================================================================================
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 FEBRUARY 29, 2000.
[ ] 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
incorporation or organization) Identification Number)
5500 CENEX DRIVE, (651) 451-5151
INVER GROVE HEIGHTS, MN 55077 (Registrant's
(Address of principal executive offices and zip code) 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 February 29, 2000)
================================================================================
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I. FINANCIAL INFORMATION
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
Item 1. Financial Statements
Consolidated Balance Sheets as of February 29, 2000 (unaudited), August 31, 1999 and
February 28, 1999 (unaudited) .......................................................... 2
Consolidated Statements of Operations for the three months and six months ended
February 29, 2000 and February 28, 1999 (unaudited) .................................... 3
Consolidated Statements of Cash Flows for the three months and six months ended
February 29, 2000 and February 28, 1999 (unaudited) .................................... 4
Notes to Consolidated Financial Statements (unaudited) ................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..................... 13
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of February 29, 2000 (unaudited), August 31, 1999 and
February 28, 1999 (unaudited) .......................................................... 14
Statements of Operations for the three months and six months ended
February 29, 2000 and February 28, 1999 (unaudited) .................................... 15
Statements of Cash Flows for the three months and six months ended February 29, 2000
and February 28, 1999 (unaudited) ...................................................... 16
Notes to Financial Statements (unaudited) .............................................. 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................................... 18
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
Item 1. Financial Statements
Balance Sheets as of February 29, 2000 (unaudited), August 31, 1999 and
February 28, 1999 (unaudited) .......................................................... 21
Statements of Operations for the three months and six months ended
February 29, 2000 and February 28, 1999 (unaudited) .................................... 22
Statements of Cash Flows for the three months and six months ended February 29, 2000
and February 28, 1999 (unaudited) ...................................................... 23
Notes to Financial Statements (unaudited) .............................................. 24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................................... 25
PART II. OTHER INFORMATION
Items 1 through 3 have been omitted since all items are inapplicable or answers
are negative.
Item 4. Submission of Matters to a Vote of Security Holders ............................ 28
Item 5 has been omitted since the answer is negative.
Item 6. Exhibits and Reports on Form 8-K ............................................... 28
SIGNATURE PAGE .......................................................................... 29
</TABLE>
i
<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 the following:
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 crises 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.
OILSEED PROCESSING AND REFINING BUSINESS COMPETITION. This 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. In addition, baking and bread flour demand has declined during a period
when the milling industry has been expanding, which will continue to put
pressure on gross margins.
YEAR 2000. To date, the Company has not experienced any significant year
2000-related failures. The Company's management believes that the Company has
taken the steps reasonably necessary to resolve the year 2000 issue with respect
to matters within its control. While the Company has taken steps to determine
the extent of remediation efforts under taken by key customers and suppliers,
there is no guarantee that the systems of other companies on which this Company
relies have been remediated in order to avoid having a material adverse effect
on the Company's operations or its financial results. To date, the Company has
not experienced any significant problems related to key customer or supplier
year-2000 related failures.
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
February 29, 2000.
1
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ---------- ------------
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 55,234 $ 75,667 $ 43,654
Receivables ................................................ 707,434 606,641 539,180
Inventories ................................................ 670,549 549,703 506,319
Other current assets ....................................... 181,550 39,414 124,185
---------- ---------- ----------
Total current assets ...................................... 1,614,767 1,271,425 1,213,338
INVESTMENTS ................................................. 407,924 427,896 357,955
PROPERTY, PLANT AND EQUIPMENT ............................... 989,101 968,333 949,599
OTHER ....................................................... 125,132 120,010 119,186
---------- ---------- ----------
Total assets .............................................. $3,136,924 $2,787,664 $2,640,078
========== ========== ==========
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .............................................. $ 225,475 $ 196,986 $ 247,000
Current portion of long-term debt .......................... 20,802 21,562 17,650
Patrons' credit balances ................................... 55,210 44,970 53,071
Patrons' advance payments .................................. 243,913 127,755 161,508
Checks and drafts outstanding .............................. 37,350 48,605 56,197
Accounts payable ........................................... 648,618 449,774 335,458
Accrued expenses ........................................... 129,650 119,728 89,873
Patronage dividends and equity retirements payable ......... 15,056 43,000 16,303
---------- ---------- ----------
Total current liabilities ................................. 1,376,074 1,052,380 977,060
LONG-TERM DEBT .............................................. 451,500 461,104 442,616
OTHER LIABILITIES ........................................... 78,366 88,173 80,166
MINORITY INTERESTS IN SUBSIDIARIES .......................... 108,938 68,371 57,925
COMMITMENTS AND CONTINGENCIES
EQUITIES .................................................... 1,122,046 1,117,636 1,082,311
---------- ---------- ----------
Total liabilities and equities ............................ $3,136,924 $2,787,664 $2,640,078
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
2
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 29 & 28, FEBRUARY 29 & 28,
----------------------------- ----------------------------
2000 1999 2000 1999
(DOLLARS IN THOUSANDS) ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales:
Grain and oilseed ............................ $ 920,623 $ 974,093 $1,923,505 $2,031,964
Energy ....................................... 652,762 254,766 1,312,032 584,634
Processed grain and oilseed .................. 130,335 134,255 266,487 271,810
Agronomy ..................................... 126,957 119,685 229,020 227,287
Feed and farm supplies ....................... 89,439 84,699 207,830 207,534
---------- ---------- ---------- ----------
1,920,116 1,567,498 3,938,874 3,323,229
Patronage dividends ........................... 1,266 3,433 1,524 3,902
Other revenues ................................ 18,864 21,160 44,844 48,371
---------- ---------- ---------- ----------
1,940,246 1,592,091 3,985,242 3,375,502
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of goods sold ............................ 1,901,993 1,536,680 3,886,806 3,264,356
Marketing, general and administrative ......... 42,099 36,679 81,391 73,950
Interest ...................................... 14,001 10,422 26,957 19,972
Minority interests ............................ (9,703) 645 (9,166) (756)
---------- ---------- ---------- ----------
1,948,390 1,584,426 3,985,988 3,357,522
---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE INCOME
TAXES ......................................... (8,144) 7,665 (746) 17,980
INCOME TAXES ................................... (4,016) (965) (5,737) 1,035
---------- ---------- ---------- ----------
NET (LOSS) INCOME .............................. $ (4,128) $ 8,630 $ 4,991 $ 16,945
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
3
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 29 & 28, FEBRUARY 29 & 28,
--------------------------- ----------------------------
2000 1999 2000 1999
(DOLLARS IN THOUSANDS) ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .................................... $ (4,128) $ 8,630 $ 4,991 $ 16,945
---------- ---------- ---------- ----------
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization ...................... 21,795 20,171 43,973 40,146
Non-cash net loss (income) from joint ventures ..... 7,787 3,402 8,610 (1,267)
Adjustment of inventories to market value .......... -- (5,913) -- 4,829
Noncash portion of patronage dividends received (1,004) (3,291) (1,074) (3,466)
Gain on sale of property, plant and equipment ...... (756) (524) (832) (1,321)
Other, net ......................................... 378 (990) 378 (990)
Changes in operating assets and liabilities:
Receivables ....................................... 17,429 88,110 (97,863) (71,089)
Inventories ....................................... 3,099 13,986 (66,446) (31,414)
Other current assets and other assets ............. (148,822) (101,600) (149,890) (108,837)
Patrons' credit balances .......................... 7,571 (9,882) 10,240 11,747
Patrons' advance payments ......................... (6,639) (25,000) 116,158 13,487
Accounts payable and accrued expenses ............. 171,716 (146,984) 208,766 (77,203)
Other liabilities ................................. (1,331) 1,834 (9,807) 4,366
---------- ---------- ---------- ----------
Total adjustments ............................... 71,223 (166,681) 62,213 (221,012)
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities ..................................... 67,095 (158,051) 67,204 (204,067)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ......... (28,690) (37,128) (60,544) (70,943)
Proceeds from disposition of property, plant and
equipment ........................................... 939 1,640 1,395 4,852
Investments .......................................... (12,331) (8,995) (15,495) (11,212)
Investments redeemed ................................. 1,437 962 13,026 5,424
Changes in notes receivable .......................... (1,634) 1,294 (1,581) 2,651
Other investing activities, net ...................... 51 156 29 (65)
---------- ---------- ---------- ----------
Net cash used in investing activities ........... (40,228) (42,071) (63,170) (69,293)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable ............................. (3,879) 217,000 28,489 246,525
Long-term debt borrowings ............................ -- 10,565 -- 10,565
Principal payments on long-term debt ................. (4,795) (2,629) (10,639) (7,257)
Changes in checks and drafts outstanding ............. 450 (9,643) (11,255) 1,455
Retirements of equity ................................ (1,581) (1,328) (13,092) (10,599)
Cash patronage dividends paid ........................ (17,970) (28,591) (17,970) (43,683)
---------- ---------- ---------- ----------
Net cash (used in) provided by financing
activities ..................................... (27,775) 185,374 (24,467) 197,006
---------- ---------- ---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS .......................................... (908) (14,748) (20,433) (76,354)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .................................. 56,142 58,402 75,667 120,008
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD ............................................ $ 55,234 $ 43,654 $ 55,234 $ 43,654
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements (unaudited).
4
<PAGE>
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. ACCOUNTING POLICIES
The unaudited consolidated statements of operations and cash flows for the
three months and six months ended February 29, 2000 and February 28, 1999,
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 and cash flows for the interim periods. The results of
operations and cash flows for any interim period are not necessarily indicative
of results for the full year. The consolidated balance sheet data as of August
31, 1999 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. These reclassifications had no
effect on previously reported net income or equity.
These statements should be read in conjunction with the consolidated
financial statements and footnotes for the year ended August 31, 1999, included
in the Company's Report on Form 10-K previously filed with Securities and
Exchange Commission on November 22, 1999.
NOTE 2. RECEIVABLES
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Trade ........................................ $715,390 $595,403 $553,917
Other ........................................ 15,657 34,493 8,662
-------- -------- --------
731,047 629,896 562,579
Less allowance for doubtful accounts ......... 23,613 23,255 23,399
-------- -------- --------
$707,434 $606,641 $539,180
======== ======== ========
</TABLE>
NOTE 3. INVENTORIES
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Energy ....................................... $299,316 $209,661 $179,283
Grain and oilseed ............................ 202,497 202,166 133,154
Agronomy ..................................... 86,153 69,050 86,407
Processed grain and oilseed .................. 14,612 14,342 19,093
Feed and farm supplies ....................... 64,930 50,908 85,448
Other ........................................ 3,041 3,576 2,934
-------- -------- --------
$670,549 $549,703 $506,319
======== ======== ========
</TABLE>
NOTE 4. COMPREHENSIVE INCOME
During the three months ended February 29, 2000 and February 28, 1999,
total comprehensive (loss) income amounted to $(5.3) million and $8.5 million,
respectively. Total comprehensive income was $3.9 million and $18.3 million for
the six months ended February 29, 2000 and February 28, 1999, respectively.
Accumulated other comprehensive (loss) income on February 29, 2000, August 31,
1999 and February 28, 1999 was $(2.3) million, $(1.2) million and $1.2 million,
respectively.
5
<PAGE>
NOTE 5. SEGMENT REPORTING
The Company's businesses are organized, managed and internally reported as
four segments. These segments, which are based on products and services, include
agronomy, energy, grain marketing and farm marketing & supply, and processed
grain and consumer products. Due to cost allocations and intersegment activity,
management does not represent that these segments if operated independently,
would report the income before income taxes and other financial information
presented.
Segment information for the three months and six months ended February 29,
2000 and February 28, 1999 is as follows:
<TABLE>
<CAPTION>
GRAIN MARKETING PROCESSED GRAIN
AND FARM AND CONSUMER
AGRONOMY ENERGY MARKETING & SUPPLY PRODUCTS OTHER TOTAL
---------- ---------- ------------------ --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
February 29, 2000:
Net sales ..................... $126,957 $ 652,762 $1,010,062 $130,335 $1,920,116
Patronage dividends ........... 73 1,112 $ 81 1,266
Other (losses) revenues ....... (9,999) (417) 21,540 1,970 5,770 18,864
-------- ---------- ---------- -------- -------- ----------
116,958 652,418 1,032,714 132,305 5,851 1,940,246
Cost of goods sold ............ 114,620 659,911 1,006,097 121,365 1,901,993
Marketing, general and
administrative ............... 5,639 11,993 14,953 5,417 4,097 42,099
Interest ...................... (1,585) 6,835 4,989 1,909 1,853 14,001
Minority interests ............ (9,732) 29 (9,703)
-------- ---------- ---------- -------- -------- ----------
(Loss) income before
income taxes ................. $ (1,716) $ (16,589) $ 6,675 $ 3,614 $ (128) $ (8,144)
======== ========== ========== ======== ======== ==========
Total identifiable assets $502,030 $1,263,845 $ 789,896 $304,589 $276,564 $3,136,924
======== ========== ========== ======== ======== ==========
For the three months ended
February 28, 1999:
Net sales ..................... $119,685 $ 254,766 $1,058,792 $134,255 $1,567,498
Patronage dividends ........... 1 6 3,349 65 $ 12 3,433
Other revenues (losses) ....... 86 21,512 (3,942) 3,504 21,160
-------- ---------- ---------- -------- -------- ----------
119,686 254,858 1,083,653 130,378 3,516 1,592,091
Cost of goods sold ............ 103,358 242,816 1,060,786 129,720 1,536,680
Marketing, general and
administrative ............... 3,580 12,299 13,216 4,020 3,564 36,679
Interest ...................... 571 3,404 5,018 1,600 (171) 10,422
Minority interests ............ 549 68 28 645
-------- ---------- ---------- -------- -------- ----------
Income (loss) before
income taxes ................. $ 12,177 $ (4,210) $ 4,565 $ (4,962) $ 95 $ 7,665
======== ========== ========== ======== ======== ==========
Total identifiable assets $423,989 $ 950,867 $ 698,679 $325,507 $241,036 $2,640,078
======== ========== ========== ======== ======== ==========
</TABLE>
Assets included in "Other" primarily consisted of intercompany transactions
and corporate facilities.
6
<PAGE>
<TABLE>
<CAPTION>
GRAIN MARKETING PROCESSED GRAIN
AND FARM AND CONSUMER
AGRONOMY ENERGY MARKETING & SUPPLY PRODUCTS OTHER TOTAL
---------- ---------- ------------------ --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
For the six months ended
February 29, 2000:
Net sales ..................... $ 229,020 $1,312,032 $2,131,335 $266,487 $3,938,874
Patronage dividends ........... 111 87 1,186 $ 140 1,524
Other (losses) revenues ....... (17,808) 1,525 43,046 7,216 10,865 44,844
--------- ---------- ---------- -------- -------- ----------
211,323 1,313,644 2,175,567 273,703 11,005 3,985,242
Cost of goods sold ............ 210,189 1,303,915 2,125,440 247,262 3,886,806
Marketing, general and
administrative ............... 10,052 23,914 28,529 10,053 8,843 81,391
Interest ...................... (253) 12,582 9,278 3,445 1,905 26,957
Minority interests ............ (9,217) 51 (9,166)
--------- ---------- ---------- -------- -------- ----------
(Loss) income before
income taxes ................. $ (8,665) $ (17,550) $ 12,320 $ 12,943 $ 206 $ (746)
========= ========== ========== ======== ======== ==========
Total identifiable assets $ 502,030 $1,263,845 $ 789,896 $304,589 $276,564 $3,136,924
========= ========== ========== ======== ======== ==========
For the six months ended
February 28, 1999:
Net sales ..................... $ 227,287 $ 584,634 $2,239,498 $271,810 $3,323,229
Patronage dividends ........... 317 28 3,418 65 $ 74 3,902
Other revenues (losses) ....... 673 40,707 (1,037) 8,028 48,371
--------- ---------- ---------- -------- -------- ----------
227,604 585,335 2,283,623 270,838 8,102 3,375,502
Cost of goods sold ............ 207,771 560,885 2,236,977 258,723 3,264,356
Marketing, general and
administrative ............... 8,372 26,100 23,984 7,821 7,673 73,950
Interest ...................... 869 7,073 9,263 2,939 (172) 19,972
Minority interests ............ (880) 68 56 (756)
--------- ---------- ---------- -------- -------- ----------
Income (loss) before
income taxes ................. $ 10,592 $ (7,843) $ 13,331 $ 1,355 $ 545 $ 17,980
========= ========== ========== ======== ======== ==========
Total identifiable assets $ 423,989 $ 950,867 $ 698,679 $325,507 $241,036 $2,640,078
========= ========== ========== ======== ======== ==========
</TABLE>
Assets included in "Other" primarily consisted of intercompany transactions
and corporate facilities.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Effective January 1, 2000, the Company, Farmland Industries, Inc.
(Farmland) and Land O' Lakes, Inc. (LOL) formed Agriliance, LLC (Agriliance), a
wholesale agronomy joint venture. For the initial investment in Agriliance, the
Company contributed its interests in the Cenex/Land O' Lakes Agronomy Company,
Agro Distribution, LLC and Agronomy Company of Canada, Ltd. Also effective
January 1, 2000, the Company and Farmland formed United Country Brands, LLC for
the purpose of holding the respective companies' ownership interests in
Agriliance. Effective March 1, 2000, the Company sold 1.455% of its economic
interest in Agriliance to LOL for approximately $7.4 million. After this sale of
ownership interest, the Company holds a 50% interest in United Country Brands,
LLC, which holds a 50% interest in Agriliance.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
The Company had a consolidated net loss for the three months ended February
29, 2000 of $4.1 million compared to net income of $8.6 million for the same
three-month period in 1999, which represents a $12.7 million decrease. This
decline in profitability is primarily attributable to a reduction in energy
results due to a significant increase in the price of petroleum crude oil and
reduced refinery margins. This loss was partially offset by an increase in the
Company's income from its grain operations, consumer products packaging joint
venture and a tax benefit change of $3.1 million.
Consolidated net sales of $1.9 billion for the three months ended February
29, 2000 increased approximately $353 million (22%) compared to the same three
months ended in 1999.
Grain and oilseed sales of $921 million decreased $53 million (5%) during
the three months ended February 29, 2000 compared to the same three months ended
in 1999. The primary cause for the reduced sales was a decline of 29 cents per
bushel in the average sales price of all grain and oilseed marketed by the
Company. The decrease was partially offset by a combined grain volume increase
of 22 million bushels compared to the same period in 1999.
