be taken into account, retained, and ultimately disposed of or recovered. The
Board may retain such losses and subsequently (i) offset all or part of such net
loss against the net income of one or more other allocation units for such
fiscal year to the extent allowed by law; (ii) dispose of them by offset against
the net earnings of this Cooperative (or of one or more of the allocation units)
in subsequent years, (iii) apply such losses to prior years' patronage
allocations at any time in order to dispose of them by means of offset and
cancellation against patron's equity accounts, or (iv) select and use any other
method of disposition of such losses as the Board, in its sole discretion, shall
from time to time determine, provided however, that the net income or net loss
of a Defined Business Unit shall not be netted against the net income or net
loss of any other allocation unit, that patron equities distributed based on the
earnings of a Defined Business Unit shall not be canceled based on the net loss
of other allocation units and that the net loss of a Defined Business Unit shall
not be applied in cancellation of patron equities distributed based on earnings
of other allocation units.
(b) NETTING. If one or more of this Cooperative's allocation units
experience losses during any fiscal year, the losses of such allocation unit(s)
may be allocated to and netted with earnings of one or more of the other
allocation units of this Cooperative or be otherwise handled and disposed of in
accordance with Section 8.6. This Cooperative's patrons shall be notified in any
fiscal year for which such netting occurred.
SECTION 8.7 DISTRIBUTION OF NET INCOME.
(a) PATRONAGE REFUNDS. The net income allocated to a patron pursuant
to Section 8.5 shall be distributed annually or more often to such patron as a
patronage refund; provided,
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however, that no distribution need be made where the amount otherwise to be
distributed to a patron is less than a DE MINIMUS amount that may be established
from time to time by the Board.
(b) PATRONAGE EQUITIES. Patronage refunds may be distributed in
cash, qualified and non-qualified allocated patronage equities, securities of
this Cooperative, other securities, or any combination thereof designated by the
Board and other equity may be distributed to members or patrons in the form of
allocated non-patronage equity. All such equity is referred to collectively
herein as "Patronage Equities", including, without limitation, the following:
(i) ALLOCATED PATRONAGE EQUITY, which may be in one or
more than one class or series, in such designations or
denominations, and with such relative rights, preferences,
privileges and limitations as may be fixed by the Board, with no
maturity date, and bearing no interest, dividend or other annual
payment.
(ii) ALLOCATED NONPATRONAGE EQUITY, which may be in one
or more than one class or series, in such designations or
denominations, and with such relative rights, preferences,
privileges and limitations as may be fixed by the Board, with no
maturity date, and bearing no interest, dividend or other annual
payment. Allocated Nonpatronage Equity may be distributed to patrons
as part of the allocation and distribution of nonpatronage income.
Such certificates shall be callable for payment in cash or other
assets at such times as may be determined by the Board.
(c) WRITTEN NOTICES OF ALLOCATION. The non-cash portion of a
patronage refund distribution that is attributable to patronage business shall
constitute a written notice of allocation as defined in 26 U.S.C. Section 1388
which shall be designated by the Board as a qualified written notice of
allocation, as a non-qualified written notice of allocation, or any combination
thereof, as provided in such section.
(d) NO VOTING RIGHTS. Patronage Equities shall not entitle the
holders thereof to any voting or other rights to participate in the affairs of
this Cooperative (which rights are reserved solely for the members of this
Cooperative), provided that certain Patronage Equities held by members of this
Cooperative may be a factor in determining the voting power of such members as
more particularly provided in these Bylaws and by the Board.
(e) TRANSFER RESTRICTION. Patronage Equities may only be transferred
with the consent and approval of the Board, and by such instrument of transfer
as may be required or approved by this Cooperative.
(f) BOARD AUTHORITY TO ALLOW CONVERSION. The Board also shall have
the authority to allow conversion of Patronage Equities into Equity
Participation Units, or such other equity interests and/or debt instruments of
this Cooperative on such terms as shall be established by the Board.
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(g) REDEMPTION DISCRETIONARY. No person shall have any right
whatsoever to require the retirement or redemption of any Patronage Equities, or
of any allocated or unallocated Capital Reserve. Such redemption or retirement
is solely within the discretion and on such terms as determined from time to
time by the Board.
SECTION 8.8 CAPITAL RESERVE. The Board shall cause to be created a
Capital Reserve and shall annually add to the Capital Reserve the sum of the
following amounts:
(a) The annual net income of this Cooperative attributable to
nonpatronage business;
(b) Annual net income from patrons who are unidentified or to whom
the amount otherwise to be distributed is less than the DE MINIMUS amount
provided in Section 8.7(a); and
(c) As determined by the Board on a prospective basis only, an
amount not to exceed 10% of the distributable net income from patronage
business. The discretion to credit patronage income to a Capital Reserve shall
be reduced or eliminated with respect to the net income of any period following
the adoption of a Board resolution that irrevocably provides for such reduction
or elimination with respect to such period.
SECTION 8.9 PER UNIT RETENTIONS. The Board may require from time to
time, capital contributions in addition to the capital contributed from retained
patronage and Equity Participation Units. These capital contributions shall be
made directly through a retain on a per unit basis for the products received by
this Cooperative from its members, and the same may be determined on either a
qualified or a nonqualified basis as defined in Subchapter T of the United
States Internal Revenue Code.
SECTION 8.10 BASE CAPITAL PLAN. For the purposes of acquiring and
maintaining adequate capital to finance the business of this Cooperative, the
Board may establish a Base Capital Plan. The Plan may provide a mechanism for
determining this Cooperative's total capital requirements and each member's or
patron's share thereof (the base capital requirement). As part of the Plan, the
Board may, in its discretion, provide for redemption of capital held by members
or patrons in excess of their base capital requirements and may provide a
mechanism under which the cash portion of the patronage refund payable to
members or patrons will depend upon the degree to which such members or patrons
meet their base capital requirements. Such Plan may be amended or modified from
time to time or suspended by the Board as it deems fit.
ARTICLE IX
CONSENT
SECTION 9.1 CONSENT. Each individual or entity that hereafter
applies for and is accepted to membership in this Cooperative and each member as
of the effective date of this Bylaw who continues as a member after such date
shall, by such act alone, consent that the amount of any
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distributions with respect to its patronage which are made in qualified written
notices of allocation (as defined in 26 U.S.C. ss. 1388), and which are received
by the member from this Cooperative, will be taken into account by the member at
their stated dollar amounts in the manner provided in 26 U.S.C. ss.1385(a) in
the taxable year in which such qualified written notices of allocation are
received by the member.
SECTION 9.2 CONSENT NOTIFICATION TO MEMBERS AND PROSPECTIVE MEMBERS.
Written notification of the adoption of this Bylaw, a statement of its
significance and a copy of the provision shall be given separately to each
member and prospective member before becoming a member of this Cooperative.
SECTION 9.3 CONSENT OF NONMEMBER PATRONS. If this Cooperative
obligates itself to do business with a nonmember on a patronage basis, such
nonmember must either: (a) agree in writing, prior to any transaction to be
conducted on a patronage basis, that the amount of any distributions with
respect to patronage which are made in written notices of allocation (as defined
in 26 U.S.C. ss. 1388), and which are received by the nonmember patron from this
Cooperative, will be taken into account by the nonmember patron at their stated
dollar amounts in the manner provided in 26 U.S.C. ss.1385(a) in the taxable
year in which such written notices of allocation are received by the nonmember
patron and further, that any revocation of such agreement will terminate this
Cooperative's obligation to distribute patronage with respect to transactions
with such nonmember that occur after the close of this Cooperative's fiscal year
in which the revocation is received; or (b) consent to take the stated dollar
amount of any written notice of allocation into account in the manner provided
in 26 U.S.C. ss. 1385 by endorsing and cashing a qualified check as defined in
and within the time provided in 26 U.S.C. ss.1388(c)(2)(C); provided that
failure to so consent shall cause the written notice of allocation that
accompanies said check to be canceled with no further action on the part of this
Cooperative.
ARTICLE X
MERGER OR CONSOLIDATION, AND DISSOLUTION
SECTION 10.1 MERGER OR CONSOLIDATION. If the terms of a merger or
consolidation of which this Cooperative is a party do not provide the members
and nonmember patrons of this Cooperative with an economic interest in the
surviving entity that is substantially similar to the economic interest
possessed by such members and nonmember patrons in this Cooperative immediately
before such merger or consolidation, the value of the consideration received
shall be divided among them in the same manner as a comparable amount of net
liquidation proceeds would be distributed pursuant to Section 10.2. This shall
not be construed to prevent issuance of differing forms of consideration to
different groups of members and nonmember patrons to the extent allowed by law.
