<PAGE>
As filed with the Securities and Exchange Commission on October 5, 2000
Registration No. 333-36104
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
Southern States Cooperative,
Incorporated
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia
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(State or other jurisdiction of incorporation or organization)
5191
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(Primary Standard Industrial Classification Code Number)
54-0387200
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(I.R.S. Employer Identification No.)
6606 West Broad Street
Richmond, Virginia 23230
(804) 281-1000
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(Address and telephone number of registrant's
principal executive office)
N. HOPPER ANCARROW, JR., ESQ.
Vice President, General Counsel and Secretary
Southern States Cooperative, Inc.
6606 West Broad Street
Richmond, Virginia 23230
(804) 281-1205
----------------------------------------------------------
(Name, address and telephone number of agent for service)
Copy to:
F. CLAIBORNE JOHNSTON, JR., ESQ.
Mays & Valentine, L.L.P.
1111 East Main Street
Richmond, Virginia 23218
(804) 697-1214
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
<PAGE>
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Each Class Maximum Maximum Proposed Maximum Amount of
of Securities to Amount to Offering Price Aggregate Registration
be Registered be Registered Per Unit Offering Price Fee (1) (2)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Notes $50,000,000 100% $50,000,000 $13,200
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</TABLE>
(1) The registration fee was calculated in accordance with Section 6
of the Securities Act of 1933, as amended.
(2) The entire $13,200 fee was paid with our initial filing of this
Registration Statement on May 2, 2000.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PRELIMINARY PROSPECTUS
----------------------
$50,000,000
SOUTHERN STATES COOPERATIVE, INCORPORATED
Senior Notes
Due from Six Months to Seven Years From Date of Issue
____________________
Southern States Cooperative, Incorporated:
. We are a regional farmers' supply and marketing cooperative. Our principal
office is located at 6606 West Broad Street, Richmond, Virginia 23230, and
our telephone number is 804-281-1000.
The Offering:
. Manner of Offering: Our offering is not underwritten by any broker-dealer.
------------------
We will offer the Senior Notes through our Manager and our Assistant
Manager of Structured Finance, both of whom are officers and employees of
Southern States. We are not paying any commission or remuneration to these
employees based on sales of the Senior Notes.
. Proceeds: Because this offering is not underwritten, we have no assurance
--------
what amount of proceeds we may receive from the offering. If all of the
Senior Notes offered are sold, we will receive approximately $49.25 million
of the proceeds, after paying approximately $750,000 in offering expenses.
. Anticipated Trading Market: We do not expect there to be any trading market
--------------------------
for the Senior Notes and we will not make application to list the Senior
Notes on any securities exchange or to include them in any automated
quotation system.
The Senior Notes:
. Maturities: The Senior Notes will mature from six months to seven years
----------
from date of issue.
. Minimum Denominations: The Senior Notes will be issued in minimum
---------------------
denominations of $1,000, $10,000 or $100,000, and increments of $100, $500
and $1,000, respectively.
. Ranking: The Senior Notes will be unsecured and will rank equally with all
-------
other unsecured and unsubordinated debt of Southern States. The Senior
Notes will be effectively subordinated to our secured indebtedness, which
aggregated approximately $22.2 million as of June 30, 2000.
. Interest Rates: Interest on each series of Senior Notes will be paid at
--------------
fixed rates that we will establish as of the first business day of the
month for Senior Notes issued during that month. Once a rate for a
particular Senior Note is set, it will not be changed while that Senior
Note is outstanding.
. Interest Payment Dates: Interest on the six month Senior Notes will be paid
----------------------
at their maturity. Interest on all other Senior Notes will be paid
quarterly. Interest will accrue from the date of original issuance of each
Senior Note.
. Redemption: The Senior Notes may be redeemed by holders prior to maturity
----------
subject to an interest penalty except in limited circumstances. The five
and seven year Senior Notes are subject to redemption at the option of
Southern States after two years from the date of issuance.
. Form: The Senior Notes will be issued in certificated form.
----
This prospectus does not constitute an offer to sell or the solicitation of an
offer to buy, nor shall there be any offer or solicitation of such offer or sale
of the Senior Notes by any person, in any jurisdiction in which it is unlawful
for such person to make an offer, solicitation or sale.