Energy sales of $653 million increased $398 million (156%) during the three
months ended February 29, 2000 compared to the same period in 1999. This
increase is primarily attributable to the formation of a refinery joint venture
whereby the Company, through its 75% ownership in National Cooperative Refining
Association (NCRA), which in turn owns approximately 57% of the refining joint
venture (Cooperative Refining, LLC), consolidates the sales made to the minority
owner. In addition, there was an increase in the average sales price of refined
fuels of 37 cents per gallon.
Processed grain and oilseed sales of $130 million decreased $3.9 million
(3%) during the three months ended February 29, 2000 compared to the same three
months ended in 1999. Sales of processed soybean products decreased by $12.1
million (13%), which was offset by an increase in wheat milling sales of $8.2
million (19%).
Agronomy sales of $127 million increased $7.3 million (6%) during the three
months ended February 29, 2000 compared to the same three-month period in 1999.
Crop protection sales increased $12.4 million in 2000 compared to 1999, which
was offset by a decrease of $10.83 per ton in the average selling price of plant
food.
Feed and farm supplies sales of $89 million increased by $4.7 million (6%)
during the three months ended February 29, 2000 compared to the same three
months of a year ago and is primarily due to price increases in most product
lines.
Other revenues of $18.9 million decreased $2.3 million (11%) during the
three months ended February 29, 2000 compared to the same three months ended in
1999. The most significant change within other revenues was a net decrease in
the Company's share of earnings from joint ventures. Consumer products packaging
joint venture income increased by $5.9 million and agronomy joint venture loss
increased by $10.0 million. This net decrease was offset by an increase in other
revenues.
8
<PAGE>
Cost of goods sold of approximately $1.9 billion increased $365 million
(24%) during the three months ended February 29, 2000, compared to the same
three months ended in 1999. The increase is primarily attributable to the
formation of Cooperative Refining, LLC, which was referenced to in the sales
section of this analysis and to a significant increase in the purchase price of
petroleum crude oil. During the three months ended February 29, 2000, the
average cost of refined fuels and propane increased by 36 cents and 10 cents per
gallon, respectively. Also, during the three months ended February 29, 2000,
agronomy cost of goods increased by $11.3 million compared to the same three
months ended in 1999. These increases were partially offset by decreases in the
Company grain operations. The cost of all grains and oilseed procured by the
Company's through its grain marketing and country elevator operations decreased
29 cents per bushel. Within the Company's food processing operations, the
average cost of wheat declined 31 cents per bushel for wheat and the average
cost of soybeans declined 15 cents per bushel. Both of these decreases are
compared to purchases made during the same three-month period ended in the
previous year.
Marketing, general and administrative expenses of $42.1 million for the
three months ended February 29, 2000 increased $5.4 million (15%) compared to
the same three months ended in 1999. This increase is primarily related to
additional locations and expansion of many of the Company's business segments.
Interest expense of $14.0 million for the three months ended February 29,
2000 increased by $3.6 million (34%) compared to the same three months ended in
1999. The average seasonal borrowings during 2000 increased as a result of
higher working capital needs, and long-term borrowings which reflected financial
activities related to the acquisition of property, plant and equipment,
generated most of this additional expense.
Minority interests in operations for the three-month period ended February
29, 2000 changed by $10.3 million compared to the same three months ended in
1999. Substantially all minority interests is related to NCRA, which operates a
petroleum refinery near McPherson, Kansas. This net change in minority interests
during the current year is reflective of less profitable operations within the
Company's majority owned subsidiaries.
Income tax benefits of $4.0 million and $1.0 million for the three months
ended February 29, 2000 and 1999, respectively, are the result of a net
non-patronage loss of approximately $10.0 million and $2.4 million,
respectively. Income tax expense or benefit and the resulting effective tax rate
varies from period to period based upon the profitability and non-patronage
business activity during each of the comparable periods.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
The Company's consolidated net income for the six months ended February 29,
2000 and February 28, 1999 was $5.0 million and $16.9 million, respectively,
which represents an $11.9 million decrease over last year. This decrease in
profitability is primarily attributable to the agronomy and energy segments of
the company. In the agronomy segment, a larger asset base has aggravated the
impact of the normal seasonality of the business. In energy a significant
increase in the price of crude oil for the refineries negatively impacted gross
margin for refined fuels. These decreases are partially offset by increases in
the Company's consumer products packaging joint venture, processed grain and
oilseed operations and a tax benefit generated primarily from agronomy joint
ventures losses.
Consolidated net sales of $3.9 billion for the six months ended February
29, 2000, increased approximately $616 million (19%) compared to the same six
months ended in 1999.
Grain and oilseed sales of $1.9 billion decreased $108 million (5%) during
the six months ended February 29, 2000 compared to the same six months ended in
1999. Although grain volumes increased approximately 37 million bushels, the
primary cause for the decreased sales is a decline of 36 cents per bushel in the
average sales price of all grain and oilseed marketed by the Company.
Energy sales of $1.3 billion increased $727 million (124%) during the six
months ended February 29, 2000 compared to the same six months of a year ago.
This increase is primarily attributable to the formation of a refinery joint
venture whereby the Company, through its 75% ownership in NCRA, which in turn
owns approximately 57% of the refining joint venture (Cooperative Refining,
LLC),
9
<PAGE>
consolidates the sales made to the minority owner. In addition, there was an
increase in the average sales price of refined fuels and propane of 28 cents and
12 cents per gallon, respectively. These increases were offset by a 14% decrease
in propane gallons due to unusually warm weather during the current six-month
period as compared to the same period of a year ago.
Processed grain and oilseed sales of $266 million decreased $5.3 million
(2%) during the six months ended February 29, 2000 compared to the same six
months ended in 1999. This decrease was primarily attributable to a 9 cent per
pound reduction in the average sales price of refined oils. The decrease was
partially offset with an increase in volumes of milled wheat products primarily
at the Mount Pocono and Huron mills.
Agronomy sales of $229 million were essentially unchanged during the six
months ended February 29, 2000 compared to the same six months of a year ago.
Feed and farm supplies sales of $208 million were essentially unchanged
during the six months ended February 29, 2000 compared to the same six months of
a year ago.
Other revenues of $44.8 million decreased $3.5 million (7%) during the six
months ended February 29, 2000 compared to the same six months ended in 1999.
The most significant change within other revenues was a decrease in the
Company's share of earnings from joint ventures. Joint venture losses were $17.8
million from the recently formed agronomy joint ventures during the six months
ended February 29, 2000. These losses were partially offset by $8.1 million and
$2.9 million, respectively, of income from the Company's consumer products
packaging and grain marketing joint ventures. The net decrease was offset by an
increase in other revenues.
Cost of goods sold of approximately $3.9 billion increased $622 million
(19%) during the six months ended February 29, 2000 compared to the same six
months ended in 1999. The increase is primarily attributable to the formation of
Cooperative Refining, LLC, which was referenced to in the sales section of this
analysis and to a significant increase in the purchase price of petroleum crude
oil. During the six months ended February 29, 2000, the average cost of refined
fuels and propane increased by 28 cents and 12 cents per gallon, respectively.
These increases were partially offset by decreases in the Company's grain
operations. The cost of all grain and oilseed procured by the Company through
its grain marketing and country elevator operations decreased 35 cents per
bushel. Within the Company's food processing operations, the average cost of
wheat declined 29 cents per bushel for wheat and the average cost of soybeans
declined 51 cents per bushel. Both of these decreases are compared to purchases
made during the same six-month period ended in the previous year.
Marketing, general and administrative expenses of $81.4 million for the six
months ended February 29, 2000 increased by $7.4 million (10%) compared to the
same six months ended in 1999. This increase is primarily related to additional
locations and expansion of many of the Company's business segments.
Interest expense of $27.0 million for the six months ended February 29,
2000 increased by $7.0 million (35%) compared to the same six months ended in
1999. The average seasonal borrowings during 2000 increased as a result of
higher working capital needs, and long-term borrowings which reflected financial
activities related to the acquisition of property, plant and equipment,
generated most of this additional expense.
Minority interests in operations of $9.2 million for the six months ended
February 29, 2000 changed by $8.4 million compared to the same six months ended
in 1999. Substantially all minority interests is related to NCRA. This net
change in minority interests during the current year is reflective of less
profitable operations within the Company's majority owned subsidiaries.
An income tax benefit of $5.7 million for the six months ended February 29,
2000 is primarily the result of a net non-patronage loss of approximately $14.3
million. Income tax expense of $1.0 million for the six months ended February
28, 1999 produced an effective tax rate of 5.8%. Income tax expense or benefit
and the resulting effective tax rate varies from period to period based upon the
profitability and non-patronage business activity during each of the comparable
periods.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company provided net cash of $67.1 million and
used net cash of $158.1 million for the three months ended February 29, 2000 and
February 28, 1999, respectively. For the period ended in 2000, the net loss of
$4.1 million was offset by net non-cash income and expenses of approximately
$28.2 million and reduced working capital requirements of approximately $43.0
million. For the three-month period ended February 28, 1999, net income of $8.6
million and net non-cash income and expenses of approximately $12.8 million were
offset by increased working capital requirements of approximately $179.5
million.
Operating activities of the Company provided net cash of $67.2 million and
used net cash of $204.1 million for the six months ended February 29, 2000 and
February 28, 1999, respectively. For the six-month period ended February 29,
2000, net income of approximately $5.0 million, net non-cash income and expenses
of approximately $51.1 million and reduced working capital requirements of
approximately $11.1 million provided this net cash from operating activities.
For the six month period ended February 28, 1999, net income of $16.9 million
and net non-cash income and expenses of approximately $37.9 million were offset
by increased working capital requirements of approximately $258.9 million.
CASH FLOWS FROM INVESTING
Investing activities of the Company used net cash of $40.2 million during
the three-month period ended February 29, 2000. Expenditures for the acquisition
of property, plant and equipment of $28.7 million, the net change in investments
of $12.3 million and the net change in notes receivable were partially offset by
investments redeemed of $1.4 million and proceeds from the disposition of
property plant and equipment. For the fiscal year ending August 31, 2000, the
Company projects that total expenditures for the acquisition of property, plant
and equipment will be approximately $139.6 million.
Investing activities of the Company used net cash of $42.1 million during
the three months ended February 28, 1999. Expenditures for the acquisition of
property, plant and equipment of $37.1 million and the net change in investments
of $9.0 million were partially offset by proceeds from the disposition of
property plant and equipment of $1.6 million, the net change in notes receivable
and investments redeemed.
Investing activities of the Company used net cash of $63.2 million during
the six months ended February 29, 2000. Expenditures for the acquisition of
property, plant and equipment of $60.5 million, the net change in investments of
$15.5 million and the net change in notes receivable were partially offset by
investments redeemed of $13.0 million and proceeds from the disposition of
property, plant and equipment.
Investing activities of the Company used net cash of $69.3 million during
the six-month period ended February 28, 1999. Expenditures for the acquisition
of property, plant and equipment of $70.9 million and the net change in
investments of $11.2 million were partially offset by investments redeemed of
$5.4 million, proceeds from the disposition of property, plant and equipment of
$4.9 million and the net change in notes receivable.
CASH FLOWS FROM FINANCING
The Company finances its working capital needs through short-term lines of
credit with a syndication of banks. In June 1998, the Company established a
364-day credit facility of $400 million, which was renewed in May 1999, and a
five-year revolving facility of $200 million, all of which is committed. In
addition to these lines of credit, the Company has a 364-day credit facility
dedicated to NCRA, with a syndication of banks in the amount of $50.0 million,
all of which is committed. On February 29, 2000 and February 28, 1999, the
Company had total short-term indebtedness on these various facilities and other
short-term notes payable totaling $225.5 million and $247.0 million,
respectively. On August 31, 1999 the Company had $197.0 million outstanding on
its short-term lines of credit and other notes payable.
11
<PAGE>
The Company has financed its long-term capital needs in the past, primarily
for the acquisition of property, plant and equipment, with long-term loan
agreements through the banks for cooperatives. In June 1998, the Company
established a long-term credit agreement through the banks for cooperatives.
This facility committed $200.0 million of long-term borrowing capacity to the
Company, with repayments through the fiscal year 2009. The commitment expired on
May 31, 1999. The amount outstanding on this credit agreement was $160.7
million, $164.0 million and $134.0 million on February 29, 2000, August 31, 1999
and February 28, 1999, respectively, with zero remaining available on both
February 29, 2000 and August 31, 1999. Repayments of approximately $1.6 million
and $3.3 million were made on this facility during the three months and six
months ended February 29, 2000, respectively.
Also in June 1998, 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.
On February 29, 2000 the Company had total long-term debt outstanding of
$472.3 million, of which approximately $221.3 million was bank financing, $225.0
million was private placement proceeds and $26.0 million was industrial revenue
bonds, capitalized leases and miscellaneous notes payable. Long-term debt of
NCRA represented $55.1 million of the total long-term debt outstanding on
February 29, 2000. On August 31, 1999 and February 28, 1999, the Company had
long-term debt outstanding of $482.7 million and $460.3 million, respectively.
During the six-months ended February 29, 2000 and February 28, 1999, the
Company repaid long-term debt of $10.6 million and $7.3 million, respectively,
and had additional long-term debt borrowings of $10.6 million during the six
months ended February 28, 1999. During the three-month periods ended February
29, 2000 and February 28, 1999, the Company repaid long-term debt of $4.8
million and $2.6 million, respectively, and had no additional long-term
borrowings during either period.
In accordance with the By-Laws and by action of the Board of Directors,
annual net savings 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 By-Laws. The patronage
earnings from the fiscal year ended August 31, 1999 were distributed in January
and February 2000. The cash portion of this distribution, deemed by the Board of
Directors to be 75% for Equity Participation Units and 30% for regular earnings,
was approximately $18.0 million. During the six months ended February 28, 1999
the Company paid out cash patronage of approximately $43.7 million from the
patronage earnings of the former Harvest States Cooperatives fiscal year ended
May 31, 1998, the former Cenex, Inc. for the period ended May 31, 1998 and the
patronage earnings resulting from the combined operations of the Company for the
three months ended August 31, 1998.
The current equity redemption policy, as authorized by the Board of
Directors, allows for the redemption of capital equity certificates held by
inactive direct members and patrons and active members and patrons at age 72 or
death who were age 61 or older on June 1, 1998. 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. Such redemptions related to the year ended
August 31, 1999, to be distributed in the current fiscal year, are expected to
be approximately $25.7 million, of which approximately $13.1 million was
redeemed during the six months ended February 29, 2000. During the six months
ended February 28, 1999 the Company redeemed approximately $10.6 million of
equity. Approximately $1.6 million and $1.3 million of equity was redeemed by
the Company during the three-month periods ended February 29, 2000 and February
28, 1999, respectively.
During the year ended May 31, 1997, the Company offered securities in the
form of Equity Participation Units (EPUs)in its Wheat Milling and Oilseed
Processing and Refining Defined Business Units. These EPUs give the holder the
right and obligation to deliver to the Company a stated number of bushels in
return for a prorata share of the undiluted grain based patronage earnings of
these respective Defined Business Units. The offering resulted in the issuance
of such equity with a stated value of $13,870,000 and generated additional
capital and cash of $10,837,000, after issuance cost and
12
<PAGE>
conversion privileges. Conversion privileges allowed a member to elect to use
outstanding patrons' equities for the payment of up to one-sixth the purchase
price of the EPUs.
Holders of the EPUs will not be entitled to payment of dividends by virtue
of holding such units. However, holders of the units will be entitled to receive
patronage refunds attributable to the patronage sourced income from operations
of the applicable defined business unit on the basis of wheat or soybeans
delivered pursuant to the Member Marketing Agreement. The Board of Directors'
goal is to distribute patronage refunds attributable to the EPUs in the form of
75% cash and 25% capital equity certificates, and to retire those capital equity
certificates on a revolving basis seven years after declaration. However, the
decision as to the percentage of cash patronage will be made each fiscal year by
the Board of Directors and will depend upon the cash and capital needs of the
respective Defined Business Units and is subject to the discretion of the Board
of Directors. The redemption policy will also be subject to change at the
discretion of the Board of Directors.
EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS
The Company believes that inflation and foreign currency fluctuations have
not had a significant effect on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, a new standard related to the accounting for derivative transactions
and hedging activities. In July 1999, the FASB issued SFAS No. 137 which defers
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. While management does not believe this standard
will materially impact the financial position and results of operations of the
Company, it is currently evaluating the reporting requirements under this new
standard.
YEAR 2000
In preparation for the year 2000, the Company engaged an information
technology consulting firm specializing in year 2000 systems projects. The scope
of the program management effort at the Company has included internal mainframe,
midrange, and LAN based systems as well as facilities, package software vendors,
and interfaces with external vendors, processors and customers. Remediation and
upgrades of these systems have been completed for all mission critical systems.
Through February 29, 2000, the Company has expensed approximately $2.1 million
to review and correct its own computer systems.
To date, the Company has not experienced any significant year 2000-related
failures. The Company's management believes that the Company has put in place an
effective program to address the year 2000 issue and that it has taken the steps
reasonably necessary to resolve this issue with respect to matters within its
control. However, it also recognizes that failure by other parties to
sufficiently resolve all aspects of the year 2000 issue in a timely fashion
continues to present substantial risks for the Company. While the Company has
taken steps to determine the extent of remediation efforts undertaken by key
customers and suppliers, there is no guarantee that the systems of other
companies on which this Company relies have been remediated in order to avoid
having a material adverse effect on the Company's results of operations or its
financial position. To date, the Company has not experienced any significant
problems related to key customer or supplier year 2000-related failures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since the Company's fiscal year end
August 31, 1999.
13
<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
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ----------- ------------
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Receivables .................................................. $24,634 $24,650 $29,233
Inventories .................................................. 17,405 17,084 26,431
Other current assets ......................................... 23
------- ------- -------
Total current assets ........................................ 42,062 41,734 55,664
PROPERTY, PLANT AND EQUIPMENT ................................. 39,329 39,001 37,981
------- ------- -------
Total assets ................................................ $81,391 $80,735 $93,645
======= ======= =======
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ..................... $ 1,119 $ 9,546 $21,487
Accounts payable ............................................. 4,928 5,768 10,185
Accrued expenses ............................................. 5,289 4,227 3,496
------- ------- -------
Total current liabilities ................................... 11,336 19,541 35,168
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY .................................. 70,055 61,194 58,477
------- ------- -------
Total liabilities and defined business unit equity ......... $81,391 $80,735 $93,645
======= ======= =======
</TABLE>
The accompanying notes are an integral part of then financial
statements (unaudited).
