SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended November 30, 1998.
[ ] 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
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 Identification Number)
incorporation or organization)
5500 CENEX DRIVE, INVER GROVE HEIGHTS, MN 55077 (651) 451-5151
(Address of principal executive offices and zip code) (Registrant's telephone
number including area
code)
Include 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
NONE NONE
---- ----
(Class) (Number of shares outstanding at
November 30, 1998)
<PAGE>
INDEX
PAGE
NO.
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PART I. FINANCIAL INFORMATION
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
Item 1. Financial Statements
Consolidated Balance Sheets as of May 31, 1998, August 31, 1998 and
November 30,1998 (unaudited)
Consolidated Statements of Operations for the three months ended
November 30, 1997 and 1998 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
November 30, 1997 and 1998 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of May 31, 1998, August 31, 1998 and November 30,
1998 (unaudited)
Statements of Operations for the three months ended November 30, 1997
and 1998 (unaudited)
Statements of Cash Flows for the three months ended November 30, 1997
and 1998 (unaudited)
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of May 31, 1998, August 31, 1998 and November 30,
1998 (unaudited)
Statements of Operations for the three months ended November 30, 1997
and 1998 (unaudited)
Statements of Cash Flows for the three months ended November 30, 1997
and 1998 (unaudited)
Notes to Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since all items are inapplicable or
answers are negative
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE PAGE
<PAGE>
PART I. FINANCIAL INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to:
SUPPLY AND DEMAND FORCES. The Company may be adversely affected by supply and
demand relationships, both domestic and international. Supply may be affected
by weather conditions, disease, insect damage, acreage planted, government
regulation and policies and commodity price levels. 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 crisis's in Asia has impacted, and is expected to continue to impact
exports of U.S. agricultural products. 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. Demand may
also be affected by changes in eating habits, population growth and increased
or decreased per capita consumption of some products.
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. The Company is exposed to risk 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 priced positions,
the Company generally takes opposite and offsetting positions by entering
into commodity futures contracts (either a straight futures contract or an
option futures contract) on regulated commodity futures exchanges.
PROCESSING AND REFINING BUSINESS COMPETITION. The industry is highly
competitive. Competitors are adding new plants and expanding capacity of
existing plants. Unless exports increase or existing refineries are closed,
this extra capacity is likely to put additional pressure on prices and erode
margins, adversely affecting the profitability of the Oilseed Processing and
Refining Defined Business Unit.
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.
Commencing in June 1998, the Wheat Milling Defined Business Unit began
conversion of a semolina line to bakery flour at the Huron mill. This project
is anticipated to be completed in March 1999 and until then, will negatively
impact profitability.
The forward-looking statements herein are qualified in their entirety by the
cautions and risk factors set forth in Exhibit 99, under the caption "Cautionary
Statement" to this Quarterly Report on Form 10-Q for the quarter ended November
30, 1998.
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
May 31, August 31, November 30,
1998 1998 1998
------------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 83,531,702 $ 120,007,512 $ 58,401,934
Receivables 564,184,981 471,516,008 627,924,476
Inventories 523,019,559 479,733,645 514,391,984
Other current assets 36,996,360 37,707,348 29,499,780
------------------------------------------------------
Total current assets 1,207,732,602 1,108,964,513 1,230,218,174
OTHER ASSETS:
Investments 346,213,691 347,333,736 347,713,021
Other 96,484,985 97,033,824 113,362,667
------------------------------------------------------
Total other assets 442,698,676 444,367,560 461,075,688
PROPERTY PLANT AND EQUIPMENT 893,531,058 915,770,470 928,996,946
------------------------------------------------------
$2,543,962,336 $2,469,102,543 $2,620,290,808
======================================================
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable $ 53,500,000 $ 475,200 $ 30,000,000
Current portion of long-term debt 39,548,281 13,855,262 14,576,699
Patrons' credit balances 42,876,236 41,324,189 62,953,585
Patrons' advance payments 108,487,413 148,021,037 186,508,047
Drafts outstanding 33,568,876 26,366,742 23,645,763
Accounts payable 491,968,576 383,160,594 474,215,504
Book cash overdraft 49,314,034 28,375,131 42,194,614
Accrued expenses 100,497,352 119,372,451 98,099,102
Patronage dividends and equity retirements payable 60,019,000 63,562,331 46,886,792
------------------------------------------------------
Total current liabilities 979,779,768 824,512,937 979,080,106
LONG-TERM DEBT 375,199,523 442,985,378 437,671,623
OTHER LIABILITIES 72,113,175 75,800,972 78,332,745
MINORITY INTERESTS IN SUBSIDIARIES 58,603,489 59,926,302 57,322,780
COMMITMENTS AND CONTINGENCIES
EQUITIES 1,058,266,381 1,065,876,954 1,067,883,554
------------------------------------------------------
$2,543,962,336 $2,469,102,543 $2,620,290,808
======================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements (unaudited).
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months Ended
November 30,
--------------------------------------
1997 1998
<S> <C> <C>
REVENUES:
Net Sales:
Grain and oilseed $ 1,442,338,208 $ 1,057,871,031
Energy 471,335,899 329,867,814
Processed grain and oilseed 162,169,586 137,554,964
Feed and farm supplies 139,065,529 122,834,815
Agronomy 146,801,705 107,602,450
--------------------------------------
2,361,710,927 1,755,731,074
Patronage dividends 631,880 469,357
Other revenues 25,128,759 27,210,434
--------------------------------------
2,387,471,566 1,783,410,865
--------------------------------------
COSTS AND EXPENSES:
Cost of good sold 2,314,404,203 1,725,866,083
Marketing, general and administrative 36,107,228 39,081,058
Interest 8,687,118 9,549,782
Minority interests (861,575) (1,400,781)
--------------------------------------
2,358,336,974 1,773,096,142
--------------------------------------
INCOME BEFORE INCOME TAXES 29,134,592 10,314,723
INCOME TAXES 2,940,000 2,000,000
--------------------------------------
NET INCOME $ 26,194,592 $ 8,314,723
======================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements (unaudited).
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months Ended
November 30,
----------------------------------
1997 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,194,592 $ 8,314,723
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 18,460,537 19,975,365
Noncash net loss (income) from joint ventures 9,451,210 (4,668,652)
Noncash portion of patronage dividends received (11,454,941) (175,190)
Gain on sale of property, plant and
equipment (1,244,934) (797,237)
Adjustment of inventories to market value 11,765,947 10,742,134
Other 1,482,351
Changes in operating assets and liabilities:
Receivables (164,488,434) (159,199,197)
Inventories (73,681,250) (45,400,473)
Other current assets and other assets 3,681,011 (7,236,755)
Patrons' credit balances 23,629,368 21,629,396
Patrons' advance payments 111,184,357 38,487,010
Accounts payable and accrued expenses 20,250,197 69,781,561
Drafts outstanding and other liabilities (4,680,589) (189,205)
----------------------------------
Total adjustments (55,645,170) (57,051,243)
----------------------------------
Net cash used in operating
activities (29,450,578) (48,736,520)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (39,752,904) (33,814,814)
Proceeds from disposition of property, plant and
equipment 14,303,093 3,211,986
Investments (3,381,989) (2,217,110)
Investments redeemed 2,051,964 4,462,039
Changes in notes receivable 9,528,881 1,357,232
Other investing activities, net (1,130,514) (221,584)
----------------------------------
Net cash used in investing activities (18,381,469) (27,222,251)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable 80,857,253 29,524,800
Long-term debt borrowings 20,403,113 --
Principal payments on long-term debt (3,648,974) (4,628,252)
Changes in book cash overdraft 24,411,105 13,819,483
Retirements of equity (15,996,740) (9,271,026)
Cash patronage dividends paid (13,414,713) (15,091,812)
----------------------------------
Net cash provided by financing
activities 92,611,044 14,353,193
----------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 44,778,997 (61,605,578)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,003,524 120,007,512
----------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79,782,521 $ 58,401,934
==================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements (unaudited).
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited consolidated statements of operations for the three-month period
ended November 30, 1997 and 1998, reflect, in the opinion of management of Cenex
Harvest States Cooperatives (the Company), all normal, recurring adjustments
necessary for a fair statement of the results of operations for the interim
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. The consolidated balance sheet data as
of May 31, 1998 was derived from audited consolidated financial statements but
does not include all disclosures required by generally accepted accounting
principles.
The unaudited consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Reclassifications have been made to the prior year's financial statements to
conform to the current year presentation.
NOTE 2. RECEIVABLES
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, NOVEMBER 30,
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Trade .................................... $ 564,737,293 $ 474,454,204 $ 641,889,536
Other .................................... 23,634,824 20,376,362 9,096,550
------------- ------------- -------------
588,372,117 494,830,566 650,986,086
Less allowance for doubtful accounts .... (24,187,136) (23,314,558) (23,061,610)
------------- ------------- -------------
$ 564,184,981 $ 471,516,008 $ 627,924,476
============= ============= =============
</TABLE>
NOTE 3. INVENTORIES
<TABLE>
<CAPTION>
MAY 31, AUGUST 31, NOVEMBER 30,
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Petroleum products ................... $ 208,055,542 $ 178,792,040 $ 171,861,863
Grain and oilseed .................... 148,381,119 153,384,301 158,404,149
Agronomy ............................. 82,167,871 80,029,854 76,842,755
Feed and farm supplies ............... 46,871,339 30,063,556 62,185,107
Processed grain and oilseed products . 37,543,688 37,463,894 45,098,110
------------- ------------- -------------
$ 523,019,559 $ 479,733,645 $ 514,391,984
============= ============= =============
</TABLE>
NOTE 3. COMPREHENSIVE INCOME
As of June 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting of Comprehensive Income" (SFAS 130). SFAS 130
establishes new rules for the reporting of comprehensive income and its
components. The adoption of SFAS 130 had no impact on the Company's net income.
SFAS 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.
During the three months ended November 30, 1997 and 1998, total comprehensive
income amounted to $0 and $1,400,731 respectively. Accumulated other
comprehensive income (loss) at May 31, 1998, August 31, 1998 and November 30,
1998 was $1,194,935, $(99,465) and $1,301,266, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives (Harvest
States) combined through merger on June 1, 1998 (the Combination) with Harvest
States the surviving corporation. In accordance with the Plan of Combination,
the Articles of Incorporation and bylaws of Harvest States Cooperatives were
restated and the name Harvest States Cooperatives was changed to "Cenex Harvest
States Cooperatives" (the Company).
This Combination has been accounted for as a pooling of interests and as a
result all comparative financial information has been restated to include the
financial statements of Cenex and Harvest States. In addition, the Company
changed its fiscal year to August 31, and is filing this Form 10-Q Report
representing the first quarter of the Company's new fiscal year.
Effective June 1, 1998 the Company adopted Statement of Accounting Standards
(SFAS) NO. 130, which establishes standards for reporting and display of
comprehensive income and its components in a full set of general financial
statements. See notes to the consolidated financial statements for disclosure
relative to this Standard.
In June, 1997, the Financial Accounting Standards Board (FASB) issued SFAS
NO. 131, Disclosure about Segments of an Enterprise and Related Information,
which relates to financial reporting of operating or business segments of a
company. The new standard is effective for fiscal years beginning after December
15, 1997. Disclosures relative to SFAS NO.131 are not required for interim
periods in the initial year of application. Management is currently evaluating
this new standard and has not yet determined its applicability or impact on the
presentation of the Company's financial statements.
In June 1998, the FASB issued SFAS NO. 133, Accounting for Derivative
Instruments and Hedging Activities, which relates to the accounting for
derivative transactions and hedging activities. This new standard is effective
for years beginning after June 15, 1999. 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.
The Year 2000 issue is the result of computer systems being written using two
digits rather than four to define the applicable year. Any of the computer
programs used by the Company that have date-sensitive software may recognize a
date using "00" for the year 1900 rather than as the year 2000. This could
result in a system failure or
<PAGE>
miscalculations causing disruptions of operations including an inability to
process transactions or engage in similar normal business activities.
Furthermore, should other companies or entities with whom the Company has a
supplier or a customer relationship encounter business disruption because of the
year 2000 issue, the Company in turn could experience disruption of normal
business processes and as a result incur additional costs or loss of revenue.
In preparation for the Year 2000, the Company has reviewed the primary
internally-developed software programs used within the divisions and defined
business units comprising the Company before the June 1, 1998 merger with Cenex.
Appropriate changes were made to that software to accommodate the Year 2000. In
addition, the Company has engaged an information technology consulting firm for
the purpose of appraising the Company's Year 2000 readiness, identifying
critical software applications which are not Year 2000 compliant, remediating
such applications, testing corrections to software, developing contingency plans
in the event that all software problems are not corrected by the year 2000, and
assisting with certifications of key supplier's Year 2000 readiness. This Year
2000 plan and action program encompasses all areas of the Company. The Company
will also assess, to the extent practical, embedded technology in its processing
equipment. The assessment phase of the project was completed shortly after
December 31, 1998, and it is anticipated that the remedial portion of the
project will be completed by June 30, 1999. Management believes that the total
cost to the Company to review and correct its own computer systems will not
exceed $2 million, of which approximately $500,000 was expended through November
30, 1998.
Based on its assessment, the Company's management presently believes that
problems related to the Year 2000 computer issue will not have a material effect
on operations and financial results. The Company continues to bear some risk
related to the Year 2000 issue if other entities not affiliated with the Company
do not appropriately address their own Year 2000 compliance issues. The Company
has not yet evaluated the full impact of the Year 2000 issue if third-party
vendors and/or customers do not resolve this issue on a timely basis.
Furthermore, a contingency plan has not been completed as of this time, and will
be developed after the Company, through its Year 2000 project, identifies the
software applications requiring remediation.
On November 9, 1998, the Company and United Grain Corporation formed a
limited liability corporation (United Harvest, LLC) for the purpose of exporting
cereal grains off the west coast of the United States. Through the terms of the
limited liability corporation agreement, the Company will originate grain for
the limited liability corporation, and will lease its Kalama, Washington grain
terminal to United Harvest, LLC. United Grain Corporation shall lease its
Vancouver, Washington grain terminal to the limited liability corporation. The
Company has a 50% ownership interest in United Harvest, LLC.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
The Company's consolidated net income for the three months ended November 30,
1998 and 1997 were $8,300,000 and $26,200,000, respectively, which represents a
$17,900,000 (68%) decrease during the current three-month period. This decline
in profitability is primarily attributable to reduced gross margins in the
Energy Division and the Food Processing Defined Business Units of the Company.
In the Energy operations, gross margins on refined fuel decreased approximately
1.8 cents per gallon during the three months ended November 30, 1998, compared
with the same period of a year ago. Pretax operating results within the Energy
Division declined approximately $13,500,000 during the three months ended
November 30, 1998
<PAGE>
compared with the same period in 1997. For the Wheat Milling Defined Business
Unit, gross margins declined 60 cents per hundred weight for all products, which
contributed to an overall decline in pretax operating income of approximately
$2,800,000. Within the Oilseed Processing and Refining Defined Business Unit,
gross margins for soymeal and other processed soybean products declined by $23
per ton, which was the primary factor in producing a decline of approximately
$6,100,000 in pretax operating results for that business unit, compared to the
same three-month period ended November 30, 1997. These diminished operating
results were partially offset by improved earnings within the grain operations
of the Company, where volumes were consistent with the prior year and at
slightly improved gross margins per bushel.
Consolidated net sales of $1,756,000,000 decreased $606,000,000 (26%) during
the three-month period ended November 30, 1998 compared to the same period ended
in 1997.
Grain volume of approximately 315 million bushels for the three-month period
ended November 30, 1998 was essentially unchanged compared to the same period in
1997. The average sales price for all grain and oilseeds marketed by the
Company, however, declined $1.28 per bushel, which was the primary factor in a
reduction in grain sales during the 1998 period of approximately $385,000,000
(27%).
Sales for energy products declined approximately $140,000,000 (30%) during
the three-month period ended November 30, 1998 compared with the same period in
1997. This was primarily the result of an 8% decline in refined fuel volume at
an average price that was 18 cents a gallon less than that of a year ago.
Wholesale agronomy product sales declined approximately $39,000,000 (27%)
during the three months ended November 30, 1998 compared to the same period in
1997, primarily the result of a 25% decrease in fertilizer volumes, and a 9%
decrease in the average per ton sales price of such product.
Processed grain and oilseed sales decreased approximately $24,600,000 (15%)
during the three months ended November 30, 1998 compared to the same period in
1997. This decrease is primarily attributable to a $91 per ton reduction in the
average sales price of soymeal, and a reduction of approximately $2.90 per
hundred-weight for milled wheat products.
Retail feed and farm supply sales declined approximately $16,200,000 (12%)
during the three-month period ended November 30, 1998 compared to the same
period in 1997. This decrease is primarily attributable to a 48,000 ton decline
in fertilizer volume, as well as somewhat lower prices for both animal feed and
fertilizer.
Cost of goods sold of $1,726,000,000 decreased approximately $590,000,000
(25%) during the three months ended November 30, 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
<PAGE>
contributed to an erosion in total gross margin of approximately $18,000,000
(38%) during the three months ended November 30, 1998 compared with the same
period in 1997.
Patronage dividends received decreased approximately $160,000 (26%) during
the three months ended November 30, 1998 compared to the same period in 1997,
resulting from reduced patronage earnings distributed by cooperative customers
and suppliers.
Other revenues of $27,200,000 increased $2,100,000 (8%) for the three months
ended November 30, 1998 compared to the same period in 1997. Most of this
increase in other revenues during the three months ended November 30, 1998
compared to the same period in 1997 was generated within the country elevator
and retail supply outlets through expanded operations. In addition to this
increase in service revenues, interest income increased approximately $600,000
during the current period compared with the three months ended November 30,
1997. The Company's refinancing program, completed in June of 1998 in
anticipation of long-term capital requirements, produced at different times
during the current period temporary cash available for short-term investment.
Marketing, general, and administrative expenses of $39,100,000 for the three
months ended November 30, 1998 increased $3,000,000 (8%) compared to the same
three months ended in 1997. Approximately $1,900,000 of this increase is
one-time costs related to the consolidation of the business units pursuant to
the merger of Cenex and Harvest States Cooperatives. Approximately $1,500,000 of
the change are credits to expenses produced as a result of the divestiture of a
petroleum exploration project during the period ended November 30, 1997.
Interest expense of $9,500,000 increased $900,000 (10%) for the three months
ended November 30, 1998 compared to the same period in 1997. Long-term borrowing
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 mentioned in the other revenue discussion
above, and should be considered as an offset to a portion of the increase in
interest expense.
Minority interest in operations for the three-month period ended November 30,
1998 decreased approximately $500,000 (63%) compared to the same period in 1997.
Substantially all of the minority interests is related to National Cooperative
Refinery Association (NCRA), which operates a refinery near McPherson, Kansas.
The Company owns approximately 75% of that operation. This change in minority
interest during the current period is reflective of less profitable operations
within the partially owned subsidiaries.
Income tax expense of $2,000,000 and $2,940,000 for the three-month periods
ended November 30, 1998 and 1997, respectively, resulted in effective tax rates
of 19.4% and 10.1%. This increase in the effective tax rate is the result of
proportionately greater earnings in the nonpatronage operations of the Company
in relationship to patronage sourced earnings.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $48.7 million and $29.5
million for the three months ended November 30, 1998 and 1997, respectively. For
the period ended in 1998, net income of $8.3 million and net non-cash income and
expenses of approximately $25.1 million were offset by increased working capital
requirements of approximately $82.1 million. For the three-month period ending
November 30, 1997, net income of $26.2 million and net non-cash income and
expenses of approximately $28.5 million were offset by increased working capital
requirements of approximately $84.1 million.
CASH FLOWS FROM INVESTING
Investing activities of the Company used net cash of $27.2 million during the
three-month period ended November 30, 1998. Expenditures for the acquisition of
property, plant and equipment of $33.8 million and additional investments in
joint ventures of $2.2 million were partially offset by proceeds from the
disposition of property, plant and equipment, proceeds from the redemption of
prior investments and collections on various notes receivable. The Company
projects total expenditures for the acquisition of property, plant and equipment
for the fiscal year ending August 31, 1999 to be approximately $196 million.
Investing activities of the Company used net cash of $18.4 million during the
three-month period ended November 30, 1997. Expenditures for the acquisition of
property, plant and equipment of $39.8 million and additional investments of
$3.4 million were partially offset by proceeds from the disposition of property,
plant and equipment, and proceeds from the redemption of prior investments and
notes receivable. The largest single source of cash partially offsetting capital
expenditures and investments was the proceeds of approximately $10.3 million
received as part of a sale-leaseback transaction for equipment within the
Oilseed Processing and Refining Defined Business Unit.