We urge you to carefully read the "Risk Factors" section beginning on page 6,
where we describe specific risks associated with the offering, along with the
rest of this prospectus, before you make your investment decision.
____________________
Neither the Securities and Exchange Commission, nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
____________________
The date of this prospectus is ___________, 2000.
<PAGE>
[To follow front cover for EDGAR filing only]
You should rely only on the information contained in this document or to which
we have referred you. Southern States has not authorized anyone to provide you
with information that is different. This document may only be used where it is
legal to sell the Senior Notes. The information in this document may only be
accurate on the date of this document.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary............................................... 1
Risk Factors..................................................... 6
Use of Proceeds.................................................. 10
Selected Historical Consolidated Financial Information........... 11
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 15
Southern States.................................................. 34
Business of Southern States...................................... 39
Management....................................................... 56
Description of the Senior Notes.................................. 70
Plan of Distribution............................................. 82
Absence of Public Market, Redemption and Market Risk............. 83
Legal Matters.................................................... 84
Experts.......................................................... 84
Available Information............................................ 84
Disclosure Regarding Forward Looking Statements.................. 85
Index to Financial Statements.................................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
Because this is a summary, it does not contain all the information that may
be important to you. You should read the entire document before making your
investment decision. Southern States Cooperative, Incorporated's fiscal year
ends on June 30.
Southern States Cooperative, Incorporated
Southern States is a regional farmers' supply and marketing cooperative.
Southern States was originally incorporated in the State of Virginia on March
14, 1923, under the name "Virginia Seed Service." It subsequently changed its
name to Southern States Cooperative, Incorporated. It has operated continuously
since 1923.
. As a supply cooperative, Southern States provides agricultural
supplies and services to its members and others through its crops,
feed, petroleum, retail farm supply, and farm and home divisions.
. As a marketing cooperative, Southern States provides marketing
services for its members through its grain marketing and livestock
marketing divisions.
For many years, Southern States has served a wide range of rural and urban
customers in its traditional Mid-Atlantic territory of Delaware, Maryland,
Virginia, West Virginia, Kentucky and North Carolina. As a result of the
acquisitions of Michigan Livestock Exchange in April 1998 and the Gold Kist
Inputs Business in October 1998, Southern States also currently operates in
Michigan, Ohio, Indiana, Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi and South Carolina.
Southern States is owned by over 300,000 farmer and local cooperative
members. It is the principal cooperative in a cooperative distribution system
that encompassed over 700 retail locations as of June 30, 2000. Southern States
operates through several divisions:
. Crops division - procures, manufactures and distributes fertilizer,
seed and crop protectants to members and other customers.
. Feed division - procures, manufactures and distributes a wide range of
dairy, livestock, equine, poultry, pet and aquaculture feeds.
. Petroleum division - sells petroleum products, including all grades of
gasoline, kerosene, fuel oil, diesel fuel and propane, as well as
petroleum equipment.
. Retail Farm Supply division - operates company-owned and managed local
cooperative retail farm supply locations throughout the Mid-Atlantic,
Southeast and South Central regions of the United States.
. Farm and Home division - distributes farm and home products at
wholesale to retail farm supply locations and at retail through urban
and suburban retail locations.
. Grain Marketing division - operates a year-round market for produced
grains, primarily corn, soybeans, wheat and barley.
1
<PAGE>
. Livestock Marketing division - operates livestock auction facilities
and swine buying stations in Michigan, Ohio, Indiana and Kentucky.
The Offering
We are offering $50 million of Senior Notes, to be issued in various series
as specified in the table below.