14
<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 FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 29 & 28, FEBRUARY 29 & 28,
----------------------- ------------------------
2000 1999 2000 1999
(DOLLARS IN THOUSANDS) ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Processed oilseed sales ....................... $79,199 $91,311 $162,756 $186,773
Other revenue ................................. 250 68 579 72
------- ------- -------- --------
79,449 91,379 163,335 186,845
------- ------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 74,057 87,914 151,421 176,887
Marketing, general and administrative ......... 1,182 1,339 2,538 2,649
Interest ...................................... 292 594
------- ------- -------- --------
75,239 89,545 153,959 180,130
------- ------- -------- --------
INCOME BEFORE INCOME TAXES ..................... 4,210 1,834 9,376 6,715
INCOME TAXES ................................... 215 195 515 275
------- ------- -------- --------
NET INCOME ..................................... $ 3,995 $ 1,639 $ 8,861 $ 6,440
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial
statements (unaudited).
15
<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 FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 29 & 28, FEBRUARY 29 & 28,
------------------------- ------------------------
2000 1999 2000 1999
(DOLLARS IN THOUSANDS) ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 3,995 $ 1,639 $ 8,861 $ 6,440
-------- -------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .............................................. 621 566 1,245 1,112
Loss on disposal of property, plant and equipment ......... 35
Changes in operating assets and liabilities:
Receivables .............................................. 2,242 2,697 16 (530)
Inventories .............................................. (1,389) (2,647) (321) (7,862)
Other current assets ..................................... 2 240 (23)
Accounts payable and accrued expenses .................... (1,029) 3,756 222 4,361
-------- -------- -------- --------
Total adjustments ...................................... 447 4,612 1,174 (2,919)
-------- -------- -------- --------
Net cash provided by operating activities .............. 4,442 6,251 10,035 3,521
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ................ (890) (1,992) (1,608) (3,500)
Proceeds from disposition of property, plant and
equipment .................................................. 3 3
-------- -------- -------- --------
Net cash used in investing activities .................. (890) (1,989) (1,608) (3,497)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to Cenex Harvest States Cooperatives .......... (3,552) (2,623) (8,427) 6,416
Defined business unit equity distributed to the
Company .................................................... (1,639) (6,440)
-------- -------- -------- --------
Net cash used in financing activities .................. (3,552) (4,262) (8,427) (24)
-------- -------- -------- --------
NET 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).
16
<PAGE>
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. ACCOUNTING POLICIES
The unaudited statements of operations and cash flows for the three months
and six months ended February 29, 2000 and February 28, 1999 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 and cash flows for the interim periods. The results of operations and
cash flows for any interim period are not necessarily indicative of results for
the full year. The balance sheet data as of August 31, 1999 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 Oilseed Processing and Refining Defined
Business Unit financial statements for the year ended August 31, 1999, which are
included in the Company's Report on Form 10-K previously filed with the
Securities and Exchange Commission on November 22, 1999.
NOTE 2. RECEIVABLES
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
Trade ........................................ $25,029 $25,045 $29,628
Less allowance for doubtful accounts ......... 395 395 395
------- ------- -------
$24,634 $24,650 $29,233
======= ======= =======
</TABLE>
NOTE 3. INVENTORIES
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
Processed oilseed products ................... $10,811 $11,918 $10,318
Oilseed ...................................... 6,594 5,166 16,113
------- ------- -------
$17,405 $17,084 $26,431
======= ======= =======
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See the Management Discussion and Analysis for the Company for discussion
of new accounting pronouncements and the Year 2000.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 29 & 28, FEBRUARY 29 & 28,
----------------------- -----------------------
2000 1999 2000 1999
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER BUSHEL INFORMATION)
Income before income taxes ................. $ 4,210 $1,834 $ 9,376 $ 6,715
Income from purchased oil .................. (1,275) (120) (2,816) (873)
Non-patronage joint venture income ......... (153)
Book to tax differences .................... 23 4 47 4
-------- ------ -------- -------
Taxable income ............................. $ 2,958 $1,718 $ 6,454 $ 5,846
======== ====== ======== =======
Bushels processed .......................... 10,018 9,553 19,245 17,618
Income per bushel .......................... $ 0.295 $ 0.180 $ 0.335 $ 0.332
</TABLE>
Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of processed
oilseed sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross margin ................................ 6.49% 3.72% 6.96% 5.29%
Marketing, general and administrative ....... 1.49% 1.47% 1.56% 1.42%
Interest .................................... 0.00% 0.32% 0.00% 0.32%
</TABLE>
COMPARISON OF THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
The Oilseed Processing and Refining Defined Business Unit net income of
$4.0 million for the three months ended February 29, 2000 represents a $2.4
million increase (144%) compared to the three-month period ended February 28,
1999. An increase in gross margin for soymeal of approximately $1.60 per ton,
and an increase in the refined oil margin of almost a half a cent per pound,
along with somewhat improved volumes for both products were the primary factors
in this improvement in net income for the three-month period ended February 29,
2000 compared to the three-month period ended February 28, 1999.
Net sales of $79.2 million for the three months ended February 29, 2000
decreased by $12.1 million (13%) compared to the three months ended February 28,
1999. A reduction in the sales price for refined oil of approximately $0.09 per
pound was partially offset by a 2% increase in sales volume for refined oil, an
increase of approximately $31 per ton for processed soybean products, and a 6%
increase in sales volume for processed soybean products during the current
three-month period compared to the same period of a year ago.
Other revenues increased approximately $182 thousand during the three
months ended February 29, 2000 compared to the three months ended February 28,
1999. During the 2000 period, the Defined Business Unit recognized interest
income of $246 thousand, accounting for most of this increase.
Cost of goods sold of $74.1 million for the three months ended February 29,
2000 decreased $13.9 million (16%) compared to the three months ended February
28, 1999. Reduced cost for soybeans averaging $0.15 per bushel and reduced cost
for crude soybean oil averaging $0.104 per pound during the three months ended
February 29, 2000, compared to the three months ended February 28, 1999 were
partially offset by a 5% increase in crush volume (approximately 450 thousand
bushels) and a 2% increase in refining volume (approximately 5.5 million
pounds).
18
<PAGE>
Marketing, general and administrative expenses of approximately $1.2
million for the three months ended February 29, 2000 declined approximately $0.2
million (12%) compared to the three months ended February 28, 1999.
During the three-month period ended February 29, 2000, the Oilseed
Processing and Refining Defined Business Unit incurred no net interest expense
compared to interest expense of approximately $0.3 million during the same
period ended in 1999. This favorable variance is primarily attributable to the
lower price of raw material and finished products which resulted in no excess
borrowings based on average outstanding daily balances.
Income tax expense of $215 thousand and $195 thousand for the three-month
periods ended February 29, 2000 and February 28, 1999, respectively, resulted in
effective tax rates of 5.1% and 10.6%. The effective tax rate varies from period
to period based upon the percentage of non-patronage business activity to total
business activity.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
The Oilseed Processing and Refining Defined Business Unit net income of
$8.9 million for the six months ended February 29, 2000 represents a $2.4
million increase (38%) compared to the six-month period ended February 28, 1999.
This improvement in income during the six-month period ended February 29, 2000
compared to the six months ended February 28, 1999 was a result of an increase
in gross margin for refined oil of approximately 4 tenths of a cent per pound,
an increase in refined oil volume of approximately 7%, and an increase in
processed soybean product volume of approximately 9% which was partially offset
by a decline in the gross margin for the processed soybean products of $3.86 per
ton.
Net sales of $162.8 million for the six months ended February 29, 2000
decreased by $24.0 million (13%) compared to the six months ended February 28,
1999. A reduction in the sales price for refined oil of approximately $0.09 per
pound was partially offset by a 7% increase in sales volume for refined oil, an
increase of approximately $16 per ton for processed soybean products, and a 9%
increase in sales volume for processed soybean products during the current
six-month period compared to the same period of a year ago.
Other revenues increased approximately $.5 million during the six months
ended February 29, 2000 compared to the six months ended February 28, 1999.
During the six months ended February 29, 2000, the Defined Business Unit
recognized interest income of approximately $.4 million, and received
approximately $.2 million from an oilseed joint venture. These two income items
accounted for nearly all of the change in other revenues between the two
periods.
Cost of goods sold of $151.4 million for the six months ended February 29,
2000 decreased $25.5 million (14%) compared to the six months ended February 28,
1999. Reduced cost for soybeans averaging $0.51 per bushel and reduced cost for
crude soybean oil averaging $0.093 per pound during the six months ended
February 29, 2000, compared to the six months ended February 28, 1999 were
partially offset by a 9% increase in crush volume (approximately 1.6 million
bushels) and an 7% increase in refining volume (approximately 35.0 million
pounds).
Marketing, general and administrative expenses of approximately $2.5
million for the six months ended February 29, 2000 declined approximately $.1
million (4%) compared to the six months ended February 28, 1999.
During the six month period ended February 29, 2000, the Oilseed Processing
and Refining Defined Business Unit incurred no net interest expense compared to
interest expense of approximately $0.6 million during the same period ended in
1999. This favorable variance is primarily attributable to the lower price of
raw material and finished products which resulted in no excess borrowings based
on average outstanding daily balances.
Income tax expense of $515 thousand and $275 thousand for the six-month
periods ended February 29, 2000 and February 28, 1999, respectively, resulted in
effective tax rates of 5.5% and 4.1%. The effective tax rate varies from period
to period based upon the percentage of non-patronage business activity to total
business activity.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Oilseed Processing and Refining Defined Business Unit's cash
requirements relate primarily to capital improvements and a need to finance
additional inventories and receivables based on increased raw material costs and
levels. These cash needs are expected to be fulfilled by the Company.
CASH FLOWS FROM OPERATIONS
Operating activities for the three months ended February 29, 2000 provided
net cash of $4.4 million. Net income of $4.0 million and non-cash expenses of
$0.6 million were partially offset by an increase in working capital
requirements of $0.2 million to generate this net cash. For the three-month
period ended February 28, 1999, operating activities provided net cash of $6.3
million. During that period, net income of $1.6 million, non-cash expenses of
approximately $0.6 million and reduced working capital requirements of
approximately $4.1 million provided this net cash from operating activities.
Operating activities for the six months ended February 29, 2000 provided
net cash of $10.0 million. Net income of $8.9 million and non-cash expenses of
$1.2 million were partially offset by an increase in working capital
requirements of $0.1 million. For the three-month period ended February 28,
1999, operating activities provided net cash of $3.5 million. During that
period, net income of $6.4 million and non-cash expenses of approximately $1.1
million were partially offset by increased working capital requirements of
approximately $4.0 million.
CASH FLOWS FROM INVESTING
During the three-month periods ended February 29, 2000 and February 28,
1999, the Oilseed Processing and Refining Defined Business Unit used cash for
investing activities of $0.9 million and $2.0 million, respectively, for the
acquisition of property, plant and equipment.
During the six-month periods ended February 29, 2000 and February 28, 1999,
the Oilseed Processing and Refining Defined Business Unit used cash for
investing activities of $1.6 million and $3.5 million, respectively, for the
acquisition of property plant and equipment.
CASH FLOWS FROM FINANCING
The Oilseed Processing and Refining 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
Oilseed Processing and Refining 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 amounts
payable to the Company of $1.1 million on February 29, 2000 compared to $9.5
million on August 31, 1999 and $21.5 million on February 28, 1999. These
interest bearing balances reflect working capital and fixed asset financing
requirements, and are influenced by the prices of soybeans and crude soybean
oil.
20
<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
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ----------- ------------
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Receivables .................................................. $ 36,821 $ 30,960 $ 32,765
Inventories .................................................. 18,107 14,339 23,137
Other current assets ......................................... 139 210 165
-------- -------- --------
Total current assets ........................................ 55,067 45,509 56,067
PROPERTY, PLANT AND EQUIPMENT ................................. 108,860 110,547 110,577
INTANGIBLE ASSETS ............................................. 8,881 9,415 9,948
-------- -------- --------
Total assets ................................................ $172,808 $165,471 $176,592
======== ======== ========
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ..................... $ 60,634 $ 48,938 $ 49,391
Accounts payable ............................................. 9,386 7,238 11,998
Accrued expenses ............................................. 4,076 4,440 3,527
Current portion of long-term debt ............................ 10,005 10,005 10,005
-------- -------- --------
Total current liabilities ................................... 84,101 70,621 74,921
LONG-TERM DEBT, CENEX HARVEST STATES
COOPERATIVES ................................................. 23,633 28,510 33,638
COMMITMENTS AND CONTINGENCIES
DEFINED BUSINESS UNIT EQUITY .................................. 65,074 66,340 68,033
-------- -------- --------
Total liabilities and defined business unit equity ......... $172,808 $165,471 $176,592
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial
statements (unaudited).
21
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 29 & 28, FEBRUARY 29 & 28,
-------------------------- -------------------------
2000 1999 2000 1999
(DOLLARS IN THOUSANDS) ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Processed grain sales ......................... $ 51,136 $ 42,944 $103,730 $ 85,037
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 47,308 41,806 95,841 81,837
Marketing, general and administrative ......... 3,483 2,441 6,216 4,679
Interest ...................................... 1,574 1,136 3,069 2,079
-------- -------- -------- --------
52,365 45,383 105,126 88,595
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES ....................... (1,229) (2,439) (1,396) (3,558)
INCOME TAXES ................................... (115) (175) (130) (275)
-------- -------- -------- --------
NET LOSS ....................................... $ (1,114) $ (2,264) $ (1,266) $ (3,283)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial
statements (unaudited).
22
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 29 & 28, FEBRUARY 29 & 28,
--------------------------- -------------------------
2000 1999 2000 1999
(DOLLARS IN THOUSANDS) ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $ (1,114) $(2,264) $ (1,266) $ (3,283)
-------- ------- -------- ---------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ............................ 1,688 1,357 3,378 2,619
Changes in operating assets and liabilities:
Receivables ............................................. 1,294 (1,104) (5,861) 2,463
Inventories ............................................. 3,279 (1,823) (3,768) (4,242)
Other current assets .................................... 128 (1) 71 265
Accounts payable and accrued expenses ................... (6,468) 2,220 1,784 2,855
-------- ------- -------- ---------
Total adjustments ..................................... (79) 649 (4,396) 3,960
-------- ------- -------- ---------
Net cash (used in) provided by operating
activities ........................................... (1,193) (1,615) (5,662) 677
-------- ------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ............... (712) (5,508) (1,157) (15,235)
-------- ------- -------- ---------
Net cash used in investing activities ................. (712) (5,508) (1,157) (15,235)
-------- ------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to Cenex Harvest States Cooperatives ......... 4,344 7,298 11,696 16,153
Principal payments on long-term debt ....................... (2,439) (2,439) (4,877) (4,878)
Defined business unit equity distributed to the
Company ................................................... 2,264 3,283
-------- ------- -------- ---------
Net cash provided by financing activities ............. 1,905 7,123 6,819 14,558
-------- ------- -------- ---------
NET 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).
23
<PAGE>
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. ACCOUNTING POLICIES
The unaudited statements of operations and cash flows for the three months
and six months ended February 29, 2000 and February 28, 1999 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 and cash flows for the interim periods. The results of operations and
cash flows for any interim period are not necessarily indicative of results for
the full year. The balance sheet data as of August 31, 1999 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 Wheat Milling Defined Business Unit
financial statements for the year ended August 31, 1999, which are included in
the Company's Report on Form 10-K previously filed with the Securities and
Exchange Commission on November 22, 1999.
NOTE 2. RECEIVABLES
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
Trade ........................................ $37,012 $32,274 $32,990
Other ........................................ 969 454 527
------- ------- -------
37,981 32,728 33,517
Less allowance for doubtful accounts ......... 1,160 1,768 752
------- ------- -------
$36,821 $30,960 $32,765
======= ======= =======
</TABLE>
NOTE 3. INVENTORIES
<TABLE>
<CAPTION>
FEBRUARY 29, AUGUST 31, FEBRUARY 28,
2000 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
Grain ........................................ $14,306 $11,915 $20,157
Processed grain products ..................... 3,242 1,815 2,196
Other ........................................ 559 609 784
------- ------- -------
$18,107 $14,339 $23,137
======= ======= =======
</TABLE>
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On February 3, 2000 the Company's Board of Directors approved pursuing the
acquisition of Dakota Valley Mills, located in Fairmount, North Dakota. The mill
processes primarily spring wheat for bulk bakery customers, and has an 8,200
cwt. daily production capacity. The transaction has not been finalized, and is
subject to due diligence and environmental review.
See the Management Discussion and Analysis for the Company for discussion
of new accounting pronouncements and the Year 2000.
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER BUSHEL INFORMATION)
Loss before income taxes ................... $ (1,229) $ (2,439) $ (1,396) $ (3,558)
Book to tax differences .................... 101 193 202 193
-------- -------- -------- --------
Taxable loss ............................... $ (1,128) $ (2,246) $ (1,194) $ (3,365)
======== ======== ======== ========
Bushels processed .......................... 10,893 8,255 20,828 16,559
Loss per bushel ............................ $ (0.10) $ (0.27) $ (0.06) $ (0.20)
</TABLE>
Certain operating information pertaining to the Wheat Milling Defined
Business Unit is set forth below, as a percentage of sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross margin ...................................... 7.49% 2.65% 7.61% 3.76%
Marketing, general and administrative ............. 6.81% 5.68% 5.99% 5.50%
Interest .......................................... 3.08% 2.65% 2.96% 2.44%
</TABLE>
COMPARISON OF THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
The Wheat Milling Defined Business Unit incurred a net loss of
approximately $1.1 million for the three months ended February 29, 2000 compared
to a net loss of $2.3 milling during the three months ended February 28, 1999,
which resulted in an improvement of approximately $1.2 million (51%). This
improvement in operating results is primarily attributable to a $0.39 per
hundred weight increase in the average gross margin for all products and a 22%
increase in volume.