SECTION 10.2 LIQUIDATION, DISSOLUTION AND WINDING-UP. Subject to the
Articles, in the event of any liquidation, dissolution or winding up of the
affairs of this Cooperative, whether
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voluntary or involuntary, equity capital shall be distributed to the holders
thereof as follows: first to payment of the liquidation preference on any
preferred stock of this Cooperative, second to payment of the face amount (par
value) of all Equity Participation Units; third to payment of the face amount
(par value) of all Allocated Patronage Equity and other outstanding equities
(other than Allocated Nonpatronage Equity); and fourth to payment of the face
amount (par value) of Allocated Nonpatronage Equity; provided, however, that,
following payment in full of the liquidation preference on any preferred stock
of this Cooperative, assets held at such time by any Defined Business Unit shall
first be used to redeem the Equity Participation Units of the Defined Business
Unit on a pro rata basis. Any assets remaining after the foregoing payments have
been made shall be allocated among the allocation units in such manner as the
Board, having taken into consideration the origin of such amounts, shall
determine to be reasonable and equitable. Amounts so allocated shall be paid to
current and former patrons of each such allocation unit in proportion to their
patronage of such unit over such period as may be determined to be equitable and
practicable by the Board. Such obligation to distribute shall be construed as a
preexisting duty to distribute any patronage sourced net gain realized in the
winding up process to the maximum extent allowable by law.
ARTICLE XI
GENERAL PROVISION
SECTION 11.1 SEAL. The Board may, by resolution, adopt, alter or
abandon the use of a corporate seal.
SECTION 11.2 AMENDMENTS. Except as otherwise provided herein, these
Bylaws may be amended or altered, in whole or in part, as provided by law, at
any regular or special meeting of the members, when such action has been duly
announced in the notice of such meeting, provided that a majority of the votes
cast by the members entitled to vote and voting, including mail ballots, if
applicable, shall approve such amendment or alteration.
# # #
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EXHIBIT B-1
STRUCTURE B/STEP ONE
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Plan") is dated as of ________
__, 2000, and is by and between CENEX HARVEST STATES COOPERATIVES ("CHSC") and
UCB ACQUISITION CO. ("UCB Acquisition"), each of which may be referred to herein
as a "Constituent Cooperative," and both of which may be collectively referred
to herein as the "Constituent Cooperatives".
RECITALS
WHEREAS, CHSC is a cooperative association organized under Chapter 308A
of the Minnesota Statutes (as amended, the "Minnesota Act"), and UCB Acquisition
is a cooperative association organized under Chapter 29 of Title 17 of the Ohio
Revised Code (as amended, the "Ohio Act"); and
WHEREAS, CHSC is the sole member of UCB Acquisition; and
WHEREAS, the respective Boards of Directors of CHSC and UCB Acquisition
and the respective members of CHSC and UCB Acquisition have approved and adopted
this Plan and the transactions contemplated hereby in the manner required by
Section 308A.801 of the Minnesota Act and Sections 1729.35 and 1729.36 of the
Ohio Act, and in the manner required by their respective Articles of
Incorporation and Bylaws;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements of the parties contained herein, the parties hereto
agree as follows:
AGREEMENT
SECTION 1. THE MERGER. As of the Effective Time (as defined in Section
8), CHSC and UCB Acquisition shall combine through merger (the "Merger"), in
accordance with the applicable provisions of the Minnesota Act and the Ohio Act.
UCB Acquisition, whose Articles of Incorporation and Bylaws each shall be
amended and restated in their entirety as further provided herein, and whose
name shall change to United Country Brands, Inc. ("UCB"), shall be the surviving
cooperative association.
UCB shall continue to exist by virtue of, and shall continue to be
governed by, the Ohio Act. The separate existence of CHSC shall cease as of the
Effective Time.
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SECTION 2. ARTICLES OF MERGER AND CERTIFICATE OF MERGER.
(a) THE ARTICLES OF MERGER. On or before the Effective
Time, CHSC and UCB Acquisition each shall execute
articles of merger (the "Articles of Merger") setting
forth the information required by and otherwise in
compliance with Section 308A.801 of the Minnesota
Act. The Articles of Merger shall be filed with the
Secretary of State of the State of Minnesota or as
otherwise required by the Minnesota Act, and shall
provide that the Merger shall become effective at the
Effective Time.
(b) THE CERTIFICATE OF MERGER. On or before the Effective
Time, CHSC and UCB Acquisition each shall execute a
certificate of merger (the "Certificate of Merger")
setting forth the information required by and
otherwise in compliance with Section 1729.38 of the
Ohio Act. The Certificate of Merger shall be filed
with the Secretary of State of the State of Ohio or
as otherwise required by the Ohio Act, and shall
provide that the Merger shall become effective at the
Effective Time.
SECTION 3. EFFECT OF THE MERGER. From and after the Effective Time,
without any further action by the Constituent Cooperatives or any of their
respective members or equity holders:
(a) UCB, as the surviving cooperative association in the
Merger, shall have all of the rights, privileges,
immunities, and powers, and shall be subject to all
the duties and liabilities, of a cooperative
association organized under the Ohio Act;
(b) UCB, as the surviving cooperative association in the
Merger, shall possess all of the rights, privileges,
immunities, and franchises, of a public as well as a
private nature, of each Constituent Cooperative;
(c) all property, including real, personal, and mixed,
and all debts due on whatever account, including all
choses in action, and each and every other interest
of or belonging to or due to each Constituent
Cooperative, shall be deemed to be and hereby is
vested in UCB, without further act or deed;
(d) the title to any property, or any interest therein,
vested in either Constituent Cooperative, shall not
revert or be in any way impaired by reason of the
Merger;
(e) UCB shall be responsible and liable for all of the
liabilities and obligations of each Constituent
Cooperative, and any claim existing or action or
proceeding pending by or against one of the
Constituent Cooperatives may be prosecuted as if the
Merger had not taken place, and UCB may be
substituted in its place;
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(f) without the creditor's consent, neither the rights of
any creditor nor any liens upon the property of
either of the Constituent Cooperatives shall be
impaired by the Merger;
(g) the Merger shall not be considered an assignment; and
(h) the Merger shall have any other effect set forth in
the Ohio Act, and in the Transaction Agreement dated
September, 1999, by and between CHSC, Farmland
Industries, Inc. ("Farmland"), and UCB Acquisition
(the "Transaction Agreement"), all with the effect
and to the extent provided in the applicable
provisions of the Minnesota Act and the Ohio Act.
SECTION 4. ARTICLES OF INCORPORATION AND BYLAWS.
(a) THE SURVIVING ENTITY ARTICLES. From and after the
Effective Time, pursuant to the Certificate of Merger
and the Articles of Merger, and without any further
action by the Constituent Cooperatives or any of
their respective members or equity holders, the
Articles of Incorporation of UCB Acquisition, as the
surviving cooperative association in the Merger,
shall be amended and restated in their entirety to
read as set forth in SCHEDULE I attached to this Plan
and made a part of it (the "Surviving Entity
Articles"). A copy of the Surviving Entity Articles
was provided to the respective members of each
Constituent Cooperative in connection with their
consideration of the Merger.
(b) THE SURVIVING ENTITY BYLAWS. From and after the
Effective Time, without any further action by the
Constituent Cooperatives or any of their respective
members or equity holders, the Bylaws of UCB
Acquisition, as the surviving cooperative
association in the Merger, shall be amended and
restated in their entirety to read as set forth in
EXHIBIT B-2, which is attached to the Transaction
Agreement and made a part of both the Transaction
Agreement and this Plan (the "Surviving Entity
Bylaws"). A copy of the Surviving Entity Bylaws was
provided to the respective members of each
Constituent Cooperative in connection with their
consideration of the Merger.
SECTION 5. BOARD OF DIRECTORS. From and after the Effective Time,
without any further action by the Constituent Cooperatives or any of their
respective members or equity holders:
(a) each person serving as a director of CHSC immediately
prior to the Effective Time shall become a director
of UCB, as the surviving cooperative association in
the Merger, to serve in accordance with the Surviving
Entity Bylaws; and
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<PAGE>
(b) each person serving as a director of UCB Acquisition
immediately prior to the Effective Time shall be
removed, and shall no longer serve as a director of
UCB after the Effective Time.
SECTION 6. EXCHANGE, REDESIGNATION, CONVERSION, AND CONTINUATION OF
CAPITAL STOCK, NON-STOCK EQUITY INTERESTS, PATRONS' EQUITIES, AND MEMBERSHIPS.