<PAGE>
CASH FLOWS FROM FINANCING
The Company finances its working capital needs through short-term lines of
credit with the banks for cooperatives and commercial banks. In June 1998 the
Company established a 364-day credit facility of $400 million and a five-year
revolving facility of $200 million, all of which is committed. In addition to
these credit lines, the Company has a 364-day credit facility dedicated to NCRA,
a subsidiary of which the Company owns 75%, with the St. Paul Bank for
Cooperatives in the amount of $52 million all of which is committed, and a
364-day credit facility dedicated to Swiss Valley Cooperative, a subsidiary of
which the Company owns 60%, with CoBank in the amount of $750,000, all of which
is committed. On November 30, 1998 the Company had total short-term indebtedness
on these various facilities totaling $30,000,000. On August 31, 1998 and May 31,
1998, respectively, the Company had $475,200 and $53,500,000 outstanding on
its short-term lines of credit. This increase in short-term borrowing is
primarily attributable to the seasonality of the grain harvest.
The Company has in the past financed its long-term capital needs, primarily
for the acquisition of property, plant, and equipment, with long-term loan
agreements through the banks for cooperatives. On May 31, 1998, the Company had
total indebtedness related to these long-term lines of credit of $373.8 million,
of which approximately $36 million represented long-term borrowings by NCRA. In
June, 1998, the Company established a new long-term credit agreement through the
banks for cooperatives whereby the Company repaid $279.6 million of the loan
balance, and borrowed $134 million on the new long-term facility with the banks
for cooperatives. This new facility commits $200 million of long-term borrowing
capacity to the Company, with repayments through the year 2009. The amount
outstanding on this credit agreement was $134 million with $66 million remaining
available on both August 31, 1998 and November 30, 1998. Regarding the $94.2
million of long-term indebtedness not included as part of the refinancing, $36.2
million was repaid during the three months ended August 31, 1998, and
approximately $1.7 million was repaid during the three months ended November 30,
1998 leaving an outstanding balance on separate facilities of $56.3 million,
with payments due through the year 2008.
Also in June 1998, as 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 million. Repayments will be
made in equal installments of $37.5 million each in the years 2008 through 2013.
<PAGE>
In addition, the Company had long-term indebtedness on May 31, 1998 and
August 31, 1998 and November 30, 1998, of $40.6 million and $39.5 million, and
$36.9 million, respectively, in the form of Industrial Revenue Bonds,
capitalized leases, and miscellaneous notes payable.
In accordance with the bylaws and by action of the Board of Directors, annual
net income from patronage sources are distributed to consenting patrons
following the close of each year and are based on amounts reportable for federal
income tax purposes as adjusted in accordance with the bylaws. In September
1998, the Company distributed patronage dividends to patrons based upon the
operating results of the former Harvest States portion of the business for its
year ended May 31, 1998. The cash portion of this distribution, deemed by the
Board of Directors to be 80% for Equity Participation Units and 30% for regular
patronage was approximately $15,100,000. The patronage earnings of the former
Cenex portion of the business for the period ended May 31, 1998, and the
patronage earnings resulting from the combined operations for the three months
ended August 31, 1998 will be distributed in early calendar year 1999. The cash
portion of that distribution, deemed by the Board of Directors to be 80% for
Equity Participation Units and 30% for regular patronage is expected to be
approximately $29,000,000.
Beginning June 1, 1998, inactive direct members and patrons and active direct
members and patrons age 61 and older on that date continue to be eligible for
patronage certificate redemptions at the age of 72 or death. For active direct
members and patrons who were 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. Total equity redemptions, related to
the May 31, 1998 fiscal year end of the former Harvest States operating units,
the eight-month reporting period of the former Cenex operating units ended on
May 31, 1998, and the three-month period ended August 31, 1998 for the combined
operations of Cenex Harvest States Cooperatives, is expected to be approximately
$24 million, of which approximately $4.5 million was redeemed during the three
months ended August 31, 1998 and approximately $9.3 million was redeemed during
the three months ended November 30, 1998.
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
ITEM 1. FINANCIAL STATEMENTS
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MAY 31, AUGUST 31, NOVEMBER 30,
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
(Audited) (Unaudited) (Unaudited)
CURRENT ASSETS:
Receivables $ 32,585,292 $ 28,703,118 $ 31,930,090
Inventories 23,758,625 18,569,191 23,783,906
Other current assets 185,399 240,110
------------- ------------- -------------
Total current assets 56,529,316 47,272,309 55,954,106
PROPERTY, PLANT AND EQUIPMENT 34,952,626 35,596,082 36,557,903
------------- ------------- -------------
$ 91,481,942 $ 82,868,391 $ 92,512,009
============= ============= =============
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives $ 22,890,878 $ 15,071,383 $ 24,110,693
Accounts payable 8,867,609 7,546,958 6,146,526
Accrued expenses 1,659,859 1,773,005 3,777,745
------------- ------------- -------------
Total current liabilities 33,418,346 24,391,346 34,034,964
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY 58,063,596 58,477,045 58,477,045
------------- ------------- -------------
$ 91,481,942 $ 82,868,391 $ 92,512,009
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the
financial statements (unaudited)
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months Ended
November 30,
------------
1997 1998
---- ----
<S> <C> <C>
REVENUES:
Processed oilseed sales $ 108,181,066 $ 95,461,986
Other revenues 212,119 4,301
---------------------------------
108,393,185 95,466,287
COSTS AND EXPENSES:
Cost of goods sold 95,871,302 88,972,834
Marketing, general and administrative 1,343,052 1,309,707
Interest 154,829 302,617
---------------------------------
97,369,183 90,585,158
---------------------------------
INCOME BEFORE INCOME TAXES 11,024,002 4,881,129
INCOME TAXES 125,000 80,000
---------------------------------
NET INCOME $ 10,899,002 $ 4,801,129
=================================
</TABLE>
The accompanying notes are an integral part of the
financial statements (unaudited)
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months Ended
November 30,
------------
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 10,899,002 $ 4,801,129
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 466,349 546,799
Gain on sale of property,
plant, and equipment (202,188)
Changes in operating assets and liabilities:
Receivables (8,474,711) (3,226,972)
Inventories (10,539,185) (5,214,715)
Other current assets 858,034 (240,110)
Accounts payable and accrued
expenses (2,018,324) 604,308
----------------------------------
Total adjustments (19,910,025) (7,530,690)
Net cash used in
operating activities (9,011,023) (2,729,561)
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property,
plant and equipment 10,266,854
Acquisition of property, plant and
equipment (3,241,903) (1,508,620)
----------------------------------
Net cash provided by (used in) investing activities 7,024,951 (1,508,620)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to Cenex Harvest
States Cooperatives 12,885,074 9,039,310
Defined business unit equity distributed (10,899,002) (4,801,129)
Net cash provided by
financing activities 1,986,072 4,238,181
----------------------------------
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 (unaudited)
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited statements of operations for the three-month period ended November
30, 1997 and 1998, reflect, in the opinion of management of Cenex Harvest States
Cooperatives (the Company), all normal, recurring adjustments necessary for a
fair statement of the results of operations for the interim periods. The results
of operations for any interim period are not necessarily indicative of results
for the full year. The balance sheet data as of May 31, 1998 was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles.
These statements should be read in conjunction with the financial statements and
footnotes included in the Defined Business Unit financial statements for the
year ended May 31, 1998 which is included in the Cenex Harvest States
Cooperatives' Report on Form 10-K dated August 27, 1998, previously filed with
the Commission.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
May 31, August 31, November 30,
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Oilseed ..................... $ 6,925,703 $ 712,466 $ 11,779,896
Processed Oilseed Products .. 16,832,922 17,856,725 12,004,010
------------- ------------- -------------
$ 23,758,625 $ 18,569,191 $ 23,783,906
============= ============= =============
</TABLE>
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 the
surviving corporation. In accordance with the Plan of Combination, the Articles
of Incorporation and bylaws of Harvest States Cooperatives were restated and the
name of Harvest States Cooperatives was changed to "Cenex Harvest States
Cooperatives" (the Company).
As a result of the Combination, the Company has changed its fiscal year to
August 31, and is filing this Form 10-Q Report representing the first quarter of
the Company's new fiscal year.
RESULTS OF OPERATIONS
Patronage refunds to the Oilseed Processing and Refining Defined Business
Unit holders are calculated on the basis of tax earnings per bushel. Because of
this, the Company believes that the calculation below is an important measure of
the Defined Business Unit's performance.
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------------
1997 1998
---- ----
Pretax Income $ 11,024,002 $ 4,881,129
Earnings from purchased oil 113,344 (753,201)
Nonpatronage joint venture income
Book to tax differences
---------------------------------
Tax basis income $ 11,137,346 $ 4,127,928
=================================
Bushels Processed 9,253,464 8,065,367
Income per Bushel $ 1.204 $ 0.512
=================================
Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of sales.
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------------
1997 1998
---- ----
Gross Margin percentage 11.38% 6.80%
Marketing, General and Administrative 1.24% 1.37%
Interest 0.14% 0.32%
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
The Oilseed Processing and Refining Defined Business Unit's net income of
$4,800,000 for the three months ended November 30, 1998 represents a $6,100,000
decrease (56%) compared to the same period in 1997. This decrease is primarily
attributable to lower gross margins for soymeal and other processed soybean
products. The average gross margin for such product declined approximately $23
per ton during the three months ended November 30, 1998 compared to the same
three-month period of a year ago.
Net sales of $95,500,000 for the three-month period ended November 30, 1998
decreased by $12,700,000 (12%) compared to the same period in 1997. A decline in
processing volume of approximately 27,800 tons, and a reduced sales price of
approximately $91 a ton for such products reduced sales by almost $24,000,000.
This decrease was partially offset by an increase of approximately 4.4 cents per
pound for refined oil products. Refining volume increased slightly in the 1998
period compared with 1997.
Other revenues declined $208,000 (98%) during the three months ended
<PAGE>
November 30, 1998 compared to the same period in 1997. During the 1997 period,
the Defined Business Unit recognized gains on disposal of replaced equipment
sold at salvage value of approximately $200,000.
Cost of goods sold of $89,000,000 for the three months ended November 30,
1998 decreased $6,900,000 (7%) compared to the same period ended in 1997. During
the 1998 period, a decline in soybeans processed of approximately 1.2 million
bushels reduced such costs almost $8,000,000. A reduced cost per bushel for
soybeans of $1.33 per bushel during the three months ended November 30, 1998
compared to the same period in 1997 reduced cost of goods sold almost
$10,800,000. These reductions related to soybeans were partially offset by an
increase in the cost of crude soybean oil, as well as slightly increased
refining volumes.
Marketing, general and administrative expenses of $1,350,000 for the three
months ended November 30, 1998 was essentially unchanged from the same period in
1997.
Interest expense for the three months ended November 30, 1998 was $300,000,
compared with $150,000 of a year ago. This $150,000 increase is primarily
attributable to capital expenditures made since the 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
The Oilseed Processing and Refining Defined Business Unit's cash requirements
result from capital improvements and the 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 three months ended November 30, 1998 used net
cash of $2,700,000. Net income of $4,800,000 and non-cash expenses of
approximately $500,000 were offset by increased working capital requirements of
$8,000,000 during this three-month period.
Operating activities for the three months ended November 30, 1997 used net
cash of $9,000,000. Net income of $10,900,000 and non-cash expenses and income
of approximately $300,000 were offset by increased working capital requirements
of $20,200,000 during this three-month period.
CASH FLOWS FROM INVESTING
The Oilseed Processing and Refining Defined Business Unit used cash of
$1,500,000 during the three months ended November 30, 1998 for the purchase of
property, plant and equipment.
During the three months ended November 30, 1997 the Oilseed Processing and
Refining Defined Business Unit received cash of approximately $10,267,000 for
the sale of soybean processing equipment and entered into a leaseback
transaction for that equipment. During that same period, the Defined Business
Unit expended approximately $3,200,000 for the purchase of property, plant and
equipment.
CASH FLOWS FROM FINANCING
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 each division and 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 availability of funds.
The Oilseed Processing and Refining Defined Business Unit had debt
outstanding to the Company of $24,100,000 on November 30, 1998 compared
<PAGE>
with $22,900,000 on May 31, 1998 and $15,100,000 on August 31, 1998. These
interest bearing balances reflect working capital and fixed asset financing
requirements.
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 million and $90 million. The precise configuration and size of
the facility has yet to be determined. The new facility may be financed with
debt, open membership equity, additional equity participation units, or a
combination of these financing alternatives.
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
ITEM 1. FINANCIAL STATEMENTS
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MAY 31, AUGUST 31, NOVEMBER 30,
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
(Audited) (Unaudited) (Unaudited)
CURRENT ASSETS:
Receivables $ 35,757,497 $ 35,227,642 $ 31,661,558
Inventories 13,785,062 18,894,703 21,314,204
Other current assets 393,085 429,772 164,698
------------- ------------- -------------
Total current assets 49,935,644 54,552,117 53,140,460
INTANGIBLE ASSETS 10,747,876 10,481,216 10,214,536
PROPERTY, PLANT AND EQUIPMENT 85,627,365 97,428,175 106,157,196
------------- ------------- -------------
$ 146,310,885 $ 162,461,508 $ 169,512,192
============= ============= =============
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives $ 16,738,969 $ 33,238,263 $ 42,092,821
Accounts payable 8,836,220 11,003,048 11,202,844
Accrued expenses 1,568,445 1,666,761 2,101,841
Current portion of long-term debt 10,005,000 10,005,000 10,005,000
------------- ------------- -------------
Total current liabilities 37,148,634 55,913,072 65,402,506
LONG-TERM DEBT 41,204,270 38,515,520 36,076,770
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY 67,957,981 68,032,916 68,032,916
------------- ------------- -------------
$ 146,310,885 $ 162,461,508 $ 169,512,192
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the
financial statements (unaudited)
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months Ended
November 30,
------------
1997 1998
---- ----
<S> <C> <C>
REVENUES:
Processed grain sales $ 53,988,519 $ 42,092,978
Other revenues 83,527
---------------------------------
54,072,046 42,092,978
COSTS AND EXPENSES:
Cost of goods sold 49,211,588 40,030,589
Marketing, general and administrative 2,185,212 2,238,787
Interest 959,686 943,427
---------------------------------
52,356,486 43,212,803
---------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 1,715,560 (1,119,825)
INCOME TAXES 150,000 (100,000)
---------------------------------
NET INCOME (LOSS) $ 1,565,560 ($ 1,019,825)
=================================
</TABLE>
The accompanying notes are an integral part of the
financial statements (unaudited)
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months Ended
November 30,
------------
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 1,565,560 ($ 1,019,825)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation and amortization 919,792 1,265,298
Changes in operating assets and liabilities:
Receivables (5,347,514) 3,566,085
Inventories (3,960,608) (2,419,501)
Other current assets (188,150) 265,073
Accounts payable and accrued
expenses (1,380,158) 634,876
----------------------------------
Total adjustments (9,956,638) 3,311,831
----------------------------------
Net cash (used in) provided by operating
activities (8,390,078) 2,292,006
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment (4,214,677) (9,727,651)
----------------------------------
Net cash used in investing activities (4,214,677) (9,727,651)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to
Cenex Harvest States Cooperatives 16,610,065 8,854,570
Principal payments on long-term debt (2,438,750) (2,438,750)
Defined business unit equity distributed (1,566,560) 1,019,825
----------------------------------
Net cash provided by financing
activities 12,604,755 7,435,645
----------------------------------
INCREASE (DECREASE) IN CASH 0 0
CASH AT BEGINNING OF PERIOD -- --
----------------------------------
CASH AT END OF PERIOD -- --
==================================
</TABLE>
The accompanying notes are an integral part of the
financial statements (unaudited)
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES
The unaudited statements of operations for the three-month period ended November
30, 1997 and 1998, reflect, in the opinion of management of Cenex Harvest States
Cooperatives (the Company), all normal, recurring adjustments necessary for a
fair statement of the results of operations for the interim periods. The results
of operations for any interim period are not necessarily indicative of results
for the full year. The balance sheet data as of May 31, 1998 was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles.
These statements should be read in conjunction with the financial statements and
footnotes included in the Defined Business Unit's financial statements for the
year ended May 31, 1998 which is included in the Cenex Harvest States
Cooperatives' Report on Form 10-K dated August 27, 1998, previously filed with
the Commission.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives (Harvest
States) combined through merger on June 1, 1998 (the Combination) with Harvest
States the surviving corporation. In accordance with the Plan of Combination,
the Articles of Incorporation and bylaws of Harvest States Cooperatives were
restated and the name Harvest States Cooperatives was changed to "Cenex Harvest
States Cooperatives" (the Company).
As a result of the Combination, the Company has changed its fiscal year end
to August 31, and is filing this Form 10-Q Report representing the first quarter
of the Company's new fiscal year.
Mr. Garry A. Pistoria, who has served as a group vice president responsible
for the operations of the Wheat Milling Defined Business Unit, retired as of
December 31, 1998. Mr. James Tibbetts, who had previously served as group vice
president of the Oilseed Processing and Refining Defined Business Unit, has
assumed responsibility for the Wheat Milling Defined Business Unit as part of
his current responsibilities for the Foods Group.
RESULTS OF OPERATIONS
Patronage refunds to the Wheat Milling Defined Business Unit holders are
calculated on the basis of tax earnings per bushel. Because of this, the Company
believes that the calculation below is an important measure of the Defined
Business Unit's performance.
Three Months Ended
November 30,
------------
1997 1998
---- ----
Pretax Income (Loss) 1,716,560 (1,119,825)
Book to tax differences
---------- ----------
Tax basis income (loss) 1,716,560 (1,119,825)
Bushels Processed 7,924,825 8,304,327
Income (Loss) per bushel $ 0.22 ($ 0.13)
---------- ----------
<PAGE>
Certain operating information pertaining to the Wheat Milling Defined
Business Unit is set forth below, as a percentage of sales.
Three Months Ended
November 30,
------------
1997 1998
---- ----
Gross Margin percentage 8.85% 4.90%
Marketing and Administrative 4.05% 5.32%
Interest 1.78% 2.24%
COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
The Wheat Milling Defined Business Unit produced a net loss of $1,020,000 for
the three months ended November 30, 1998 compared to net income of $1,566,000
for the same period in 1997, for a decrease in net income of $2,600,000.
Approximately $1,000,000 of this decrease was created by a reduction in
production at the Huron mill, where the conversion of a semolina line to a hard
wheat bakery flour reduced volume 35% compared to the same period in 1997, with
essentially the same fixed costs applying against lower volume. While the
decrease in Huron volume was offset by increased production at the other mills,
a general deterioration in gross margins of approximately 60 cents per hundred
weight on all products produced the balance of the change in net income. The
Huron conversion estimated completion date is February 15, 1999.
Net sales for the three-month period ended November 30, 1998 of $42,100,000
decreased $11,900,000 (22%) compared to the same period in 1997. A reduced sales
price of $2.90 per hundred weight, partially offset by a 250,000 hundred weight
volume increase produced this decline in sales revenue.
Cost of goods sold of $40,000,000 for the three months ended November 30,
1998 decreased $9,200,000 (19%) compared to the same period in 1997. This
decrease was created primarily by a $1.60 per bushel decline in the cost of raw
material during the three months ended November 30, 1998, compared to that same
period in 1997. This price variance was partially offset by an increase in
volume of approximately 500,000 bushels, and by a $600,000 increase in plant
expense, $500,000 of which was incurred at the Houston mill. The Houston mill
was operating in a startup phase during this period in 1997.
Marketing, general and administrative expenses of $2,200,000 for the three
months ended November 30, 1998 were essentially unchanged compared to the same
period in 1997.
Interest expense of $950,000 during the three months ended November 30, 1998
was consistent with the same expense incurred during the three-month period
ended November 30, 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Wheat Milling 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 and levels.
In September 1997, the Wheat Milling Defined Business Unit began construction
of a mill at Mount Pocono, Pennsylvania. As committed in the registration
statement for the original equity participation unit offering, this mill is to
be financed with equity from the Company. Anticipated cost is $41,350,000, of
which $33,175,000 was expended through November 30, 1998. Projected completion
is for March 1999, although some phases are or will be in operation in January
and February 1999.
The Cenex Harvest States 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 $1,755,000 for the cost of the land and an access road. Plans
for this mill are subject to due diligence, routine regulatory review and cost
verification. Anticipated costs for this mill are approximately $35,000,000, and
may be financed with debt, open member equity, additional equity participation
units, or a combination of these financing alternatives. Construction is
projected to begin sometime during the year 2002.
Commencement of operations at a particular facility involves increased
working capital to fund required inventories and receivables related to
increased sales. New facilities may not be immediately profitable, which would
then have a negative impact on cash flows and may require additional financing
as a result. In addition, increased carrying value of inventories and
receivables because of higher prices, increased receivables because of slow
collections or increased inventories above historical levels requires additional
financing.
CASH FLOWS FROM OPERATIONS
Operating activities for the three months ended November 30, 1998 provided
net cash of $2,300,000. Noncash expenses of $1,270,000 and a reduction in
working capital requirements of $2,050,000 offset the net operating loss of
$1,020,000.
For the three months ended November 30, 1997, operating activities used net
cash of $8,400,000. Net earnings of $1,570,000 and noncash expenses of $920,000
were offset by increased working capital requirements totaling approximately
$10,900,000.
CASH FLOWS FROM INVESTING
Cash expended for the acquisition of property, plant and equipment during the
three-month periods ended November 30, 1998 and 1997, respectively, totaled
approximately $9,700,000 and $4,200,000.