Net sales of $51.1 million for the three months ended February 29, 2000
increased approximately $8.2 million (19%) compared to the three-month period
ended February 28, 1999. A reduction to the average sales price of $0.23 per
hundred weight was offset by a 1.2 million hundred weight volume increase. The
increased volume is primarily attributable to the Mount Pocono mill which
commenced operations in January of 1999, and the Huron mill, which during the
1999 period, was under conversion of one of its lines from semolina to bakery
flour.
Cost of goods sold of $47.3 million for the three months ended February 29,
2000 increased $5.5 million (13%) compared to the three-month period ended on
February 28, 1999. While the average cost per bushel of raw material declined
$0.31 during the three months ended February 29, 2000 compared to the same three
months of a year ago, increased bushel grind of approximately 1.7 million
bushels and increased milling expense of approximately $1.1 million offset this
price variance. Essentially all of the increased mill expense is attributable to
Mount Pocono, which operated only on a limited basis during the 1999 period.
25
<PAGE>
Marketing, general and administrative expenses of $3.5 million for the
three months ended February 29, 2000 increased approximately $1.0 million (43%)
compared to the three months ended February 28,1999. Most of this increase is
attributable to activities at or for the Mount Pocono mill, which operated only
on a limited basis during the1999 period.
Interest expense of $1.6 million during the three months ended February 29,
2000 increase approximately $0.4 million (39%) compared to the three-month
period ended February 28, 1999. Most of this increase in interest expense is
attributable to the construction and working capital requirements of the Mount
Pocono mill.
An income tax benefit of $115 thousand for the three months ended February
29, 2000 is based upon an effective tax rate of 9.4% applied to the pretax loss
of approximately $1.2 million. For the three months ended February 28, 1999, an
income tax benefit of $175 thousand was based upon an effective tax rate of 7.2%
applied to a pretax loss of $2.4 million. The effective tax rate varies from
period to period based upon the percentage of non-patronage business activity to
total business activity.
COMPARISON OF SIX MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
The Wheat Milling Defined Business Unit incurred a net loss of
approximately $1.3 million for the six months ended February 29, 2000 compared
to a net loss of $3.3 milling during the six months ended February 28, 1999, for
an improvement of approximately $2.0 million (61%). This improvement in
operating results is primarily attributable to a $0.30 per hundred weight
increase in the average gross margin for all products and a 27% increase in
volume.
Net sales of $103.7 million for the six months ended February 29, 2000
increased approximately $18.7 million (22%) compared to the six months ended
February 28, 1999. A reduction to the average sales price of $0.32 per hundred
weight was offset by a 2.7 million hundred weight volume increase. The increased
volume is primarily attributable to the Mount Pocono mill which commenced
operations in January of 1999, and the Huron mill, which during the 1999 period,
was under conversion of one of its lines from semolina to bakery flour.
Cost of goods sold of $95.8 million for the six months ended February 29,
2000 increased $14.0 million (17%) compared to the six-month period ended on
February 28, 1999. While the average cost per bushel of raw material declined
$0.29 during the six months ended February 29, 2000 compared to the same six
months of a year ago, increased bushel grind of approximately 4.3 million
bushels and increased milling expense of approximately $1.6 million offset this
price variance. Essentially all of the increased mill expense is attributable to
Mount Pocono, which operated only on a limited basis during the 1999 period.
Marketing, general and administrative expenses of $6.2 million for the six
months ended February 29, 2000 increased approximately $1.5 million (33%)
compared to the six months ended February 28, 1999. Most of this increase is
attributable to activities at or for the Mount Pocono mill, which operated only
on a limited basis during the 1999 period.
Interest expense of $3.1 million during the six months ended February 29,
2000 increase approximately $1.0 million (48%) compared to the six-month period
ended February 28, 1999. Most of this increase in interest expense is
attributable to the construction and working capital requirements of the Mount
Pocono mill.
An income tax benefit of $130 thousand for the six months ended February
29, 2000 is based upon an effective tax rate of 9.3% applied to the pretax loss
of approximately $1.4 million. For the six months ended February 28, 1999, an
income tax benefit of $275 thousand was based upon an effective tax rate of 7.7%
applied to a pretax loss of $3.6 million. The effective tax rate varies from
period to period based upon the percentage of non-patronage business activity to
total business activity.
LIQUIDITY AND CAPITAL RESOURCES
The Wheat Milling 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 and levels. These cash needs
are expected to be fulfilled by the Company.
26
<PAGE>
CASH FLOWS FROM OPERATIONS
Operating activities for the three months ended February 29, 2000 used net
cash of approximately $1.2 million. Non-cash expenses of $1.7 million were
offset by the net operating loss of $1.1 million and increased working capital
requirements of approximately $1.8 million. Increased working capital
requirements were primarily attributable to increased volume activity. Operating
activities for the three months ended February 28, 1999 used net cash of
approximately $1.6 million. Non-cash expenses of approximately $1.4 million were
offset by the net operating loss of $2.3 million and increased working capital
requirements of $ .7 million.
Operating activities for the six months ended February 29, 2000 used net
cash of approximately $5.7 million. Non cash expenses of $3.4 million were
offset by the net operating loss of $1.3 million and increased working capital
requirements of approximately $7.8 million. Increased working capital
requirements were primarily attributable to increased volume activity. Operating
activities for the three months ended February 28, 1999 provided net cash of
approximately $ .7 million. Non-cash expenses of approximately $2.6 million and
reduced working capital requirements of approximately $1.4 million were
partially offset by the net operating loss of $3.3 million.
CASH FLOWS FROM INVESTING
Cash expended for the acquisition of property, plant and equipment during
the three-month periods ended February 29, 2000 and February 28, 1999, totaled
approximately $0.7 million and $5.5 million, respectively. The majority of the
capital expenditures during the 1999 period were for the completion of the Mount
Pocono mill.
Cash expended for the acquisition of property, plant and equipment during
the six-month periods ended February 29, 2000 and February 28, 1999, totaled
approximately $1.2 million and $15.2 million, respectively. The majority of the
capital expenditures during the 1999 period were for the completion of the Mount
Pocono mill.
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 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 availability of funds.
The Wheat Milling Defined Business Unit had amounts payable to the Company
of $60.6 million on February 29, 2000 compared to $48.9 million on August 31,
1999, and $49.4 million on February 28, 1999. This increase is primarily
attributable to additional financing required for accounts receivables and
inventories due to increased volume activity.
The Wheat Milling Defined Business Unit had long-term debt outstanding and
payable to the Company of $33.6 million on February 29, 2000 compared with $38.5
million on August 31, 1999, and $43.6 million of February 28, 1999. This debt
was originally incurred for the acquisition, expansion, and construction of
certain mills within the Wheat Milling Defined Business Unit. Approximately
$10.0 million of the current balance is payable within the next twelve months.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting held on December 1-2, 1999, the following
new directors were elected to the Board of Directors: Richard Owen, Robert
Grabarski, Glen Keppy. In addition, the following directors were re-elected to
the Board: Curt Eischens, Jerry Hasnedl, Bruce Anderson, Steven Burnet. Finally,
the following directors' terms of office continued after the meeting: Robert
Bass, Robert Elliott, Jim Kile, Gerald Kuster, Leonard Larsen, Duane Stenzel,
Michael Toelle, Richard Traphagen, Merlin Van Walleghn, Elroy Webster. Steven
Burnet was subsequently elected Chairman of the Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------------------------------------------------------------
10.38 Joint Venture Agreement for Agriliance LLC, dated as of January
1, 2000 among Farmland Industries, Inc., Cenex Harvest States
Cooperatives, United Country Brands, LLC and Land O' Lakes, Inc.
10.39 Employment Agreement dated as of January 14, 2000 between Noel K.
Estenson and Cenex Harvest States Cooperatives
10.40 Employment Agreement dated as of January 14, 2000 between John D.
Johnson and Cenex Harvest States Cooperatives
99 Cautionary Statement
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
Form 8-K, Item 5, "Other Events" filed December 1, 1999 referencing the
press release issued to the public on November 23, 1999 which described the
outcome of a proposed unification of the Company and Farmland Industries,
Inc.
28
<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)
NAME TITLE DATE
---- ----- ----
/S/ JOHN SCHMITZ Senior Vice President and Chief April 11, 2000
- ------------------- Financial Officer
John Schmitz
29
EXHIBIT 10.38
JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT (this "AGREEMENT"), effective
January 1, 2000 is entered into by and between FARMLAND INDUSTRIES, INC., a
cooperative corporation organized under the laws of Kansas ("FARMLAND"), CENEX
HARVEST STATES COOPERATIVES, a cooperative corporation organized under the laws
of Minnesota ("CHS"), United Country Brands LLC, a Delaware limited liability
company ("UNITED LLC") and LAND O'LAKES, INC., a cooperative corporation
organized under the laws of Minnesota ("LOL") (Farmland, CHS, United LLC and LOL
each individually a "PARTY" and collectively the "PARTIES". Farmland and CHS
together are "UCB PARTIES").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the UCB Parties have formed United LLC as a Delaware
limited liability company for the purpose of holding certain of their interests
in the joint venture created by this Agreement.
WHEREAS, each of the Parties is engaged in businesses of or
related to the wholesale marketing of plant food and crop protection products in
North America; and
WHEREAS, in order to better realize the potential of the
businesses, UCB Parties and LOL desire to form a joint venture by establishing
and operating a limited liability company and by entering into agreements
ancillary thereto;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein, the Parties agree as follows:
ARTICLE I
ESTABLISHMENT OF LIMITED LIABILITY COMPANY
1. Limited Liability Company. On or before the Operational Closing Date,
the Parties shall cause to be formed a Delaware limited liability
company with a name to be determined by the agreement of the Parties
(the "COMPANY"). The members of the Company to be formed shall be
Farmland, CHS, United LLC and LOL (each of which is sometimes referred
to as a "Member" and all of which are herein sometimes referred to
collectively as the "MEMBERS"). United LLC and LOL shall each own a 50%
governance interest in the Company. LOL shall own a 38.75 % economic
interest in the Company. United LLC shall own a 50% economic interest
in the Company. Farmland shall own a 9.795% economic interest in the
Company. CHS shall own a 1.455% economic interest in the Company.
United LLC and LOL each shall at all times exercise all management
rights with respect to the Company in such a manner as to ensure
compliance with the provisions of this Agreement. The Members shall
execute and deliver to each other a Limited Liability Company Agreement
consistent with the provisions hereof and incorporating such other
provisions as may be agreed to by the Parties. Upon completion of the
Limited Liability Company Agreement it shall be separately initialed by
the Parties and attached hereto as EXHIBIT B ("LLC AGREEMENT").
<PAGE>
1.1 Purpose and Scope of Joint Venture.
(a) Business Objectives: The Company's objectives and scope of business
include: (i) selling plant food and crop protection products to
cooperative members and patrons of Members (and others as may be
otherwise agreed to by the Members) for resale or use in North American
markets, and (ii) providing other goods and services to Members and
members and patrons of Members (and others as may be otherwise agreed
to by the Members). Until the time of the Working Asset Closing (as
hereinafter defined), the Company shall act as the manager of all of
such direct and indirect businesses of the Members and of WilFarm LLC
and the earnings and losses of such businesses and WilFarm shall inure
to the joint shared benefit of the Members and in accordance with the
agreement of WilFarm with the Company. Following the Working Asset
Closing, the Company shall use the LOL Contributed Assets and the
United LLC Contributed Assets for purposes of operation of the
businesses in its own name pursuant to clauses (a)(i) and (a)(ii)
above.
(b) Term. It is anticipated that the term of the Company shall be
perpetual subject to the earlier termination in accordance with the
provisions of Delaware law. To the extent it is not in material breach
of the LLC Agreement or any of the Ancillary Agreements, at the end of
the term of the venture each of United LLC and LOL will be granted a
right of last refusal to meet or exceed the highest offer for the
assets of the Company in liquidation. In the event that both members
desire to at least meet such highest offer, the Members shall
participate in an internal auction for the purchase by one Member of
the other Member's interest in the Company in accordance with the
procedures set forth in Schedule 1.1(b).
(c) Products: The Company's main products will be a variety of plant
food and crop protection products mutually agreed upon by the unanimous
decision of the Members.
1.2 Financing of the Company. LOL expects to have contributed
38.75% of the capital of the Company, consisting of cash and the beneficial use
of the LOL Contributed Assets referred to in Section 1.4. Farmland, CHS, and
United LLC expect to have together directly or indirectly contributed 61.25% of
the capital of the Company, consisting of cash and the beneficial use of United
LLC Contributed Assets referred to in Section 1.5, subject to the provisions of
the LLC Agreement. The Parties shall arrange for financing of the joint venture
pursuant to the terms of the LLC Agreement, it being the intent of the Parties
to obtain non-recourse as to the Members financing for the Company, as soon as
practical and in any event not later than April 30, 2000.
1.3 Compliance with Laws. All matters referred to herein are
subject to and conditioned upon compliance with all applicable laws.
1.4 LOL's Contribution to Company.
(a) Contribution of LOL Assets: At the Operational Closing, in
addition to any cash amount required by the LLC Agreement, except as
the parties may otherwise agree,
2
<PAGE>
LOL shall contribute, or cause to be contributed, to the Company the
economic benefit derived from the use of: (i) all LOL's rights and
interest to real property used by it in the wholesale marketing of
plant food and crop protection products in North America listed on
Schedule 1.4(a) (the "LOL Real Property"), (ii) all of LOL's rights
and interest in the Assigned Investments and Agreements listed on
Schedule 1.4(a) attached hereto (including, without limitation, its
interest and title to, and goodwill attendant thereto, its
ownership, equity, and governance interests in, and the beneficial
use of the assets of, Cenex/LOL Agronomy Company, Agro Distribution
LLC, Omnium LLC, Imperial Inc., and RSA Microtech, Inc.), (iii) all
of LOL's rights and interest in Other Assets (as defined below) and
(iv) the personal property listed on Schedule 1.4(a) attached hereto
(the "LOL PERSONAL PROPERTY") (collectively, the "LOL CONTRIBUTED
ASSETS"). The Parties hereby acknowledge and agree that the economic
benefit derived from the use of LOL Contributed Assets shall be
deemed for all purposes to have been contributed to the Company
effective as of the first day of January, 2000, (the "Effective
Date") and the net earnings or loss arising from such assets from
the Effective Date until the actual date of Closing shall be
included among the assets to be contributed pursuant to this
Agreement. The parties further agree that the earnings and loss
arising from operation of such assets prior to the Effective Date,
including without limitation chemical rebates earned on business
conducted prior to January 1, 2000, shall inure to LOL.
(b) Other Assets: As used herein, the term "OTHER ASSETS" means the
beneficial use of the following items pertaining to the LOL Real
Property (or any portion thereof): (i) any and all rights, licenses,
permits, betterments, accretions, easements, and any personal
property of every kind and character owned by LOL (and/or any
Affiliate thereof), attached to, appurtenant to, located in, or used
or useful in connection with the LOL Real Property; (ii) all
construction, engineering, consulting, architectural and other
similar contracts, and any and all amendments and modifications
thereto, relating to the LOL Real Property and all warranties with
respect thereto; (iii) all architectural, plans, specifications,
soils tests, engineering reports and similar materials relating to
the LOL Real Property; (iv) all deposits, performance bonds,
guarantees or other payments given or made with respect to the LOL
Real Property and any and all modifications and extensions thereto
relating to the LOL Real Property; (v) all governmental entitlements
(including, without limitation, all environmental reports,
declarations, map approvals, conditional use permits, and any other
permits related to the LOL Real Property), permissions,
environmental clearances, rights, licenses and permits which relate
to the LOL Real Property; (vi) all leases, licenses and occupancy
agreements with respect to the LOL Real Property; (vii) all rights
and remedies of LOL against the party from which LOL purchased the
LOL Real Property; and (viii) all other general intangibles relating
to the development and/or use of the LOL Real Property and the
improvements thereon including, without limitation, all refunds and
payments of any kind relating to the ownership, operation, use
and/or disposition of the LOL Real Property, and all proceeds and
claims arising on account of any loss, damage to or taking of the
LOL Real Property (or any part thereof).
3
<PAGE>
(c) Transfer on an "AS-IS" Basis. Each Party acknowledges and agrees
that, except for the express representations and warranties set
forth in this Agreement, the Company is acquiring the beneficial use
of LOL Contributed Assets "AS IS" without any representation or
warranty of LOL (or any other Party), express, implied or statutory,
as to the nature or condition of the Contributed Assets, the
condition of title to the Contributed Assets or the fitness for use
of the Contributed Assets.
(d) Prorations and Adjustments. The following shall be prorated and
adjusted between LOL and the Company as of the Effective Date,
except as otherwise specified:
(i) General real estate, personal property and ad valorem
taxes and assessments for the current tax year for the
Contributed Assets with LOL being responsible for the payment
of such items for the period before the Effective Date and the
Company being responsible for such payment for the period on
and after the Effective Date.
(ii) Utility charges, if any, costs of maintaining the
Contributed Assets, if any, and such other items that are
customarily prorated in transactions of this nature shall be
ratably prorated with LOL being responsible for the payment of
such items for the period before the Effective Date and the
Company being responsible for such payment for the period on
and after the Effective Date.
(e) Commissions or Fees. LOL hereby represents and warrants to the
Company and the other Members that no person or entity is entitled
to any commission, broker's fee or other compensation based on
contacts or understandings between such claimant and LOL or its
Affiliates with respect to the contribution of the LOL Contributed
Assets.