As of the Effective Time, the manner and basis of exchanging and continuing the
shares of capital stock, non-stock equity interests, patronage equity interests
(including all entitlements to patronage refunds), any other allocated equity
interests, and unallocated and capital reserves of CHSC and of UCB (all such
interests referred to herein as "CHSC Equity Interests" or "UCB Equity
Interests," respectively), and membership interests in CHSC and UCB, shall be as
set forth in this Section 6:
(a) CONTINUATION OF CHSC MEMBERSHIPS. As of the Effective
Time, without any further action by the Constituent
Cooperatives or any of their respective members or
equity holders, each member of CHSC shall become and
be a member of UCB, to the extent such member is
eligible for membership under the Surviving Entity
Articles and the Surviving Entity Bylaws, in such
class and with such incidents of membership as are
set forth in the Surviving Entity Articles and the
Surviving Entity Bylaws.
However, notwithstanding the foregoing provisions,
any membership interest which Farmland has in CHSC
shall be terminated as of the Effective Time, without
any further action by the Constituent Cooperatives or
any of their respective members or equity holders.
(b) TERMINATION OF THE CHSC MEMBERSHIP AND EQUITY
INTERESTS IN UCB ACQUISITION. As of the Effective
Time, without any further action by the Constituent
Cooperatives or any of their respective members or
equity holders, the membership of CHSC in UCB
Acquisition shall be terminated, and all of CHSC's
equity interests in UCB Acquisition shall be
terminated, canceled, and extinguished.
(c) EXCHANGE AND CONTINUATION OF CHSC EQUITY INTERESTS.
As of the Effective Time, without any further action
by the Constituent Cooperatives or any of their
respective members or equity holders, all Equity
Interests standing on the books of CHSC immediately
prior to the Effective Time shall be converted into
Equity Interests in UCB at their stated dollar amount
on a dollar-for-dollar basis, or redeemed and
canceled, as follows:
(i) Equity Participation Units. Each Equity
Participation Unit of CHSC issued and
outstanding or otherwise standing on the
books of CHSC immediately prior to the
Effective Time, including without limitation
all Wheat Milling EPUs and all Oilseed
Processing & Refining EPUs,
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<PAGE>
shall be redeemed and canceled in a manner
consistent with the terms and conditions of
the original issuance.
(ii) Patronage Equity Interests. All patronage
certificates and any other allocated or to
be allocated patronage equity interests
(including all entitlements to patronage
refunds) standing on the books of CHSC
immediately prior to the Effective Time,
including without limitation all Capital
Equity Certificates, Certificates of
Indebtedness, and Preferred Capital
Certificates, shall be exchanged for like
and equal patronage certificates, allocated
or to be allocated patronage equity
interests, entitlements to patronage
refunds, allocated patronage equity, or
other like and equal patronage equity
interests on the books of UCB, at the same
stated dollar amount and on a
dollar-for-dollar basis, and in such
denominations or other designations or
series so as to preserve the year of issue
(as UCB deems necessary), along with all of
the other terms and conditions of the
original issuance.
(iii) Nonpatronage Equity Interests. All
nonpatronage certificates and any other
allocated or to be allocated nonpatronage
equity interests (including all entitlements
to nonpatronage refunds) standing on the
books of CHSC immediately prior to the
Effective Time shall be exchanged for like
and equal nonpatronage certificates,
allocated or to be allocated nonpatronage
equity interests, entitlements to
nonpatronage refunds, allocated nonpatronage
equity, or other like and equal nonpatronage
equity interests on the books of UCB, at the
same stated dollar amount and on a
dollar-for-dollar basis, and in such
denominations or other designations or
series so as to preserve the year of issue
(as UCB deems necessary), along with all of
the other terms and conditions of the
original issuance.
(iv) Patronage Payable and Capital Reserve. An
amount equal to the unallocated capital
reserves of CHSC, minus an amount equal to
the deferred patronage equity of CHSC (as
computed from the books and records of CHSC
as of the Effective Time, in accordance with
generally accepted accounting principles,
consistently applied), and minus $100
million, shall be allocated and distributed
to the CHSC members (in such manner and to
such members as the CHSC Board of Directors
shall specify prior to the Effective Time)
in the form of allocated nonpatronage equity
of UCB.
(v) Net Effect. The net effect of the conversion
of CHSC Equity Interests for like and equal
Equity Interests in UCB shall be that the
holders of CHSC Equity Interests standing on
the books of CHSC immediately prior to the
Effective Time shall receive from UCB and
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<PAGE>
will have like and equal Equity Interests in
UCB immediately following the Effective Time
in terms of stated dollar amount on a
dollar-for-dollar basis, year of issue (as
UCB deems necessary), and other rights and
preferences, and that the patronage payable,
capital reserve, and other allocated or
unallocated Equity Interests of CHSC
standing on its books immediately prior to
the Effective Time shall be exchanged for
the same identical and equal Equity Interest
in UCB immediately following the Effective
Time, in terms of the stated dollar amount
on a dollar-for- dollar basis, year of issue
(if applicable and as UCB deems necessary),
and other rights and preferences.
Notwithstanding the foregoing provisions,
any CHSC Equity Interests that are held by
Farmland shall be canceled and extinguished
as of the Effective Time, without any
further action by the Constituent
Cooperatives or any of their respective
members or equity holders.
(d) SURVIVING ENTITY ARTICLES AND SURVIVING ENTITY BYLAWS
TO GOVERN. Membership in UCB and all Equity Interests
in UCB issued or credited in exchange for CHSC Equity
Interests, as described above, shall in all instances
be governed by the provisions of the Surviving Entity
Articles and the Surviving Entity Bylaws.
(e) FURTHER ASSURANCES OF HOLDERS OF EQUITY INTERESTS.
Each holder of CHSC Equity Interests shall take such
action or cause to be taken such action as UCB may
reasonably deem necessary or appropriate to effect
the exchange and continuation of the CHSC Equity
Interests described in this Plan, including without
limitation the indorsement and delivery of any stock
certificates or other evidences of equity being
exchanged or continued under this Plan.
(f) NO AFFECTED STOCKHOLDERS. CHSC and UCB Acquisition
agree that the Merger does not involve any "Affected
Stockholders," as defined in Section 1729.35 of the
Ohio Act.
SECTION 7. FURTHER ASSURANCES. From time to time and after the
Effective Time, as and when requested by UCB, or its successors or assigns, CHSC
shall execute and deliver or cause to be executed and delivered all such deeds
and other instruments, and shall take or cause to be taken all such further
action or actions, as UCB, or its successors or assigns, may deem necessary or
desirable in order to vest in and confirm to UCB, or its successors or assigns,
title to and possession of all of the properties, rights, privileges, powers,
and franchises referred to in Section 3 of this Plan, and otherwise to carry out
the intent and purposes of this Plan.
If UCB shall at any time deem that any further assignments or assurances or any
other acts are necessary or desirable to vest, perfect, or confirm of record or
otherwise the title to any property or
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<PAGE>
to enforce any claims of CHSC vested in UCB pursuant to this Plan, the officers
of UCB, or its successors or assigns, are hereby specifically authorized as
attorneys-in-fact of CHSC (which appointment is irrevocable and coupled with an
interest), to execute and deliver any and all such deeds, assignments, and
assurances and to do all such other acts in the name of and on behalf of CHSC,
or otherwise, as such officer shall deem necessary or appropriate to accomplish
such purpose.
SECTION 8. EFFECTIVE TIME. The Merger shall become effective at 12:01
a.m. Central Time on March 1, 2000 (the "Effective Time").
SECTION 9. GOVERNING LAW. This Plan shall be governed by and construed
in accordance with the laws of the States of Minnesota and Ohio.
SECTION 10. ABANDONMENT. In accordance with the Ohio Act and the
Minnesota Act, the Merger may be abandoned at any time before the Effective
Time, in the manner described in the Transaction Agreement.
SECTION 11. AMENDMENT. Subject to any requirement or limitation imposed
by law, this Plan may be amended in the manner described in the Transaction
Agreement.
IN WITNESS WHEREOF, this Plan has been agreed to and executed by the
duly authorized representatives of CHSC and UCB Acquisition, as of the date
first set forth above.
CENEX HARVEST STATES UCB ACQUISITION CO.
COOPERATIVES
By By
--------------------------------- --------------------------------------
Its Its
-------------------------------- -------------------------------------
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<PAGE>
SCHEDULE I
TO
EXHIBIT B-1
Please refer to Exhibit A-1, Schedule I
<PAGE>
STRUCTURE B/STEP TWO
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Plan") is dated as of ________
__, 2000, and is by and between FARMLAND INDUSTRIES, INC. ("Farmland") and UCB
ACQUISITION CO. ("UCB Aquisition"), each of which may be referred to herein as a
"Constituent Cooperative," and both of which may be collectively referred to
herein as the "Constituent Cooperatives".