Maturities and
Minimum Denominations........ The Senior Notes will be available for the
maturities and in the minimum denominations as
shown below:
<TABLE>
<CAPTION>
Minimum Initial
Series Initial Investment Interest Rate
---------------------------------------------------------------- ---------------------------- -----------------------
<S> <C> <C>
Six month maturity, Series A (Standard Certificate) $ 1,000 %
Six month maturity, Series B (Large Certificate) 10,000 %
Six month maturity, Series C (Jumbo Certificate) 100,000 %
One year maturity, Series D (Standard Certificate) 1,000 %
One year maturity, Series E (Large Certificate) 10,000 %
Two year maturity, Series F (Standard Certificate) 1,000 %
Two year maturity, Series G (Large Certificate) 10,000 %
Five year maturity, Series H (Standard Certificate) 1,000 %
Five year maturity, Series I (Large Certificate) 10,000 %
Seven year maturity, Series J (Standard Certificate) 1,000 %
Seven year maturity, Series K (Large Certificate) 10,000 %
</TABLE>
[room for sticker]
2
<PAGE>
Manner of Offering.......... We are not using an underwriter to offer the
Senior Notes. Instead, designated employees of
Southern States will be selling the Senior Notes
on our behalf. Our employees will not receive any
commission or remuneration based on sales of the
Senior Notes.
Ranking..................... The Senior Notes are unsecured. They will rank
equally with all of our unsecured and
unsubordinated debt obligations, which aggregated
approximately $170.2 million as of June 30, 2000.
The Senior Notes will be effectively subordinated
to our secured indebtedness, which aggregated
approximately $22.2 million at June 30, 2000. The
Indenture under which the Senior Notes will be
issued contains no restrictions on additional
indebtedness that we may incur. However, the most
restrictive debt limitation covenant in any of our
loan agreements limited our aggregate senior
indebtedness to approximately $274.5 million at
June 30, 2000, based on our capitalization at that
date.
Interest Rates.............. We will determine the interest rate on each of the
Senior Notes as described in "Description of the
Senior Notes--Interest Rates." In summary, we will
pay interest on Senior Notes of each series at
fixed rates which we will establish as of the
first business day of the month for all of the
Senior Notes issued during that month.
Interest Payment Dates...... We will pay interest on the six month Senior Notes
at their maturity. We will pay interest on all
other Senior Notes on January 1, April 1, July 1
and October 1 of each year, to holders of record
on the 15th day of the preceding month. Each
Senior Note will accrue interest from the date of
its original issuance.
Redemption at Your Option... We will redeem the Senior Notes held by any person
upon the holder's request. Early redemption will
be subject to an early redemption penalty, except
in the case of the holder's death or pursuant to
mandatory IRA withdrawals. In the case of six
month and one year Senior Notes, the penalty will
be equal to three months' interest. In the case of
Senior Notes with a maturity of more than one
year, the interest penalty will be equal to six
months' interest.
3
<PAGE>
Redemption at the
Option of Southern States... We may elect to redeem the five and seven year
Senior Notes before their maturities at our
option. We may redeem a five year or seven year
Senior Note anytime after two years from the date
of its issuance. The price we will pay on
redemption will be the face amount of the
particular Senior Note plus accrued interest to
the date of redemption.
Use of Proceeds............. We will use the net proceeds from the sale of the
Senior Notes to repay other senior indebtedness
and for other general corporate purposes.
Default..................... The indenture under which the Senior Notes will be
issued defines the circumstances which will
constitute an "event of default" with respect to
Senior Notes. These events include our failure to
pay the principal on the Senior Notes when due, or
our failure to pay any interest on the Senior
Notes within 60 days of becoming due. The holders
of a majority in principal amount of the
outstanding Senior Notes of any series may waive a
default for that series, except a default in the
payment of principal or interest on the Senior
Notes, or a default with respect to a covenant or
provision that cannot be amended or modified
without the consent of the holder of each
outstanding Senior Note of the series affected.
Holders of 75% in aggregate principal amount of
the Senior Notes of any affected series may, on
behalf of the holders of all Senior Notes of that
series, consent to the postponement of overdue
interest payments for up to three years from the
interest due date.
Modification of the
Indenture................... We may amend the indenture under which the Senior
Notes will be issued without the consent of the
holders of the Senior Notes in limited
circumstances. We may amend the indenture to
change the rights of holders of any series of
Senior Notes only with the consent of a majority
in aggregate principal amount of Senior Notes of
that series. Except with respect to the
postponement of overdue interest payments, no
amendment of the principal or interest payment
terms of the Senior Notes will be effective
against a holder without that holder's
consent.