<PAGE>
CASH FLOWS FROM FINANCING
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 and cash requirements of all other Company operations.
Working capital requirements for each division of the Company are reviewed on
a periodic basis, and could potentially be restricted based upon availability of
funds.
Short-term debt outstanding and payable to the Company on November 30, 1998
was $42,100,000 compared to $33,300,000 and $16,700,000 on August 31, 1998 and
May 31, 1998, respectively. This increase is primarily due to payments for Mount
Pocono capital expenditures, for which the Company had contributed $38,800,000
of capital to this account on June 1, 1997.
On November 30, 1998 the Wheat Milling Defined Business Unit had long-term
debt of $46,100,000 which was incurred for the acquisition, expansion and
construction of its various plants since 1990. The balance of such long-term
debt was $48,500,000 and $51,200,000 on August 31, 1998 and May 31, 1998
respectively. Approximately $10,000,000 of the current balance is payable within
the next twelve months.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------------------
10.27 Limited Liability Company Agreement of United Harvest, LLC
dated November 9, 1998 between United Grain Corporation and
Cenex Harvest States Cooperatives
99 Cautionary Statement
27.1 Financial Data Schedule (EDGAR filing only)
27.2 Restated Financial Data Schedule due to the merger of Harvest
States Cooperatives and Cenex Inc. accounted for as a pooling
of interests (EDGAR filing only)
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENEX HARVEST STATES COOPERATIVES
(Registrant)
/s/ T. F. Baker
------------- ---------------
(Date) T. F. Baker
Executive Vice-President - Finance & Administration
EXHIBIT 10.27
LIMITED LIABILITY COMPANY AGREEMENT
FOR
UNITED HARVEST, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
NOVEMBER 9, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 GENERAL PROVISIONS..........................................1
1.1 Formation.......................................................1
1.2 Name............................................................1
1.3 Filings; Registered Office and Statutory Agent..................1
1.4 Principal Executive Office......................................2
1.5 Purpose.........................................................2
1.6 Company Powers..................................................2
1.7 Term............................................................3
1.8 Qualification in Other Jurisdictions............................3
1.9 Definitions.....................................................3
ARTICLE 2 MEMBERS....................................................11
2.1 Members........................................................11
2.2 Access to Books of Account.....................................11
2.3 Confidential Information.......................................11
ARTICLE 3 MANAGEMENT.................................................13
3.1 Management.....................................................13
3.2 Powers of the Members Committee................................13
3.3 Members Committee Meetings.....................................15
3.4 Voting.........................................................17
3.5 Deadlocks......................................................17
3.6 Executive Committee............................................17
3.7 Members........................................................19
ARTICLE 4 OFFICERS AND EMPLOYEES.....................................19
4.1 Officers.......................................................19
4.2 President......................................................19
ARTICLE 5 PURCHASES AND SALES OF GRAIN; PUT-THROUGH
SERVICES...................................................19
5.1 Grain Origination..............................................19
5.2 Grain Sales....................................................21
5.3 Put-through Services...........................................22
ARTICLE 6 DISPUTE RESOLUTION.........................................22
6.1 Dispute Resolution.............................................22
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
ARTICLE 7 SHORT TERM CREDIT FACILITIES FROM MEMBERS..................25
7.1 Credit Facilities..............................................25
7.2 Security Interest..............................................25
7.3 Cross-Default..................................................25
7.4 Agreement Regarding Payments...................................26
7.5 Distributions In Reorganization................................26
7.6 Allocation and Payment of Credit Arrearages....................26
7.7 Agreement To Hold In Trust.....................................26
7.8 Limit On Right Of Action.......................................26
7.9 Actions In Reorganization......................................27
7.10 Further Assurances.............................................27
7.11 Continuing Effect..............................................27
7.12 Transfers......................................................27
ARTICLE 8 CAPITAL CONTRIBUTIONS......................................27
8.1 Capital Accounts...............................................27
8.2 Initial Contributions of Capital...............................28
8.3 Additional Contributions by Members............................28
8.4 Member Obligations.............................................29
8.5 Withdrawals of Capital Accounts................................29
8.6 Interest on Capital Accounts...................................29
8.7 Revaluation of Company Assets..................................29
8.8 Redetermination of Percentage Interests........................30
8.9 Determination of Fair Market Value.............................30
ARTICLE 9 ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS............32
9.1 Allocation of Profits and Losses...............................32
9.2 Allocation of Taxable Income and Loss..........................35
9.3 Distribution of Assets by the Company..........................35
ARTICLE 10 TAX MATTERS AND REPORTS; ACCOUNTING........................36
10.1 Filing of Tax Returns...........................................36
10.2 Tax Matters Partner.............................................36
10.3 Tax Reports to Current and Former Members.......................37
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
10.4 Accounting Records; Independent Audit...........................37
10.5 Fiscal Year.....................................................37
10.6 Tax Accounting Method...........................................37
10.7 Withholding.....................................................37
10.8 Tax Elections...................................................37
10.9 Prior Tax Information...........................................37
10.10 Financial Reports...............................................38
ARTICLE 11 TRANSFER AND ASSIGNMENT OF INTERESTS; ADDITIONAL
MEMBERS....................................................38
11.1 Transfer and Assignment of Interests............................38
11.2 Assignees and Substituted Members...............................38
11.3 Additional Members..............................................39
11.4 Transfer of Assets..............................................40
11.5 Transfer of Interest in United Grain............................40
11.6 Change of Country Facilities or Operations......................40
ARTICLE 12 DISSOLUTION AND LIQUIDATION................................40
12.1 Events of Dissolution...........................................40
12.2 Voluntary Dissolution...........................................41
12.3 Liquidation and Order of Dissolution............................41
12.4 Liquidator......................................................43
12.5 Termination of Company..........................................43
12.6 Orderly Winding Up..............................................43
ARTICLE 13 INDEMNIFICATION AND EXCULPATION; CERTAIN
AGREEMENTS.................................................43
13.1 Indemnification of the Members..................................43
13.2 Reimbursement and Indemnity.....................................44
13.3 Exculpation.....................................................44
13.4 Indemnification Relating To Initial Contributions...............44
ARTICLE 14 MISCELLANEOUS..............................................45
14.1 Notices.........................................................45
14.2 Governing Law...................................................46
14.3 Amendments......................................................46
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
14.4 Entire Agreement................................................46
14.5 Waiver of Partition.............................................47
14.6 Consents........................................................47
14.7 Successors......................................................47
14.8 Counterparts....................................................47
14.9 Severability....................................................47
14.10 Survival........................................................47
14.11 No Third Party Beneficiaries....................................47
-iv-
<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
FOR
UNITED HARVEST, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
This Limited Liability Company Agreement of UNITED HARVEST, LLC (the
"Company") is made as of November 9, 1998, by and between UNITED GRAIN
CORPORATION, an Oregon corporation ("United Grain") and CENEX HARVEST STATES
COOPERATIVES, a Minnesota corporation ("Harvest States"), each of which shall be
a Member (as hereinafter defined) from and after said date for all purposes
hereof.
WHEREAS, United Grain and Harvest States have concluded that it will
be in their best interests to form a limited liability company for the purchase,
processing, marketing, storage, distribution and export of grain originated in
certain States of the United States and of operating the Business hereinafter
described and, in furtherance thereof, United Grain and Harvest States wish to
become Members in the Company; and
NOW, THEREFORE, in consideration of the promises, mutual covenants
and agreements herein contained and in order to set forth the respective rights,
obligations and interests of the Members to one another and to the Company, the
Members hereby agree as follows:
ARTICLE 1
GENERAL PROVISIONS
1.1 Formation. United Grain and Harvest States hereby agree to form
the Company as a limited liability company under and pursuant to the Act (as
hereinafter defined) and this Agreement. Except as provided in this Agreement,
the rights, duties, liabilities and obligations of the Members and the
administration, dissolution, winding up and termination of the Company shall be
governed by the Act.
1.2 Name. The name of the Company shall be "United Harvest, LLC".
The name of the Company may be changed with the unanimous approval of the
Members Committee.
1.3 Filings; Registered Office and Statutory Agent.
(a) The Members shall cause the Certificate to be filed with the
Secretary of State of Delaware and any other office in accordance
with the Act. The Members shall cause additional amendments to the
Certificate to be filed whenever required by the Act. The Members
shall take any and all other actions as may be reasonably necessary
to perfect and maintain the status of the Company as a limited
liability company under the Act.
(b) The registered office of the Company in the State of
Delaware required by the Act shall be c/o The Corporation Trust
Company, 1209 Orange Street, County of New Castle, Wilmington,
Delaware 19801, as set forth in the Certificate, until such time
<PAGE>
as the registered office is changed with the unanimous approval of
the Members Committee in accordance with the Act and the filing of
an amendment to the Certificate.
(c) The statutory agent of the Company in the State of Delaware
required by the Act shall be the Corporation Trust Company, 1209
Orange Street, County of New Castle, Wilmington, Delaware 19801
until such time as the statutory agent is changed with the unanimous
approval of the Members Committee in accordance with the Act and the
filing of an amendment to the Certificate.
1.4 Principal Executive Office. The principal executive office for
the transaction of the business of the Company may be fixed upon the unanimous
approval of the Members Committee within or without the State of Delaware.
Initially, such principal executive office of the Company shall be 200 Southwest
Market Street, Suite 1780, Portland, OR 97201-6281.
1.5 Purpose. The purpose of the Company shall be (a) to enter into
the Joint Venture Agreement (as hereinafter defined); (b) to lease, sublease and
operate the Vancouver Terminal Elevator (as hereinafter defined), the Kalama
Terminal Elevator (as hereinafter defined), and other grain elevators and
facilities; (c) to purchase Grain (as hereinafter defined) originated in the
Exclusive Territory (as hereinafter defined) or outside of the Exclusive
Territory from Harvest States or from private commercial companies, in
accordance with Section 5.1, for sale into the Wheat Territory (as hereinafter
defined) (for wheat) and into the Barley Territory (as hereinafter defined) (for
feed barley); (d) to sell wheat outside of the Wheat Territory and feed barley
outside of the Barley Territory only as provided in Section 5.2; (e) to export
through the CRDIP Grain purchased in accordance with Section 5.1; (f) to
purchase Grain originated outside the Exclusive Territory in accordance with
Section 5.1; and (g) to conduct such other business activities as may from time
to time be unanimously approved by the Members Committee (collectively, the
"Business").
1.6 Company Powers.
(a) The Company shall have the power: (i) to acquire and operate
the Business; (ii) to acquire or lease all equipment, supplies and
services and to make improvements necessary for the ownership,
operation, management and maintenance of the Business; (iii) to
borrow or raise money necessary for the acquisition, ownership,
operation, management and maintenance of the Business; (iv) to use
any contributions from the Members for such purposes; (v) to execute
any documents required in connection with the foregoing; (vi) to do
any and all acts and things which may be necessary, appropriate,
proper, advisable, incidental or convenient to or for the
furtherance of the Business as contemplated by this Agreement; and
(vii) to take any other action permissible under the Act in
connection with the Business;
(b) The Company may enter into, deliver and perform all
contracts, agreements and other undertakings and engage in all
activities and transactions as may be necessary or appropriate to
carry out the foregoing purposes. Without limiting the foregoing,
the Company may:
2
<PAGE>
(i) acquire, sell, lease, exchange, transfer, assign,
encumber, pledge or mortgage assets of the Business or otherwise
exercise all rights, powers, privileges and other incidents of
ownership or possession with respect to such assets;
(ii) borrow or raise money and secure the payment of any
obligations of the Company by mortgage upon, or pledge or
hypothecation of, all or any part of the assets of the Company;
(iii) engage personnel, whether part-time or full-time, to
do such acts as are necessary or advisable in connection with
the maintenance, operation and administration of the Company and
its investments; and
(iv) engage attorneys, independent accountants, investment
bankers, consultants or such other Persons as are necessary or
advisable.
1.7 Term. The term of the Company shall commence on the date that
the Certificate is executed and filed in the Office of the Secretary of State of
the State of Delaware pursuant to Section 18-201 of the Act. Unless earlier
terminated and dissolved as provided in Article 12 or by applicable law, the
Company shall continue in existence until December 1, 2003 (the "Initial Term");
provided however, that unless the Company is earlier terminated and dissolved as
provided in Article 12 or by applicable law, the Initial Term, and the duration
of the Company, shall automatically be extended for successive 18-month periods
(such Initial Term and successive periods being collectively referred to herein
as the "Term").
1.8 Qualification in Other Jurisdictions. The Members acting through
the Members Committee shall cause the Company to be qualified, formed, or
registered under assumed or fictitious name statutes or similar laws in any
jurisdiction in which the Company owns property or engages in activities if such
qualification, formation or registration is necessary to permit the Company
lawfully to own property and engage in the Business. The Members shall execute,
file and publish all such certificates, notices, statements or other instruments
necessary to permit the Company to engage in the Business as a limited liability
company in all jurisdictions where the Company elects to engage in or do
Business.
1.9 Definitions. For purposes of this Agreement the following terms
have the following meanings unless indicated otherwise, all Article and Section
references are to Articles and Sections in this Agreement, and all Schedule
references are to Schedules to this Agreement:
"Accumulated Net Loss" means the total of all Net Losses of the
Company since inception in excess of the total of all Net Income either retained
or distributed of the Company for all of the Company's fiscal years since
inception.
"Act" means Title 6 Chapter 18 of the Delaware Code (the Delaware
Limited Liability Company Act), as from time to time in effect in the State of
Delaware, or any corresponding provision or provisions of any succeeding or
successor law of such State; provided, however, that in the event that any
amendment to the Act, or any succeeding or successor law, is applicable to the
Company only if the Company has elected to be governed by the Act as so amended
or by such succeeding or successor law, as the case may be, the term "Act" shall
refer
3
<PAGE>
to the Act as so amended or to such succeeding or successor law only after the
appropriate election by the Company, if made, has become effective.
"Additional Member" means any additional Person admitted as a Member
to the Company pursuant to Article 11.
"Adjusted Capital Contributions" means, for each Member, the
cumulative amount of such Member's capital contributions to the Company which
for purposes of this definition shall be equal to the sum of (i) the amount of
cash and the Fair Market Value as of the date of contribution of any other
property contributed to the capital of the Company, plus (ii) the cumulative
amount of Adjusted Revaluation Gain, and less (iii) the cumulative amount of
Adjusted Revaluation Loss.
"Adjusted Revaluation Gain" or "Adjusted Revaluation Loss" means,
respectively, the Revaluation Gain or Revaluation Loss, as the case may be, with
respect to an asset being revalued which would have arisen had the basis used in
computing Revaluation Gain or Revaluation Loss been equal to the Capital Account
book basis of such asset immediately following the later of its contribution or
acquisition or any immediately preceding revaluation.
"Affiliate" means a Person that directly, or indirectly through one
or more intermediaries, controls, is controlled by or is under common control
with the Person specified. For purposes of this definition, the term "control"
(including the terms "controlling," "controlled by" and "under common control
with") of a Person means the possession, direct or indirect, of the power to (i)
vote in excess of 50% of the Voting Securities of such Person, or (ii) direct or
cause the direction of the management and policies of such Person, whether by
contract or otherwise. Anything hereinabove to the contrary notwithstanding,
under no circumstances shall the Company be deemed to be an Affiliate of United
Grain, Harvest States or any of their respective Affiliates.
"Affiliate Transferee" means, with respect to a Member, a Wholly
Owned Affiliate of such Member to which an ownership interest of all or any part
of its Membership Interest has been transferred in accordance with Article 11
hereof.
"Agent" means any officer, director, Committee Member, employee,
partner, shareholder or agent of any Person.
"Agreement" means this Limited Liability Company Agreement, as it
may be amended, supplemented or restated from time to time.
"Appraiser" means any of the First Appraiser, the Second Appraiser
and the Third Appraiser as defined in Section 8.9 of this Agreement.
"Appraiser's Certificate" means a certificate prepared by an
Appraiser, executed on behalf of an Appraiser by a duly authorized officer
thereof, and setting forth such Appraiser's opinion as to the Fair Market Value
of an asset.
"Asset Member" shall have the meaning set forth in Section 8.9(a) of
this Agreement.
4
<PAGE>
"Asset Value" with respect to any Company asset means:
(a) The Fair Market Value when contributed of such asset
contributed to the Company by any Member;
(b) The Fair Market Value on the date of distribution of such
asset distributed by the Company to any Member as consideration for
its Membership Interest;
(c) The Fair Market Value of such asset upon a revaluation
pursuant to Section 8.7 of this Agreement; or
(d) The Basis of the asset in all other circumstances.
"Assignee" means the Person to whom a transfer of a Membership
Interest is made; an Assignee is not a Substituted Member unless and until the
Assignee complies with Section 11.2 of this Agreement.
"Barley Territory" means the PNW plus the states of California,
Arizona and Nevada.
"Basis" with respect to an asset means the adjusted basis from time
to time of such asset for United States federal income taxes purposes.
"Budget" means a one-year revenue, expense and capital expenditure
budget for the Company, as it may be amended from time to time in accordance
with the terms of this Agreement. Each such annual Budget shall include, in
respect of the Company for the next fiscal year, an income statement, balance
sheet and capital budget (with line item detail showing revenues and expenses
projected for the Business) prepared on an accrual basis for the Company for the
forthcoming fiscal year; a cash flow statement which shall show in reasonable
detail the receipts and disbursements (including without limitation, the
anticipated distributions) projected for the Company for the forthcoming fiscal
year and the amount of any corresponding cash deficiency or surplus, and the
amount and due dates of all required capital contributions, if any; and any
information reasonably available which could assist the Members in evaluating
such Budgets. Each such Budget shall be prepared on a basis consistent with the
Company's financial statements and the Business Plan approved by the Members
Committee.
"Business" shall have the meaning set forth in Section 1.5.
"Business Plan" means an annual business plan for the Company, as it
may be amended from time to time in accordance with this Agreement, but which
shall include: (a) an annual operating plan; (b) a three year rolling strategic
plan; (c) a detailed description of key underlying assumptions and business
strategies. It should also include cash flow projections, capital expenditure
budgets, and compensation proposals.
"Capital Account" means the capital account maintained by the
Company for each Member as described in Section 8.1 of this Agreement.
"Capital Expenditures" means all expenditures for, or contracts for
expenditures with respect to, any fixed assets or improvements, or for
replacements, substitutions or additions
5
<PAGE>
thereto, which are capitalized on the consolidated balance sheet of the Company
in conformity with GAAP.
"Certificate" means the certificate of formation filed with the
Secretary of State of the State of Delaware pursuant to the Act to form the
Company as originally executed and amended, modified or restated from time to
time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the limited liability company formed pursuant to
this Agreement and the Certificate.
"Confidential Information" means all documents and information
(including, without limitation, confidential and proprietary information with
respect to customers, sales, marketing, production, costs and the design and
development of new products or services) of each of the Company, the Members and
their respective Affiliates, except to the extent that such information can be
shown to have been (a) generally available to the public other than as a result
of a breach of the provisions of Section 2.3 of this Agreement; (b) already in
the possession of the receiving Person or its Agents without restriction and
prior to any disclosure in connection with the Company or pursuant to any of the
terms of this Agreement; (c) lawfully disclosed to the receiving Person or its
Agents by a third party who is free lawfully to disclose the same; or (d)
independently developed by the receiving Person without use of any Confidential
Information obtained in connection with the transactions leading up to and
contemplated by this Agreement and the operation of the Company or its
businesses.
"CPR" shall mean the CPR Center for Dispute Resolution.
"CPR Rules" shall mean the Rules for Non-Administered Arbitration of
International Disputes promulgated by CPR.
"CRDIP" means the Columbia River District including Portland.
"Credit Documents" means the applicable Form of Loan Agreement, Form
of Trade Credit Agreement, Form of Promissory Note and Form of Security
Agreement attached hereto as Exhibit I, as executed and delivered in connection
with the extension of Credit pursuant to Article 7 hereto.
"Default" and "Event of Default" shall have the meanings assigned to
such terms under any of the Credit Documents.
"Default Amount" shall have the meaning set forth in Section 8.3(b)
of this Agreement.
"Defaulting Member" shall have the meaning set forth in Section
8.3(b) of this Agreement.
"Depreciation" for any fiscal year or other period means the cost
recovery or amortization deduction with respect to an asset for such year or
other period as determined for federal income tax purposes, provided that if the
Asset Value of such asset differs from its Basis
6
<PAGE>
at the beginning of such year or other period, depreciation shall be determined
by applying tax recovery periods and methods to the Asset Value of the asset as
provided in Income Tax Regulation Section 1.704-l(b)(2)(iv)(g)(3).
"Dispute" shall have the meaning set forth in Section 6.1.
"Effective Date" means the date upon which the acquisition by the
Company of the Business shall have been consummated, pursuant to the Joint
Venture Agreement.
"Employee Lease Agreement" means the Employee Lease Agreement
between and among Harvest States, United Grain and the Company to be entered
into on or about December 1, 1998.
"Exclusive Territory" or "PNW" means the States of Idaho, Montana,
Utah, Oregon and Washington.
"Facilities" shall have the meaning set forth in the Put-through
Agreement.