RECITALS
WHEREAS, Farmland is a cooperative corporation organized under Article
16 of Chapter 17 of the Kansas Statutes (as amended, the "Kansas Act"), and UCB
Acquisition is a cooperative association organized under Chapter 29 of Title 17
of the Ohio Revised Code (as amended, the "Ohio Act"); and
WHEREAS, Cenex Harvest States Cooperatives ("CHSC") is the sole member
of UCB Acquisition; and
WHEREAS, the respective Boards of Directors of Farmland and UCB
Acquisition and the respective members of Farmland and UCB Acquisition have
approved and adopted this Plan and the transactions contemplated hereby in the
manner required by Sections 17-1637 and 17-1638 of the Kansas Act and Sections
1729.35 and 1729.36 of the Ohio Act, and in the manner required by their
respective Articles of Incorporation and Bylaws;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements of the parties contained herein, the parties hereto
agree as follows:
AGREEMENT
SECTION 1. THE MERGER. At the Effective Time (as defined in Section 8),
Farmland and UCB Acquisition shall combine through merger (the "Merger"), in
accordance with the applicable provisions of the Kansas Act and the Ohio Act.
UCB Acquisition, whose Articles of Incorporation and Bylaws each shall be
amended and restated in their entirety as further provided herein, and whose
name shall change to United Country Brands, Inc. ("UCB"), shall be the surviving
cooperative association.
UCB shall continue to exist by virtue of, and shall continue to be
governed by, the Ohio Act. The separate existence of Farmland shall cease as of
the Effective Time.
SECTION 2. ARTICLES OF MERGER AND CERTIFICATE OF MERGER.
<PAGE>
(a) THE ARTICLES OF MERGER. On or before the Effective
Time, Farmland and UCB Acquisition each shall execute
articles of merger (the "Articles of Merger") and/or
a certificate of merger (the "Certificate of Merger")
setting forth the information required by and
otherwise in compliance with Sections 17-1637 and
17-1638 of the Kansas Act. The Articles of Merger
and/or the Certificate of Merger shall be filed with
the Secretary of State of the State of Kansas or as
otherwise required by the Kansas Act, and shall
provide that the Merger shall become effective at the
Effective Time.
(b) THE CERTIFICATE OF MERGER. On or before the Effective
Time, Farmland and UCB Acquisition each shall execute
a certificate of merger (the "Certificate of Merger")
setting forth the information required by and
otherwise in compliance with Section 1729.38 of the
Ohio Act. The Certificate of Merger shall be filed
with the Secretary of State of the State of Ohio or
as otherwise required by the Ohio Act, and shall
provide that the Merger shall become effective at the
Effective Time.
SECTION 3. EFFECT OF THE MERGER. From and after the Effective Time,
without any further action by the Constituent Cooperatives or any of their
respective members or equity holders:
(a) UCB, as the surviving cooperative association in the
Merger, shall have all of the rights, privileges,
immunities, and powers, and shall be subject to all
the duties and liabilities, of a cooperative
association organized under the Ohio Act;
(b) UCB, as the surviving cooperative association in the
Merger, shall possess all of the rights, privileges,
immunities, and franchises, of a public as well as a
private nature, of each Constituent Cooperative;
(c) all property, including real, personal, and mixed,
and all debts due on whatever account, including all
choses in action, and each and every other interest
of or belonging to or due to each Constituent
Cooperative, shall be deemed to be and hereby is
vested in UCB, without further act or deed;
(d) the title to any property, or any interest therein,
vested in either Constituent Cooperative, shall not
revert or be in any way impaired by reason of the
Merger;
(e) UCB shall be responsible and liable for all of the
liabilities and obligations of each Constituent
Cooperative, and any claim existing or action or
proceeding pending by or against one of the
Constituent Cooperatives may be prosecuted as if the
Merger had not taken place, and UCB may be
substituted in its place;
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<PAGE>
(f) without the creditor's consent, neither the rights of
any creditor nor any liens upon the property of
either of the Constituent Cooperatives shall be
impaired by the Merger;
(g) the Merger shall not be considered an assignment; and
(h) the Merger shall have any other effect set forth in
the Ohio Act, and in the Transaction Agreement dated
September, 1999, by and between CHSC, Farmland, and
UCB Acquisition (the "Transaction Agreement"), all
with the effect and to the extent provided in the
applicable provisions of the Kansas Act and the Ohio
Act.
SECTION 4. ARTICLES OF INCORPORATION AND BYLAWS.
(a) THE SURVIVING ENTITY ARTICLES. From and after the
Effective Time, pursuant to the Certificate of Merger
and the Articles of Merger, and without any further
action by the Constituent Cooperatives or any of
their respective members or equity holders, the
Articles of Incorporation of UCB Acquisition, as the
surviving cooperative association in the Merger,
shall be amended and restated in their entirety to
read as set forth in SCHEDULE I, which is attached to
this Plan and made a part of it (the "Surviving
Entity Articles"). A copy of the Surviving Entity
Articles was provided to the respective members of
each Constituent Cooperative in connection with their
consideration of the Merger.
(b) THE SURVIVING ENTITY BYLAWS. From and after the
Effective Time, without any further action by the
Constituent Cooperatives or any of their respective
members or equity holders, the Bylaws of UCB
Acquisition, as the surviving cooperative association
in the Merger, shall be amended and restated in their
entirety to read as set forth in EXHIBIT B-2, which
is attached to the Transaction Agreement and made a
part of both the Transaction Agreement and this Plan
(the "Surviving Entity Bylaws"). A copy of the
Surviving Entity Bylaws was provided to the
respective members of each Constituent Cooperative in
connection with their consideration of the Merger.
SECTION 5. BOARD OF DIRECTORS. From and after the Effective Time,
without any further action by the Constituent Cooperatives or any of their
respective members or equity holders:
(a) each person serving as a director of Farmland
immediately prior to the Effective Time shall become
a director of UCB, as the surviving cooperative
association in the Merger, to serve in accordance
with the Surviving Entity Bylaws; and
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<PAGE>
(b) each person serving as a director of UCB immediately
prior to the Effective Time shall remain a director
of UCB, as the surviving cooperative association in
the Merger, to serve in accordance with the Surviving
Entity Bylaws.
SECTION 6. EXCHANGE, REDESIGNATION, CONVERSION, AND CONTINUATION OF
CAPITAL STOCK, NON-STOCK EQUITY INTERESTS, PATRONS' EQUITIES, AND MEMBERSHIPS.
On the Effective Time, the manner and basis of exchanging and continuing the
shares of capital stock, non-stock equity interests, patronage equity interests
(including all entitlements to patronage refunds), any other allocated equity
interests, and unallocated and capital reserves of Farmland (all such interests
referred to herein as "Farmland Equity Interests"), and membership interests in
Farmland and UCB, for like and equal Equity Interests and membership interests
in UCB, shall be as set forth in this Section 6:
(a) CONTINUATION OF FARMLAND MEMBERSHIPS. As of the
Effective Time, without any further action by the
Constituent Cooperatives or any of their respective
members or equity holders, each member of Farmland
shall become and be a member of UCB, to the extent
such member is eligible for membership under the
Surviving Entity Articles and the Surviving Entity
Bylaws, in such class and with such incidents of
membership as are set forth in the Surviving Entity
Articles and the Surviving Entity Bylaws.
However, notwithstanding the foregoing provisions,
any membership which UCB Acquisition has in Farmland
shall be terminated as of the Effective Time, without
any further action by the Constituent Cooperatives or
any of their respective members or equity holders.
(b) TERMINATION OF THE FARMLAND MEMBERSHIP IN UCB. As of
the Effective Time, without any further action by the
Constituent Cooperatives or any of their respective
members or equity holders, any membership interest
which Farmland has in UCB shall be terminated.
(c) EXCHANGE AND CONTINUATION OF FARMLAND EQUITY
INTERESTS. As of the Effective Time, without any
further action by the Constituent Cooperatives or any
of their respective members or equity holders, all
Equity Interests standing on the books of Farmland
immediately prior to the Effective Time shall be
converted into Equity Interests in UCB at their
stated dollar amount on a dollar-for-dollar basis, as
follows:
(i) Common Stock and Associate Member Common
Stock. Each share of common stock and
associate member common stock of Farmland
issued and outstanding or otherwise standing
on the books of Farmland immediately prior
to the Effective Time shall be exchanged for
allocated patronage equity or allocated
nonpatronage equity of UCB in a face amount
of $25.00, and in such designations or
series
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<PAGE>
so as to preserve the year of issue (as UCB
deems necessary) and other terms and
conditions of the original issuance.