1.5 United LLC's Contribution to Company.
(a) Contribution of United LLC Assets: At the Operational Closing,
in addition to any cash amount required by the LLC Agreement, except
as the Parties may otherwise agree, the UCB Parties and United LLC
shall contribute to the Company the economic benefit derived from
the use of (i) all rights and interest of UCB Parties and United LLC
to real property used by any of them in the wholesale marketing of
plant food and crop protection products in North America listed on
Schedule 1.5(a) (the "UNITED LLC REAL PROPERTY") (ii) all of the
rights and interest in the Assigned Investments and Agreements
listed on Schedule 1.5(a) attached hereto (including, without
limitation, all interest and title to, and goodwill attendant
thereto, its ownership, equity, and governance interests in WilFarm,
Cenex/LOL Agronomy Company, Agro Distribution LLC, Omniun LLC,
Imperial Inc., and RSA Microtech, Inc.), (iii) all rights and
interest in Other Assets (as defined below) and (iv) the personal
property listed on Schedule 1.5(a) attached hereto (the "UNITED LLC
PERSONAL PROPERTY") (collectively, the "UNITED LLC CONTRIBUTED
ASSETS"). Farmland will also contribute or, pursuant to the contract
with Wilbur Ellis
4
<PAGE>
attached hereto as Exhibit C (to be provided no later than the
Operational Closing) will cause Wilbur Ellis to contribute its
ownership, equity, and governance interests in WilFarm and goodwill
attendant thereto. The Parties hereby acknowledge and agree that the
United LLC Contributed Assets shall be deemed for all purposes to
have been contributed to the Company effective as of the Effective
Date, and the net earnings or loss arising from the assets from the
Effective Date until the actual date of Closing shall be included
among the assets to be contributed pursuant to this Agreement. The
parties further agree that the earnings and loss arising from
operation of such assets prior to the Effective Date, including
without limitation chemical rebates earned on business conducted
prior to January 1, 2000, shall inure to the UCB Parties.
(b) Other Assets: As used herein, the term "OTHER ASSETS" means the
beneficial use of the following items pertaining to the United LLC
Real Property (or any portion thereof): (i) any and all rights,
licenses, permits, betterments, accretions, easements, and any
personal property of every kind and character owned by United LLC
(and/or any Affiliate thereof), attached to, appurtenant to, located
in, or used or useful in connection with the United LLC Real
Property; (ii) all construction, engineering, consulting,
architectural and other similar contracts, and any and all
amendments and modifications thereto, relating to the United LLC
Real Property and all warranties with respect thereto; (iii) all
architectural, plans, specifications, soils tests, engineering
reports and similar materials relating to the United LLC Real
Property; (iv) all deposits, performance bonds, guarantees or other
payments given or made with respect to the United LLC Real Property
and any and all modifications and extensions thereto relating to the
United LLC Real Property; (v) all governmental entitlements
(including, without limitation, all environmental reports,
declarations, map approvals, conditional use permits, and any other
permits related to the United LLC Real Property), permissions,
environmental clearances, rights, licenses and permits which relate
to the United LLC Real Property; (vi) all leases, licenses and
occupancy agreements with respect to the United LLC Real Property;
(vii) all rights and remedies of UCB parties or United LLC against
the party from which such UCB Party or United LLC purchased the
United LLC Real Property; and (viii) all other general intangibles
relating to the development and/or use of the United LLC Real
Property and the improvements thereon including, without limitation,
all refunds and payments of any kind relating to the ownership,
operation, use and/or disposition of the United LLC Real Property,
and all proceeds and claims arising on account of any loss, damage
to or taking of the United LLC Real Property (or any part thereof).
(c) Transfer on an "AS-IS" Basis. Each Party acknowledges and agrees
that, except for the express representations and warranties set
forth in this Agreement, the Company is acquiring the beneficial use
of United LLC Contributed Assets "AS IS" without any representation
or warranty of United LLC, Farmland, CHS (or any other Party),
express, implied or statutory, as to the nature or condition of the
United LLC Contributed Assets, the condition of title to the United
LLC Contributed Assets or the fitness for use of the United LLC
Contributed Assets.
5
<PAGE>
(d) Prorations and Adjustments. The following shall be prorated and
adjusted between United LLC or the UCB Parties as appropriate on the
one part and the Company on the other part as of the Effective Date,
except as otherwise specified:
(i) General real estate, personal property and ad valorem
taxes and assessments for the current tax year for the United
LLC Contributed Assets with United LLC or the UCB Parties
being responsible for the payment of such items for the period
before the Effective Date and the Company being responsible
for such payment for the period on and after the Effective
Date.
(ii) Utility charges, if any, costs of maintaining the United
LLC Contributed Assets, if any, and such other items that are
customarily prorated in transactions of this nature shall be
ratably prorated with United LLC or the UCB Parties being
responsible for the payment of such items for the period
before the Effective Date and the Company being responsible
for such payment for the period on and after Effective Date.
(e) Commissions or Fees. Each of the UCB Parties and United LLC
hereby represent and warrant to the Company and the other Members
that no person or entity is entitled to any commission, broker's fee
or other compensation based on contacts or understandings between
such claimant and UCB Parties, United LLC, or their respective
Affiliates with respect to the contribution of the United LLC
Contributed Assets.
1.6 No Adjustment of Economic Interest. Barring any purchase
or sale of any economic interest in the Company among Members, all of which such
sales and purchases may be made by agreement by any of the Members and as to
which consent of each of the other Members is hereby given, the economic
interests of the Parties shall remain as they are except as may be agreed to
from time to time by the Parties. It is anticipated that any expansion of the
wholesale fertilizer and crop protection business by the Parties hereto shall be
solely through the Company with any and all assets used in such expansion being
acquired by, and pursuant to terms negotiated by, the Company. If any of the
Members acquire any wholesale fertilizer and/or crop protection business assets
in North America by operation of law or otherwise, the Company and such Member
shall negotiate in good faith to sell such assets to the Company upon terms and
conditions acceptable to both parties. If the Company and such Member or are
unable to reach agreement on the terms of the sale to the Company such assets
shall, within a two (2) year period following the acquisition by such Member ,
be sold or transferred to a third party unrelated to such Member by ownership or
by continuing contract. Pending such sale such assets shall to the extent
legally permissible be operated and managed by the Company for the sole economic
benefit of such Member. To the extent such management and operation is not
legally permissible in the reasonable determination of the Company, such assets
shall, pending sale, be operated by the Member on a full arms length basis for
its own account.
1.7 Fertilizer and Agricultural Chemical Procurement and
Marketing Arrangements with LOL, United LLC and UCB Parties.
6
<PAGE>
(a) Procurement. It is anticipated that the Company will procure
plant food product primarily from Farmland and CF Industries Inc.
("CF"). Procurement of product from Farmland will be accomplished
directly by the Company. Such purchases will not be on a patronage
basis, and production earnings therefrom will remain with Farmland
for retention or distribution in its sole determination. The
purchases of CF product, either directly or through CHS or LOL, will
not be on a patronage basis from the perspective of the Company, and
any patronage earned will go to or remain with CHS or LOL for
retention or distribution in their sole determination. Product
procured from non-CF third parties shall be procured directly by the
Company, or if through the Members, shall be by each Member ratably
in proportion to its economic interest in the Company.
(b) Allocation of Product Sourced from CF. For purposes of CF
patronage and the CF base capital plan, CHS and LOL will allocate
between themselves nitrogen product purchased from CF on the basis
described herein. For purposes of this section, Farmland and CF
shall each have an annual "base level" of product to be supplied to
the Company as follows:
Nitrogen Products (on a total N basis)
--------------------------------------
Farmland - 2,998,000 tons annually
CF - 1,831,000 tons annually
The base percentage split between the Members ("Base Percentage
Split"), for all CF-sourced nitrogen product (on a total N basis)
shall be LOL 61.8% and CHS 38.2%. The Base Percentage Split shall
apply to all nitrogen product sourced from CF in any fiscal year up
to the CF base level. For CF-sourced product over the base level and
to the extent such increase results from an increase in produced
tons available to the Company, LOL shall receive credit for 100% of
such product, but only to the extent that Farmland-sourced product
exceeds Farmland's base level as a result of an increase in Farmland
production being sold to the Company; provided that this sentence
shall apply only in the case of a merger between Farmland and CHS or
other combination resulting in the participation by CHS in the
economic results of the Farmland fertilizer production business and,
if no such merger or other combination has occurred the Parties will
renegotiate the terms of this sentence to protect the rights of all
Members to participate in such increase in sourcing and production
on an equitable basis. To the extent that CF-sourced product exceeds
the CF base level by more tons than the Farmland-sourced product
exceeds the Farmland base level, the CF-sourced product shall be
subject to the Base Percentage Split between CHS and LOL.
(c) Phosphate Fertilizer. The allocation for phosphate fertilizer
will operate in the same manner as the nitrogen allocation except
that the following base levels shall apply:
Farmland 589,000 tons
CF 552,000 tons
All CF-sourced phosphate fertilizer shall be sourced for the account
of LOL or CHS in accordance with the Base Percentage Split.
7
<PAGE>
(d) Potash. There shall not be any special allocation rule for
potash. All potash sourced from CF shall be sourced subject to the
Base Percentage Split.
(e) Supply. The Company will be the preferred supplier of fertilizer
and agricultural chemicals to the Members, and the Members agree to
purchase such product from the Company for retail resale so long as
it is commercially reasonable to do so and the prices and terms
offered by the Company are competitive.
1.8 Exhibits and Schedules. The Exhibits and Schedules
attached to this Agreement shall be construed with and be an integral part of
this Agreement to the same extent as if the same had been set forth verbatim
herein. In case of any inconsistency between the terms of this Agreement and the
terms of any Exhibit or Schedule, the terms of this Agreement shall prevail. The
following are the Exhibits and Schedules attached to or to be attached and
incorporated in this Agreement:
Name of Exhibit or Schedule Description
- --------------------------- -----------
Schedule 1.1(b) Internal Auction Process
Schedule 1.4(a) List of LOL Property Contributed to the Company
Schedule 1.5(a) List of United LLC Property Contributed to the
Company
Schedule 3.1(c) LOL Consents and Approvals
Schedule 3.1(d) LOL Violations or Conflicts
Schedule 3.1(g) Liabilities or Obligations relating to LOL
Contributed Assets
Schedule 3.2(c) Farmland Consents and Approvals
Schedule 3.2(d) Farmland Violations or Conflicts
Schedule 3.2(g) Liabilities or Obligations relating to
Farmland-originated United LLC Contributed Assets
Schedule 3.3(c) CHS Consents and Approvals
Schedule 3.3(d) CHS Violations or Conflicts
Schedule 3.3(g) Liabilities or Obligations relating to
CHS-originated United LLC Contributed Assets
Schedule 8.1 Services to Company or to WilFarm
Exhibit A Defined Terms
Exhibit B Limited Liability Company Agreement
8
<PAGE>
Exhibit C Agreement between Farmland and Wilbur Ellis
Exhibit D Management Agreement
ARTICLE II
DEFINITIONS
Capitalized terms used but not defined herein shall have the
respective meanings set forth or made applicable in Exhibit A hereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 By LOL. LOL hereby represents and warrants to the Company
and other Members as follows:
(a) Organization. LOL is an agricultural cooperative duly organized,
validly existing and in good standing under the laws of the State of
Minnesota and has full power and authority to own and operate its
assets and properties and to carry on its business as presently
being conducted and as presently proposed to be conducted (including
in the manner contemplated by this Agreement) and is duly qualified
to do business and is in good standing in all jurisdictions in which
the ownership or occupancy of its properties or its activities
presently make such qualification necessary, except where the
failure to so qualify would not have a Material Adverse Effect upon
it.
(b) Authority. LOL has all requisite corporate power and authority
to execute and deliver this Agreement and each Ancillary Agreement
to which it is a party, to perform its obligations hereunder and
thereunder, to contribute both the beneficial use of, and
ultimately, the fee title to the Contributed Assets to the Company
and to consummate the other transactions contemplated hereby and
thereby. The execution, delivery and performance of this Agreement
and each such Ancillary Agreement by LOL and the consummation by LOL
of the transactions contemplated hereby and thereby have been duly
and validly authorized by all requisite corporate proceedings of
LOL. This Agreement and each Ancillary Agreement that has been
executed by LOL on or prior to the date hereof have been duly and
validly executed and delivered by LOL and each constitutes a legal,
valid and binding obligation of LOL, enforceable against LOL in
accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of equity.
(c) Consents and Approvals. Except as set forth in Schedule 3.1(c)
attached hereto and made a part hereof, no Consents are required to
be obtained from, and no registrations, declarations and filings are
required to be made with, any Governmental
9
<PAGE>
Authority to permit LOL to execute, deliver and perform this
Agreement and any Ancillary Agreement to which it is a party. All
terms and conditions contained in, or existing in respect of, such
Consents have been duly satisfied and performed to the extent
necessary prior to the date of the execution and delivery of this
Agreement.
(d) No Violations or Conflicts. The execution, delivery and
performance of this Agreement and each Ancillary Agreement to which
it is a party by LOL do not and will not, subject to those items set
forth on Schedule 3.1(d), (i) violate or conflict with any provision
of, or result in the breach of, any applicable statute, law, rule or
regulation of any Governmental Authority, the Articles of
Incorporation or By-laws of LOL, or any contract, agreement,
indenture or other instrument or obligation to which LOL is a party
or by which LOL or any of its assets (including the Contributed
Assets) is bound or of any order, judgment, writ, injunction, award,
ruling or decree applicable to LOL, or (ii) constitute an event
which, after notice or lapse of time or both, would result in any
such violation, conflict, breach or termination, or result in a
violation or revocation of any permit from any Governmental
Authority, regulatory body or other third party, except to the
extent that the occurrence of any of the foregoing would not
individually or in the aggregate have a Material Adverse Effect on
the ability of LOL to consummate the transactions contemplated
hereby or by any Ancillary Agreement.
(e) Litigation. There is no action, suit or proceeding pending, or
to the knowledge of LOL threatened, against LOL which questions the
validity of this Agreement, the Contributed Assets or any Ancillary
Agreement or any action taken or to be taken pursuant to or in
connection with this Agreement, the Contributed Assets or any
Ancillary Agreement or which would, if adversely determined, affect
the ability of LOL to perform its obligations hereunder or
thereunder or have a Material Adverse Effect on LOL.
(f) Compliance with Law. LOL and its Affiliates have conducted their
respective businesses in material compliance with applicable
statutes and other laws, rules, regulations, or interpretation of
any Governmental Authority and any Governmental Licenses.
(g) Contributed Assets. LOL has, and for the term of the Company
will maintain, except as may be agreed between the Company and LOL,
good and marketable title to the LOL Contributed Assets, free and
clear of any mortgages, liens, claims, encumbrances, pledges,
conditional sale agreements, security agreements and charges in
favor of any third party of any nature. Except as disclosed on
Schedule 3.1(g), there are no liabilities, including environmental
liabilities, or obligations of any nature, whether absolute,
accrued, contingent or otherwise, relating to the Contributed
Assets, other than obligations which are in amounts which, in the
aggregate, shall not have a material impact on the value of the LOL
Contributed Assets. Any contracts included in the Contributed Assets
are assignable and are in full force and effect, no dispute or
disagreement exists under any such contract. LOL has made, or will
make, available to
10
<PAGE>
the other Members true and correct copies of each such contract.
Neither LOL nor, to its knowledge, any other party is in default in
connection with any such contract.
3.2 By Farmland. Farmland hereby represents and warrants to
the Company and the other Members as follows:
(a) Organization. Farmland is a corporation duly organized, validly
existing and in good standing under the laws of Kansas; has full
corporate power and authority to own and operate its assets and
properties and carry on its business as presently being conducted
and as presently proposed to be conducted (including in the manner
contemplated by this Agreement) and is duly qualified to do business
and is in good standing in all jurisdictions in which the ownership
or occupancy of its properties or its activities presently make such
qualification necessary, except where the failure to so qualify
would not have a Material Adverse Effect upon it.
(b) Authority. Farmland has all requisite corporate power and
authority to execute and deliver this Agreement and each Ancillary
Agreement to which it is a party, to perform its obligations
hereunder and thereunder, to contribute both the beneficial use of,
and ultimately, the fee title to the Farmland-sourced United LLC
Contributed Assets to the Company and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and each Ancillary Agreement to which
it is a party by Farmland and the consummation by Farmland of the
transactions contemplated hereby and thereby have been duly and
validly authorized by all requisite corporate proceedings. This
Agreement and each Ancillary Agreement that has been executed by
Farmland on or prior to the date hereof have been duly and validly
executed and delivered by such corporation and each such agreement
constitutes a legal, valid and binding obligation of Farmland,
enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors' rights generally and to general
principles of equity.
(c) Consents and Approvals. Except as set forth in Schedule 3.2(c)
attached hereto, and made a part hereof, no Consents are required to
be obtained from, and no registrations, declarations and filings,
are required to be made with, any Governmental Authorities to permit
Farmland to execute, deliver and perform this Agreement and any
Ancillary Agreement to which it is a party. All terms and conditions
contained in, or existing in respect of, such Consents have been
duly satisfied and performed, to the extent necessary prior to the
date of the execution and delivery of this Agreement.
(d) No Violations or Conflicts. The execution, delivery and
performance of this Agreement and each Ancillary Agreement to which
it is a party by Farmland do not and will not, subject to those
items set forth on Schedule 3.2(d) attached hereto, (i) violate or
conflict with any provision of, or result in the breach of, any
applicable statute, law, rule or regulation of any Governmental
Authority, the Articles of Incorporation or By-laws of Farmland or
any contract, agreement, indenture or other instrument or obligation
to which Farmland is a party or by which Farmland or any of the
assets of Farmland is
11
<PAGE>
bound, or of any order, judgment, writ, injunction, award, ruling or
decree applicable to Farmland, or (ii) constitute an event which,
after notice or lapse of time or both, would result in any such
violation, conflict, breach or termination, or result in a violation
or revocation of any permit from any Governmental Authority,
regulatory body or other third party, except to the extent that the
occurrence of any of the foregoing would not individually or in the
aggregate have a Material Adverse Effect on the ability of Farmland
to consummate the transactions contemplated hereby or by an
Ancillary Agreement.
(e) Litigation. There is no action, suit or proceeding pending, or
to the knowledge of Farmland threatened, against Farmland which
questions the validity of this Agreement or any Ancillary Agreement
or any action taken or to be taken pursuant to or in connection with
this Agreement or any Ancillary Agreement or which would, if
adversely determined, affect the ability of Farmland to perform its
obligations hereunder or thereunder or have a Material Adverse
Effect on Farmland.
(f) Compliance with Law. Farmland and its Affiliates have conducted
their respective businesses in material compliance with applicable
statutes and other laws, rules, regulations, or interpretation of
any Governmental Authority and any Governmental Licenses.