"Fair Market Value" means, with respect to any asset, as of the date
of determination, the cash price at which a willing seller would sell, and a
willing buyer would buy, each being apprised of all relevant facts and neither
the seller nor the buyer acting under compulsion, such asset in an arm's-length
negotiated transaction with an unaffiliated third party without time
constraints, all as determined under Section 8.9 of this Agreement.
"Financial Reports" shall have the meaning set forth in Section
10.10 of this Agreement.
"GAAP" means generally accepted accounting principles, consistently
applied with prior periods.
"Grain" means wheat, excluding durum, and feed barley.
"Harvest States" shall have the meaning set forth in the preamble of
this Agreement.
"Harvest States Substituted Member" means any Substituted Member
which has acquired its Membership Interest from Harvest States or whose
Membership Interest was originally owned by Harvest States.
"Income Tax Regulations" means the United States federal income tax
regulations, including temporary (but not proposed) regulations, promulgated
under the Code.
"Joint Venture Agreement" means the Joint Venture Agreement to be
entered into among United Grain, Harvest States and the Company, pursuant to
which United Grain and Harvest States shall, not later than December 31, 1998,
enter into the transactions set forth therein in consideration of their
respective Membership Interests in the Company.
"Kalama Terminal Elevator" shall have the same meaning as set forth
in the Joint Venture Agreement.
7
<PAGE>
"Lien" means, as to any Membership Interest, liens, encumbrances,
security interests and other rights, interests or claims of others therein
(including, without limitation, warrants, options, rights of first refusal,
rights of first offer, co-sale and similar rights).
"Liquidator" has the meaning set forth in Section 12.4 of this
Agreement.
"Member" means each of United Grain and Harvest States, and includes
any Person admitted as an Additional Member or Substituted Member of the Company
pursuant to Article 11 of this Agreement. United Grain and Harvest States shall
be admitted as Members of the Company on the date hereof. A Person who is not
admitted on the date hereof as a Member of the Company shall be deemed admitted
as a Member upon satisfaction of the requirements of Article 11.
"Membership Interest" means the interest and ownership of a Member
in the Company, including the Capital Account of such Member, its participation
in the profits and losses of the Company in accordance with its Percentage
Interest, and all of its other rights and obligations under this Agreement and
the Act, relating to the Company.
"Net Book Value" means (a) all cash, cash equivalents and other
assets as of the date of determination thereof which should be classified as
current assets in accordance with GAAP, minus (b) all liabilities as of the date
of determination thereof which should be classified as current liabilities in
accordance with GAAP.
"Net Income (Loss)" means the Company's consolidated net income (or
loss) after taxes incurred or paid by the Company, at the end of each fiscal
year of the Company, and shall be calculated in accordance with GAAP; provided
that there shall be specifically excluded therefrom (i) any distributions of the
Company's assets, (ii) retained earnings, (iii) tax-adjusted gains or losses
from the sale of capital assets, (iv) net income of any person in which the
Company has an ownership interest, unless received by the Company in a cash
distribution and (v) any gains arising from extraordinary items, as defined by
GAAP.
"Net Operating Available Cash" means at the time of determination,
(a) all cash and cash equivalents on hand in the Company, less (b) the Forecast
Cash Requirements, if any, of the Company, as determined by the Members in a
manner consistent with a Budget approved by the Members Committee. For purposes
of this definition, "Forecast Cash Requirements" means, for the twelve-month
period following the date of determination, the excess, if any, of (a) forecast
capital expenditures, capital contributions to other entities and other
investments, acquisitions, cash income tax payments and debt service (including
principal and interest) requirements and other non-cash credits to income, plus
forecast cash reserves for future operations or other requirements, over (b)
forecast net income of the Company, plus the sum of forecast depreciation,
amortization, interest expenses, income tax expenses and other non-cash charges
to income, in each case to the extent deducted in determining such net income,
plus or minus forecast changes in working capital, plus the forecast cash
proceeds of dispositions of assets (net of expenses), plus an amount equal to
the forecast net proceeds of debt financings.
"Non-Defaulting Members" shall have the meaning set forth in Section
8.3(b) of this Agreement.
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"Parent Entity" means, as to any Person, an Affiliate of which such
Person is a Wholly Owned Subsidiary.
"Payment" or "Distribution" means with respect to indebtedness of
any Person, (i) deliveries of cash, securities or other property on or in
respect of such indebtedness or as a result of rescission or damages in respect
of such indebtedness, or (ii) deliveries of cash, securities or other property
made on or in respect of the purchase, repurchase, redemption or other
acquisition of such indebtedness, in each case whether received through a direct
payment, set-off, foreclosure, a deed in lieu of foreclosure, judgment lien,
casualty insurance proceeds or in any other manner.
"Percentage Interest" means, for each Member, the Percentage
Interest of the Member as set forth on Schedule I, as such Percentage Interests
may be modified pursuant to Section 8.8.
"Person" means any individual, corporation, partnership, limited
liability company, firm, joint venture, association, joint-stock company, trust,
estate, unincorporated organization, governmental or regulatory body or other
entity.
"Prime Rate" means the per annum rate publicly announced by Bank of
America from time to time at its head office in San Francisco, California as its
"Reference Rate".
"Profits and Losses" for any fiscal year or other period means an
amount equal to the Company's taxable income for United States federal income
tax purposes for such year or period determined in accordance with Code Section
703(a) and the Income Tax Regulations thereunder with the following adjustments:
(a) All items of income, gain, loss, and deduction of the
Company required to be stated separately shall be included in
taxable income or loss;
(b) Income of the Company exempt from United States federal
income tax shall be treated as taxable income;
(c) Expenditures of the Company described in Code Section
705(a)(2)(B) or treated as such expenditures under Income Tax
Regulation Section 1.704--l(b)(2)(iv)(i) shall be subtracted from
taxable income;
(d) Revaluation Gain and Revaluation Loss shall be included;
(e) Gain or loss resulting from the disposition of property from
which gain or loss is recognized for United States federal income
tax purposes shall be determined with reference to the Asset Value
of such property; and
(f) Depreciation shall be determined based upon Asset Value
instead of as determined for United States federal income tax
purposes.
"Put-through Agreement" means the Put-through Agreement between the
Company and Harvest States to be entered into on or about December 1, 1998.
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"Reorganization" means any voluntary or involuntary dissolution,
winding-up, total or partial liquidation or bankruptcy, insolvency,
reorganization, receivership or other statutory or common law proceedings or
arrangements involving the Company or its assets or the readjustment of the
Company's liabilities or any assignment for the benefit of creditors or any
marshaling of the assets or liabilities of the Company.
"Revaluation Gain" means the amount of gain which would have been
realized had there been a taxable disposition of any Company asset being
revalued under Section 8.7 of this Agreement for an amount of cash equal to such
asset's then Fair Market Value, determined in accordance with the provisions of
Section 8.9 of this Agreement.
"Revaluation Loss" means the amount of loss which would have been
realized had there been a taxable disposition of any Company asset being
revalued under Section 8.7 of this Agreement for an amount of cash equal to such
asset's then Fair Market Value, determined in accordance with the provisions of
Section 8.9 of this Agreement.
"Substituted Member" shall have the meaning set forth in Section
11.5 of this Agreement.
"Tax Matters Partner" means the Tax Matters Partner of the Company
as referred to in Section 10.2 of this Agreement.
"Taxes" means all taxes, charges, fees, levies or other assessments
imposed by any taxing authority, including, but not limited to, income, gross
receipts, excise, property, sales, use, transfer, payroll, license, ad valorem,
value added, withholding, social security, national insurance (or other similar
contributions or payments), franchise, estimated, severance and stamp taxes
(including any interest, fines, penalties or additions attributable to, or
imposed on or with respect to, any such taxes, charges, fees, levies or other
assessments) and "Tax Return" means any return, report, information return or
other document (including any related or supporting information) with respect to
Taxes.
"Term" shall have the meaning set forth in Section 1.7 of this
Agreement.
"Transfer" means as a verb to transfer, sell, assign, exchange,
pledge, give, hypothecate or otherwise convey or encumber, including by
operation of law, all or any portion of a Membership Interest, and, as a noun,
any transfer, sale, assignment, exchange, change, gift, hypothecation or other
conveyance or encumbrance of all or any portion of a Membership Interest.
"United Grain" shall have the meaning set forth in the preamble of
this Agreement.
"United Grain Substituted Member" means any Substituted Member which
has acquired its Membership Interest from United Grain or whose Membership
Interest was originally owned by United Grain.
"Vancouver Terminal Elevator" shall have the same meaning as set
forth in the Joint Venture Agreement.
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"Wheat Territory" means the PNW.
"Wholly Owned Affiliate" means, as to any Person, a Parent Entity or
any Affiliate that is a Wholly Owned Subsidiary of such Parent Entity.
"Wholly Owned Subsidiary" means, as to any Person, a corporation or
other entity all of the capital stock or other equity interests of which
corporation or entity is at the time owned, directly or indirectly, through one
or more intermediaries, or both, by such Person.
ARTICLE 2
MEMBERS
2.1 Members. Each of the parties to this Agreement, and each Person
admitted as a Member of the Company pursuant to the Act and Article 11 of this
Agreement, shall be Members of the Company until they cease to be Members in
accordance with the provisions of the Act, the Certificate, or this Agreement.
The names of the Members shall be set forth in Schedule I hereto, as such
Schedule I may be amended from time to time.
2.2 Access to Books of Account. Each Member shall have the right at
all reasonable times during usual business hours to audit, examine, and make
copies or extracts of or from the complete books of account of the Company,
including but not limited to the books and records maintained in accordance with
Section 10.4 and all other books and records of the Company. Such right may be
exercised through any Agent of such Member designated by it or by independent
certified public accountants or counsel designated by such Member. Each Member
shall bear all expenses incurred in any examination made for such Member's
account.
2.3 Confidential Information.
(a) The Company and each Member shall not use or disclose to
others any Confidential Information received from the Company or any
other Member for any purpose other than provided for in this
Agreement, and shall take or cause to be taken such precautions as
are reasonably necessary to prevent disclosure or use of
Confidential Information to others, except to or by (i) any lender
to the Company, or (ii) any Member or any of their respective
Affiliates or Agents on a "need to know" basis in connection with
the transactions leading up to and contemplated by this Agreement,
including with respect to any agreements or contracts between the
Member and the Company, and the operation of the Company and the
Business, and such Member disclosing Confidential Information
pursuant to this Section 2.3 shall use, and shall cause its
Affiliates and Agents to use, such Confidential Information only for
the benefit of the Company in conducting the Business or for any
other specific purposes for which it was disclosed to such party;
provided that Harvest States may use Confidential Information
disclosed by it to the Company or United Grain in its other business
operations; and provided that the disclosure of financial statements
of, or other information relating to, the Company shall not be
deemed to be the disclosure of Confidential Information (i) to the
extent that any Member is required by law or GAAP to disclose such
financial statements or other information or (ii) to the extent that
in order to sustain a position taken for tax purposes,
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any Member deems it necessary and appropriate to disclose such
financial statements or other information. All Confidential
Information disclosed in connection with the Company or pursuant to
this Agreement shall remain the property of the Person whose
property it was prior to such disclosure.
(b) No Confidential Information regarding the plans or
operations of any Member or any Affiliate thereof received or
acquired by or disclosed to any other Member or Affiliate thereof in
the course of the conduct of the Business, or otherwise as a result
of the existence of the Company, may be used by such other Member or
Affiliate thereof for any purpose other than for the benefit of the
Company in conducting the Business.
(c) In the event that a Member or anyone to whom a Member
transmits any Confidential Information becomes legally compelled (by
oral questions, interrogatories, requests for information or
documents, subpoena, investigative demand or similar process) to
disclose any of the Confidential Information, such Member will
provide the other Members and the Company with prompt written notice
prior to disclosure so that the other Members and the Company may
seek a protective order or other appropriate remedy and/or waive
compliance with the provisions of this Agreement. In the event that
such protective order or other remedy is not obtained, or that the
Company and the other Members waive compliance with the provisions
of this Section 2.3, the Member or Person who is compelled to
disclose such Confidential Information will take reasonable measures
to minimize any required disclosure.
(d) Each Member who ceases to be such will, and will cause its
Affiliates and Agents to, maintain the confidentiality required by
this Section 2.3 and to destroy or return upon request, all
documents and other materials, and all copies thereof, obtained by
such Member or on its behalf from either the Company or the other
Members or any of their Affiliates in connection with the
transactions leading up to and contemplated by this Agreement and
the operation of the Company and the Business, that are subject to
such confidentiality obligations. The obligations under this Section
2.3 shall survive the dissolution of the Company for a period of
five years.
(e) To the fullest extent permitted by law, if a Member or any
of its Affiliates or Agents breaches, or threatens to commit a
breach of, this Section 2.3, the other Members and the Company shall
have the right and remedy to have this Section 2.3 specifically
enforced by and pursuant to the arbitration provisions in Section
6.1, and to obtain injunctive relief as authorized by Section 6.1,
it being acknowledged and agreed that money damages will not provide
an adequate remedy to such other Members or the Company. Nothing in
this Section 2.3 shall be construed to limit the right of any Member
or the Company to collect money damages in the event of breach of
this Section 2.3.
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ARTICLE 3
MANAGEMENT
3.1 Management. The Business of the Company shall be managed by the
Members in accordance with this Article 3. Except as provided in Section 3.7,
all decisions concerning the management of the Business shall be made by the
Members acting through the Members Committee and the officers of the Company, in
each case as further described in Sections 3.2 and 3.3. Any Person not a party
to this Agreement which deals with the Company shall be entitled to rely
conclusively upon the power and authority of the Members Committee. Except upon
the express authorization or designation by the Members or the Members Committee
in accordance with this Agreement, no Member shall have any unilateral right or
authority to take any action on behalf of the Company with respect to third
parties.
(a) Members Committee. The Members Committee shall consist of
ten (10) members, five (5) of whom shall be appointed by United
Grain and five (5) of whom shall be appointed by Harvest States.
Each Committee Member shall be an officer, director or employee of
the appointing Member and shall not be an officer or employee of the
Company. The foregoing restriction on qualifications of Committee
Members shall be subject to waiver and exceptions if approved by all
Members. The Committee Members shall serve without compensation in
connection with service on the Members Committee as such.
(b) Each Member's initial Committee Members shall be as set
forth in Schedule II. Effective upon the giving of written notice
thereof to the other Members, any Member may, at any time, in its
sole discretion and with or without cause, replace any or all of its
appointed Committee Members with other individuals and may designate
one or more alternates for any or all of its Committee Members;
provided that such replacement Committee Members or alternates meet
the requirements provided in Section 3.1(a) above. Each Committee
Member shall serve on the Members Committee until his or her
successor is appointed, or until his or her earlier death,
resignation or removal. In the event that a Committee Member ceases
to serve for any reason, the Member that appointed such Committee
Member shall promptly designate a successor. Effective upon a Member
ceasing to be a member of the Company, the Committee Members
representing such Member on the Members Committee shall cease to be
Committee Members.
3.2 Powers of the Members Committee.
(a) Without prejudice to the general powers of the Members to
manage the Business, but subject to any limitations contained in the
Act, it is hereby expressly declared that the Members delegate to
the Members Committee the full and complete authority, power and
discretion to manage and control the Business including the
following powers, authority and duties:
(i) to cause the Company to enter into (a) the Joint Venture
Agreement and all other documents, instruments and agreements in
connection
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therewith; and (b) all credit agreements with the lenders and
other agreements or instruments relating to the Business, with
respect to any loans or other financing obtained by the Company;
(ii) to change the scope of the Business of the Company;
(iii) to adopt the annual Budgets and Business Plans for the
Company and the amendments thereto;
(iv) to approve the admission of an Additional Member of the
Company;
(v) to elect to continue the business of the Company
following an event of dissolution, pursuant to Section 12.1
hereof;
(vi) to approve a merger or consolidation of the Company
with or into any other Person;
(vii) to approve the sale of all or substantially all of the
Company's assets;
(viii) to establish or dissolve any subsidiary of the
Company;
(ix) to require any capital contributions (except the
Initial Capital Contributions as provided for in this Agreement)
and to determine the form of such contributions;
(x) to require any Capital Expenditures in excess of
$50,000;
(xi) to form or dissolve a joint venture, partnership or any
other similar arrangement between the Company and any other
Person;
(xii) to appoint, replace or discharge the President of the
Company (who shall initially be Gary Schuld);
(xiii) to approve any acquisitions or disposition of shares
or bonds of any other entity or other interest in any other
Person or business enterprise;
(xiv) to authorize any acquisition of assets of any other
Person, or any disposition of assets of the Company, except in
the ordinary course of business;
(xv) to borrow money or incur indebtedness in the name of
the Company and in connection therewith issue notes or other
debt securities of the Company and secure any such indebtedness
by mortgage, pledge or other lien encumbering all or any portion
of the Company's assets;
(xvi) to appoint or change the independent auditor of the
Company;
(xvii) to approve the Financial Reports of the Company;
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(xviii) except as otherwise provided in this Agreement, to
approve any distribution to the Members of the Company;
(xix) to bring and defend actions in law or at equity and
compromise, submit to arbitration, or settle all claims in favor
of or against the Company;
(xx) to settle or compromise any claims against the Company;
(xxi) to make any accounting and income tax elections,
determinations or other decisions;
(xxii) to appoint one or more subcommittees of the Members
Committee (including the Executive Committee in accordance with
the terms of this Agreement, subject to Section 3.6 hereof),
such subcommittees to have such power and authority as shall be
delegated to them by the Members Committee; and
(xxiii) to establish, amend or abolish internal rules of the
Company with respect to the authority of the President and other
designated officers and to create, reorganize or abolish
departments and offices of the Company.
(b) The powers, authority and duties delegated to the Members
Committee in Section 3.2(a) above may be delegated by the Members
Committee to any sub-committee established by the Members Committee
or to any one or more officers of the Company, provided that any
such delegation with respect to the items enumerated in Section
3.2(a)(i) through Section 3.2(a)(xxiii) shall require the unanimous
affirmative vote of all Committee Members then serving. Each Member,
by execution of this Agreement, agrees to, consents to, and
acknowledges the delegation of the powers, authority and duties of
the Members to the Committee Members in accordance with this
Agreement, and to the actions and decisions of the Committee Members
within the scope of their authority as provided herein.
3.3 Members Committee Meetings.
(a) The Members Committee shall hold regular meetings (at least
quarterly) at such time and place as shall be determined by the
Members Committee (or the Presiding Chairman, if any, of the Members
Committee). Special meetings of the Members Committee may be called
at any time by any Committee Member by delivering a notice of
meeting in accordance with Section 3.4(g) hereof. The President and
other officers of the Company may be invited by any Committee Member
to attend and express their respective opinions at meetings of the
Members Committee.
(b) There shall be two Chairmen of the Members Committee, one of
whom shall be appointed by United Grain from among its appointed
Committee Members and the other of whom shall be appointed by
Harvest States from among its appointed Committee Members. Each
Chairman so appointed shall serve as such at the pleasure of the
Member appointing such Chairman and until his respective successor
is appointed by the Member who appointed him. The Chairman appointed
by United Grain shall serve as
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the Presiding Chairman from the Effective Date until August 31,
1999. The Chairman appointed by Harvest States shall serve as the
Presiding Chairman during fiscal year 2000. The next Chairman
appointed by United Grain shall serve as the Presiding Chairman
during fiscal year 2001, and so on, with the Chairman appointed by
each of United Grain and Harvest States alternating as the Presiding
Chairman after August 31, 1999, fiscal year by fiscal year. If the
Presiding Chairman shall be absent from any meeting of the Members
Committee, the other Chairman shall act as the Presiding Chairman in
his place. The Presiding Chairman shall establish the agendas for,
and regulate the proceedings of, meetings of the Members Committee,
but must include on such agendas matters requested by any Committee
Member in writing received at least two business days in advance of
any meeting.
(c) Committee Members may participate in a meeting of the
Members Committee by conference telephone or similar communications
equipment by means of which all Persons participating in the meeting
can hear each other, and such participation shall constitute
presence in person of such Committee Members at such meeting.
(d) Any action required or permitted to be taken at any meeting
of the Members Committee may be taken without a meeting upon the
unanimous written consent of all of the Committee Members.
(e) The Members Committee may appoint, from time to time, a
person to act as Secretary of one or more meetings of the Members
Committee ("Committee Secretary"). The Committee Secretary may or
may not be the same person as the Secretary of the Company. The
Committee Secretary shall prepare complete written minutes of the
meetings of the Members Committee and shall cause same to be kept
with the books and records of the Company. A duplicate copy of such
written minutes shall be provided to each Committee Member.
(f) A Committee Member shall have the right by written notice to
the Presiding Chairman to designate an alternate Person to attend
meetings of the Members Committee, instead and in place of such
Committee Member, and to exercise all of the functions of such
Committee Member. Any such alternate shall be deemed to be a
Committee Member for all purposes hereunder until such designation
is revoked. A Committee Member shall also have the right to give a
written proxy to any other Committee Member for a specific meeting
to exercise all voting rights of the Committee Member at such
meeting.