4
<PAGE>
Covenants................... For as long as any of the Senior Notes are
outstanding, we are obligated to:
. pay the principal and interest on the Senior
Notes when due;
. maintain an office for transfer, exchange,
redemption and payment of the Senior Notes;
. keep a trustee appointed;
. deliver a certificate to the trustee at the
end of each year confirming our compliance
with our obligations under the Indenture; and
. set aside, or deposit with any third-party
paying agent, sufficient funds for the
payment of principal and interest on the
Senior Notes when due.
Anticipated Trading Market.. We do not expect there to be any trading market
for the Senior Notes. We will not make application
to list the Senior Notes on any securities
exchange or to include them in any automated
quotation system.
We urge you to carefully read the "Risk Factors" section beginning on page 6,
where we describe specific risks associated with the offering, along with the
rest of this prospectus, before you make your investment decision.
5
<PAGE>
RISK FACTORS
You should read carefully the following risk factors and the other sections
of this prospectus before purchasing any Senior Notes.
Risk Factors Relating to the Senior Notes
We do not expect there to be any significant secondary market for the Senior
Notes and consequently your ability to sell the Senior Notes if you wish to do
so before they mature may be limited.
There is no present trading market for the Senior Notes. We do not intend
to create or encourage a trading market for the Senior Notes, and it is highly
unlikely that any secondary trading market will develop. We do not intend to
apply for a listing of the Senior Notes on any securities exchange or to include
them in any automated quotation system. Any secondary market which might develop
for, and the market value of, the Senior Notes will be affected by a number of
factors which are independent of our creditworthiness. These factors include the
level and direction of interest rates, the remaining period to maturity of the
Senior Notes, our right to redeem the Senior Notes, our right to issue Senior
Notes at interest rates higher than the rates for the Senior Notes previously
issued, the aggregate principal amount of the Senior Notes outstanding and the
terms and availability of comparable investments. In addition, the market value
of the Senior Notes may be affected by numerous other interrelated factors,
including factors that affect the U.S. corporate debt market generally, and
Southern States specifically.
You should rely solely on our ability to repay at maturity the principal of
the offered Senior Notes as the source for liquidity for this investment. See
"Description of the Senior Notes--Interest Rates," "--Redemption at the Option
of Holders" and "--Redemption at the Option of Southern States."
Except in limited circumstances, holders of the Senior Notes who ask to have
their Senior Notes redeemed prior to their maturity will be penalized by the
deduction from the redemption price of an amount equal to up to six months'
interest.
You may submit your Senior Notes for redemption prior to maturity if you
wish to do so. However, we will impose an interest penalty for redemptions made
at your request prior to maturity for reasons other than death or mandatory IRA
withdrawals. We will permit early redemption without any interest penalty in the
case of death of a holder of Senior Notes or if the holder is holding a Senior
Note in an individual retirement account established under section 408 of the
Internal Revenue Code and the redemption is necessary to satisfy mandatory
withdrawal requirements. In the case of six month and one year Senior Notes, the
penalty will be equal to three months' interest. In the case of Senior Notes
with a maturity date of more than one year, the interest penalty will be equal
to six months' interest. The penalty could exceed the amount of interest paid or
accrued on the Senior Note to the redemption date, and result in a redemption
price that is less than the principal amount of the Senior Note being redeemed.
The effect of the interest penalty is more fully described under "Description of
the Senior Notes--Redemption at the Option of Holders." Depending on your
investment objective, the imposition of interest penalties may make these Senior
Notes an unsuitable investment for you.
6
<PAGE>
The indenture under which the Senior Notes will be issued does not limit our
ability to incur additional debt that ranks senior or equal to the Senior Notes,
which may increase the risk that we might not be able to meet our interest and
principal obligations on the Senior Notes or our other senior debt.
The indenture under which the Senior Notes will be issued does not limit
our ability to incur additional debt that ranks senior or equal to the Senior
Notes. As a result, we potentially could incur significant additional
indebtedness through the issuance of senior notes or other senior indebtedness,
including secured indebtedness which would effectively be senior to the
unsecured Senior Notes. The issuance of such additional indebtedness could
entail financial risks to Southern States and the holders of Senior Notes
because of the increased payments of interest and repayments of principal that
accompany higher levels of indebtedness, and the consequent increased risk that
Southern States might not be able to meet its required payments. Also, if
Southern States were liquidated, holders of secured indebtedness would
effectively rank senior to holders of unsecured indebtedness such as the Senior
Notes. However, our bank credit facilities do have debt limitation covenants
which restrict our ability to issue additional unsecured senior debt based upon
our capitalization. As of June 30, 2000, under those covenants our aggregate
debt limit for all senior debt was $274.5 million. At the same date our
financial covenants limited our secured indebtedness to the amount secured and
outstanding on that date, which was approximately $22.2 million in the
aggregate, plus amounts secured by liens given in connection with the purchase
or lease of new property or equipment, plus amounts up to $2.5 million for any
other purpose.