(g) Contributed Assets. Farmland has, and for the term of the
Company will maintain, except as may be agreed between the Company
and Farmland, good and marketable title to the Farmland-sourced
United LLC Contributed Assets, free and clear of any mortgages,
liens, claims, encumbrances, pledges, conditional sale agreements,
security agreements and charges in favor of any third party of any
nature. Except as disclosed on Schedule 3.2(g), to the knowledge of
Farmland there are no liabilities, including environmental
liabilities, or obligations of any nature, whether absolute,
accrued, contingent or otherwise, relating to the Farmland-sourced
United LLC Contributed Assets, other than obligations which are in
amounts which, in the aggregate, shall not have a material impact on
the value of the Farmland-sourced United LLC Contributed Assets. Any
contracts included in the Farmland-sourced United LLC Contributed
Assets are assignable and are in full force and effect, no dispute
or disagreement exists under any such contract. Farmland has made,
or will make, available to the other Members true and correct copies
of each such contract. Neither Farmland nor, to its knowledge, any
other party is in default in connection with any such contract.
3.3 By CHS. CHS hereby represents and warrants to the Company
and the other Members as follows:
(a) Organization. CHS is a corporation duly organized, validly
existing and in good standing under the laws of Minnesota; has full
corporate power and authority to own and operate its assets and
properties and carry on its business as presently being conducted
and as presently proposed to be conducted (including in the manner
contemplated by this
12
<PAGE>
Agreement) and is duly qualified to do business and is in good
standing in all jurisdictions in which the ownership or occupancy of
its properties or its activities presently make such qualification
necessary, except where the failure to so qualify would not have a
Material Adverse Effect upon it.
(b) Authority. CHS has all requisite corporate power and authority
to execute and deliver this Agreement and each Ancillary Agreement
to which it is a party, to perform its obligations hereunder and
thereunder, to contribute both the beneficial use of, and
ultimately, the fee title to the CHS-sourced United LLC Contributed
Assets to the Company and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and each Ancillary Agreement to which
it is a party by CHS and the consummation by CHS of the transactions
contemplated hereby and thereby have been duly and validly
authorized by all requisite corporate proceedings. This Agreement
and each Ancillary Agreement that has been executed by CHS on or
prior to the date hereof have been duly and validly executed and
delivered by such corporation and each such agreement constitutes a
legal, valid and binding obligation of CHS, enforceable against it
in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of equity.
(c) Consents and Approvals. Except as set forth in Schedule 3.3(c)
attached hereto, and made a part hereof, no Consents are required to
be obtained from, and no registrations, declarations and filings,
are required to be made with, any Governmental Authorities to permit
CHS to execute, deliver and perform this Agreement and any Ancillary
Agreement to which it is a party. All terms and conditions contained
in, or existing in respect of, such Consents have been duly
satisfied and performed, to the extent necessary prior to the date
of the execution and delivery of this Agreement.
(d) No Violations or Conflicts. The execution, delivery and
performance of this Agreement and each Ancillary Agreement to which
it is a party by CHS do not and will not, subject to those items set
forth on Schedule 3.3(d) attached hereto, (i) violate or conflict
with any provision of, or result in the breach of, any applicable
statute, law, rule or regulation of any Governmental Authority, the
Articles of Incorporation or By-laws of CHS or any contract,
agreement, indenture or other instrument or obligation to which CHS
is a party or by which CHS or any of the assets of CHS is bound, or
of any order, judgment, writ, injunction, award, ruling or decree
applicable to CHS, or (ii) constitute an event which, after notice
or lapse of time or both, would result in any such violation,
conflict, breach or termination, or result in a violation or
revocation of any permit from any Governmental Authority, regulatory
body or other third party, except to the extent that the occurrence
of any of the foregoing would not individually or in the aggregate
have a Material Adverse Effect on the ability of CHS to consummate
the transactions contemplated hereby or by an Ancillary Agreement.
(e) Litigation. There is no action, suit or proceeding pending, or
to the knowledge of CHS threatened, against CHS which questions the
validity of this Agreement or any
13
<PAGE>
Ancillary Agreement or any action taken or to be taken pursuant to
or in connection with this Agreement or any Ancillary Agreement or
which would, if adversely determined, affect the ability of CHS to
perform its obligations hereunder or thereunder or have a Material
Adverse Effect on CHS.
(f) Compliance with Law. CHS and its Affiliates have conducted their
respective businesses in material compliance with applicable
statutes and other laws, rules, regulations, or interpretation of
any Governmental Authority and any Governmental Licenses.
(g) Contributed Assets. CHS has, and for the term of the Company
will maintain, except as may be agreed between the Company and CHS,
good and marketable title to the CHS-sourced United LLC Contributed
Assets, free and clear of any mortgages, liens, claims,
encumbrances, pledges, conditional sale agreements, security
agreements and charges in favor of any third party of any nature.
Except as disclosed on Schedule 3.3(g), to the knowledge of CHS
there are no liabilities, including environmental liabilities, or
obligations of any nature, whether absolute, accrued, contingent or
otherwise, relating to the CHS-sourced United LLC Contributed
Assets, other than obligations which are in amounts which, in the
aggregate, shall not have a material impact on the value of the
Contributed Assets. Any contracts included in the CHS-sourced United
LLC Contributed Assets are assignable and are in full force and
effect, no dispute or disagreement exists under any such contract.
CHS has made, or will make, available to the other Members true and
correct copies of each such contract. Neither CHS nor, to its
knowledge, any other party is in default in connection with any such
contract.
3.4 Survival. All representations and warranties made herein
shall survive the execution and delivery of this Agreement and for a period of
time equal to the statutes of limitations applicable or related thereto.
3.5 Finder's Fees. Each Party represents that it has not
engaged or authorized any broker, finder or similar agent who would be entitled
to a commission or other fee in respect of the transactions contemplated herein.
14
<PAGE>
3.6 Bring Down of Representations and Warranties. The parties
agree that each shall deliver a certificate, at each Closing described in
Article V, verifying the continued accuracy of the representations and
warranties contained herein, as applicable, together with such other and further
representations and warranties as the Parties may deep appropriate or advisable.
ARTICLE IV
COVENANTS PRIOR TO OPERATIONAL CLOSING
4.1 Covenants. Each Party shall, prior to the Operational
Closing effected pursuant to this Agreement:
(a) Due Diligence. Upon written request, make available to other
Parties any documents and materials reasonably necessary to permit
them to conduct legal, business and economic due diligence, provided
however, that nothing herein shall be deemed to permit a Party
hereto to conduct a Phase II environmental audit on or with respect
to the real property of another Party without the written permission
of the other Party given or withheld in its sole discretion.
(b) Assistance to Company. Use reasonable efforts to assist the
Company in obtaining all necessary permits and licenses necessary
for it to conduct the business contemplated hereby.
(c) Covenant to Close. Have duly performed and complied with all
agreements and conditions required by this Agreement and the LLC
Agreement to be performed or complied with by it on or prior to the
Operational Closing Date.
(d) Conduct of Business. Will not cause or permit the use of the
Contributed Assets in any material transaction outside the ordinary
course of business. Consistent with and subject to the foregoing,
each Party shall cause its respective Contributed Assets to be kept
and maintained in good operating condition and repair and shall use
its good faith best efforts consistent with good business practice
to cause the value of the business on an on-going basis to be
preserved.
4.2 Publicity. Any and all publicity concerning any matters
contemplated under this Agreement or an Ancillary Agreement shall be agreed upon
in writing by all Parties, unless otherwise required by law.
15
<PAGE>
ARTICLE V
CLOSINGS
5.1 Execution of this Agreement. The execution of this
Agreement by each of the Parties shall take place no later than February 4,
2000. The effective date hereof shall nonetheless be January 1, 2000.
5.2 Operational Closing. The Operational Closing shall be held
as soon as practicable and in any event within 10 business days after each of
the conditions referred to in Sections 5.2 have been satisfied or waived (the
"OPERATIONAL CLOSING DATE") at the offices of CHS, or at such other date, time
and place as the Parties shall mutually agree; provided that this Agreement has
not been terminated pursuant to Article VI prior to such date. At the
Operational Closing, the actions and deliveries referred to in Sections 5.4 and
5.5 shall take place and the documents referred to therein shall be exchanged.
The Parties agree and acknowledge that it is their mutual intention to be bound
in good faith by this Agreement in accordance with its terms, it being agreed
and understood that the Operational Closing contemplated by this Agreement shall
be subject only to the satisfaction or waiver by the appropriate Party of the
conditions set forth in this Article V.
5.3 Conditions to the Obligations of All Parties to Effect the
Operational Closing. The obligations of the Parties set forth in this Agreement
are subject to the following conditions:
(a) The results of legal, business and economic due diligence
investigations, if any, conducted by LOL and UCB Parties shall be
completed to the satisfaction of the investigating Party;
(b) Each of the representations and warranties made by the Parties
shall be true and correct when made and as of the Closing Date;
(c) Each Party shall have performed and complied with all agreements
and covenants required by this Agreement to be performed or complied
with by it on or prior to the Operational Closing Date;
(d) Restructuring of WilFarm, LLC ownership and other contractual
arrangements between Farmland and Wilbur Ellis Company to the
satisfaction of Farmland, LOL and CHS; and
16
<PAGE>
(e) All necessary Consents from Governmental Authorities and
Governmental Licenses shall have been obtained by the Parties.
5.4 LOL, Farmland, CHS and United LLC Actions and Deliveries
at the Operational Closing. At or prior to the Operational Closing, each of the
Parties shall:
(a) Execute and deliver a signed copy of the Ancillary Agreements to
which it is a party;
(b) Deliver a certificate signed by its duly authorized
representative stating that all its representations and warranties
contained in this Agreement and the LLC Agreement are true and
correct as of the Operational Closing Date and all its covenants
required to be performed as of the Operational Closing Date have
been performed;
(c) Respectively deliver documents reasonably required by the
Company to permit its use and occupancy of the LOL Real Property,
the LOL Personal Property, the United LLC Personal Property, and the
United LLC Real Property for such time as any of LOL, or the UCB
Parties remains a Member of the Company; and
(d) Execute and deliver an Management Agreement in the form of
EXHIBIT D attached hereto.
5.5 Company Actions and Deliveries at the Operational Closing.
At or prior to the Operational Closing, following execution and delivery of the
LLC Agreement by the parties thereto, the Certificate shall be executed and
filed with the Secretary of State of the State of Delaware.
5.6 Working Asset Closing. The Working Asset Closing shall be
held as soon as practicable and in any event within 10 business days after the
financing referred to in Section 1.2 has been obtained (the "WORKING ASSET
CLOSING") at the offices of CHS, or at such other date, time and place as the
Parties shall mutually agree. At the Working Asset Closing, each of the parties
shall sell to the Company their respective inventories of plant food and crop
protection products which can reasonably be marketed by the Company.
17
<PAGE>
ARTICLE VI
TERMINATION
6.1 Termination. Prior to the Operational Closing, this
Agreement shall be terminated upon the occurrence of either of the following
events:
(a) The written election of a Party that is not in material default
or material breach under any of the provisions of this Agreement,
(i) if there is a material default by another Party in its
obligations hereunder, or there is a material breach by another
Party of its representations and warranties hereunder, and such
default or breach, as the case may be, shall not have been cured by
the defaulting or breaching Party within twenty (20) business days
after notice of such default or breach has been given by the
non-defaulting, non-breaching Party to the defaulting Party or (ii)
if the First Operational Closing has not occurred by October 1,
2000;
(b) The written election of the Party not subject to the same, upon
(i) the admission in writing by a Party of its inability to pay its
debts as they become due; (ii) the institution by a Party of
proceedings for relief as a debtor under United States law, as now
constituted or hereafter in effect, including, without limitation,
Title 11 of the United States Code, or under any state or other law
for the relief of debtors; (iii) the institution against a Party or
its direct or indirect parent of any proceeding seeking to
adjudicate it bankrupt or insolvent, or seeking liquidation or
reorganization under any bankruptcy, insolvency or similar laws for
the relief of debtors, or seeking the appointment of a receiver or
equivalent official for any substantial part of its assets, and such
proceeding shall not have been dismissed or withdrawn within sixty
(60) days from the date of the institution thereof; (iv) the making
by a Party or its direct or indirect parent of an assignment for the
benefit of creditors; or (v) the appointment of a receiver or
trustee for the business or properties of a Party or its direct or
indirect parent.
6.2 Right to terminate after June 30,2000. Any party shall
have the right to terminate this Agreement after June 30, 2000, upon at least
ninety (90) days prior written notice to the other parties, if at the time of
such notice the Working Asset Closing has not occurred and such terminating
party has reasonably determined in good faith that, as a result of such Closing
not having occurred, continued operation of the Company will have a material
adverse effect on the terminating party.
18
<PAGE>
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification by a Party. Subject to Section 7.2, each
Party (the "INDEMNIFYING PARTY") shall indemnify, defend and hold harmless the
Company, the other Parties, the other Parties Affiliates, and the other Parties
and each such Affiliate's employees, officers, directors and agents, and the
Company's officers and representatives (collectively the "INDEMNIFIED PERSONS")
from and against any and all claims, demands, actions, suits, damages,
liabilities, losses, costs and expenses (including reasonable attorneys' fees),
to the extent caused by, resulting from or arising out of or in connection with
any of the following:
(a) The breach of, or misrepresentation contained in, any written
representation or warranty made by the Indemnifying Party or its
Affiliates in this Agreement, in any Ancillary Agreement, in any
officer's certificate delivered hereunder, or in any written
agreement between a Party and the Company;
(b) All liabilities or obligations of the Indemnifying Party, or
conditions, existing at the time of contribution or transfer of any
property or assets to the Company with respect to property or assets
so contributed or transferred by the Indemnifying Party except to
the extent specifically assumed by the Company;
(c) The breach or default in performance of any covenant or
agreement required to be performed by the Indemnifying Party
contained in the Agreement or any Ancillary Agreement; or
(d) Any claim, action, suit or proceeding or threat thereof, made or
instituted as a result of acts or omissions of the Indemnifying
Party or its Affiliates unrelated to the business and operations of
the Company or outside the scope of the Indemnifying Party's rights
or authority conferred by this Agreement.
7.2 Survival; Limitations; Procedures.
(a) The indemnification obligations contained in Section 7.1 shall
survive the Fee Closing and shall remain in effect [for a period of
time thereafter equal to the statutes of limitations applicable or
related to the matters indemnified against].
(b) The rights and remedies provided to the Parties and the Company
in this Agreement are cumulative and non-exclusive and shall not
preclude any other right or remedy available to any Party or the
Company at law or in equity.
(c) Notwithstanding any other provision hereof, neither the Company
nor any Party shall be liable to any other Party or its Affiliates,
the Company, or any other Indemnified
19
<PAGE>
Person for special, indirect, punitive or consequential damages,
including but not limited to loss of profit.
(d) If the Indemnifying Party makes any payment in respect of
indemnity obligations under Section 7.1, it shall be subrogated, to
the extent of such payment, to all rights and remedies of the
Indemnified Person to any insurance benefits or other claims of the
Indemnified Person with respect to such claim.
(e) Notwithstanding any other provision hereof, neither the Company
nor any Party shall be liable to any other Party or its Affiliates
for debts, liabilities or any other obligations except as
specifically assumed in a writing in or pursuant to this Agreement.
ARTICLE VIII
POST OPERATIONAL CLOSING
8.1 Services to Company. Existing agreements relating to
services currently being provided to the Cenex/LOL Agronomy Co. by LOL or CHS or
to WilFarm by Farmland including but not limited to those listed on Schedule 8.1
attached hereto will be reviewed and, to the extent appropriate, revised as
necessary or terminated in a manner agreeable to the parties, the intent of all
parties being that the Company should procure at the cost/benefit ratio most
favorable to the Company. It is anticipated that the definitive agreements will
be negotiated prior to the Operational Closing reflecting the services to be
provided by any of the Members which agreements may but shall not necessarily
include reimbursement for costs of terminating services formerly provided by the
Members with respect to their respective contributed assets.
8.2 Extension of Membership or Patronage Rights. LOL, CHS and
Farmland will each as soon as practical following the Operational Closing extend
the offer of membership and the ability to procure plant food and crop
protection products through the Company on a cooperative basis as facilitated by
each of them, the intention being that all qualified patrons of LOL, CHS and
Farmland will be entitled to participate on a patronage basis in the earnings of
the Members derived from the Company. Except as may be otherwise agreed by the
Members, all marketing of fertilizer and agricultural chemical by the Company is
anticipated to be for the benefit of members and patrons of the Members with the
intention being that LOL, CHS and Farmland will be able to treat their
respective earnings therefrom as patronage business done for their respective
members and patrons as permitted under the Internal Revenue Code. Earnings of
the Company will be split on the basis of the economic interests of the parties
as determined from time to time. An accounting system shall be maintained by the
Company permitting its earnings to be calculated and distributed separately for
fertilizer and crop protection products.
8.3 Non-Competition.
20
<PAGE>
(a) Effective upon the Operational Closing, LOL, CHS and Farmland
each agree not to directly or indirectly engage in the wholesale
marketing of fertilizer and agricultural chemicals except through
the Company in the territory of North America during the time it, or
an entity of which it is a material owner, remains a member of the
Company and for a period of four years thereafter.
(b) The Parties believe that the restrictive covenant contained in
this Section 8.3 is reasonable. However, if any court having
jurisdiction shall at any time hereafter hold this restriction to be
unenforceable or unreasonable, whether as to scope, territory or
period of time specified herein, and if such court shall declare or
determine the scope, territory or period of time which it deems to
be reasonable, such scope, territory or period of time shall be
deemed to be reduced to that declared or determined by said court to
be reasonable.
(c) Each Party recognizes that in the event of violation of the
terms of the above covenant, the other Parties will suffer
irreparable damages and that it will be difficult if not impossible
to compute actual damages sustained by such Parties as the result of
such unauthorized competition. Therefore, the Parties agree that
each Party shall be entitled to apply to a court of competent
jurisdiction to enjoin any breach, threatened or actual, of the
covenants contained herein.
ARTICLE IX
MISCELLANEOUS
9.1 Expenses. The Parties shall bear their own costs and
expenses incurred in connection with the performance of their obligations under
this Agreement.