(g) Notice of each regular meeting and each special meeting of
the Members Committee shall be given in writing to each Committee
Member at least fourteen (14) business days before such meeting.
Notices of special meetings shall contain a description, in
reasonable detail, of the items of business to be conducted at such
meeting and no business other than those items (unless expressly and
unanimously agreed to by all of the Committee Members) may be
conducted at such special meeting. The notice provisions of this
Section 3.4(g) shall be waived upon either the signing of a written
waiver thereof or attendance at a meeting by all of the Committee
Members appointed by each Member.
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3.4 Voting. Except as provided in the next sentence, any action that
may be taken by the Members Committee, including without limitation in exercise
of the powers set forth in Section 3.2, shall require the affirmative vote of a
majority of Committee Members present (in person or by proxy) at the meeting.
Notwithstanding the foregoing, any action taken by the Members Committee with
respect to the items enumerated in Section 3.2(a)(i) through Section
3.2(a)(xxiii) shall require the unanimous affirmative vote of all Committee
Members; provided that as long as there is any vacancy on the Members Committee
the affirmative vote of all of the Committee Members then serving shall be
sufficient. A quorum of any meeting of the Members Committee shall require the
presence (in person or by proxy) of at least six (6) Committee Members. Each
Committee Member shall be entitled to one vote regarding all matters coming
before the Members Committee and each Committee Member may vote in the best
interests of the Member who appointed him or her, and shall have no duty to
consider or to vote with regard to the best interests of the Company or any
other Member.
3.5 Deadlocks.
(a) If the Members Committee fails to adopt, by the requisite
affirmative vote, the annual Budget and Business Plan for the
Company prior to the first day of any fiscal year of the Company,
the Company shall be operated in accordance with the annual Budget
and Business Plan for the next previous fiscal year of the Company
until the Members Committee adopts the annual Budget and Business
Plan for the relevant fiscal year.
(b) If the Members Committee fails to resolve, by the requisite
affirmative vote, any matter submitted thereto (other than the
annual Budget and Business Plan), within ninety (90) days after such
matter is first referred to the Members Committee, then each Member
shall appoint a delegate in order to resolve such disagreement. Such
delegates shall then meet as necessary to resolve such disagreement
and attempt to resolve such disagreement by mutual agreement. If
such delegates fail to resolve the disagreement within ninety (90)
days of their appointment, no action with respect to such matter
will be taken by the Company. Notwithstanding the foregoing, if such
delegates fail to resolve the disagreement within ninety (90) days
of their appointment, and as a result it is not reasonably practical
to carry on the Business in accordance with this Agreement, then
either United Grain or Harvest States may apply for a judicial
dissolution of the Company in accordance with Section 18-802 of the
Act.
3.6 Executive Committee.
(a) The Executive Committee shall consist of two (2) members,
one of whom shall be appointed by the designees of United Grain to
the Members Committee (the "United Grain Members Committee
Designees") and one of whom shall be appointed by the designees of
Harvest States to the Members Committee (the "Harvest States Members
Committee Designees"). Each member of the Executive Committee shall
be a member of the Members Committee and shall be an officer,
director or employee of the appointing Member and shall not be an
officer or employee of the Company. The foregoing restriction on
qualifications of the Executive Committee Members shall be subject
to waiver and exceptions if approved by all Members. The Executive
Committee Members
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shall serve without compensation in connection with service on the
Executive Committee as such.
(b) The principal purpose of the Executive Committee shall be to
review and discuss financial results of the operations of the
Company, to review and analyze business and planning issues relating
to the Company and its services and products, to explore strategies
for future operations and for the maintenance and development of
business for the Company, and to analyze and review other
appropriate topics as may be delegated to it from time to time by
the Members Committee. The Executive Committee shall make regular
reports of its meetings to the Members Committee and, based on its
review and analysis, may recommend various actions to the Members
Committee. The Executive Committee, however, shall not have the
power to exercise any of the powers and authority of the Members
Committee in the management of the business and affairs of the
Company except to the extent provided above or to the extent that
such power and authority is conferred upon the Executive Committee
by the Members Committee, acting by resolution unanimously adopted
in accordance with Sections 3.2(b) and 3.4 of this Agreement. The
Executive Committee shall not have any powers delegated to any other
committee under this Agreement.
(c) Any action that may be taken by the Executive Committee
shall require the unanimous affirmative vote of all Executive
Committee members. Each Executive Committee member shall be entitled
to one vote regarding all matters coming before the Executive
Committee and each member of the Executive Committee may vote in the
best interests of the Members who appointed the designees of the
Members Committee who appointed such member of the Executive
Committee, and shall have no duty to consider or to vote with regard
to the best interests of the Company or any other Member. The
Executive Committee shall otherwise have the power to establish such
rules and regulations covering its proceedings and meetings as it
shall see fit, subject to the limitations thereon set forth in this
Article 3 or elsewhere in this Agreement.
(d) The United Grain Members Committee Designees initial member
of the Executive Committee and the Harvest States Members Committee
Designees initial member of the Executive Committee shall be as set
forth in Schedule III. Effective upon the giving of written notice
thereof to the other Members Committee members, each of the United
Grain Members Committee Designees and the Harvest States Members
Committee Designees may, at any time, in its sole discretion and
with or without cause, replace any or all of its appointed Executive
Committee members with other individuals, and may designate one or
more alternates for any or all of its Executive Committee members;
provided that such replacement Executive Committee members or
alternates meet the requirements provided in this Section 3.6. Each
Executive Committee member shall serve on the Executive Committee
until his or her successor is appointed, or until his or her earlier
death, resignation or removal. In the event that an Executive
Committee Member ceases to serve for any reason, the United Grain
Members Committee Designees or the Harvest States Members Committee
Designees, as the case may be, that appointed such Executive
Committee member shall promptly designate a successor. Effective
upon a United Grain Members Committee Designee's or a Harvest States
Members Committee Designee's ceasing to be a member of the Members
Committee, the Executive
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Committee member representing such United Grain Members Committee
Designees or Harvest States Members Committee Designees, as the case
may be, shall cease to be an Executive Committee member.
3.7 Members. Notwithstanding anything contained herein to the
contrary, the Members reserve the right, power and authority by unanimous
written consent to take the following actions:
(a) to amend the Certificate;
(b) to amend the Agreement;
(c) to approve the dissolution or liquidation of the Company
other than as required by the Act; and
(d) to direct the Members Committee or Executive Committee to
take any action or make, modify or amend any decision.
ARTICLE 4
OFFICERS AND EMPLOYEES
4.1 Officers. The officers of this Company shall include a President
("President") and a Secretary and such other officers as the Members Committee
shall designate. The powers, rights, duties and responsibilities of the officers
shall be as provided in this Agreement or determined by the Members Committee.
4.2 President. The President shall have the responsibility for the
general active day-to-day management of the Business. The President shall see
that all orders and resolutions of the Members Committee are carried into
effect. Except to the extent otherwise directed by the Members Committee, the
President shall have the general powers and duties usually vested in the office
of the chief operating officer of a corporation and shall have such other powers
and perform such other duties as may from time to time be prescribed by the
Members Committee.
Gary Schuld shall serve as the initial President of the Company
until his resignation or removal and subject to the terms of the Employee Lease
Agreement.
ARTICLE 5
PURCHASES AND SALES OF GRAIN; PUT-THROUGH SERVICES
5.1 Grain Origination.
(a) General. Harvest States shall originate all Grain to be sold
to the Company. Notwithstanding the foregoing, the Company may
purchase Grain directly from private commercial grain companies,
local or regional cooperatives and farmers not affiliated with
Harvest States at the time of purchase and in the event that (a) the
price and/or other terms for such Grain from such third party is
more favorable than the price
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or other terms for Grain originated by Harvest States, or (b) with
Harvest States approval, which approval shall not be unreasonably
withheld. Grain purchased from commercial grain companies, local or
regional cooperatives and farmers not affiliated with Harvest States
may originate inside or outside the Exclusive Territory. Harvest
States authorizes each of the United Grain employees and Harvest
States employees leased to the Company pursuant to the Employee
Lease Agreement to act as Harvest States' agents in purchasing Grain
subject to and in accordance with policies and procedures agreed
upon between Harvest States and United Grain; provided that all
Grain shall be acquired in Harvest States' name, on Harvest States'
contracts and shall be paid for with Harvest States' drafts or
checks, except Grain directly purchased by the Company from private
commercial grain companies, local or regional cooperatives and
farmers not affiliated with Harvest States.
(b) Grain Originated or Purchased by Harvest States Within the
Exclusive Territory. In the event Harvest States originates or
purchases Grain within the Exclusive Territory, it shall sell such
Grain to the Company at Harvest States' Cost. "Harvest States' Cost"
shall mean Harvest States' cost for the Grain in the relevant
transaction, giving effect to all discounts applicable to the
transaction.
(c) Right of First Refusal for Grain Originated or Purchased by
Harvest States Outside the Exclusive Territory. In the event Harvest
States originates or purchases Grain outside the Exclusive Territory
for sale into the Exclusive Territory at the time of purchase, then
Harvest States shall disclose to the Company the type, quantity,
shipment date, and Harvest States' Cost with respect to such Grain,
and shall offer to sell the same type and quantity of Grain to the
Company at Harvest States' Cost (a "HS Cost Offer"). Such offer by
Harvest States may be made orally. In the event the Company does not
advise Harvest States, within the time mutually agreed upon by the
respective traders in accordance with customary trade practice, that
it accepts such HS Cost Offer, such HS Cost Offer shall be deemed to
have been rejected by the Company. If the Company shall reject any
such HS Cost Offer within the time set forth above, Harvest States
shall have the right to sell the type and quantity of Grain
described in such HS Cost Offer to a third party.
(d) Inter-Market Opportunities. In the event, after Harvest
States has made an initial purchase of Grain, it proposes to sell
Grain into the Exclusive Territory which was not originally intended
to be sold into such Exclusive Territory at the time of the initial
purchase, then Harvest States shall disclose to the Company the
type, quantity, shipment date, and Harvest States Market Price and
Terms with respect to such Grain, and shall offer to sell the same
type and quantity of such Grain to the Company at Harvest States'
Market Price and Terms. Such offer by Harvest States (the "HS Market
Offer") may be made orally. In the event the Company does not advise
Harvest States, within the time mutually agreed upon by the
respective traders in accordance with customary trade practice, that
it accepts such HS Market Offer, such HS Market Offer shall be
deemed to have been rejected by the Company. If the Company shall
reject any such HS Market Offer within the time set forth above,
Harvest States shall have the right to sell the type and quantity of
Grain described in such HS Market Offer to a third party. "Harvest
States' Market Price and Terms" means the terms and conditions and
delivered price of
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Grain at which Harvest States is prepared to sell to a third party.
The Parties shall repeat the procedure set forth herein for each
change in Harvest States' Market Price and Terms with respect to
such Grain.
5.2 Grain Sales.
(a) Exclusive Distributorship. During the term of this
Agreement, except in accordance with Article 5 hereof, neither
United Grain nor Harvest States shall (i) export, distribute or sell
Grain through the CRDIP (regardless of whether such Grain originated
within or outside the Exclusive Territory) or (ii) distribute or
sell into the Exclusive Territory Grain originated within or outside
the Exclusive Territory. Notwithstanding the foregoing, Harvest
States may export Grain through the CRDIP (regardless of whether
such Grain originated within or outside the Exclusive Territory)
which the Company does not purchase and export pursuant to this
Agreement.
(b) Right of First Refusal for Grain Proposed to be Sold Outside
Wheat Territory or Barley Territory. In the event the Company
proposes to sell wheat outside the Wheat Territory or feed barley
outside the Barley Territory at the time of purchase, then the
Company shall disclose to Harvest States the type, quantity,
shipment date, and the Company's Cost with respect to such Grain,
and shall offer to sell the same type and quantity of such Grain to
Harvest States at the Company's Cost (a "Company Cost Offer"). Such
offer by the Company may be made orally. In the event Harvest States
does not advise the Company, within the time mutually agreed upon by
the respective traders in accordance with customary trade practice,
that it accepts such Company Cost Offer, such Company Cost Offer
shall be deemed to have been rejected by Harvest States. If Harvest
States shall reject any such Company Cost Offer within the time set
forth above, the Company shall have the right to sell the type and
quantity of Grain described in such Company Cost Offer into the
Wheat Territory, into the Barley Territory or to any third party.
"Company's Cost" shall mean the Company's cost for the Grain in the
relevant transaction, giving effect to all discounts applicable to
the transaction.
(c) Inter-Market Opportunities. In the event, after the Company
has made an initial purchase of Grain, it proposes to sell wheat
outside the Wheat Territory or feed barley outside the Barley
Territory, which was not originally intended to be sold outside such
territories, respectively, at the time of the initial purchase, then
the Company shall disclose to Harvest States the type, quantity,
shipment date, and Company Market Price and Terms with respect to
such Grain, and shall offer to sell the same type and quantity of
such Grain to Harvest States at the Company's Market Price and
Terms. Such offer by the Company (the "Company Market Offer") may be
made orally. In the event Harvest States does not advise the
Company, within the time mutually agreed upon by the respective
traders in accordance with customary trade practice, that it accepts
such Company Market Offer, such Company Market Offer shall be deemed
to have been rejected by Harvest States. If Harvest States shall
reject any such Company Market Offer within the time set forth
above, the Company shall have the right to sell the type and
quantity of Grain described in such Company Market Offer to a third
party. "Company's Market Price and Terms" means the terms and
conditions and delivered price of Grain at which the Company is
prepared to sell to a third party. The parties shall repeat the
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procedure set forth herein for each change in the Company's Market
Price and Terms with respect to such Grain.
5.3 Put-through Services. Harvest States shall offer put-through
services to the Company for Grain purchased by the Company at the locations
described in, and in accordance with, the Put-through Agreement.
ARTICLE 6
DISPUTE RESOLUTION
6.1 Dispute Resolution. The Members desire to avoid all forms of
traditional litigation, subject to the provisions for judicial dissolution set
forth in Section 3.5(b) and 12.1(d) and the provision for preliminary injunctive
relief described in Section 6.1(d) hereof. Any dispute, controversy or claim of
any nature whatsoever between the Members and the Company arising out of or
relating to this Agreement or the breach, termination or invalidity of this
Agreement or any related agreements, whether in contract, tort or equity, or
under any statute or regulation arising out of or relating to such agreements,
the relationship between or among the Members or any circumstances pertaining to
the creation or termination thereof, including without limitation, claims of
discrimination, breach of fiduciary duty, bad faith, or interference with other
business opportunities and including determining in the first instance the
interpretation or scope of this dispute resolution agreement and other
preliminary jurisdictional questions (a "Dispute"), shall be resolved in
accordance with this Article 6. All other remedies to which the Members
(including their respective Affiliates) may otherwise have been entitled,
whether at law or in equity, are hereby waived to the fullest extent allowed by
law. The obligations under this Article 6 shall survive the dissolution of the
Company.
The preceding provision notwithstanding, if a Dispute arises out of
third-party litigation against any Member, these procedures shall not be
mandatory, and such Member shall have the right to engage in such litigation
with the third-party claimant and with other Members concerning such Dispute.
For purposes of this exception pertaining to Disputes arising out of third-party
litigation, a third-party means a party (i) which is not an Affiliate of a
Member, (ii) has no record or beneficial financial, ownership or other
significant interest in or with a Member and (iii) in which a Member has no
record or beneficial financial, ownership or other significant interest.
(a) Informal Dispute Resolution. The Members shall initially
attempt in good faith to resolve any Dispute promptly by
confidential negotiations between representatives of the Members
with authority to settle the matter. All such negotiations shall be
treated as compromise and settlement negotiations for purposes of
the relevant rules of evidence. Any Member making a claim shall give
the other Member written notice that the Member is invoking the
dispute resolution procedures of this Article 6 with respect to a
specified Dispute. Within ten (10) days after delivery of the
written notice, the receiving Members shall submit to the other
Member a written response. The notice and the response shall include
(a) a statement of each Member's position and a summary of arguments
supporting that position, and (b) the name of the Person(s) who will
represent that Member and the name of any other Person who will
accompany the
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representative(s) to the meeting. Within thirty (30) days after
delivery of the written notice, the representatives of both parties
shall meet at a mutually acceptable time and place (or failing such
agreement at the Company's headquarters), or confer by telephone and
thereafter as often as they reasonably deem necessary, to attempt to
resolve the Dispute.
(b) Mediation. If the Dispute has not been resolved by
negotiation within forty-five (45) days of the initial written
notice, any Member may notify the other Members that it intends to
submit such Dispute to non-binding mediation under the then current
model procedure for mediation of business disputes promulgated by
CPR. In such event the Members shall mediate the Dispute. The
Members shall promptly attempt to agree upon a reputable and
experienced mediation service. Failing agreement within five (5)
days after the notice of intent to mediate has been given by a
Member, the mediator will be selected in accordance with the
previously mentioned CPR procedure. Any such mediation process shall
be conducted in Portland, Oregon and must be completed within
seventy-five (75) days of delivery of the initial written notice
unless otherwise agreed by the Members.
(c) Formal Dispute Resolution.
(i) Any Dispute which remains unresolved seventy-five (75)
days after delivery of the initial written notice (whether as a
result of the inability of the parties to resolve the dispute
pursuant to subsections (a) and/or (b) herein, or because of the
refusal of one of the parties to engage in the procedures
described in said subsections) shall be promptly resolved by
final and binding arbitration. Such arbitration shall be
conducted pursuant to the CPR Rules except to the extent herein
otherwise provided. The place of arbitration shall be Portland,
Oregon unless all Members which are parties to the arbitration
agree to a different locale. There shall be a single neutral and
impartial arbitrator, who shall not have been involved in the
mediation, appointed by CPR experienced in the subject matter of
the Dispute and who has not had a material personal or financial
relationship with any participant to the Dispute or any
Affiliate of any such participant in the preceding three years,
to be selected in accordance with the CPR Rules. The arbitration
shall be conducted in the English language, provided that a
witness may testify in another language if the party calling
such witness shall provide a competent interpreter at such
party's expense. The arbitrator shall follow the laws of the
State of Oregon (without regard to conflict of law provisions)
in resolving any Dispute, provided that any question concerning
arbitrability shall be governed exclusively by the United States
Arbitration Act as then in force. Each Member hereby waives any
right to and the arbitrator shall not have the power to award
punitive, exemplary, double or treble damages. The award of the
arbitrator shall be final and binding, and judgment on it may be
entered in any court having jurisdiction. The Members agree that
any decision or award resulting from proceedings in accordance
with this dispute resolution provision shall have no preclusive
or other effect in any other matter between the Members or
involving a third-party.
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(ii) The arbitrator may consolidate an arbitration under
this Agreement with any other arbitration between the Members if
the subject of the Dispute arises out of or relates essentially
to the same facts or transaction(s). No other person may be
included in the arbitration of a Dispute, whether by
consolidation, joinder or in any other manner, except by written
consent of the Members which are parties to the Dispute.
(d) Injunctive Relief. The Members agree that notwithstanding
anything to the contrary contained herein, any Member may seek a
temporary restraining order or a preliminary injunction from any
court of competent jurisdiction in order to prevent immediate and
irreparable injury, loss or damage; provided such Member has
commenced in good faith an informal dispute resolution proceeding
pursuant to this Article 6. The arbitrator once appointed shall have
the power to modify or vacate such temporary restraining order or
preliminary injunction or to issue a restraining order or
injunction.
(e) Confidentiality. The dispute resolution proceedings
contemplated by this Article 6 shall be as confidential and private
as permitted by law. To that end, the Members shall not disclose the
existence, content or results of any proceedings conducted in
accordance with this provision, and materials submitted in
connection with such proceedings shall not be admissible in any
other proceeding, provided, however, that this confidentiality
provision shall not prevent a petition to vacate or enforce an
arbitration award, and shall not bar disclosures required by law.
(f) Limitations Period. The statutes of limitation of the State
of Oregon shall be applicable to the arbitration of any Dispute
hereunder just as if such arbitration were a lawsuit between the
Members, except that all applicable statutes of limitation and
defenses based upon the passage of time shall be tolled during the
pendency of any informal dispute resolution or mediation under
Sections 6.1(a) and (b) hereof and that any such statutes of
limitation shall be subject to any shorter limitations periods as
may result from the provisions of Section 13.1. The parties shall
take such action, if any, as may be required to effectuate the
tolling provided for in this Section 6.1(f).
(g) Proceedings in Name of Company. Should United Grain or
Harvest States have potential liability to the Company under this
Agreement for the alleged breach of any covenant, inaccuracy of any
representation or warranty, or otherwise, the non-defaulting party
(the "Moving Party"), either United Grain or Harvest States as the
case may be, shall commence a proceeding under this Article 6 in the
name, and for the benefit, of the Company. Neither United Grain nor
Harvest States shall commence such a proceeding directly against one
another in their own names. The Company shall reimburse the Moving
Party for all costs and expenses incurred by it in connection with
such proceedings up to but not to exceed the amount of any recovery
by the Company resulting from such proceeding. If the Company
receives no recovery, it shall not be responsible to pay any such
reimbursement. The arbitrator shall not award attorneys' fees or
other costs of any dispute resolution proceedings conducted pursuant
to this Article 6 to the prevailing or any party as part of any
arbitration award.