(ii) Patronage Equity Interests. All capital
credits, patronage refunds, and any other
allocated or to be allocated equity
interests (including all entitlements to
patronage refunds) as of the Effective Time
which are not included in clause (i) above
shall be exchanged for allocated patronage
equity or allocated nonpatronage equity of
UCB in a face amount equal to such capital
credits, patronage refunds, allocated or to
be allocated equity interests, entitlements
to patronage refunds, or other equity
interests in such denominations or other
designations or series so as to preserve the
year of issue (as UCB deems necessary) and
other terms and conditions of the original
issuance.
(iii) SF Services Warrants. The outstanding
Warrants for Equity Interests of Farmland
issued in the acquisition of SF Services,
Inc. shall, from and after the Effective
Time, represent warrants to convert into UCB
allocated patronage equity or allocated
nonpatronage equity in the same face amount
as the Warrants could have been converted
into face amount Farmland Equity Interests.
(iv) Unallocated Surplus. There shall be
allocated to the Farmland members (in such
manner and to such members as the Farmland
Board of Directors shall specify prior to
the Effective Time) an amount equal to the
amount by which Farmland's earned surplus
account (as computed from the books and
records of Farmland as of the Effective
Time, in accordance with generally accepted
accounting principles, consistently applied)
exceeds $100 million, and UCB allocated
nonpatronage equity shall be so issued to
such Farmland members as of the Effective
Time; provided, however, that the UCB
allocated nonpatronage equity issued
hereunder shall be registered in the name of
UCB to be held by it in escrow and disposed
of as provided in the Capital Plan of UCB.
(v) Preferred Stock. Each share of 8% Series A
Cumulative Redeemable Preferred Stock of
Farmland issued and outstanding or otherwise
standing on the books of Farmland
immediately prior to the Effective Time
shall be converted into one share of 8%
Series A Cumulative Redeemable Preferred
Stock of UCB.
(vi) Net Effect. The net effect of the conversion
of Farmland Equity Interests for like and
equal Equity Interests in UCB shall be that
the holders of Farmland Equity Interests
standing on the books of Farmland
immediately prior to the Effective Time
shall hold and will
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<PAGE>
have equal Equity Interests in UCB
immediately following the Effective Time, in
terms of stated dollar amount on a
dollar-for-dollar basis, year of issue (as
determined necessary), and any other rights
and preferences.
Notwithstanding the foregoing provisions,
any Farmland Equity Interests that are held
by UCB Acquisition shall be canceled and
extinguished as of the Effective Time,
without any further action by the
Constituent Cooperatives or any of their
respective members or equity holders.
(d) SURVIVING ENTITY ARTICLES AND SURVIVING ENTITY BYLAWS
TO GOVERN. Membership in UCB and all Equity Interests
in UCB issued or credited in exchange for Farmland
Equity Interests, as described above, shall in all
instances be governed by the provisions of the
Surviving Entity Articles and the Surviving Entity
Bylaws.
(e) FURTHER ASSURANCES OF HOLDERS OF EQUITY INTERESTS.
Each holder of Farmland Equity Interests shall take
such action or cause to be taken such action as UCB
may reasonably deem necessary or appropriate to
effect the exchange and continuation of the Farmland
Equity Interests described in this Plan, including
without limitation the indorsement and delivery of
any stock certificates or other evidences of equity
being exchanged or continued under this Plan.
(f) NO AFFECTED STOCKHOLDERS. Farmland and UCB
Acquisition agree that the Merger does not involve
any "Affected Stockholders," as defined in Section
1729.35 of the Ohio Act.
SECTION 7. FURTHER ASSURANCES. From time to time and after the
Effective Time, as and when requested by UCB, or its successors or assigns,
Farmland shall execute and deliver or cause to be executed and delivered all
such deeds and other instruments, and shall take or cause to be taken all such
further action or actions, as UCB, or its successors or assigns, may deem
necessary or desirable in order to vest in and confirm to UCB, or its successors
or assigns, title to and possession of all of the properties, rights,
privileges, powers, and franchises referred to in Section 3 of this Plan, and
otherwise to carry out the intent and purposes of this Plan.
If UCB shall at any time deem that any further assignments or assurances or any
other acts are necessary or desirable to vest, perfect, or confirm of record or
otherwise the title to any property or to enforce any claims of Farmland vested
in UCB pursuant to this Plan, the officers of UCB, or its successors or assigns,
are hereby specifically authorized as attorneys-in-fact of Farmland (which
appointment is irrevocable and coupled with an interest), to execute and deliver
any and all such deeds, assignments, and assurances and to do all such other
acts in the name of and on behalf of
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<PAGE>
Farmland, or otherwise, as such officer shall deem necessary or appropriate to
accomplish such purpose.
SECTION 8. EFFECTIVE TIME. The Merger shall become effective at 12:02
a.m. Central Time on March 1, 2000 (the "Effective Time").
SECTION 9. GOVERNING LAW. This Plan shall be governed by and construed
in accordance with the laws of the States of Kansas and Ohio.
SECTION 10. ABANDONMENT. In accordance with the Kansas Act and the Ohio
Act, the Merger may be abandoned at any time before the Effective Time, in the
manner described in the Transaction Agreement.
SECTION 11. AMENDMENT. Subject to any requirement or limitation imposed
by law, this Plan may be amended in the manner described in the Transaction
Agreement.
IN WITNESS WHEREOF, this Plan has been agreed to and executed by the
duly authorized representatives of Farmland and UCB Acquisition, as of the date
first set forth above.
FARMLAND INDUSTRIES, INC. UCB ACQUISITION CO.
By By
--------------------------------- --------------------------------------
Its Its
-------------------------------- -------------------------------------
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<PAGE>
SCHEDULE I
TO
EXHIBIT B-1
Please refer to Exhibit A-1, Schedule I
<PAGE>
EXHIBIT B-2
Please refer to Exhibit A-2
Surviving Entity Bylaws
<PAGE>
EXHIBIT C
[FLOW CHART]
BOARD OF
DIRECTORS
OFFICE LEADERSHIP
CEO PRESIDENT
ASSISTANTS ASSISTANT
SENIOR MANAGEMENT
B B B A A A A
FINANCE COMMUNICATION ENERGY FARM MKTG GRAIN BASED MEMBER BUSINESS
& SUPPLY FOODS SERVICES DEVELOPMENT
B B B A A A
LEGAL AGRONOMY STRATEGIC ALIGNED REF. FOODS SUPPORT
PLANNING GRAIN LIVESTOCK SERVICES
ALL SENIOR MANAGEMENT REPORTS TO OFFICE OF LEADERSHIP
A AND B DENOTES PRIMARY CONTACT IN OFFICE OF LEADERSHIP
A = PRESIDENT
B = CHIEF EXECUTIVE OFFICER
<PAGE>
EXHIBIT D
CAPITAL PLAN
I. Key Principles Underlying the Capital Plan.
1) The total capital required by the Company will be dependent
upon the assets required to be owned to accomplish its mission
as well as the cost and availability of debt.
2) Each base capital pool will have a target level of base
capital.
3) Members of the Company will be required to provide capital
based upon relative use of the capitalization unit and the
respective target levels of base capital.
4) Retention of earnings will be a source of capital. The
percentage of earnings to be paid in cash patronage from a
patronage pool will increase as a member's capital increases
relative to the base capital requirement.
5) If a member has capital levels in excess of base capital
requirements, the excess amount will be subject to retirement
on a basis to be determined by the Board of Directors.
6) Patronage-sourced earnings will be allocated on a patronage
basis provided that the Board will have the authority to
designate a portion of patronage-sourced earnings as
unallocated surplus to build a reserve to absorb losses.
7) Earnings from non-patronage sourced business will generally be
used to build unallocated surplus.
8) The concept of Equity Participation Units developed by Harvest
States will be retained.
9) Minimum capital requirements will be $1,000 for individual
members and $10,000 for member cooperatives, with all existing
members to be grandfathered under existing minimum capital
requirements. New members meet minimum capital requirements
through patronage earnings.
II. Terra Tax Case.
A. Key Terra Principles
1) No owner equities will be adversely impacted in a
consolidated setting as compared to stand alone. In
the event, however, that there is an adverse impact,
it is understood that it should be borne by the
former Farmland stockholders (equity holders).
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<PAGE>
2) The Company must maintain a base of permanent equity
to support its operations (i.e. equity which is not
subject to retirement and is not credited to base
capital plan requirements).
3) The outcome of the Terra case will not impact voting
power.