If holders of a large amount of Senior Notes submit their Senior Notes for early
redemption, it is possible Southern States may have to seek other sources of
funds in order to satisfy those redemption requests.
Southern States does not intend to maintain back-up lines of credit from
commercial banks or other lenders sufficient to cover the early redemption of
all or any substantial portion of the Senior Notes. If circumstances should
cause holders of a substantial amount of the Senior Notes to submit their Senior
Notes for early redemption in close proximity to each other, Southern States may
not have readily available bank lines of credit or other funds to satisfy all
such early redemption requests. In such an event, Southern States would have to
seek other sources of funding and, if such funding is not available, Southern
States might have to seek some accommodation with the holders of Senior Notes in
order to permit an orderly plan of payment of the Senior Notes.
Risk Factors Relating to Southern States
Declining commodity prices resulted in lower than anticipated revenues and
reduced net savings in fiscal 1998 and fiscal 2000 compared to prior years and
in a net loss in fiscal 1999.
Our recent operating results have been adversely affected by significant
declines in a wide range of agricultural commodity prices. Net savings for the
fiscal years ended June 30, 1998, and June 30, 2000, were $10.7 and $5.0
million, respectively. We experienced a loss for the fiscal year ended June 30,
1999, of $2.1 million. These results were significantly below the net savings of
$27.5 million achieved for the year ended June 30, 1997, and the $27.6 million
achieved for the year ended June 30, 1996. These reductions in net savings in
fiscal 1998 and 1999, in comparison to fiscal 1997 and 1996, were attributable
to significant price declines in
7
<PAGE>
petroleum products, grains, livestock and fertilizer coupled with volume
reductions in petroleum and grain marketing as a result of warmer than usual
weather during the heating season and drought and flood conditions that
adversely affected grain harvests. Agricultural commodity prices remained at
depressed levels during fiscal 2000; however, petroleum product prices recovered
significantly and in some cases are now at record or near-record highs.
Although some commodity prices have returned to more normal levels, we
expect lower than usual commodity prices in many of our product lines to
continue for some time in the future. As a result, our operating results in
fiscal 2001 and future periods may continue to be adversely affected unless and
until prices return to more normal levels.
A violation of financial covenants in our credit facilities and other borrowing
agreements could cause an acceleration of payment on a substantial portion of
our debt obligations and could affect our ability to pay interest and principal
on the Senior Notes.
If we experience an event of default under one of our loan agreements, it
may cause a default under other loan agreements. Our bank credit facilities, our
tax-exempt bond financings, and some of our other borrowing agreements relating
to our senior debt contain various financial covenants. If we violate any of
these covenants and do not cure the violation within the time permitted under
such agreements, the violation could constitute an event of default under one or
more of these agreements. In some cases, an event of default might permit the
lender to accelerate the payment of our indebtedness under a particular
agreement. Virtually all of our bank credit agreements, tax-exempt bond
financing agreements, capital leases and other financing agreements contain some
form of cross-default provision, which could permit our lenders to accelerate
the payment of at least a substantial portion of our total indebtedness if a
default occurs under any one of these agreements. Such an event could cause an
acceleration of payment under our various loan agreements and prevent us from
borrowing under our credit facilities if we needed to do so in order to make
payments of principal or interest on the Senior Notes. The Indenture under which
the Senior Notes will be issued does not contain any provision that would make
an event of default under any of Southern States' other loan agreements a
default with respect to the Senior Notes.
As a cooperative, we are restricted in our ability to raise equity in the
capital markets and, consequently, our ability to finance our current operations
and future growth is more limited than is the case for other types of business
organizations.