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ARTICLE 7
SHORT TERM CREDIT FACILITIES FROM MEMBERS
7.1 Credit Facilities. United Grain shall make short term bridge
financing available to the Company in the form of working capital loans
("Loans"), and Harvest States shall make short term bridge financing available
to the Company in the form of trade credits for the Company to purchase Grain
originated by such Member ("Trade Credits") (such financing in the form of Loans
and Trade Credits is referred to herein as the "Credit"); provided, however,
that (i) the aggregate principal balance of such Loans and Trade Credits from
all Members, taken together, shall not exceed $75,000,000; (ii) the aggregate
principal balance of the Loans and Trade Credits from any Member shall not
exceed $50,000,000 at any time; and (iii) notwithstanding clause (ii) of this
Section 7.1, no Member shall be required to make available any further Loans or
Trade Credits at any time when the outstanding principal balance of all Loans
and Trade Credits from such Member exceeds $37,500,000. The proceeds of each
Credit, whether in the form of a Loan or a Trade Credit, shall be applied by the
Company toward the purchase of Grain by the Company from Grain suppliers and
originators (including Harvest States) pursuant to Article 5 hereof. Each Loan
shall be evidenced by a Form of Loan Agreement and Form of Security Agreement
and each Trade Credit shall be evidenced by a Form of Trade Credit Agreement and
Form of Security Agreement, in each case in the form attached hereto as Exhibit
I, executed by the Company and the Member providing the Credit. The terms and
conditions of each such Credit, including without limitation the amount borrowed
or the credit extended, shall be as set forth in the applicable Credit
Documents, and otherwise as mutually agreed upon between the Company and the
Member providing the financing at the time the Credit is consummated. In the
case of each Trade Credit, the amount, terms and conditions of such Trade Credit
shall also be as set forth in the applicable purchase agreement and otherwise
agreed upon between the Company and Harvest States at the time the Trade Credit
is provided. Interest rates on and terms of the Credit shall reflect commercial
market rates and commercial terms and shall compensate the Members for costs
incurred by the Member in providing the financing. Subject to agreement on
terms, the Company may obtain the Loans from United Grain or Trade Credits from
Harvest States based upon the best terms available. Notwithstanding anything to
the contrary set forth herein, neither Member shall be required to provide a
Loan or Trade Credit to the Company if by reason of such Loan or Trade Credit
the total outstanding principal balance of Loans and Trade Credit provided by
such Member would exceed 50% of the total outstanding principal balance of all
Loans and Trade Credits to the Company.
7.2 Security Interest. The Company hereby grants a security interest
to the Members in all of the Company's inventory, accounts receivable,
equipment, personal property, fixtures and the proceeds of the foregoing (the
"Collateral") to secure payment of the Credit, including the Loans and Trade
Credits. The security interest granted to each of the Members shall be of equal
priority and shall secure each Credit ratably according to the principal balance
of the Credit outstanding to each Member.
7.3 Cross-Default. The parties hereto agree that any Event of
Default or Default under the terms of any Credit or Credit Document will
constitute an Event of Default or Default, as the case may be, under every other
Credit Document.
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7.4 Agreement Regarding Payments. Each of United Grain and Harvest
States agrees that, upon the occurrence and during the continuance of an Event
of Default, all Payments and Distributions pursuant to any Credit shall be made
in pari passu, in proportion to all amounts due each of them, taken together,
under all Credits extended pursuant to the Credit Documents (giving effect, in
the event of a Reorganization, to allocation of unpaid Credits in accordance
with Section 7.6 hereof).
7.5 Distributions In Reorganization. In the event of any
Reorganization, all of the Credits shall first be indefeasibly paid and
satisfied in full in cash before any Payment or Distribution is made upon any
indebtedness of the Company owing to any other Person. Prior to the Company's
obtaining credit from any Person other than a United Grain or Harvest States,
United Grain and Harvest States may require such agreements as they deem
reasonably necessary from such third party lender to confirm such priority of
payment. In any Reorganization, any Payment or Distribution of any kind or
character, whether in cash or property or securities, which may be payable or
deliverable in respect of other indebtedness of the Company shall be paid or
delivered directly to the holders of the Credits for application in payment of
the Credits unless and until all such Credits shall have been indefeasibly paid
and satisfied in full in cash. Loans or other credit accommodations extended by
either United Grain or Harvest States outside the Credit Documents, or after
notice of an Event of Default has been given, shall be considered loans to a
third party lender for purposes of this Agreement.
7.6 Allocation and Payment of Credit Arrearages. Upon the occurrence
of an Event of Default, following the Payments and Distributions in accordance
with Sections 7.4 and 7.5 hereof, any remaining amounts under any Credit which
the Company has failed to timely pay when due or when declared due or which
United Grain or Harvest States (whichever has extended the Credit) fails to
receive (an "Arrearage") shall be allocated equally between Harvest States and
United Grain. To the extent the Arrearage of either United Grain or Harvest
States exceeds the Arrearage of the other, whichever of United Grain and Harvest
States has the smaller Arrearage shall promptly pay to the other one-half of
such difference, for application in payment of the Credits, unless and until all
such Credits shall have been indefeasibly paid and satisfied in full in cash.
7.7 Agreement To Hold In Trust. If the holder of any Credits shall
receive any Payment or Distribution in violation of the provisions of this
Agreement, it shall hold such Payment or Distribution in trust for the benefit
of the other holder of the Credits and shall forthwith remit so much thereof as
is owing to the other holder of the Credits pursuant to the terms of the Credit
Documents and this Agreement, in each case in the same in the form in which it
was received, together with such endorsements or documents as may be necessary
to effectively negotiate or transfer the same, for application in payment of the
Credits.
7.8 Limit On Right Of Action. For so long as any Credits remain
outstanding or any commitments of United Grain or Harvest States to make loans
or other extensions of credit to the Company under any of the Credit Documents
remain outstanding, the holders of Credits shall not take any action (other than
providing notice to the Company of any default under the Credits) to accelerate
or demand payment of the Credits, to exercise any of their rights or remedies
under the Credit Documents, including the Security Agreement, or otherwise
collect any amount due in respect of the Credits, to initiate any litigation
against or reorganization of, the Company,
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without the written consent of the other holder of Credits. The foregoing
provisions of this Section 7.8 are solely for the purpose of defining the
relative rights of the holders of Credits and shall not limit or otherwise
affect any rights which the holders of Credits may have against the Company
under the Credit Documents or otherwise.
7.9 Actions In Reorganization. Each of United Grain and Harvest
States agrees that in connection with any Reorganization it will not, without
the prior written consent of the other: (a) take any legal action which would be
prohibited pursuant to Section 7.8 above; (b) agree or attempt to extend credit
to the Company in connection with any Reorganization; (c) file any motion for
relief from automatic stay or for adequate protection or similar relief or
protection; (d) vote or agree to accept any plan of reorganization or similar
arrangement unless the other has voted or agreed to accept such plan or
arrangement; (e) oppose any request by the representative of the Company's
bankruptcy estate to use collateral or cash collateral if the other has
consented to such use; and (f) take such actions consistent with the terms of
this Agreement as may be reasonably requested by the other to effectuate the
agreements provided herein.
7.10 Further Assurances. Each holder of Credits shall execute and
deliver to the other holder of Credits such further instruments and shall take
such further action as such other holder of the Credits may at any time or times
reasonably request in order to effect the provisions and intent of this
Agreement and the Credit Documents.
7.11 Continuing Effect. The provisions of this Agreement shall be
reinstated and revived, and the rights of the holders of the Credits shall
continue, with respect to any amount at any time paid on account of the Credits
which shall thereafter be required to be restored or returned by the holders of
the Credits in any Reorganization or otherwise, all as though such amount had
not been paid.
7.12 Transfers. Neither United Grain or Harvest States may sell,
assign, transfer, pledge, hypothecate, or encumber (a "Transfer") all or any
portion of the Credits to any other party without the consent of the other, and
only if such party agrees to be bound by the terms of this Agreement and
acknowledges in writing to and for the benefit of the other prior to such
Transfer that the Credits so transferred will remain following such Transfer,
subject to this Agreement. Any purported Transfer by United Grain or Harvest
States of all or any portion of the Credits in violation of this Section 7.12
shall be null and void.
ARTICLE 8
CAPITAL CONTRIBUTIONS
8.1 Capital Accounts.
(a) A single capital account shall be maintained for each Member
(regardless of the class of interests owned by such Member and
regardless of the time or manner in which such interests were
acquired) in accordance with the capital accounting rules of Section
704(b) of the Code, and the Income Tax Regulations thereunder
(including particularly section 1.704-l(b)(2)(iv) of the Income Tax
Regulations) (a "Capital Account").
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(b) In general, under such rules, a Member's Capital Account
shall be:
(i) Increased by (x) the amount of money contributed by the
Member to the Company (including the amount of any make-up
contributions made by such Member pursuant to Section 8.3(b) and
the amount of any Company liabilities that are assumed by such
Member other than in connection with distribution of Company
property); (y) the Fair Market Value (determined in accordance
with Section 8.9 hereof) of property contributed by the Member
to the Company (net of liabilities secured by such contributed
property that the Company is considered to assume or take
subject to under section 752 of the Code); and (z) allocations
to the Member of Company Profits; and
(ii) Decreased by (w) the amount of money distributed to the
Member by the Company (including the amount of such Member's
individual liabilities that are assumed by the Company other
than in connection with contribution of property to the
Company); (x) the Fair Market Value (determined in accordance
with Section 8.9 hereof) of property distributed to the Member
by the Company (net of liabilities secured by such distributed
property that such Member is considered to assume or take
subject to under section 752 of the Code); (y) allocations to
the Member of expenditures of the Company not deductible in
computing its taxable income and not properly capitalized; and
(z) allocations to the Member of Company Losses; and
(iii) Increased or decreased by any Revaluation Gain or
Revaluation Loss determined under Section 8.7.
8.2 Initial Contributions of Capital. On or before the Effective
Date, United Grain and Harvest States shall each make the contributions of
assets and liabilities to the Company as set forth on Schedule I hereto.
8.3 Additional Contributions by Members.
(a) In the event that the Members Committee determine that an
additional capital contribution, payable in cash or other property
(or combination thereof), is necessary or advisable, each Member
will be notified in writing by the Members Committee, at least sixty
(60) days prior to the date on which such capital contribution is
payable (the "Due Date"), of the amount of the capital contribution
required from each of them, on a pro rata basis, determined in
accordance with such Member's respective Percentage Interest, and
the Due Date for such capital contribution. Each such capital
contribution shall be payable in cash unless otherwise determined by
vote of the Members Committee. Such contributions, when made by a
Member, shall be credited to such Member's Capital Account.
(b) In the event that a Member fails to make a required capital
contribution on or prior to the Due Date thereof (a "Defaulting
Member"), the other Members, who have made their respective capital
contributions and are not Affiliate Transferees of the Defaulting
Member (the "Non-Defaulting Members"), within thirty (30) days
following
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the mailing of notice from the Company that payment from the
Defaulting Member has not been made, may (but shall not be obligated
to) by a vote of the Non-Defaulting Members representing a majority
of the Percentage Interests of the Non-Defaulting Members exercise
any or all of the following remedies with respect to the
contribution which the Defaulting Member failed to make to the
capital of the Company (a "Default Amount"):
(i) Withdraw the required capital contributions contributed
by each of the Non-Defaulting Members from the Company;
(ii) Pay to the Company the Default Amount on behalf of the
Defaulting Members; provided that each of the Non-Defaulting
Members shall be required to contribute a portion of the Default
Amount that is equal to such Non-Defaulting Member's Percentage
Interest divided by the Percentage Interests of all
Non-Defaulting Members unless the Non-Defaulting Members
otherwise agree to contribute different percentages of the
Default Amount. To the extent that a Default Amount shall be
paid in whole or in part by one or more Non-Defaulting Members,
the Capital Accounts of the Non-Defaulting Members who make such
payment and their Percentage Interests shall be appropriately
increased and the Percentage Interest of the Defaulting Member
shall be appropriately decreased; or
(iii) Initiate and maintain an action, under the sole
control of the Non-Defaulting Members, against the Defaulting
Member for the Default Amount and to pursue any available
remedy, including but not limited to seeking payment by the
Defaulting Member of such Default Amount or the unpaid portion
thereof and damages incurred by the Company in connection
therewith. The costs of any action commenced by the Company
pursuant to this Section 8.3(b)(iii) shall be paid by the
Company and shall be reimbursed by the Defaulting Member to the
Company and to the extent not so reimbursed shall be deducted
from such Defaulting Member's Capital Account and Adjusted
Capital Contributions.
8.4 Member Obligations. No Member shall have any obligation to
restore any portion of any deficit balance in such Member's Capital Account,
whether upon liquidation of its interest in the Company, liquidation of the
Company or otherwise.
8.5 Withdrawals of Capital Accounts. No Member shall be entitled to
withdraw any amount from its Capital Account prior to dissolution of the
Company.
8.6 Interest on Capital Accounts. No interest or compensation shall
be paid on or with respect to the Capital Account or capital contributions of
any of the Members, except as otherwise expressly provided herein.
8.7 Revaluation of Company Assets.
(a) The assets of the Company shall be revalued in accordance
with Section 8.9 hereof to their then Fair Market Values as of the
date of and immediately prior to (i) the acquisition of an
additional interest in the Company (including adjustments to
Percentage Interests arising as a result of a failure of any Member
to make
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a required capital contribution pursuant to Section 8.3 hereof) by
any new or existing Member in exchange for more than a de minimis
capital contribution to the Company, (ii) the distribution by the
Company of more than a de minimis amount of property as
consideration for the redemption of a portion (but not all) of a
Member's interest in the Company and (iii) the liquidation of a
Member's entire interest in the Company, or immediately prior to the
distribution of Company assets in liquidation of the Company within
the meaning of Income Tax Regulations section 1.704-l(b)(2)(ii)(g);
provided, however, that no revaluation shall occur if the Members
Committee reasonably determines that a revaluation would not
materially affect the Capital Accounts of the Members or that the
cost of such revaluation would be disproportionate to any benefit to
be derived by the Members from such revaluation.
(b) Immediately prior to the distribution of any asset by the
Company, the Members Committee shall revalue such asset to its then
Fair Market Value.
(c) Any Revaluation Gain or Revaluation Loss arising from a
revaluation of any Company asset pursuant to this Section 8.7 shall
respectively be credited to or debited from the Members' Capital
Accounts in accordance with their respective Percentage Interests
immediately prior to the event giving rise to such revaluation.
8.8 Redetermination of Percentage Interests. The respective
Percentage Interests of each of the Members shall be redetermined immediately
after (a) the election of the Non-Defaulting Members to contribute the Default
Amount pursuant to Section 8.3(b)(ii) or (b) the admission of an Additional
Member pursuant to Section 11.
8.9 Determination of Fair Market Value. The Fair Market Value, as of
the date of determination, of any asset shall be determined (a) by mutual
agreement of the Members or (b) if no such agreement is reached within ten days
of the relevant date of determination, as follows:
(a) Selection of Appraisers. Each of (A) the Member who is
either contributing an asset to the Company, receiving an asset as a
distribution from the Company or transferring an asset which is
being valued hereunder (or, if there is no such Member, United
Grain) (the "Asset Member") and (B) the other Members shall
designate by written notice to the Company and each Member a firm of
recognized national standing familiar with appraisal techniques
applicable to assets of the type being evaluated to serve as an
Appraiser pursuant to this Section 8.9 (the firms designated by the
Asset Member and the other Members being referred to herein as the
"First Appraiser" and the "Second Appraiser," respectively) within
five business days after the expiration of the ten day period
referred to in clause (b) above. In the event that either the Asset
Member or the other Members fail to designate its or their Appraiser
within the foregoing time period, the other(s) shall have the right
to designate such Appraiser by notifying the failing party or
parties in writing of such designation (and the Appraiser so
designated shall be the First Appraiser or the Second Appraiser, as
the case may be).
(b) Evaluation Procedures. Each Appraiser shall be directed to
determine the Fair Market Value of the asset. Each Appraiser will
also be directed to deliver an Appraiser's Certificate to each
Member on or before the 30th day after their respective
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designation (the "Certificate Date"), upon the conclusion of its
evaluation, and each Appraiser's Certificate once delivered may not
be retracted or modified in any respect. Each Appraiser shall keep
confidential all information disclosed by the Company in the course
of conducting its evaluation, and, to that end, will execute such
customary documentation as the Company may reasonably request with
respect to such confidentiality obligation. The Members shall
cooperate in causing the Company to provide each Appraiser with such
information within the Company's possession which may be reasonably
requested in writing by the Appraiser for purposes of its evaluation
hereunder. The Appraisers shall consult with each other in the
course of conducting their respective evaluations. Each Member shall
have full access to each Appraiser's work papers. Each Appraiser
shall be directed to comply with the provisions of this Section 8.9,
and to that end each Member shall provide to its respective
Appraiser a complete and correct copy of this Section 8.9 (and the
definitions of capitalized terms used in this Section 8.9 that are
defined elsewhere in this Agreement).
(c) Fair Market Determination. The Fair Market Value of any
asset shall be determined on the basis of the Appraisers'
Certificates in accordance with the provisions of this subparagraph
(c), each of which shall be simultaneously delivered to each Member.
The higher of the values set forth in the Appraisers' Certificates
is hereinafter referred to as the "Higher Value" and the lower of
such values is hereinafter referred to as the "Lower Value". If the
Higher Value is not more than 110% of the Lower Value, the Fair
Market Value will be the arithmetic average of such two Values. If
the Higher Value is more than 110% of the Lower Value, a third
appraiser shall be selected in accordance with the provisions of
subparagraph (d) below, and the Fair Market Value shall be
determined in accordance with the provisions of subparagraph (e)
below.
(d) Selection of and Procedure for Third Appraiser. If the
Higher Value is more than 110% of the Lower Value, then within seven
days after delivery to the Members of the Appraiser's Certificates,
the First Appraiser and the Second Appraiser shall agree upon and
jointly designate a third firm of recognized national standing
familiar with appraisal techniques applicable to assets of the type
being evaluated to serve as an appraiser pursuant to this Section
8.9 (the "Third Appraiser"), by written notice to each Member. If,
within ten days after delivery of the Appraiser's Certificates, as
provided in clause (c) above, the First Appraiser and the Second
Appraiser shall have failed to so designate the Third Appraiser,
then any Member may apply to the CPR to appoint the Third Appraiser
which shall be a firm of recognized national standing familiar with
appraisal techniques applicable to assets of the type being
evaluated. The Members shall direct the Third Appraiser to determine
the Fair Market Value of the asset (the "Third Value") in accordance
with the provisions of subparagraph (b) above, and to deliver to the
Members an Appraiser's Certificate on or before the 30th day after
the designation of such Appraiser hereunder. The Third Appraiser
shall be directed to comply with the provisions of this Section 8.9,
and to that end the parties shall provide to the Third Appraiser a
complete and correct copy of this Section 8.9 (and the definitions
of capitalized terms used in this Section 8.9 that are defined
elsewhere in this Agreement).
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(e) Alternative Determination of Fair Market. Upon the delivery
of the Appraiser's Certificate of the Third Appraiser, the Fair
Market Value shall be determined as provided in this subparagraph
(e). The Fair Market Value shall be (i) the Lower Value, if the
Third Value is less than the Lower Value, (ii) the Higher Value, if
the Third Value is greater than the Higher Value, (iii) the
arithmetic average of the Third Value and the other Value (Lower or
Higher) that is closer to the Third Value if the Third Value falls
within the range between (and including) the Lower Value and the
Higher Value and (iv) the Third Value, if the Lower Value and the
Higher Value are equally close to the Third Value.
(f) Costs. Each of the Asset Member and the other Members shall
bear the cost of the Appraiser designated by it or on its behalf. If
the Higher Value is not more than 115% of the Lower Value, or if the
Higher Value and the Lower Value are equally close to the Third
Value, each of the Asset Member and the other Members shall bear 50%
of the cost of the Third Appraiser, if any; otherwise, the party
whose Appraiser's determination of Fair Market Value is further away
from the Third Value shall bear the entire cost of the Third
Appraiser. The Members agree to pay when due the fees and expenses
of the Appraisers in accordance with the foregoing provisions.
(g) Conclusive Determination. To the fullest extent provided by
law, the determination of the Fair Market Value made pursuant to
this Section 8.9 shall be final and binding on the Company and the
Members and such determination shall not be appealable to or
reviewable by any court or arbitrator; provided that the foregoing
shall not limit a Member's rights to seek arbitration of the
obligations of the other Members and the Company hereunder.
(h) Fair Market Value of United Grain Assets and Harvest States
Assets. The Members hereby agree that the Fair Market Value of the
United Grain Assets and the Harvest States Assets, as defined in the
Joint Venture Agreement, shall be as specified in Schedule I.
ARTICLE 9
ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS
9.1 Allocation of Profits and Losses.
(a) Company Profits and Losses, and items of income, gain, loss
and deduction included in determining Profits and Losses, shall be
allocated among the Members as provided in this Section. As set
forth in the definition of Profit and Loss, the amounts allocated
under this Section are determined by using Asset Value, which may be
based on Fair Market Value at the time of contribution or
revaluation pursuant to Section 8.7. The allocation of taxable
income and loss is governed by Section 9.2.