B. Key Terra Agreements
1) Each party will be responsible for $100,000,000 of
permanent equity.
a. As set forth in the Plan of Merger, at the
Effective Time, the Surviving Entity will
allocate and distribute to CHSC members
non-patronage equity interests in the
Surviving Entity in an amount equal to
CHSC's surplus minus CHSC's deferred
patronage as of the Effective Time and minus
$100,000,000. Such non-patronage equity
interests shall not be included for purposes
of voting determinations but shall be
"retirement/base capital eligible equity"
(i.e., included in determining satisfaction
of requirements for base capital and shall
be eligible for redemption under the Capital
Plan).
b. At the Effective Time, the Surviving Entity
will allocate to Farmland members
non-patronage equity interests in the
Surviving Entity in an amount equal to the
excess of the Farmland surplus over
$100,000,000 as of the Effective Time. The
non-patronage equity interests allocated to
Farmland's members shall be distributed to
such members by transfer of such
non-patronage equity interests to the
Surviving Entity to be held in escrow on
behalf of the Farmland members until the
Terra tax case is resolved and is then to be
distributed to Farmland members in
accordance with the provisions set forth
below or canceled. So long as such
non-patronage equity is held in escrow, it
shall not be included for purposes of voting
determinations, shall not be included in
determining satisfaction of requirements for
base capital and shall not be eligible for
redemption under the Capital Plan; however,
once distributed from escrow to Farmland
members, such non-patronage equity shall be
included in determining satisfaction of
requirements for base capital and shall be
eligible for redemption under the Capital
Plan.
2) If Terra is lost:
a. The amount of the Terra loss (which amount
shall be net of the deferred tax asset
created) shall be determined.
b. The amount in 2)a. shall be reduced by an
amount equal to 64.5% of the net
non-patronage income of the Surviving Entity
from the Effective Time.
-2-
<PAGE>
c. The net amount determined in 2)b. above
shall first be allocated to Farmland members
by cancellation of the non-patronage equity
issued under 1)b. above up to such net
amount and if, thereafter, there remains any
non-patronage equity held in escrow under
1)b. above, it shall be distributed from
escrow to the appropriate members and shall
be converted to retirement/base capital
eligible equity.
d. If there is any net loss remaining after
application of 2)c. above (the "Remaining
Adjustment"), then equity in an amount equal
to the Remaining Adjustment received by
Farmland members in the Merger for their
Farmland Equity Interests shall be converted
to permanent equity so that such converted
equity will not be included in determining
satisfaction of requirements for base
capital and will not be eligible for
redemption under the Capital Plan. However,
such equity will continue to be counted for
voting purposes.
e. Permanent equity in 2)d. will be converted
to retirement/base capital eligible equity
at a rate of 64.5% of the total
non-patronage earnings (after application of
all expenses other than interest on
borrowings used to pay the Terra
obligation), less an appropriate interest
charge to reflect the borrowings used to pay
the Terra obligation, less the reduction of
the deferred tax asset associated with the
Terra loss.
f. Debt and other funding actions required to
pay a Terra judgment will be serviced from
non-patronage income deemed attributable to
Farmland assets.
g. Equity balances held by estates will be
retired in full regardless of
classification.
h. An example of the foregoing is appended
hereto as Appendix I.
3) If Terra is won, Farmland members' non-patronage
equity allocated under 1)b. above will be converted
into retirement/base capital eligible equity and
distributed from the escrow.
III. Other Contingent Liabilities.
A. Key Principles. The parties recognize that there will be
liabilities that arise in the future out of facts that existed
at the Effective Time, which liabilities would be required to
be paid by the Surviving Entity. Some of such liabilities
and/or the facts related thereto may not be disclosed pursuant
to the Transaction Agreement, or if disclosed, nevertheless
may not be adequately reserved for in the party's financial
statements.
-3-
<PAGE>
B. Reclassification. Accordingly, in addition to the Terra Tax
case matter, the Surviving Entity shall make reclassifications
of equity as follows: (a) with respect to Farmland Contingent
Losses, the Surviving Entity shall reclassify the equity that
was received in the Transaction in exchange for Farmland
common stock or other Farmland equity, and (b) with respect to
CHSC Contingent Losses, the Surviving Entity shall reclassify
the equity that was retained with respect to CHSC equity or
was received in exchange for CHSC equity in the Transaction.
C. Procedures and Definitions.
1) As used herein, "Farmland Contingent Loss" is a loss
that exceeds $1,000,000.00 incurred by the Surviving
Entity arising out of a matter or group of related
matters relating to liabilities (fixed, contingent or
otherwise, but not including losses relating to the
Terra Tax case) of Farmland, the material facts of
which existed at the Effective Time but were not
included in Farmland's Disclosure Schedule and were
not adequately reserved for in the financial
statements of Farmland as of the Effective Time, or
even if included in such disclosure schedule, were
not adequately reserved for in the financial
statements of Farmland as of the Effective Time, and
a "CHSC Contingent Loss" is a loss that exceeds
$1,000,000.00 incurred by the Surviving Entity
arising out of a matter or group of related matters
relating to liabilities (fixed, contingent or
otherwise) of CHSC, the material facts of which
existed at the Effective Time but were not included
in CHSC's Disclosure Schedule and were not adequately
reserved for in the financial statements of CHSC as
of the Effective Time, or even if included in such
disclosure schedule, were not adequately reserved for
in the financial statements of CHSC as of the
Effective Time; and which in either case come to
light before October 1, 2000 or such earlier time as
the parties agree. For purposes of these definitions:
(i) a loss shall be deemed to have been incurred at
the earlier of the time that (a) it was actually
incurred, or (b) at the time that the party incurring
the loss is required by GAAP to account for the loss
on its books; (ii) whether a liability was
"adequately" reserved for shall be assessed with
reference to the finally-determined amount of the
liability in question; and (iii) the amount of a
Contingent Loss shall be determined net of any actual
reserves.
2) In determining the amount of any loss, there shall be
taken into account the reserves for such loss that
were provided for in the financial statements of (i)
Farmland or of any unconsolidated Subsidiary of
Farmland, in the instance of determining the amount
of any Farmland Contingent Loss, and (ii) CHSC or of
any unconsolidated Subsidiary of CHSC, in the
instance of determining the amount of any CHSC
Contingent Loss. Determinations of the amount of any
loss shall be made by the board of directors of the
Surviving Entity.
3) Such reclassification of equity shall be done by the
Surviving Entity as follows:
-4-
<PAGE>
a. Each party's Contingent Losses shall be
calculated.
b. $20 million shall be deducted from each such
Contingent Loss figure, to arrive at a "Net
Contingent Loss" figure for each party.
c. Reclassification of equity shall be made
with respect to a party only if, and to the
extent that, the aggregate of such party's
Net Contingent Losses exceeds the aggregate
of the other party's Net Contingent Losses.
4) Any such reclassification shall be made in a manner
substantially similar to the procedures for the
reclassification to be made if there is a loss
relating to the Terra Tax case (as set forth in II
above).
5) The provisions of this Part III may be modified upon
the affirmative vote of three-fourths of the full
board of directors of the Surviving Entity.
<PAGE>
APPENDIX I
1. Assume a Terra loss with a required payment of $400 million. The
approximate after-tax charge to equity would be $280 million. A
deferred tax asset of $120 million would be created.
2. If Farmland allocated equity is $550 million and unallocated surplus is
$250 million, the $280 million charge would offset the entire
unallocated account; $30 million would be carried in a deficit account.
3. Of the $550 million in allocated equities, $130 million would be
converted to permanent equity. The remaining $420 million would remain
as retirement/base capital eligible equity.
4. Assume, after the Effective Time, the Surviving Entity has total
non-patronage income (after application of all expenses other than
interest on borrowings used to pay the Terra obligation) of $93
million.
5. Of the $93 million in total non-patronage earnings, approximately $60
million would go into the Farmland pool.
6. Assume the interest expense on the Terra note is $25 million. The net
non-patronage sourced income in the Farmland pool would be $35 million.
7. The $35 million net non-patronage sourced income in the pool will be
sheltered with the NOL. As the NOL is used, the deferred tax asset will
be reduced.
8. The net build-up in the unallocated surplus attributable to the
Farmland pool will be $35 million less the reduction in the deferred
tax asset. This net number will be the amount of permanent equity
converted to retirement/base capital eligible equity.
EXHIBIT 10.36
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of May 1, 1999 by and between Michael
Bergeland (hereinafter "Bergeland") and Cenex Harvest States Cooperatives, a
Minnesota cooperative corporation (together with all affiliates, the "Company").
1. The Employment Clause
The Company hereby agrees to and does hereby employ Bergeland as Executive
Vice President and Bergeland hereby agrees to continue in the employ of the
Company as Executive Vice President for the period set forth in Paragraph 2
below (the period of employment) upon the other terms and conditions set
forth in this Agreement. It is also agreed for the period of this
agreement, Bergeland shall be afforded the same professional privileges
generally afforded Executive Vice Presidents of the Company which include
but are not limited to attendance at meetings, business trips, and
continuation of membership on boards such as the Grain Exchange, United
Harvest and the Company Retirement Plans.