9.2 Exchange of Information. Neither any Party nor any of its
Affiliates shall prior to the Operational Closing Date produce to, or exchange
with, another Party any competitively sensitive information unless counsel to
each Party has reached the independent determination, made in good faith, that
the production or exchange of such information will not violate Sections 1 and 2
of the Sherman Act, 15 U.S.C. ss.ss. 1, 2, Section 7 and 7A of the Clayton Act,
15 U.S.C. ss.ss. 18, 18A, and Section 5 of the Federal Trade Commission Act, 15
U.S.C. ss. 45. For these purposes, the term "competitively sensitive
information" shall mean: (i) information concerning allowable and unallowable
costs, including rates for services and price quotes or bids provided to any
government agency or other customer, (ii) trade secrets or confidential
practices, methods or processes, or (iii) any business plans, strategic plans or
competitive strategies.
21
<PAGE>
9.3 Notice. All notices, reports, requests, demands and other
communications under or in connection with this Agreement or any other
agreements entered into between the Parties in connection with this Agreement
shall be written in the English language and shall be sent by registered
airmail, postage prepaid, return receipt requested, and addressed as follows,
and all notices, reports, requests, demands and other communications shall be
deemed to have been given on the date of receipt indicated on the return
receipt.
If to Farmland: Farmland Industries, Inc.
3315 N. Oak Trafficway
P. O. Box 7305
Kansas City, MO 64116
Attention: General Counsel
If to LOL: Land O'Lakes, Inc.
4001 Lexington Avenue North
Arden Hills, MN 55126
Attention: Law Department
If to CHS: Cenex Harvest States Cooperatives
PO Box 64089
5500 Cenex Drive
St. Paul, MN 55164-0089
Attention: Law Department
Any Party may change its postal address for the purpose of this Section 9.3 by
notice given to the other Parties in the manner set forth above.
9.4 Assignability; Transferability of Interests in the
Company. Except as otherwise expressly provided in this Agreement, no Party
shall assign or transfer or otherwise dispose of to any third party all or any
part of this Agreement or any of the rights or obligations to accrue hereunder,
without the prior written consent of the other Parties; provided that
restrictions, if any, on the transfer of any interest in the Company shall be as
set forth in the LLC Agreement.
9.5 Entire Agreement and Non-Waiver.
(a) This Agreement and the Ancillary Agreements constitute the
entire and only agreement among the Parties hereto relating to the
subject matter of the joint venture arrangement, and supersede and
cancel all previous negotiations, agreements, commitments or
representations (if any), oral or written, in respect thereto, and
shall not be discharged, changed or modified in any manner except by
instruments signed by duly authorized representatives of the
Parties.
22
<PAGE>
(b) Any failure by any Party to enforce any provision of this
Agreement shall not be considered as constituting a waiver of that
Party's right to enforce thereafter the same provision or other
provisions hereof whether or not of similar character.
9.6 Further Assurances. Each Party hereto agrees to perform
any further acts, and to execute and deliver (with acknowledgment, verification,
and/or affidavit, if required) any further documents and instruments, as may be
reasonably necessary or desirable to implement and/or accomplish the provisions
of this Agreement and the transactions contemplated herein.
9.7 No Third Party Beneficiaries. This Agreement is solely for
the benefit of the Parties hereto and no other person or entity is entitled to
rely upon or benefit from this Agreement or any term hereof, except by a writing
signed by all of the Parties hereto.
9.8 Modification. The terms of this Agreement may not be
modified, amended, or otherwise changed in any manner, except by an instrument
in writing executed by each of the parties hereto.
9.9 Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the permitted successors and assigns of
the parties hereto.
23
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the day and year first above written.
FARMLAND INDUSTRIES, INC.
By: /s/ Robert W. Honse
-----------------------------
Name: Robert W. Honse
Title: Executive Vice President and Chief Operating Officer
Date: February 3, 2000
CENEX HARVEST STATES COOPERATIVES
By: /s/ John D. Johnson
-----------------------------
Name: John D. Johnson
Title: President
Date: February 3, 2000
LAND O'LAKES, INC.
By: /s/ John E. Gherty
-----------------------------
Name: John E. Gherty
Title: President & CEO
Date: February 3, 2000
UNITED COUNTRY BRANDS LLC
By: /s/ Robert W. Honse By: /s/ John D. Johnson
----------------------------- -----------------------------
Name: Robert W. Honse Name: John D. Johnson
Title: Manager Title: Manager
Date: February 3, 2000 Date: February 3, 2000
24
EXHIBIT 10.39
EMPLOYMENT AGREEMENT
This Employment Agreement is made effective as of January 14, 2000
between Cenex Harvest States Cooperatives, a Minnesota cooperative corporation
(together with all affiliates, the "Company") and Noel Estenson, who is
presently the Chief Executive Officer of the Company ("Executive").
WHEREAS;
A. Executive is the principal officer of the Company and an
integral part of its management.
B. This Employment Agreement is intended to provide Executive a
severance benefit and to put his total compensation package in
a competitive range for 1998 through 2000, as described
herein.
NOW THEREFORE, it is hereby agreed by and between the parties as
follows:
1. Employment. The Company hereby employs Executive and Executive
hereby accepts employment with the Company, subject to the
terms and conditions hereinafter provided.
2. Term. The employment of Executive hereunder will be for the
period commencing on the effective date of this Agreement and
ending on December 31, 2000, provided, however, that the
Executive may terminate the employment relationship prior to
the expiration date as hereinafter provided. Executive hereby
agrees to tender his written resignation effective December
31, 2000.
3. Position, Duties, Responsibilities. Executive shall be
employed as the Chief Executive Officer. Executive shall
exercise such authority and perform such duties and services,
consistent with such position, as may be assigned to him from
time to time by the Board of Directors (the "Board").
4. Devotion of Time and Best Efforts. Except for vacations and
absences due to temporary illness, Executive shall devote his
best efforts during his employment to the performance of his
duties and to advance the Company's interests, as determined
by the Board. During his employment, Executive shall not,
without the prior approval of the Board be engaged in any
other business activity which conflicts with the duties of
Executive hereunder, whether or not such business activity is
pursued for gain, profit or other pecuniary advantage.
5. Early Termination.
a. Death. Executive's employment shall terminate upon
Executive's death. In the event of Executive's death,
any unpaid payments under paragraphs 6(c) and/or 8
shall be paid to his estate at the time they are
otherwise payable.
-1-
<PAGE>
b. Termination by the Company. The Company shall be
entitled to terminate Executive's employment prior to
December 31, 2000. In the event of any such
termination, however, the Company shall make the
payments required under paragraphs 6(a) and 6(b)
through December 31, 2000, and shall make the
payments required under paragraphs 6(c) and 8 at the
time they are otherwise payable.
c. Termination by Executive. Executive may terminate his
employment at any time and for any reason whatsoever,
effective upon delivery of written notice of
termination to the Company. In that event, Executive
will not be entitled to receive any further payments
pursuant to paragraph 6(a) herein, but will be
entitled to receive any unpaid payments pursuant to
paragraphs 6(c) and/or 8 herein at the times
specified below. In that event, Executive shall also
be entitled (a) to receive the unpaid portion of his
Base Salary, prorated to the date of termination, (b)
to receive reimbursement for any ordinary and
reasonable business expenses for which he had not yet
been reimbursed, (c) to receive payment for accrued
and unused vacation days, (d) to receive his
incentive compensation for each full or partial (on a
pro rata basis) year during which he was employed, to
the extent earned and accrued, pursuant to the terms
and conditions of the applicable incentive
compensation plan(s), (e) to receive payments under
the Company's pension, profit sharing, deferred
compensation or other benefit plans in which the
Executive has participated, all to the extent and in
accordance with the terms of such plans, and (f) to
continue certain health insurance at his expense
pursuant to COBRA.
6. Compensation.
a. Base Salary. During his employment, the Company shall
pay Executive a "Base Salary" at the rate of Five
Hundred Forty Thousand Eight Hundred Dollars
($540,800) per year, commencing on the effective date
of this Agreement, payable in accordance with the
Company's regular payroll practices and policies
which are in effect from time to time.
b. Annual Variable and Long-Term Incentive Compensation.
During his employment, Executive shall be entitled to
receive compensation under the annual Variable
Compensation Plan and the Management Long-Term
Incentive Plan, payable within the current customary
time frame, which is at least equal to amounts
payable pursuant to the terms of the Executive
Compensation Plan that was in effect for Cenex on
January 1, 1998. In calculating the amount of
incentive compensation under the Executive
Compensation Plan, it shall be assumed that Cenex had
met the projected earnings in the Cenex Long Range
Business Plan in effect on January 1, 1998. In the
event that either of these plans is discontinued or
amended effective during his employment, and the
amount of variable compensation
-2-
<PAGE>
due Executive under the replacement or amended plans
is less than Executive would have received under the
current plans, the Executive shall be entitled to
receive the amount of variable compensation that
would have been payable under the current plans.
c. One-Time Adjustment to Total Cash Compensation. The
Company shall make payment to Executive in the amount
of Six Hundred Sixty Thousand Dollars ($660,000),
payable at the earlier of (i) August 1, 2000 or (ii)
thirty (30) days prior to the effective date of any
consolidation of the Company's business with the
business of any other entity ("Consolidation").
7. Benefit Plans.
a. General. During the Employment Period, Executive
shall be eligible to participate in all executive
compensation and employee benefit plans or programs
generally applicable to senior management employees
of the Company pursuant to the terms and conditions
of such plans and programs. Nothing contained in this
Agreement shall preclude the Company from terminating
or amending any such plan or program.
b. Qualified Plans. Executive shall be entitled to
Company contributions and benefits with respect to
Base Salary under the Company's qualified pension
plans determined in the same manner as for other
participants in those plans, subject to any
contribution or benefit limitations. However, if such
plans as in effect on the date of execution of this
Agreement are modified in a manner which will reduce
future benefits under those plans for Executive,
then, as a means to make up for those reductions, the
Company shall establish a new nonqualified plan or
amend an existing nonqualified plan which shall
provide for any lost benefits under the Company's
pension plan.
c. Nonqualified Plans.
(1) Share Option Plan. Executive shall continue
to be eligible to participate in the Share
Option Plan. If this plan should be amended
or terminated prior to the end of the
Employment Period, the terms of the plan
will be maintained with respect to
Executive, unless Executive agrees to accept
the modified provisions of a revised plan or
a new plan intended to replace the plan.
(2) Supplemental Executive Retirement Plan.
Executive will be entitled to benefits under
this plan on terms no less favorable than
those set forth in the restatement of the
plan effective January 1, 1997; however, if
this plan should be amended or terminated
prior to the completion of payments under it
to Executive, the terms of the plan will be
maintained with respect to Executive, unless
Executive
-3-
<PAGE>
agrees to accept the modified provisions of a revised
plan or a new plan intended to replace that
restatement.
8. Severance Payment by the Company. The Company shall make a
severance payment to Executive in the amount of Six Hundred
Thousand Dollars ($600,000), payable at the earlier of (a)
August 1, 2000 or (b) thirty (30) days prior to the effective
date of any Consolidation. This severance payment shall not be
considered as income or compensation in determining
Executive's benefits under any non-qualified benefit plan,
including the Supplemental Executive Retirement Plan.
9. Other Executive Obligations. Executive agrees that the
following provisions will apply throughout Executive's period
of active or inactive employment, and will continue to apply
even if Executive's employment is terminated under Paragraph
5, regardless of the reason for termination:
a. Nondisclosure of Confidential Information. Except to
the extent required in furtherance of the Company's
business in connection with matters as to which
Executive is involved as an employee, Executive will
not, during the term of his employment and for an
unlimited period thereafter, directly or indirectly:
(1) disclose or furnish to, or discuss with, any
other person or entity any confidential information
concerning the Company or its business or employees,
acquired during the period of his employment by the
Company; (2) individually or in conjunction with any
other person or entity, employ or cause to be
employed, any such confidential information in any
way whatsoever or (3) without the written consent of
the Company, publish or deliver any copies, abstracts
or summaries of any papers, documents, lists, plans,
specifications or drawings containing any such
confidential information.
b. Non-Interference. Executive will not, during the term
of his employment and for an unlimited period
thereafter, directly or indirectly attempt to
encourage, induce or otherwise solicit any employee
or other person or entity to breach any agreement
with the Company or otherwise interfere with the
advantageous business relationship of the Company
with any person or entity. Executive specifically
agrees not to solicit, on Executive's own behalf or
on behalf of another, any of the Company's employees
to resign from their employment with the Company in
order to go to work elsewhere. Executive further
specifically agrees not to make any disparaging
remarks of any sort or otherwise communicate any
disparaging remarks about the Company or any of its
members, equity holders, directors, officers or
employees, directly or indirectly, to any of the
Company's employees, members, equity holders,
directors, customers, vendors, competitors, or other
people or entities with whom the Company has a
business or employment relationship.
-4-
<PAGE>
c. Non-Competition. Executive agrees that during the
term of his employment and thereafter for a period of
two (2) years, Executive will not directly or
indirectly engage in or carry on a business that is
in direct competition with any significant business
unit of the Company as conclusively determined by the
Board of Directors. Further, Executive agrees that
during this same period of time he will not act as an
agent, representative, consultant, officer, director,
independent contractor or employee of any entity or
enterprise that is in direct competition with any
significant business unit of the Company as
conclusively determined by the Board of Directors.
d. Consulting. Executive agrees to make himself
generally available to the Company as needed for
consulting, on terms to be separately agreed upon
between the parties, through December 31, 2001.
e. Cooperation in Claims. During the term of his
employment and for an unlimited period thereafter, at
the request of the Company, Executive will cooperate
with the Company with respect to any claims or
lawsuits by or against the Company where Executive
has knowledge of the facts involved in such claims or
lawsuits. Executive shall be entitled to reasonable
compensation for Executive's time and expense in
rendering such cooperation. Further, Executive will
decline to voluntarily aid, assist or cooperate with
any party who has claims or lawsuits against the
Company, or with their attorneys or agents. The
Company and Executive both acknowledge, however, that
nothing in this paragraph shall prevent Executive
from honestly testifying at an administrative
hearing, arbitration, deposition or in court, in
response to a lawful and properly served subpoena in
a proceeding involving the Company.
f. Remedies. The parties recognize and agree that,
because any breach by Executive of the provisions of
this Paragraph 9 would result in damages difficult to
ascertain, the Company shall be entitled to
injunctive and other equitable relief to prevent a
breach or threatened breach of the provisions of this
Paragraph 9. Accordingly, the parties specifically
agree that the Company shall be entitled to temporary
and permanent injunctive relief to enforce the
provisions of this Paragraph 9, that such relief may
be granted without the necessity of proving actual
damages. The parties further agree that the right to
such relief shall be in lieu of any right to recover
money damages for any such breach.
g. Enforceability. Executive agrees that considering
Executive's relationship with the Company, and given
the terms of this Agreement, the restrictions and
remedies set forth in Paragraph 9 are reasonable.
Notwithstanding the foregoing, if any of the
covenants set forth above shall be held to be invalid
or unenforceable, the remaining parts thereof shall
nevertheless continue to be valid and enforceable as
though the invalid or unenforceable parts have
-5-
<PAGE>
not been included therein. In the event the
provisions relating to time periods and/or areas of
restriction shall be declared by a court of competent
jurisdiction to exceed the maximum time periods or
areas of restriction permitted by law, then such time
periods and areas of restriction shall be amended to
become and shall thereafter be the maximum periods
and/or areas of restriction which said court deems
reasonable and enforceable. Executive also agrees
that the Company's action in not enforcing a
particular breach of any part of Paragraph 9 will not
prevent the Company from enforcing any other breaches
that the Company discovers, and shall not operate as
a waiver by the Company against any future
enforcement of a breach.
10. Notices. Notices hereunder shall be in writing and shall be
delivered personally or sent return receipt requested and
postage prepaid, addressed as follows:
If to Executive:
Noel Estenson
Cenex Harvest States Cooperatives
5500 CENEX Drive
Inver Grove Heights, MN 55077
If to the Company:
Chairman of the Board
Cenex Harvest States Cooperatives
5500 CENEX Drive
Inver Grove Heights, MN 55077
With a Copy to:
General Counsel
Cenex Harvest States Cooperatives
5500 CENEX Drive
Inver Grove Heights, MN 55077
11. Assignment. This Agreement is personal in its nature and the
parties hereto shall not, without the consent of the other,
assign or transfer this Agreement or any rights or obligations
hereunder; provided, however, that the provisions hereof shall
inure to the benefit of, and be binding upon each successor in
a change of control of the Company, whether by merger,
consolidation, transfer of all or substantially all assets,
sale or otherwise (and such successor shall thereafter be
deemed the "Company" for purposes of this Agreement).
-6-
<PAGE>
12. Binding Agreement. The provisions of this Agreement shall be
binding upon, and shall inure to the benefit of, the
respective heirs, legal representatives and successors of the
parties hereto.
13. Minnesota Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of
Minnesota, unless otherwise preempted by federal law.
14. Captions and Section Headings. Captions and paragraph headings
used herein are for convenience only and are not a part of
this Agreement and shall not be used in construing it.
15. Invalid Provisions. If any provision of this Agreement shall
be unlawful, void, or for any reason unenforceable, it shall
be deemed severable from, and shall in no way affect the
validity or enforceability of, the remaining provisions of
this Agreement.
16. Waiver of Breach. The failure to enforce at any time any of
the provisions of this Agreement, or to require at any time
performance by the other party of any of the provisions
hereof, shall in no way be construed to be a waiver of such
provisions or to affect either the validity of this Agreement
or any part hereof or the right of either party thereafter to
enforce each and every provision in accordance with the terms
of this Agreement.
17. Entire Agreement. Except as provided in paragraph 9(d), this
Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supersedes all
prior and contemporaneous agreements, representations and
understandings of the parties with respect thereto. No
modification or amendment of any of the provisions of this
Agreement shall be effective unless in writing specifically
referring hereto and signed by Executive and a member of the
Board upon authorization of the Board to do so.
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date set forth above.
EXECUTIVE CENEX HARVEST STATES
COOPERATIVES
By: /s/ Noel K. Estenson By: /s/ Steven Burnet
---------------------------- --------------------------------
Noel Estenson Chairman of the Board
7
EXHIBIT 10.40
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of January 14, 2000 by and between
John D. Johnson (hereafter "Johnson") and Cenex Harvest States Cooperatives, a
Minnesota cooperative corporation (together with all affiliates, the "Company").