(b) Except as otherwise provided in this Section 9.1, Company
Profits, Losses and items of income, gain, loss and deduction
included in determining Profits and Losses shall be allocated among
the Members proportionately in accordance with their
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respective Percentage Interests as set forth on Schedule I and, if
applicable, as redetermined under Section 8.8.
(c) Minimum Gain Chargeback. Notwithstanding anything to the
contrary in this Article 9, if there is a net decrease in
"Partnership Minimum Gain" or "Partner Nonrecourse Debt Minimum
Gain" (as such terms are defined in sections 1.704-2(b) and
1.704-2(i)(2), respectively, of the Income Tax Regulations) during a
Company taxable year, then each Member shall be allocated items of
Company income and gain for such year (and, if necessary, for
subsequent years), to the extent required by, and in the manner
provided in, section 1.704-2 of the Income Tax Regulations.
This provision is intended to be a "minimum gain chargeback" within
the meaning of sections 1.704-2(f) and 1.704-2(i)(4) of the Income Tax
Regulations and shall be interpreted and implemented as therein provided.
(d) Qualified Income Offset. Subject to the provisions of
Section 9.1(c), but otherwise notwithstanding anything to the
contrary in this Article 9, if any Member's Capital Account has a
deficit balance in excess of such Member's obligation to restore its
Capital Account balance, computed in accordance with the rules of
paragraph (b)(2)(ii)(d) of section 1.704-1 of the Income Tax
Regulations (including such Member's share of Partnership Minimum
Gain and Partner Nonrecourse Debt Minimum Gain as provided in
sections 1.704-2(g) and 1.704-2(i)(5) of the Income Tax
Regulations), then sufficient amounts of income and gain (consisting
of a pro rata portion of each item of Company income, including
gross income, and gain for such year) shall be allocated to such
Member in an amount and manner sufficient to eliminate such deficit
as quickly as possible. This provision is intended to be a
"qualified income offset" within the meaning of section
1.704-l(b)(2)(ii)(d) of the Income Tax Regulations and shall be
interpreted and implemented as therein provided.
(e) Loans. Except as otherwise provided in Section 9.1(g), if
and to the extent any Member is deemed to recognize income as a
result of any loans described herein pursuant to the rules of
sections 1272, 1273, 1274, 1274A, 7872, 482 or 483 of the Code, or
any similar provision now or hereafter in effect, any corresponding
resulting deduction of the Company shall be allocated to the Member
who is charged with the income. Subject to the provisions of section
704(c) of the Code and Sections 9.1(c) (d) and (g) hereof, if and to
the extent the Company is deemed to recognize income as a result of
any loans described herein pursuant to the rules of sections 1272,
1273, 1274, 1274A, 7872, 482 or 403 of the Code, or any similar
provision now or hereafter in effect, such income shall be allocated
to the Member who is entitled to any corresponding resulting
deduction.
(f) Change in Interests. Except as provided in Section 9.1(e)
hereof or as otherwise required by law, if the Percentage Interests
of the Members are changed herein during any taxable year, all items
to be allocated to the Members for such entire taxable year shall be
prorated on the basis of the portion of such taxable year which
precedes each such change and the portion of such taxable year on
and after each such change according to the number of days in each
such portion, and the items so allocated for each
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such portion shall be allocated to the Members in the manner in
which such items are allocated as provided in this Article 9 during
each such portion of the taxable year in question.
(g) Losses.
(i) Items of deduction and loss attributable to recourse
liabilities of the Company (within the meaning of section
1.752-l(a)(1) of the Income Tax Regulations, but excluding
"partner nonrecourse debt" within the meaning of section
1.704-2(b)(4) of the Income Tax Regulations) shall be allocated
among the Members in accordance with the ratio in which the
Members share the economic risk of loss (within the meaning of
section 1.752-2 of the Income Tax Regulations) for such
liabilities.
(ii) Items of deduction and loss attributable to "Partner
Nonrecourse Debt" within the meaning of section 1.704-2(b)(4) of
the Income Tax Regulations shall be allocated to the Members
bearing the economic risk of loss with respect to such debt in
accordance with section 1.704-2(i) of the Income Tax
Regulations.
(iii) Items of deduction and loss attributable to the
Company's "Nonrecourse Liabilities" within the meaning of
section 1.704-2(b)(3) of the Income Tax Regulations shall be
allocated among the Members proportionately in accordance with
their Percentage Interests.
(iv) All other items of operating net loss ("Operating Net
Loss") shall be allocated among the Members, proportionately in
accordance with their Percentage Interests, except that
Operating Net Loss shall not be allocated to any Member to the
extent it would create a deficit balance in excess of such
Member's obligation to restore its capital account balance,
computed in accordance with the rules of section
1.704-l(b)(2)(ii)(d) of the Income Tax Regulations (including
such Member's share of Partnership Minimum Gain and Partner
Nonrecourse Debt Minimum Gain as provided in sections 1.704-2(g)
and 1.704-2(i)(5) of the Income Tax Regulations). Any Operating
Net Loss which cannot be allocated to a Member because of the
limitation set forth in the previous sentence shall be allocated
first to the other Members to the extent such other Members
would not be subject to such limitation and second any remaining
amount to the Members in the manner required by the Code and the
Income Tax Regulations.
(h) Purpose and Application. The purpose and the intent of the
special allocations provided for in Sections 9.1(c), (d), and (g)
are to comply with the provisions of sections 1.704-l(b) and 1.704-2
of the Income Tax Regulations, and such special allocations are to
be made so as to accomplish that result. However, to the extent
possible, the Members in allocating items of income, gain, loss, or
deduction among the Members shall take into account the special
allocations in such a manner that the net amount of allocations to
each Member shall be the same as such Member's distributive share of
Profits and Losses would have been had the events requiring the
special allocations not taken place. The Members shall apply the
provisions of this Section 9.1
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in whatever order they reasonably believe will minimize any economic
distortion that otherwise might result from the application of the
special allocations.
9.2 Allocation of Taxable Income and Loss.
(a) General. Items of income, gain, loss, and deduction reported
for federal income tax purposes shall be allocated in the same
manner as the corresponding items included in Profits and Losses and
allocated under Section 9.1, except as provided in this Section 9.2.
(b) Section 704(c) Allocations. A Member's distributive share of
income, gain, loss, or deduction with respect to any tangible
property with Asset Value that differs from Basis shall be
determined in accordance with the principles of the "remedial
allocation method" set forth in section 1.704-3(d) of the Income Tax
Regulations. A Member's distributive share of income, gain, loss, or
deduction with respect to any intangible property with Asset Value
that differs from Basis shall be determined in accordance with the
principles of the "traditional allocation method" set forth in
section 1.704-3(b) of the Income Tax Regulations.
(c) Recapture. Subject to the provisions of section 704(c) of
the Code and Sections 9.1 hereof, gain recognized (or deemed
recognized under the provisions hereof) upon the sale or other
disposition of Company property, which is treated as depreciation
recapture, shall be allocated to the Member who was entitled to
deduct such depreciation.
(d) Credits. Except as otherwise required by law, tax credits
shall be allocated among the Members pro rata in accordance with the
manner in which Company profits are allocated to the Members under
this Article 9, as of the time the credit property is placed in
service or if no property is involved, as of the time the credit is
earned. Recapture of any tax credit required by the Code shall be
allocated to the Members in the same proportion in which such tax
credit was allocated.
(e) Conformity of Reporting. The Members hereby agree to be
bound by the provisions of this Article 9 in reporting their shares
of Company income, loss, credits and other items for income tax
purposes.
9.3 Distribution of Assets by the Company.
(a) Subject to any restrictions under applicable law, as
promptly as practical after the end of each mid-year closing and
fiscal year of the Company, but in any event within sixty (60) days
after the end of each such period, the Company shall estimate the
Company's Net Profits for such period and shall distribute to the
Members 100% of the Company's estimated Net Profits for such period
less the Net Profits for such period previously distributed by the
Company. Other distributions, whether in cash or in kind, shall be
made to the Members at such times and in such amounts as shall be
determined by the Members Committee. The amount of any in-kind
distribution shall be distributed on the basis of the property's
then Fair Market Value (determined in accordance with Section 8.9
hereof).
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(b) Distributions shall be made among the Members in accordance
with their respective Percentage Interests at the time of such
distribution.
(c) Upon liquidation of the Company, within the meaning of
Income Tax Regulations section 1.704-l(b)(2)(ii)(g), distributions
shall be made among the Members as provided in Section 12.3.
(d) All matters not expressly provided for by the terms of
Article 9 or elsewhere in this Agreement concerning the valuation of
any assets of the Company, the allocation of profits and losses and
items thereof (including credits) among the Members, the
distribution of Net Profits or other assets of the Company, and
accounting procedures shall be agreed by the Members or referred to
arbitration under Article 6.
ARTICLE 10
TAX MATTERS AND REPORTS; ACCOUNTING
10.1 Filing of Tax Returns. The Members Committee shall prepare and
file, or cause the accountants of the Company to prepare and file, all federal,
state and local Tax Returns for each tax year of the Company and shall upon
request, provide copies of such Tax Returns to each Member.
10.2 Tax Matters Partner.
(a) The "Tax Matters Partner" of the Company within the meaning
of section 6231(a)(7) of the Code shall be United Grain. Unless
otherwise expressly provided herein, the Tax Matters Partner is
authorized to take any action that it determines to be necessary or
appropriate with respect to all tax matters, provided that the Tax
Matters Partner shall not have the authority to bind any other
Member to any consent, determination, resolution of a dispute or
other legal matter.
(b) The Tax Matters Partner shall promptly advise the other
Members of all audits or other actions by the Internal Revenue
Service and shall furnish to the Company and to each Member a copy
of each notice or other communication received by the Tax Matters
Partner from the Internal Revenue Service except such notice or
communication sent directly to the Members by the Internal Revenue
Service. All expenses incurred by the Tax Matters Partner in its
capacity as such shall be expenses of the Company and shall be paid
by the Company.
(c) To the fullest extent permitted by law, the Company shall
indemnify Members on an after-tax basis against any liabilities
incurred while acting as the Tax Matters Partner of the Company but
only to the extent such Member acts within the scope of its
authority as Tax Matters Partner under this Agreement or the Tax
Matters Partner has acted in reliance on advice of the Company's tax
accountants or legal counsel or at the direction of the Members
Committee. The Tax Matters Partner shall not be indemnified against
any liability regarding Company tax matters arising by reason of the
willful misconduct, bad faith, gross negligence or reckless
disregard of the duties of the Tax Matters Partner.
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10.3 Tax Reports to Current and Former Members. After the end of
each fiscal year, the Company shall, in a timely manner, prepare and mail, or
cause its accountants to prepare and mail, to each Member and, to the extent
necessary, to each former Member (or its legal representatives), a report
setting forth in sufficient detail such information as is required to be
furnished to members or partners by law (e.g., section 6031(b) of the Code and
the Income Tax Regulations thereunder) and as shall enable such Member or former
Member (or its legal representatives) to prepare their respective federal and
state income tax or informational returns in accordance with the laws, rules and
regulations then prevailing and, if requested, a full copy of the Company's Tax
Return.
10.4 Accounting Records; Independent Audit. Complete books and
records accurately reflecting the accounts, business, transactions and Members
of the Company shall be maintained and kept by the Company at the Company's
principal place of business. The accounting records of the Company shall be
maintained to assure preparation of the financial statements in accordance with
GAAP. The accounting records of the Company shall be audited by a firm of
independent certified public accountants selected by the Members Committee.
10.5 Fiscal Year. Except as may otherwise be required by the federal
tax laws, the fiscal year of the Company for both financial and tax reporting
purposes shall end on August 31.
10.6 Tax Accounting Method. The books and accounts of the Company
shall be maintained using the accrual method of accounting for tax purposes.
10.7 Withholding. Notwithstanding any other provision of this
Agreement, the Members Committee is authorized to take any action that it
determines to be necessary or appropriate to cause the Company to comply with
any federal, state and local withholding requirement with respect to any
allocation, payment or distribution by the Company to any Member or other
Person. All amounts withheld to satisfy any federal, state or local withholding
requirement with respect to a Member shall be treated as distributions to such
Member. If any such withholding requirement with respect to any Member exceeds
the amount distributable to such Member under this Agreement, or if any such
withholding requirement was not satisfied with respect to any amount previously
allocated or distributed to such Member, such Member and any successor or
assignee with respect to such Member's interest in the Company hereby, to the
fullest extent permitted by law, indemnifies and agrees to hold harmless the
Members and the Company for such excess amount or such withholding requirement,
as the case may be.
10.8 Tax Elections. Upon the request of a transferee of an Interest
in the Company or a distributee of a Company distribution, the Company shall
make the election under section 754 of the Code in accordance with applicable
Income Tax Regulations thereunder for the first fiscal year in which such
election could apply. The Company may seek to revoke such election (if made) if
agreed to by the Members Committee. In addition to the foregoing, the Members
Committee shall, determine whether to make any other available tax elections and
select any other appropriate tax accounting methods and conventions for any
purpose under this Agreement.
10.9 Prior Tax Information. Each Member agrees to deliver to the
Company all relevant information regarding Taxes that the Company will require
in order to comply with its
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own tax accounting and reporting requirements, including without limitation
schedules setting forth the fair market value and tax basis of each asset that
may from time to time be contributed by a Member to the Company; provided,
however, that no Member shall be required to disclose the income tax returns of
itself or any of its Affiliates.
10.10 Financial Reports. The Company will furnish the following
reports (the "Financial Reports") to each Member:
(a) As soon as practicable after the end of each fiscal year of
the Company, and in any event within ninety (90) days thereafter, a
consolidated balance sheet of the company and its subsidiaries, if
any, as of the end of such fiscal year, and consolidated statements
of income and cash flows of the Company and its subsidiaries, if
any, for such year, prepared in accordance with GAAP and setting
forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail.
(b) As soon as practicable after the end of the first, second
and third quarterly accounting periods in each fiscal year of the
Company, and in any event within forty-five (45) days thereafter, a
consolidated balance sheet of the Company and its subsidiaries, if
any, as of the end of each such quarterly period, and consolidated
statements of income and cash flows of the Company and its
subsidiaries, if any, for such period and for the current fiscal
year to date, prepared in accordance with GAAP and stetting forth in
comparative form the figures for the corresponding periods of the
pervious fiscal year, subject to changes resulting from normal year
end audit adjustments, all in reasonable detail, except that such
financial statements need not contain the notes required by GAAP.
ARTICLE 11
TRANSFER AND ASSIGNMENT OF INTERESTS;
ADDITIONAL MEMBERS
11.1 Transfer and Assignment of Interests. No Member shall be
entitled to Transfer, all or any part of its Membership Interest, including any
economic interest therein except with the prior written approval of each other
Member, which approval may be given or withheld as the other Members may
determine in their sole discretion. Any Transfer of a Membership Interest in
contravention of this Article 11 shall be null and void and of no force
whatsoever. No Member, without the prior written consent of the other Members,
shall retire or withdraw from the Company.
11.2 Assignees and Substituted Members.
(a) In the event of a Transfer of part or all of any Membership
Interest permitted pursuant to the provisions of this Article 11 the
Assignee of such Membership Interest shall become a Member hereunder
upon and subject to compliance with Section 11.2(b). If Section
11.2(b) is not complied with, the Person to whom such Transfer is
made shall not become a Member hereunder and shall be considered
only an Assignee of the Membership Interest and, as such, shall only
be entitled to share in those
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distributions, if any, in which its assignor would be eligible. An
Assignee who does not comply with Section 11.2(b) shall have no
right to require any information or accounting of any transactions
of the Company or inspect the Company books and records.
(b) An Assignee of a Membership Interest pursuant to a Transfer
permitted under the provisions of this Article may become a
Substituted Member with all the rights and liabilities of its
assignor under the Agreement (except as limited by Section 11.3) if
and only if (1) the Assignee expressly assumes and agrees to be
bound by the Agreement, (2) the appropriate instruments, documents,
or statements, if any, are prepared, executed, acknowledged, filed,
recorded, published and delivered as required by the law, (3) the
Assignee pays or obligates itself to pay any and all reasonable
expenses of the Company connected with such substitution, and (4)
the Assignee causes to be delivered to the Company, at its sole cost
and expense, a favorable opinion of legal counsel reasonably
acceptable to the other Members, to the effect that (w) the
contemplated Transfer of such Membership Interest to the Assignee
will not violate any applicable federal or state laws, including
securities laws, (x) the Assignee has the legal right, power and
capacity to own the Membership Interest, (y) the contemplated
Transfer will not cause the Company to cease to be classified as a
partnership for federal tax purposes, and (z) the contemplated
Transfer will not cause any of the Members any material adverse tax
consequences. Upon compliance with all provisions hereof applicable
to such Person becoming a Member, all other Members agree to execute
and deliver such amendments hereto as are necessary to constitute
such Person a Member of the Company.
(c) Upon a Transfer by a Member of all or part of its Membership
Interest and substitution of a Substituted Member with respect to
all or such portion of its Membership Interest, the transferring
Member shall cease to be a Member to the extent of the Membership
Interest so Transferred.
(d) The admission of a Substituted Member shall not result in
the release of the Member who assigned the Membership Interest from
any liability that such transferor Member may have incurred prior to
the assignment and substitution.
11.3 Additional Members. With the unanimous consent of the Members,
acting by and through the Members Committee, the Company may issue additional
Membership Interests for such consideration and on such terms and conditions and
to such Persons as the Members Committee shall unanimously approve, provided
that (1) the Person or Persons to whom such additional Membership Interests are
to be issued ("Additional Members") expressly assume and agree to be bound by
this Agreement, (2) the appropriate instruments, documents or statements, if
any, are prepared, executed, acknowledged, filed, recorded, published and
delivered as required by law, (3) if required by the Company, the Additional
Member or Additional Members pays or obligates itself or themselves to pay any
and all reasonable expenses of the Company incurred in connection with the
issuance of such additional Membership Interests, and (4) the Company shall have
received the favorable opinion of legal counsel to the Company reasonably
acceptable to the existing Members of the Company to the effect that (w) the
issuance of such additional Membership Interests to such Additional Member or
Additional Members will not violate any applicable federal or state laws,
including securities laws, (x) the Additional Member or Additional Members have
the legal right, power and capacity to own the additional
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Membership Interests, (y) the issuance of the additional Membership Interests
will not cause the Company to cease to be classified as a partnership for
federal tax purposes, and (z) the issuance of such additional Membership
Interests will not cause any of the Members any material adverse tax
consequences.
11.4 Transfer of Assets. If Harvest States proposes to transfer its
interest in the Kalama Elevator, or if United Grain proposes to transfer its
interest in the Vancouver Elevator, the transferring Member shall provide
written notice thereof to the non-transferring Member, including the proposed
terms of the transfer. The non-transferring Member shall have the right, for a
period of sixty (60) days following receipt of such notice to acquire the
interest of the transferring Member in the Elevator upon the same terms and
conditions as the proposed transfer. If the non-transferring Member does not
exercise its right to acquire such interest, the transferring Member shall be
free to transfer its interest in the Elevator; provided that the
non-transferring Member shall have the right within ninety (90) days following
the transfer by the transferring Member to terminate this Agreement and dissolve
the Company.
11.5 Transfer of Interest in United Grain. If Mitsui & Co., Ltd.
transfers a controlling interest in United Grain to a third party, United Grain
shall give written notice thereof to Harvest States within ten (10) days after
the transfer. Harvest States shall have the right for a period of thirty (30)
days after receipt of such notice to terminate this Agreement and dissolve the
Company.
11.6 Change of Country Facilities or Operations. Except with the
prior written consent of United Grain, Harvest States will not sell, lease or
otherwise dispose of any of the Facilities, as defined in the Put-through
Agreement, or change its operations at any of said Facilities, if such sale,
lease, disposition or change of operations would have a material adverse effect
upon the ability of Harvest States to originate Grain or the volume of Grain
originated by Harvest States. In order to avoid such effect, Harvest States may
substitute other elevator facilities for one or more of the Facilities if such
substitution would not materially and adversely affect Harvest States' ability
to originate Grain or the volume of Grain originated by Harvest States, or
substantially increase the cost to the Company of such Grain. All obligations
under this Section 11.6 shall remain in full force and effect, regardless of
whether the Put-through Agreement is in effect.
ARTICLE 12
DISSOLUTION AND LIQUIDATION
12.1 Events of Dissolution. The Company shall be dissolved upon (a)
December 31, 1998 if the Effective Date shall not have occurred, (b) an election
to dissolve the Company pursuant to Section 12.2, (c) the expulsion, bankruptcy
or dissolution of a Member, or the occurrence of any other event that results in
a Member ceasing to be a Member of the Company under the Act; (d) the entry of a
decree of judicial dissolution pursuant to Section 18-802 of the Act, including
a decree of dissolution pursuant to Section 3.5(b) hereof, and (e) the unanimous
written consent of the Members.