Bergeland shall also be afforded the same consideration for retention
and/or success incentives as other Executive Vice President's of the
Company should such incentives become operative through any merger,
acquisition, or change in control.
2. Period of Employment; Termination of Agreement
The period of employment shall commence on the date of this Agreement and,
subject only to the provisions of Paragraphs 6(b) and 6(c) below, relating,
respectively, to death and disability, shall continue through August 31,
2001, provided that Bergeland's employment may be terminated by either
party on at least thirty (30) days written notice, subject to the rights
and obligations of the parties set forth herein.
3. The Performance Clause
Throughout the period of employment, Bergeland agrees to devote his full
time and attention during normal business hours to the business of the
Company, except for earned vacation and except for illness or incapacity.
4. The Compensation Clause
a. For all services to be rendered by Bergeland in any capacity during
the period of employment, Bergeland shall be paid as annual
compensation a base or fixed salary of $300,000. The President &
General Manager will annually review Bergeland's annual compensation
and determine what is appropriate for a cost of living, merit
increase, and/or increase in responsibilities or duties.
b. Bergeland shall be entitled to receive incentive compensation based on
the Executive Compensation Plan of the Company. It is agreed Bergeland
shall receive the maximum payout as provided in the terms of the
annual variable pay plan of the Company for the years 1999, 2000 and
2001.
<PAGE>
c. During the term of his employment hereunder, Bergeland shall be
entitled to retain the automobile Bergeland presently uses and shall
be covered by all provisions of the automobile policy in effect at the
time of this Agreement.
d. During the term of Bergeland's employment herunder, Bergeland shall be
entitled to those employee benefits separately made available to him
from time to time by the Company in its discretion, including
financial planning, club memberships, executive physicals and
executive disability programs.
e. The Company shall bear such ordinary and necessary business expenses
incurred by Bergeland in performing his duties herunder as the Company
determines from time to time, provided that Bergeland accounts
promptly for such expenses to the Company in the manner prescribed
from time to time by the Company.
5. Termination with Severance Allowance
a) Terms of Severance Allowance and Amount. At the expiration of this
Agreement, Bergeland shall be provided a severance allowance made up
of the following components:
i) Bergeland shall receive a lump sum payment for the Company's
long-term variable pay plan equal to his target payout from that
plan.
ii) Bergeland and the Company are party to the "1997 Supplemental
Executive Retirement Plan (SERP) Agreement" executed by Bergeland
on May 30, 1997 and the Company on May 27, 1997. The schedule of
SERP balance outlined in that agreement shall be accelerated by 5
years and 4 months so that Bergeland is eligible for the maximum
amount provided for pursuant that schedule and shall be eligible
to receive that amount effective September 1, 2001.
iii) Medical, dental, vision and hearing insurance shall be provided
to Bergeland on the same basis as other eligible retirees of the
Company.
iv) Ownership in the equity portion of Bergeland's membership at
Midland Hills Golf Club shall be maintained by Bergeland.
b) Terms and Conditions for Early Severance Allowance and Amount. In the
event of termination of the employment of Bergeland by the Company
during the period of employment for any reason other than for cause,
as defined in (b) below, death or disability, the Company shall pay
Bergeland a severance allowance by continuing Bergeland's base or
fixed salary through August 31, 2001. In addition, Bergeland shall
receive a pro rata benefit from variable pay plans of the employer in
effect at the time this Agreement is effective. Bergeland shall also
receive benefits described in 5(a)(ii-iv) above. Said severance
allowance shall be in lieu of all other severance payable to Bergeland
under Company severance policies. Said severance shall be paid in
semi-monthly installments, subject to normal withholding taxes.
c) Definition of "For Cause". For the purpose of this Agreement,
termination of Bergeland's employment shall be deemed to have been for
cause (and in which case the Company shall have no obligation to
Bergeland whatsoever) only:
2
<PAGE>
i) If termination of Bergeland's employment shall have been the
result of an act or acts of fraud, theft or embezzlement on the
part of Bergeland which, if convicted, would constitute a felony
and which results or which is intended to result directly or
indirectly in gain or personal enrichment of Bergeland at the
expense of the Company; or
ii) If termination of Bergeland's employment results from Bergeland's
willful and material misconduct, including willful and material
failure to perform his duties, and Bergeland has been given
written notice by the Company with respect to such and Bergeland
does not cure within a reasonable time; or
iii) If there has been a breach by Bergeland during the period of
employment of the provisions of Paragraph 3 above, relating to
the time to be devoted to the affairs of the Company, and with
respect to any alleged breach of Paragraph 3 hereof, Bergeland
shall have substantially failed to remedy such alleged breach
within thirty days from Bergeland's receipt of notice from the
Company.
d) Request and Release. In order to obtain the severance allowance
provided for in this Agreement, Bergeland must submit a request for
severance and must sign a complete release of all claims. The Company
shall have no obligation to pay any severance allowance unless and
until Bergeland shall have submitted the request for severance and
signed a full and complete release of all claims, to be drafted by
Legal Counsel for the Company.
6. Termination without Severance Allowance
a. Voluntary Termination by Bergeland. In the event of voluntary
termination by Bergeland, the Company shall not owe Bergeland any
severance allowance and Bergeland shall not, for a period of three (3)
years from the date of termination, directly or indirectly participate
anywhere in the continental United Sates in any activities which are
in competition or conflict with the activities of the Company or any
Company subsidiary of affiliate, including, but not limited to,
managing, consulting, operating, controlling, owning or having an
ownership interest in, being employed by, or being connected with the
management, operation or control of, any business which is of the same
or similar type of business in which the Company or any Company
subsidiary or affiliate presently engage, or hereafter engage during
the term of this Agreement, or which competes with, or reasonably
could be expected to compete with, the Company or any Company
subsidiary or affiliate. Notwithstanding any provision herein,
Bergeland shall be entitled to receive, to the date of termination,
base or fixed compensation plus a prorated amount of Executive
Compensation.
b. Death. In the event of Bergeland's death during the period of
employment, the legal representative of Bergeland shall be entitled to
the base or fixed salary provided for in Paragraph (4)a above for the
month in which death shall have occurred, at the rate being paid at
the time of death, and the period of employment shall be deemed to
have ended as of the close of business on the last day of the month in
which death shall have occurred but without prejudice to any benefits,
such as life insurance, otherwise due in respect to Bergeland's death.
3
<PAGE>
c. Disability
i) In the event of Bergeland's disability during the period of
employment, Bergeland shall be entitled to an amount equal to the
base or fixed salary provided for in Paragraph 4(a) above, at the
rate being paid at the time of the commencement of disability,
for the period of such disability but not in excess of twelve
(12) months from the beginning of the period that establishes
such disability, as described in Paragraph 6(c)(iii) below.
ii) The amount of any payments under Paragraph 6 (c)(i) shall be
reduced by any payments to which Bergeland may be entitled for
the same period because of disability under any disability or
pension plan of Cenex Harvest States or of any division,
subsidiary, or affiliate thereof, or as the result of worker's
compensation or nonoccupational disability payments received from
any government entity.
iii) The term "Disability" as used in this Agreement, shall mean an
illness or accident occurring during the period of employment
which prevents Bergeland from performing the essential functions
of his job under the Agreement, with reasonable accommodations
(as defined by federal and Minnesota disability laws), for a
period of six consecutive months. The period of employment shall
be deemed to have ended as of the close of business on the last
day of such six-month period but without prejudice to any
payments due Bergeland from any disability policy or disability
insurance.
7. Successor in Interest
This Agreement and the rights and obligations hereunder shall be binding
upon and inure to the benefit of the parties hereto and their respective
legal representatives, and shall also bind and inure to the benefit of any
successor of the Company by merger or consolidation or any purchaser or
assignee of all or substantially all of its assets, but, except to any such
successor, purchaser, or assignee of the Company, neither this Agreement
nor any rights or benefits hereunder may be assigned by either party
hereto.
8. Construction
Whenever possible, each provision of this Agreement shall be interpreted in
such a manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
9. Governing Laws
This Agreement shall be governed by an construed and enforced in accordance
with the laws of the State of Minnesota.
4
<PAGE>
10. Notices
Any notice required or permitted to be given under this Agreement shall be
sufficient if in writing, sent by Certified Mail, Return Receipt Requested:
If to Bergeland: Michael Bergeland
853 Amble Road
Shoreview, MN 55126
If to the Company: John D. Johnson
Cenex Harvest States Cooperatives
P. O. Box 64089
St. Paul, MN 55164-0089
With a copy to: Richard L. Baldwin, Human Resources
Cenex Harvest States Cooperatives
P. O. Box 64089
St. Paul, MN 55164-0089
11. Entire Agreement
This Agreement shall constitute the entire agreement between the parties,
superseding all prior agreements, and may not be modified or amended and no
waiver shall be effective unless by written document signed by the
President and General Manager and Bergeland.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the
date set forth above.