WHEREAS, Johnson is an integral part of the Company's management;
WHEREAS, the Company is contemplating the possible full consolidation
of its business with the business of Farmland Industries, Inc. through
a merger or other similar transaction (the "Consolidation") and desires
to assure both itself and Johnson of continuity in the event of the
Consolidation; and
WHEREAS, the Company or its successor, after that Consolidation,
intends to appoint Johnson as its Chief Executive Officer on or before
January 1, 2004;
NOW, THEREFORE, it is hereby agreed to by and between the parties as
follows:
1. Employment
(a) The Company hereby agrees to and does hereby employ Johnson as
President and General Manager, and Johnson hereby agrees to
accept employment with the Company as President and General
Manager, for the period set forth in Paragraph 2 below (the
period of employment) upon the other terms and conditions set
forth in this Agreement.
(b) Upon the Company's consolidation with Farmland Industries,
Inc., Johnson will be appointed President of the consolidated
entity. Each of the Chief Executive Officer and Johnson will
have direct reports from the Senior Management team, as set
forth on Exhibit B. The Chief Executive Officer shall not
demote or discharge Johnson, unilaterally change the initially
agreed reporting relationships, or otherwise cause a material
adverse change to Johnson's status without the agreement of
the Executive Committee of the Board of Directors. If Johnson
claims that any such change in his status has occurred, he
will be entitled to seek relief from the Executive Committee
of the Board of Directors. If the Executive Committee supports
Johnson's position, it shall remedy the change in status. If
the Executive Committee does not support Johnson's position,
he will be entitled to resign his employment and receive the
severance benefits described in paragraph 5(b) below.
2. Period of Employment; Termination of Agreement
The period of employment shall commence on the date of this Agreement
and, subject to the provisions of Paragraphs 5 and 6 below, shall
continue for a rolling three (3) year
1
<PAGE>
period, provided that Johnson's employment may be earlier terminated by
either party subject to the rights and obligations of the parties set
forth herein.
3. Performance
Throughout the period of employment, Johnson agrees to devote his full
time and attention during normal business hours to the business of the
Company, except for earned vacations and except for illness or
incapacity.
4. Compensation
(a) For all services to be rendered by Johnson in any capacity
during the period of employment, Johnson shall be paid as
annual compensation a base salary of at least $600,000. The
Board will annually review Johnson's annual compensation and
determine what is appropriate for a cost of living increase,
merit increase, and/or increase in responsibilities or duties.
(b) During the term of his employment hereunder, Johnson shall be
compensated for fiscal year 2000 (ending August 31, 2000) with
annual variable pay of the maximum level eligible of 90% of
his base salary. The long term variable pay including the
years 1999, 2000, and 2001 shall be at the targeted level of
66.6% of the bonus potential. Johnson shall further be
entitled to any additional employee benefits separately made
available to him from time to time by the Board in its
discretion.
(c) The Company shall bear such ordinary and necessary business
expenses incurred by Johnson in performing his duties
hereunder as the Company determines from time to time,
provided that Johnson accounts promptly for such expenses to
the Company in the manner prescribed from time to time by the
Company.
5. Termination with Severance Allowance
(a) Termination by the Company Not for Cause. In the event of
termination of the employment of Johnson by the Company during
the period of employment for any reason other than for cause,
as defined in paragraph 6(a), death or disability, the Company
shall:
(i) pay Johnson a severance allowance in the amount of 2.99
times the greater of
(A) his then-current base salary plus
short-term and long-term target bonus ("Target
Bonus"), or
(B) the amount payable in base salary plus
Target Bonus for calendar year 1999;
2
<PAGE>
(ii) provide a five-year enhancement to his retirement plan,
except that no such enhancement shall be provided if the
termination occurs after Johnson has attained the age of 60;
(iii) include the amount of the severance paid as salary for
purposes of pension cash balance calculation;
(iv) bear the entire cost of Johnson's COBRA family health
insurance coverage for one (1) year;
(v) continue his family health insurance thereafter up to age
65 (or any revised age for Medicare eligibility), upon
Johnson's payment of the retiree premium rate, except for any
period during which Johnson is eligible for coverage, without
any exclusions for preexisting conditions, through another
employee group plan; and
(vi) continue his existing executive perquisites for a period
of three (3) years.
Said severance allowance shall be in lieu of all other severance
payable to Johnson under Company severance policies.
(b) Termination by Johnson if the Consolidation is closed on or
before December 31, 2001. If the Consolidation is closed on or
before December 31, 2001; and if (i) Johnson is not appointed
to the position of Chief Executive Officer of the consolidated
Company or its successor on or before January 1, 2004, or (ii)
Johnson resigns his employment at any time between the closing
of the Consolidation and December 31, 2003 pursuant to
paragraph 1(b), the Company shall:
(i) pay Johnson a severance allowance in the amount of 2.99
times the greater of
(A) his then-current base salary plus Target Bonus,
or
(B) the amount payable in base salary plus Target
Bonus for calendar year 1999;
(ii) provide a five-year enhancement to his retirement plan,
except that no such enhancement shall be provided if the
termination occurs after Johnson has attained the age of 60;
(iii) include the amount of the severance paid as salary for
purposes of pension cash balance calculation;
(iv) bear the entire cost of Johnson's COBRA family health
insurance coverage for one (1) year;
3
<PAGE>
(v) continue his family health insurance thereafter up to age
65 (or any revised age for Medicare eligibility), upon
Johnson's payment of the retiree premium rate, except for any
period during which Johnson is eligible for coverage, without
any exclusions for preexisting conditions, through another
employee group plan; and
(vi) continue his existing executive perquisites for a period
of three (3) years.
Said severance allowance shall be in lieu of all other severance
payable to Johnson under Company severance policies.
(c) Termination by Johnson if the Consolidation is not closed on or
before December 31, 2000. If the Consolidation is not closed on or
before December 31, 2000 and Johnson is not offered the position of
Chief Executive Officer of the Company on or before December 31, 2000,
this shall be deemed an event of termination without cause. In that
event, the Company shall:
(i) pay Johnson a severance allowance in the amount of 2.99
times the greater of
(A) his then-current base salary plus Target Bonus,
or
(B) the amount payable in base salary plus Target
Bonus for calendar year 1999;
(ii) provide a five-year enhancement to his retirement plan,
except that no such enhancement shall be provided if the
termination occurs after Johnson has attained the age of 60;
(iii) include the amount of the severance paid as salary for
purposes of pension cash balance calculation;
(iv) bear the entire cost of Johnson's COBRA family health
insurance coverage for one (1) year;
(v) continue his family health insurance thereafter up to age
65 (or any revised age for Medicare eligibility), upon
Johnson's payment of the retiree premium rate, except for any
period during which Johnson is eligible for coverage, without
any exclusions for preexisting conditions, through another
employee group plan; and
(vi) continue his existing executive perquisites for a period
of three (3) years.
Said severance allowance shall be in lieu of all other severance
payable to Johnson under Company severance policies.
(d) Additional Payments. In the event that Johnson becomes entitled to
payments under paragraph 5(a), 5(b), or 5(c) of this Agreement, the
Company shall cause its independent auditors promptly to review, at the
Company's sole expense, the applicability
4
<PAGE>
of Section 4999 of the Code to such payments. If such auditors shall
determine that any payment or distribution of any type by the Company
to Johnson or for his benefit, whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise
(the "Total Payments"), would be subject to the excise tax imposed by
Section 4999 of the Code, or any interest or penalties with respect to
such excise tax (such excise tax, together with any such interest and
penalties, are collectively referred to as the "Excise Tax"), then
Johnson shall be entitled to receive an additional cash payment (a
"Gross-Up Payment") within 30 days of such determination equal to an
amount such that after payment by Johnson of all taxes (including any
interest or penalties imposed with respect to such taxes), including
any Excise Tax, imposed upon the Gross-Up Payment, Johnson would retain
an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Total Payments. For purposes of the foregoing determination,
Johnson's tax rate shall be deemed to be the highest statutory marginal
state and Federal tax rate (on a combined basis) (including Johnson's
share of F.I.C.A. and Medicare taxes) then in effect. If no
determination by the Company's auditors is made prior to the time a tax
return reflecting the Total Payments is required to be filed by
Johnson, he will be entitled to receive a Gross-Up Payment calculated
on the basis of the Total Payments reported by Johnson in such tax
return, within 30 days of the filing of such tax return. In all events,
if any tax authority determines that a greater Excise Tax should be
imposed upon the Total Payments than is determined by the Company's
independent auditors or reflected in Johnson's tax return pursuant to
this Section 6, Johnson shall be entitled to receive the full Gross-Up
Payment calculated on the basis of the amount of Excise Tax determined
to be payable by such tax authority from the Company within 30 days of
such determination.
(e) Request and Release. In order to obtain the severance allowance
provided for in this Agreement, Johnson must submit a request for
severance and must sign a complete release of all claims. The Company
shall have no obligation to pay any severance allowance unless and
until Johnson shall have submitted the request for severance and signed
a full and complete release of all claims, to be drafted by Legal
Counsel for the Company.
6. Termination without Severance Allowance
(a) Termination by the Company for Cause. The Company may
terminate Johnson's employment for cause without incurring
further obligation. For the purpose of this Agreement,
termination of Johnson's employment shall be deemed to have
been for cause only:
(i) if termination of Johnson's employment shall have
been the result of an act or acts of fraud, theft or
embezzlement on the part of Johnson which, if
convicted, would constitute a felony and which
results or which is intended to result directly or
indirectly in gain or personal enrichment of Johnson
at the expense of the Company; or
5
<PAGE>
(ii) if termination of Johnson's employment results from
Johnson's willful and material misconduct, including
willful and material failure to perform his duties,
and Johnson has been given written notice by the
Board of Directors with respect to such and Johnson
does not cure within a reasonable time; or
(iii) if there has been a breach by Johnson during the
period of employment of the provisions of Paragraph 3
above, relating to the time to be devoted to the
affairs of the Company, and with respect to any
alleged breach of Paragraph 3 hereof, Johnson shall
have substantially failed to remedy such alleged
breach within thirty days from Johnson's receipt of
notice from the Board of Directors.
(b) Nonrenewal of Agreement. Except as otherwise provided in
paragraph 5(b) and/or 5(c) above, the Company may elect not to
renew this Agreement, and thereby to terminate Johnson's
employment hereunder without any severance obligations, upon
at least three (3) years' prior written notice to Johnson.
(c) Termination by Johnson. Johnson shall have the right to
terminate his employment in his sole discretion, with or
without cause, by providing thirty (30) days notice of his
intent to resign. Except as otherwise provided in paragraph
5(b) and/or 5(c) above, Johnson shall in that event receive no
further compensation or severance allowance.
(d) Death. In the event of Johnson's death during the period of
employment, the legal representative of Johnson shall be
entitled to the base or fixed salary provided for in Paragraph
4(a) above for the month in which death shall have occurred,
at the rate being paid at the time of death, and the period of
employment shall be deemed to have ended as of the close of
business on the last day of the month in which death shall
have occurred but without prejudice to any benefits, such as
life insurance, otherwise due in respect of Johnson's death.
(e) Disability
(i) In the event of Johnson's disability during the
period of employment, Johnson shall be entitled to an
amount equal to the base or fixed salary provided for
in Paragraph 4(a) above, at the rate being paid at
the time of the commencement of disability, for the
period of such disability but not in excess of twelve
(12) months from the beginning of the period that
establishes such disability, as described in
Paragraph 6(e)(iii) below.
(ii) The amount of any payments due under Paragraph
6(e)(i) shall be reduced by any payments to which
Johnson may be entitled for the same period because
of disability under any disability or pension plan of
the Company or of any division, subsidiary, or
affiliate thereof, or as the result of
6
<PAGE>
workers' compensation or nonoccupational disability
payments received from any government entity.
(iii) The term "Disability" as used in this Agreement,
shall mean an illness or accident occurring during
the period of employment which prevents Johnson from
performing the essential functions of his job under
this Agreement, with reasonable accommodations (as
defined by federal and Minnesota disability laws),
for a period of six consecutive months. The period of
employment shall be deemed to have ended as of the
close of business on the last day of such six-month
period but without prejudice to any payments due
Johnson from any disability policy or disability
insurance.
7. Performance Incentive
If the Company and Farmland Industries, Inc. complete the Consolidation
prior to December 31, 2001, and Johnson has not by then resigned or
been terminated for cause, Johnson shall become eligible to receive a
Performance Incentive payment in an aggregate amount equal to his base
salary plus short-term and long-term target bonus for calendar year
1999. The Performance Incentive shall be payable, in part or in whole,
upon attainment of the objectives set forth in Exhibit A.
8. Noncompetition
Johnson agrees that during the term of his employment and thereafter
for a period of two (2) years, he will not directly or indirectly
engage in or carry on a business that is in direct competition with any
significant business unit of the Company as conclusively determined by
the Board of Directors. Further, Johnson agrees that during this same
period of time he will not act as an agent, representative, consultant,
officer, director, independent contractor or employee of any entity or
enterprise that is in direct competition with any significant business
unit of the Company as conclusively determined by the Board of
Directors.
9. Successor in Interest
This Agreement and the rights and obligations hereunder shall be
binding upon and inure to the benefit of the parties hereto and their
respective legal representatives, and shall also bind and inure to the
benefit of any successor of the Company by merger or consolidation or
any purchaser or assignee of all or substantially all of its assets,
but, except to any such successor, purchaser, or assignee of the
Company, neither this Agreement nor any rights or benefits hereunder
may be assigned by either party hereto.
10. Construction
Whenever possible, each provision of this Agreement shall be
interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective
7
<PAGE>
only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining
provisions of this Agreement.
11. Governing Laws
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Minnesota.
12. Notices
Any notice required or permitted to be given under this Agreement shall
be sufficient if in writing, sent by Certified Mail, Return Receipt
Requested:
If to Johnson: John D. Johnson
10 Echo Lake Blvd.
Mahtomedi, MN 55115
If to the Company: Chairman of the Board
Cenex Harvest States Cooperatives
5500 CENEX Drive
Inver Grove Heights, MN 55077
With a copy to: General Counsel
Cenex Harvest States Cooperatives
5500 CENEX Drive
Inver Grove Heights, MN 55077
13. Entire Agreement
This Agreement shall constitute the entire agreement between the
parties, superseding the parties' Agreement of June 16, 1999 and any
prior agreements. This Agreement may not be modified or amended, and no
waiver shall be effective, unless by written document signed by the
Chairman of the Board and Johnson.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.
CENEX HARVEST STATES COOPERATIVES
/s/ John D. Johnson By: /s/ Steven Burnet
- ------------------------------ ------------------------------
John D. Johnson
Its: Chairman of the Board
------------------------------
8
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 crises in Asia have impacted,
and are expected to continue to impact, exports of U.S. agricultural products.
Demand may also be affected by changes in eating habits, by population growth
and increased or decreased per capita consumption of some products.
The Freedom to Farm Act of 1996 (the Farm Act), enacted in April of 1996,
may affect crop production in several ways. The Farm Act more narrowly defines
what will qualify as environmentally sensitive acreage for purposes of the
conservation reduction program, with the result that 3 to 4 million acres may be
put back into agricultural production in the future from a present enrollment of
36.4 million acres. The Farm Act also removes restrictions on the type of crops
planted (other than fruit and vegetables), allowing farmers to plant crops
having favorable prices and thereby increasing the production of those crops.
Increased production may lower prices of certain crops but increase the amount
available for export. However, the Farm Act also reduces Export Enhancement
Program subsidies, which may adversely affect the ability of the U.S. exports to
compete with those of other countries. Reduced demand for U.S. agricultural
products may also adversely affect the demand for fertilizer, chemicals, and
petroleum products sold by the Company and used to produce crops.
COMPANY SUBJECT TO PRICE RISKS. Upon purchase, the Company has risks of
carrying grain and petroleum, including price changes and performance risks
(including delivery, quality, quantity and shipment period), depending upon the
type of purchase contract entered into. The Company is exposed to risks of loss
in the market value of positions held, consisting of grain and petroleum
inventory and purchase contracts at a fixed or partially fixed price, in the
event market prices decrease. The Company is also exposed to risk of loss on its
fixed price or partially fixed price sales contracts in the event market prices
increase.
To reduce the price change risks associated with holding fixed price
positions, the Company generally takes opposite and offsetting positions by
entering into commodity futures contracts (either a straight futures contract or
an options futures contract) on regulated commodity futures exchanges. While
hedging activities reduce the risk of loss from changing market values, such
activities also limit the gain potential which otherwise could result from
changes in market prices. Hedging arrangements do not protect against
nonperformance of a contract. The Company's policy is to generally maintain
hedged positions in grain and petroleum, which are hedgeable, but the Company
can be long or short at any time. The Company's profitability is primarily
derived from margins on grain and products merchandised and processed, not from
hedging transactions.
At any one time, the Company's inventory and purchase contracts for
delivery to the Company may be substantial.
<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. In addition, baking and bread flour demand has declined during a period
when the milling industry has been expanding, which will continue to put
pressure on gross margins.
YEAR 2000. To date, the Company has not experienced any significant year
2000-related failures. The Company's management believes that the Company has
taken the steps reasonably necessary to resolve the year 2000 issue with respect
to matters within its control. While the Company has taken steps to determine
the extent of remediation efforts undertaken by key customers and suppliers,
there is no guarantee that the systems of other companies on which this Company
relies have been remediated in order to avoid having a material adverse effect
on the Company's operations or its financial results. To date, the Company has
not experienced any significant problems related to key customer or supplier
year 2000-related failures.
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> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-END> FEB-29-2000
<CASH> 55,234
<SECURITIES> 0
<RECEIVABLES> 715,390
<ALLOWANCES> 23,613
<INVENTORY> 670,549
<CURRENT-ASSETS> 1,614,767
<PP&E> 1,809,333
<DEPRECIATION> 820,232
<TOTAL-ASSETS> 3,136,924
<CURRENT-LIABILITIES> 1,376,074
<BONDS> 697,777
0
0
<COMMON> 0
<OTHER-SE> 1,122,046
<TOTAL-LIABILITY-AND-EQUITY> 3,136,924
<SALES> 3,938,874
<TOTAL-REVENUES> 3,985,242
<CGS> 3,886,806
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 358
<INTEREST-EXPENSE> 26,957
<INCOME-PRETAX> (746)
<INCOME-TAX> (5,737)
<INCOME-CONTINUING> 4,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,991
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