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12.2 Voluntary Dissolution. Either United Grain or Harvest States
but no other Member may elect, upon the occurrence of any of the following
events, by written notice to the Company and the other Members, to require the
Company to dissolve and wind up in accordance with the terms of this Article 12:
(a) If the other Member shall, for any reason, fail to make the
initial capital contributions required to be made by such other
Member under Section 8.2 and the Joint Venture Agreement, when and
as required by Section 8.2;
(b) If the Company shall at any time have (i) a Net Loss in any
fiscal year in excess of $10,000,000, or (ii) an Accumulated Net
Loss at any time in excess of $5,000,000;
(c) By a Member in accordance with Article 11 of this Agreement;
(d) If the Company is unable to discharge its liabilities as
they become due; or
(e) The expiration of the Initial Term or any successive
18-month period following the Initial Term by written notice by a
Member to the other Members and the Company; provided however, that
written notice to the Company and the other Members by United Grain
or Harvest States, as the case may be, shall be given at least
eighteen (18) months prior to the date of termination.
In addition, Harvest States (but no other Member) may elect, by
written notice to the Company, United Grain and Mitsui & Co., Ltd.,
to require the Company to dissolve and wind up in accordance with
the terms of this Article 12 if (i) the consolidated stockholders'
equity of United Grain, determined in accordance with GAAP and as
reflected in the most recent financial statements of United Grain,
is less than $10,000,000 (the "Threshold Amount") for two
consecutive fiscal quarters of United Grain and (ii) within three
(3) months from the date of receipt by Mitsui & Co., Ltd. of the
written notice of such fact from Harvest States, Mitsui & Co.
(U.S.A.), Inc. has not caused the consolidated stockholders' equity
of United Grain to be at least equal to the Threshold Amount or
agreed to be jointly and severally liable, up to the Threshold
Amount, for United Grain's obligations under Section 13.2 hereof.
12.3 Liquidation and Order of Dissolution. In all cases of
dissolution of the Company, the Business of the Company shall be continued to
the extent necessary to allow an orderly winding up of its affairs as promptly
as possible, including the liquidation and termination of the Company pursuant
to the provisions of this Article 12, as promptly as practicable thereafter, and
each of the following shall be accomplished:
(a) All leases, subleases, and other agreements between the
Members and/or the Company shall be terminated.
(b) The Liquidator shall cause to be prepared a statement
setting forth the assets and liabilities of the Company as of the
date of dissolution and the Net Book Value as of the date of
dissolution of any Capital Expenditures made by the Company to any
facilities or premises leased or subleased from a Member by the
Company, including
41
<PAGE>
capital expenditures made pursuant to the Joint Venture Agreement, a
copy of which statement shall be furnished to each Member.
(c) Each Member shall promptly pay to the Company the Net Book
Value of any Capital Expenditures made or paid by the Company to any
facilities or premises owned by such Member.
(d) The property and assets of the Company, including amounts
set forth in paragraph (c) of this Section 12.3, shall be liquidated
by the Liquidator as promptly as possible, but in an orderly and
businesslike manner. The Liquidator may, in the exercise of its
business judgment, determine not to sell all or any portion of the
remaining assets of the Company, in which event such remaining
assets shall be distributed in kind pursuant to Section 12.3(e).
(e) Any gain or loss realized by the Company upon the sale of
its assets shall be deemed recognized and allocated to the Members
in the manner set forth in Article 9. To the extent that an asset is
to be distributed in kind, such asset shall be deemed to have been
sold at its Fair Market Value on the date of distribution, the gain
or loss deemed recognized upon such deemed sale shall be allocated
in accordance with Article 9 and the amount of the distribution
shall be considered to be such Fair Market Value of the asset.
(f) The proceeds of sale and all other assets of the Company,
including Operating Cash Flow of the Company, shall be applied and
distributed as follows and in the following order of priority:
(i) To pay (or make reasonable provision for the payment of)
all creditors of the Company, including to the extent permitted
by law, Members or their Affiliates who are creditors, in
satisfaction of liabilities of the Company in the order of
priority provided by law, including expenses relating to the
dissolution and winding up of the affairs of the Company
(including, without limitation, expenses of selling assets of
the Company, discharging the liabilities of the Company,
distributing the assets of the Company and terminating the
Company as a limited liability company in accordance with this
Agreement and the Act); and
(ii) To the Members in proportion to their respective
positive Capital Account balances, as those balances are
determined after all adjustments to such Capital Accounts as
required by this Agreement for all periods immediately prior to
such distribution.
(iii) If the Company shall be dissolved by reason of the
failure of the Effective Date to occur prior to December 31,
1998, then, anything hereinabove to the contrary
notwithstanding, United Grain and Harvest States shall be liable
for all of the liabilities and expenses of the Company incurred
through the date of dissolution, in the proportions of 50% and
50%, respectively, subject to any rights or remedies each may
have against the other arising out of the Joint Venture
Agreement, this Agreement or any other matter.
42
<PAGE>
12.4 Liquidator. The Members Committee is hereby named as the
Liquidator and the Chairman thereof is irrevocably appointed as the true and
lawful attorney in the name, place and stead of each of the Members, such
appointment being coupled with an interest, to make, execute, sign, acknowledge
and file with respect to the Company all papers which shall be necessary or
desirable to effect the dissolution, liquidation and termination of the Company
in accordance with the provisions of this Article. Notwithstanding the
foregoing, if either United Grain or Harvest States objects to the Members
Committee acting as the Liquidator, then the Members will cooperate in naming a
third party to act as Liquidator, or if the Members are unable to agree on a
third party Liquidator within thirty (30) days after the event of dissolution,
either Member may seek a court appointed Liquidator. Without limiting the
foregoing, the Liquidator shall, upon the final dissolution of the Company, file
an appropriate certificate to such effect in the proper governmental office or
offices under the Act as then in effect. Notwithstanding the foregoing, each
Member, upon the request of the Liquidator, shall promptly execute, acknowledge
and deliver all such documents, certificates and other instruments as the
Liquidator shall reasonably request to effectuate the proper dissolution,
liquidation and termination of the Company, including the winding up of the
Business of the Company.
12.5 Termination of Company. The Company shall be terminated upon
(a) completion of any dissolution and liquidation thereof pursuant to the
provisions of this Article, and (b) preparation, execution, acknowledgment,
filing, recordation, publication, delivery and/or cancellation of any
instruments, documents or statements if and as required by the Act, the Code or
any other applicable laws.
12.6 Orderly Winding Up. Notwithstanding anything to the contrary in
this Article 12 upon winding up and liquidation, if required to maximize the
proceeds of liquidation, the Members may, upon unanimous approval, transfer the
assets of the Company to a liquidating trustee or trustees.
ARTICLE 13
INDEMNIFICATION AND EXCULPATION; CERTAIN AGREEMENTS
13.1 Indemnification of the Members. The Company shall indemnify and
hold harmless the Members, the Committee Members, and their Affiliates, and
their respective Agents and/or the legal representatives of any of them, and
each other Person who may incur liability as a Member or otherwise in connection
with the management or ownership of the Company (each, an "Indemnified Party"),
against all liabilities and expenses (including amounts paid in satisfaction of
judgments, in compromise, as fines and penalties, and as counsel fees)
reasonably incurred by him, her or it in connection with the investigation,
defense or disposition of any action, suit or other proceeding, whether civil or
criminal, in which any Indemnified Party may be involved or with which he, she
or it may be threatened, while a Member or serving in such other capacity or
thereafter, by reason of its being or having been a Member, or by serving in
such other capacity, except with respect to any matter which constitutes willful
misconduct, bad faith, gross negligence or reckless disregard of the duties of
his office, or criminal intent. The Company shall have the right to approve any
counsel selected by any Indemnified Party and to approve the terms of any
proposed settlement. The rights accruing to a Member and each other Indemnified
Party under this Section 13.1 shall not exclude any other right to which it or
they
43
<PAGE>
may be lawfully entitled; provided that any right of indemnity or reimbursement
granted in this Section 13.1 or to which any Indemnified Party may be otherwise
entitled may only be satisfied out of the assets of the Company, and no Member
and no withdrawn Member shall be personally liable with respect to any such
claim for indemnity or reimbursement. Notwithstanding any of the foregoing to
the contrary, the provisions of this Section 13.1 shall not be construed so as
to provide for the indemnification of a Member or any other Indemnified Party
for any liability to the extent (but only to the extent) that such
indemnification would be in violation of applicable law or such liability may
not be waived, modified or limited under applicable law, but shall be construed
so as to effectuate the provisions of this Section 13.1 to the fullest extent
permitted by law.
13.2 Reimbursement and Indemnity. If a Member shall, pursuant to
authorization of or approval by the Members Committee or a final judgment of a
court of competent jurisdiction or in compliance with law or order of any
governmental agency, pay any amount on behalf of or for the account of the
Company with respect to any liability, obligation, undertaking, damage, or claim
for which the Company shall or may, pursuant to contract or applicable law, be
liable or responsible, or with respect to making good any loss or damage
sustained by, or paying any duty, cost, claim, or damage incurred by, the
Company, then the Company shall reimburse such Member for such amount as shall
have been so paid by such Member. If the Company shall fail fully to reimburse
such paying Member, the other Member shall indemnify such paying Member by
paying to it that share of the excess of (a) such payments over (b) the
aggregate reimbursement, if any, which such paying Member shall have received
from the Company in respect of such payments, as shall be proportionate to the
other Member's Percentage Interest. Subject to the provisions set forth in
Section 7.2 hereof and the Form of Credit Agreements between the Company and a
Member, this Section 13.2 shall have no application to any liability incurred by
the Company to a Member pursuant to any contract between the Company and such
Member.
13.3 Exculpation. No Officer, Committee Member, Company employee,
Member or Affiliate thereof or their respective Agents and/or the legal
representatives of any of them shall be liable to any Member or the Company for
mistakes of judgment or for any action or inaction which may cause or result in
any loss or damage to the Company or the other Members unless such action or
inaction constitutes fraud or willful misconduct. Each Member may (on its own
behalf or on the behalf of any Committee Member or Officer designated by such
Member, any Affiliates of such Member or their respective Agents and/or legal
representatives of any of them), consult with counsel, accountants and other
experts in respect of the Company's affairs and such Person shall be fully
protected and justified in any action or inaction which is taken in accordance
with the advice or opinion of such counsel, accountants or other experts;
provided that they shall have been selected with reasonable care. The Members
shall have no duties or obligations to the Company or the other Members unless
expressly imposed by this Agreement.
13.4 Indemnification Relating To Initial Contributions. United Grain
and Harvest States each hereby agree to indemnify and hold harmless each other
from and against any and all liability, loss or damage which shall result from
the failure of either of them, for any reason, to timely make the initial
contributions of capital to the Company required by Section 8.2. Such indemnity
shall include, but shall not be limited to, the reimbursement by the defaulting
party of the non-defaulting party for 100% of all organizational expenses
incurred by the non-defaulting
44
<PAGE>
party in connection with the Joint Venture Agreement, this Agreement and the
transactions contemplated thereby and hereby, including but not limited to the
expenses provided in Section 14.2 of the Joint Venture Agreement to be
reimbursed by the Company.
The indemnification provided for in this Section 13.4 shall apply
only in the case of the failure of either United Grain or Harvest States to
timely make the initial capital contributions required by Section 8.2 and shall
not apply to their respective obligations to contribute additional capital to
the Company or to any other of their respective obligations under this
Agreement, preserving unto each of United Grain and Harvest States, however,
such rights as may be afforded them under applicable law in the case of a breach
of any of such other obligations.
ARTICLE 14
MISCELLANEOUS
14.1 Notices. All notices, requests, demands or other communications
required by or otherwise with respect to this Agreement shall be in writing and
shall be deemed to have been duly given to any party (i) where delivered
personally (by courier service or otherwise), (ii) when delivered by facsimile
and confirmed by return facsimile, (iii) on the business day after the date sent
by a nationally recognized overnight courier service, or (iv) seven days after
being mailed by first-class, registered or certified mail, postage prepaid and
return receipt requested, in each case to the applicable addresses set forth
below:
If to United Grain: United Grain Corporation
200 South Market Street, Suite 1770
Portland, OR 97201
Attn: President
Facsimile: (503) 226-6074
With copies to: Mitsui & Co., Ltd.
2-1, Ohtemachi 1-chome
Chiyoda-ku
Tokyo 100-0004, Japan
Attn: General Manager, Grain Division (TKPGZ)
Facsimile: 81-3-3285-9520
Mitsui & Co. (U.S.A.), Inc.
Met Life Building
200 Park Avenue
New York, NY 10166-0130
Attention: General Manager, Grain Division
(NYCPZ)
Facsimile (212) 878-4186
45
<PAGE>
Mitsui & Co. (U.S.A.), Inc.
200 SW Market Street, Suite 1830
Portland, OR 97201
Attn: General Manager (PTDZZ)
Facsimile: (503) 276-3520
If to Harvest States: Cenex Harvest States Cooperatives
5500 Cenex Drive
Inver Grove Heights, MN 55077
Attn: Senior Vice President
Facsimile: (612) 641-6832
With copies to: Cenex Harvest States Cooperatives
5500 Cenex Drive
Inver Grove Heights, MN 55077
Attn: Legal Department
Facsimile: (612) 641-6832
or to such other address or facsimile number as any party may have furnished to
the other parties in writing in accordance with this Section 14.1.
14.2 Governing Law. This Agreement (other than Article 7 hereof)
shall be governed by, interpreted, and construed in accordance with the laws of
the State of Delaware, without regard to Delaware choice of law provisions. The
provisions of Article 7 of this Agreement shall be governed by, interpreted, and
construed in accordance with the laws of the State of New York, without regard
to New York choice of law provisions.
14.3 Amendments.
(a) This Agreement may be modified or amended only by an
instrument in writing signed by each Member, and, as so modified and
amended, shall inure to the benefit of all of the Members.
Notwithstanding anything to the contrary set forth herein, the
provisions of Article 7 hereof may not be waived, amended or
modified with respect to any Credit except pursuant to an instrument
in writing signed by the Company and the holder of such Credit with
respect to which such waiver, amendment or modification is to apply.
(b) United Grain and Harvest States acknowledge that in the
event of the admission of one or more Additional Members or
Substituted Members of the Company, appropriate revision of portions
of this Agreement will be necessary, to be mutually agreed by United
Grain and Harvest States as a condition of the admission of such
Additional Member or Substituted Member.
14.4 Entire Agreement. Except to the extent other agreements are
specifically referred to herein, this Agreement constitutes the entire agreement
between the Members with respect to the matters covered hereby and thereby and
supersedes all prior agreements, understandings, offers and negotiations, oral
or written.
46
<PAGE>
14.5 Waiver of Partition. Each Member hereby irrevocably waives any
and all rights that it may have to maintain an action for partition of any of
the Company's property.
14.6 Consents. All consents, agreements and approvals required or
permitted by this Agreement shall be in writing and a signed copy thereof shall
be filed and kept with the books of the Company.
14.7 Successors. Subject to Article 11, all rights and duties of the
Members hereunder shall inure to the benefit of and be binding upon their
respective successors and assigns.
14.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
14.9 Severability. Each provision of this Agreement shall be
considered severable and if for any reason any provision which is not essential
to the effectuation of the basic purposes of the Agreement is determined by a
court of competent jurisdiction to be invalid or unenforceable and contrary to
existing or future applicable law, such invalidity shall not impair the
operation of or affect those provisions of this Agreement which are valid. In
that case, this Agreement shall be construed so as to limit any term or
provision so as to make it enforceable or valid within the requirements of any
applicable law, and in the event such term or provision cannot be so limited,
this Agreement shall be construed to omit such invalid or unenforceable
provisions.
14.10 Survival. All indemnities and reimbursement obligations made
pursuant to this Agreement shall survive dissolution and liquidation of the
Company until expiration of the longest applicable statute of limitations
(including extensions and waivers) with respect to the matter for which a party
would be entitled to be indemnified or reimbursed, as the case may be.
14.11 No Third Party Beneficiaries. Nothing contained in this
Agreement is intended to, or shall, confer upon any Person other than the
parties hereto any rights or remedies hereunder.
47
<PAGE>
IN WITNESS WHEREOF, the Members have executed this Limited Liability
Company Agreement as of the date first hereinabove written.
UNITED GRAIN CORPORATION
By: /s/ William Cormack
------------------------------------
Name: William Cormack
----------------------------------
Title: President
---------------------------------
CENEX HARVEST STATES COOPERATIVES
By: /s/ Mark L. Palmquist
------------------------------------
Name: Mark L. Palmquist
----------------------------------
Title: Senior Vice President
---------------------------------
48
<PAGE>
Schedules
- ---------
I Members; Capital Contributions; Percentage Interests
II Initial Members Committee Members
III Initial Executive Committee Members
EXHIBITS
- --------
I. Form of the Credit Agreements, including Form of Loan Agreement, Form of
Trade Credit Agreement and Form of Security Agreement.
<PAGE>
SCHEDULE I
INITIAL CAPITAL CONTRIBUTION OF MEMBERS
================================================================================
INITIAL CAPITAL CONTRIBUTION
- --------------------------------------------------------------------------------
PERCENTAGE
MEMBER TOTAL INTEREST
- --------------------------------------------------------------------------------
United Grain $125,000 50%
- --------------------------------------------------------------------------------
Harvest States $125,000 50%
================================================================================
S-1
<PAGE>
SCHEDULE II
INITIAL APPOINTEES TO MEMBERS COMMITTEE
United Grain Harvest States
- ------------------------------------- --------------------------------------
Mr. H. Hirano Mr. N. Estenson
- ------------------------------------- --------------------------------------
Mr. Y. Satake Mr. J. Johnson
- ------------------------------------- --------------------------------------
Mr. Y Muramatsu Mr. T. F. Baker
- ------------------------------------- --------------------------------------
Mr. H. Ichikawa Mr. M. Bergeland
- ------------------------------------- --------------------------------------
Mr. W. Cormack Mr. M. Palmquist
- ------------------------------------- --------------------------------------
S-2
<PAGE>
SCHEDULE III
INITIAL APPOINTEES TO EXECUTIVE COMMITTEE
United Grain Harvest States
- ------------------------------------- --------------------------------------
Mr. W. Cormack Mr. M. Palmquist
- ------------------------------------- -------------------------------------
S-3
<PAGE>
EXHIBIT I
FORM OF CREDIT DOCUMENTS
EXHIBIT 99
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 crisis in Asia has impacted,
and is expected to continue to impact, exports of US 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, enacted in April 1996, may affect crop
production in several ways. The Act more narrowly defines what will qualify as
environmentally sensitive acreage for purposes of the conservation reduction
program, with the result that 3 to 4 million acres may be put back into
agricultural production in the future from a present enrollment of 36.4 million
acres. The Act also removes restrictions on the type of crops planted (other
than fruit and vegetables), allowing farmers to plant crops having favorable
prices and thereby increasing the production of those crops. Increased
production may lower prices of certain crops but increase the amount available
for export. However, the Act also reduces Export Enhancement Program subsidies,
which may adversely affect the ability of U.S. exports to compete with those of
other countries. Reduced demand for US agricultural products may also adversely
affect the demand for fertilizer, chemicals, and petroleum products sold by the
Company and used to produce the crop.
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 risk 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.
<PAGE>
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.
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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> NOV-30-1998
<CASH> 58,401,934
<SECURITIES> 0
<RECEIVABLES> 641,889,536
<ALLOWANCES> 23,061,610
<INVENTORY> 514,391,984
<CURRENT-ASSETS> 1,230,218,174
<PP&E> 1,670,377,218
<DEPRECIATION> 741,380,272
<TOTAL-ASSETS> 2,620,290,808
<CURRENT-LIABILITIES> 979,080,106
<BONDS> 482,248,322
0
0
<COMMON> 0
<OTHER-SE> 1,067,883,554
<TOTAL-LIABILITY-AND-EQUITY> 2,620,290,808
<SALES> 1,755,731,074
<TOTAL-REVENUES> 1,783,410,865
<CGS> 1,725,866,083
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 82,416
<INTEREST-EXPENSE> 9,549,782
<INCOME-PRETAX> 10,314,723
<INCOME-TAX> 2,000,000
<INCOME-CONTINUING> 8,314,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,314,723
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 79,782,521
<SECURITIES> 0
<RECEIVABLES> 717,098,890
<ALLOWANCES> 24,822,246
<INVENTORY> 539,435,168
<CURRENT-ASSETS> 1,373,991,807
<PP&E> 1,531,829,253
<DEPRECIATION> 676,198,620
<TOTAL-ASSETS> 2,640,066,555
<CURRENT-LIABILITIES> 1,145,015,973
<BONDS> 468,590,043
0
0
<COMMON> 0
<OTHER-SE> 1,023,148,230
<TOTAL-LIABILITY-AND-EQUITY> 2,640,066,555
<SALES> 2,361,710,927
<TOTAL-REVENUES> 2,387,471,566
<CGS> 2,314,404,203
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 490,228
<INTEREST-EXPENSE> 8,687,118
<INCOME-PRETAX> 29,134,592
<INCOME-TAX> 2,940,000
<INCOME-CONTINUING> 26,194,592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,194,592
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