CENEX HARVEST STATES COOPERATIVES
_________________________ By: _______________________________
Michael Bergeland John D. Johnson
President & General Manager
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Cenex Harvest States Cooperatives on Form S-8 (File No. 333-42153) of our report
dated October 29, 1999, on our audits of the consolidated financial statements
of Cenex Harvest States Cooperatives as of August 31, 1999 and 1998, and May 31,
1998 and for the year ended August 31, 1999, for the three months ended August
31, 1998, and for the years ended May 31, 1998 and 1997, which report is
included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 22, 1999
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-42153 of Harvest States Cooperatives on Form S-8 of our reports dated July
24, 1998 on (i) the consolidated financial statements of Harvest States
Cooperatives; (ii) the financial statements of the Oilseed Processing and
Refining Defined Business Unit; and (iii) the financial statements of the Wheat
Milling Defined Business Unit, as of May 31, 1998 and for each of the two years
in the period ended May 31, 1998, appearing in this Annual Report on Form 10-K
of Cenex Harvest States Cooperatives for the year ended August 31, 1999.
Deloitte & Touche, LLP
Minneapolis, Minnesota
November 19, 1999
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Noel K. Estenson and John Schmitz,
and each of them his or her true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities to sign a
Form 10-K under the Securities Act of 1933, as amended, of Cenex Harvest States
Cooperatives, and any and all amendments thereto, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, each acting alone, or
the substitutes for such attorneys-in-fact and agents, may lawfully do or cause
to be done by virtue hereof.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Noel K. Estenson
___________________________ Chief Executive Officer November 2, 1999
Noel K. Estenson (principal executive officer)
/s/ John Schmitz
___________________________ Senior Vice President -- Finance November 2, 1999
John Schmitz (principal financial officer)
/s/ Gerald Kuster
___________________________ Co-Chairman of the Board of Directors November 2, 1999
Gerald Kuster
/s/ Elroy Webster
___________________________ Co-Chairman of the Board of Directors November 2, 1999
Elroy Webster
/s/ Bruce Anderson
___________________________ Director November 2, 1999
Bruce Anderson
/s/ Robert Bass
___________________________ Director November 2, 1999
Robert Bass
/s/ Steven Burnet
___________________________ Director November 2, 1999
Steven Burnet
/s/ Steve Carney
___________________________ Director November 2, 1999
Steve Carney
/s/ Curt Eischens
___________________________ Director November 2, 1999
Curt Eischens
/s/ Robert Elliott
___________________________ Director November 2, 1999
Robert Elliott
<PAGE>
/s/ Edward Ellison
___________________________ Director November 2, 1999
Edward Ellison
/s/ Sheldon Haaland
___________________________ Director November 2, 1999
Sheldon Haaland
/s/ Fred Harris
___________________________ Director November 2, 1999
Fred Harris
/s/ Jerry Hasnedl
___________________________ Director November 2, 1999
Jerry Hasnedl
/s/ Edward Hereford
___________________________ Director November 2, 1999
Edward Hereford
/s/ Douglas Johnson
___________________________ Director November 2, 1999
Douglas Johnson
/s/ James Kile
___________________________ Director November 2, 1999
James Kile
/s/ Leonard Larsen
___________________________ Director November 2, 1999
Leonard Larsen
/s/ Tyrone Moos
___________________________ Director November 2, 1999
Tyrone Moos
/s/ Gaylord Olson
___________________________ Director November 2, 1999
Gaylord Olson
/s/ Duane Risan
___________________________ Director November 2, 1999
Duane Risan
/s/ Denis Schilmoeller
___________________________ Director November 1, 1999
Denis Schilmoeller
/s/ Duane Stenzel
___________________________ Director November 2, 1999
Duane Stenzel
/s/ Michael Toelle
___________________________ Director November 2, 1999
Michael Toelle
/s/ Richard Traphagen
___________________________ Director November 2, 1999
Richard Traphagen
<PAGE>
/s/ Russ Twedt
___________________________ Director November 2, 1999
Russell Twedt
/s/ Merlin Van Walleghen
___________________________ Director November 2, 1999
Merlin Van Walleghen
/s/ Arnold Weisenbeck
___________________________ Director November 2, 1999
Arnold Weisenbeck
/s/ William Zarak
___________________________ Director November 2, 1999
William Zarak
</TABLE>
EXHIBIT 99.1
CAUTIONARY STATEMENT
Cenex Harvest States Cooperatives (the "Company"), or persons acting on behalf
of the Company, or outside reviewers retained by the Company making statements
on behalf of the Company, or underwriters, from time to time, may make, in
writing or orally, "forward-looking statements" as defined under the Private
Securities Litigation Reform Act of 1995 (the "Act"). This Cautionary Statement
is for the purpose of qualifying for the "safe harbor" provisions of the Act and
is intended to be a readily available written document that contains factors
which could cause results to differ materially from those projected in such
forward-looking statements. These factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on the
business, financial condition, liquidity, results of operations or prospects,
financial or otherwise, of the Company. Reference to this Cautionary Statement
in the context of a forward-looking statement shall be deemed to be a statement
that any one or more of the following factors may cause actual results to differ
materially from those which might be projected, forecast, estimated or budgeted
by the Company in such forward-looking statement or statements:
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. The current monetary crises in Asia have impacted,
and are expected to continue to impact, exports of U.S. agricultural products.
Demand may also be affected by changes in eating habits, by population growth
and increased or decreased per capita consumption of some products.
The Freedom to Farm Act of 1996 (the Farm Act), enacted in April of 1996, may
affect crop production in several ways. The Farm 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 Farm 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 Farm Act also reduces Export Enhancement
Program subsidies, which may adversely affect the ability of the U.S. exports to
compete with those of other countries. Reduced demand for U.S. agricultural
products may also adversely affect the demand for fertilizer, chemicals, and
petroleum products sold by the Company and used to produce crops.
<PAGE>
COMPANY SUBJECT TO PRICE RISKS. Upon purchase, the Company has risks of
carrying grain and petroleum, 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 risks of loss
in the market value of positions held, consisting of grain and petroleum
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 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, such
activities also limit the gain potential which otherwise could result from
changes in market prices. Hedging arrangements do not protect against
nonperformance of a contract. The Company's policy is to generally maintain
hedged positions in grain and petroleum, which are hedgeable, but the Company
can be long or short at any time. The Company's profitability is primarily
derived from margins on grain and products merchandised and processed, not from
hedging transactions.
At any one time the Company's inventory and purchase contracts for delivery to
the Company may be substantial.
OILSEED 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. The
Company estimates that U.S. crushing capacity has increased by about 30% to 35%
between 1994 and 1998. Refining capacity has increased by an estimated 25% to
30% between 1996 and 1999. 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 Oilseed Processing
and Refining Defined Business Unit. Several competitors operate over various
market segments and may be suppliers to, or customers of, other competitors.
MILLING BUSINESS COMPETITIVE TRENDS. Certain major competitors of the Wheat
Milling Defined Business Unit have developed long-term relationships with
customers by locating plants adjacent to pasta manufacturing plants. This trend
could potentially decrease the future demand for semolina from nonintegrated
millers.
YEAR 2000. Although the Company's management believes that the Company has in
place an effective program to address the Year 2000 issue in a timely manner, it
also recognizes that failure to sufficiently resolve all aspects of the Year
2000 issue in a timely fashion presents substantial risks for the Company,
including disruption of normal business processes and additional costs or loss
of revenue. Furthermore, there is no guarantee that the systems of other
companies on which this Company's relies will be remediated in a timely fashion
to avoid having a material adverse effect on the Company's operations or its
financial results.
<PAGE>
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.
DEPENDENCE ON CERTAIN CUSTOMERS. Each of the Wheat Milling Defined Business
Unit and the Oilseed Processing and Refining Defined Business Unit has certain
major customers. 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 defined business unit. In addition, the Wheat Milling Defined Business
Unit would be adversely affected by a decline in pasta production in the United
States.
The foregoing review of factors pursuant to the Act should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of the Act.
EXHIBIT 99.2
Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the consolidated balance sheet of Harvest States
Cooperatives and subsidiaries (the Company) as of May 31, 1998 and the related
consolidated statements of earnings, capital, and cash flows (not presented
herein) for each of the two years in the period ended May 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, 1998 and
the results of its operations and its cash flows for each of the two years in
the period ended May 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 16 to the consolidated financial statements, effective
June 1, 1998, the Company merged with CENEX, Inc. to form Cenex Harvest States
Cooperatives.
DELOITTE & TOUCHE LLP
Minneapolis, MN
July 24, 1998
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