As a cooperative, we raise equity primarily through the retention of a
portion of our patronage refunds and through retention of net savings (net
earnings) generated by transactions with non-members. Under applicable law
governing cooperatives, the only persons eligible to own our membership common
stock are our members, and consequently we are restricted in our ability to
raise equity capital in the public capital markets. Thus, we are more limited in
our ability to finance our current operations and our future growth than other
types of business organizations. In the past we have relied primarily on bank
borrowings and other types of debt financings to finance a significant portion
of our business. Through the offering of the Senior Notes, we plan to reduce to
some extent our reliance on bank financings to support our business operations.
8
<PAGE>
The cyclical and often unpredictable nature of the agriculture business can
reduce our revenues and our ability to meet our payment obligations under the
Senior Notes.
Agriculture is generally cyclical in nature. Agricultural commodities
experience wide fluctuations in price, based largely on the supply of farm
commodities and demand for raw or processed products.
The cyclical nature of the agriculture business is something over which we
have no control; at times it negatively affects our revenues and operating
results. Currently, the agriculture industry is experiencing a period of
depressed prices for a wide variety of commodities. This has affected our
operating results in terms of lower sales, lower net savings and increased
credit risk among some of our customers. In addition, a portion of our business
is dependent on the demand of farmers for particular products, which is
influenced by the general farm economy and the success of particular crops.
The cyclical nature of our operations related to various commodities can
result in significant variations from year to year and over a period of years in
sales volume, cost of goods and cost of raw materials. These variations could
negatively affect our net income and reduce our ability to meet our payment
obligations with respect to the Senior Notes.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Weather conditions can materially impact the demand for our products and
services.
Historically, weather conditions have had a significant impact on the farm
economy and, consequently, our operating results. Weather conditions affect the
demand for, and in some cases the supply of, products, which in turn has an
impact on our prices. For example, weather patterns such as flood, drought or
frost can cause crop failures that in turn affect the supply of feed and seed
and the marketing of grain products, as well as the demand for fertilizer, crop
protectants, seeds and other agronomic supplies. In recent years, we have
experienced unusually severe weather conditions, including ice storms, floods
and wind damage, and a summer dearth of water and pasture in some states.
Weather conditions also directly affect the demand for petroleum products,
particularly during the winter heating season. Adverse weather conditions can
also impact the financial position of agricultural producers who do business
with us. This, in turn, may adversely affect the ability of the producers to
repay their obligations to us in a timely manner. Accordingly, the weather can
have a material effect on our business, financial condition, and results of
operations.
Competition in the agribusiness industry could materially adversely affect our
business and operating results.
We compete against large national and regional manufacturers and suppliers
as well as small independent businesses operating in our territory for sales of
feed, fertilizer, seed, grain, livestock, petroleum and farm supplies.
Competition with other suppliers is based primarily on price and service.
Agriculture, and the entire food industry, is consolidating rapidly. The
potential inability to compete successfully would result in a loss of customers,
which could have a material adverse effect on our business, financial condition,
and results of operations. For example, some of our competitors may offer
supplies or services on more favorable terms, and
9
<PAGE>
some may have capital resources, research and development staffs, facilities or
name recognition that may be greater than ours. See "Business of Southern
States--Other Factors Affecting the Business of Southern States--Competition."
Exposure to environmental liabilities could materially adversely affect our
business.
The use and handling of fertilizer, crop protectants and petroleum products
sometimes result in environmental contamination. We are governed by stringent
and changing federal, state and local environmental laws and regulations,
including those governing the labeling, use, storage, discharge and disposal of
hazardous materials. These laws and regulations impose liability for the cleanup
of environmental contamination. Because we use and handle hazardous substances
in our business, changes in environmental requirements or an unanticipated
significant adverse environmental event could have a material adverse effect on
our business, financial condition and results of operations. See "Business of
Southern States--Other Factors Affecting the Business of Southern States--
Matters Involving the Environment."
USE OF PROCEEDS
We are offering for sale $50 million principal amount of Senior Notes. The
offering is not underwritten and no assurance can be provided as to the amount
of net proceeds Southern States may receive as a result of this offering. If all
of the Senior Notes offered are sold, we will receive no more than approximately
$49.25 million of the proceeds from the sale of the Senior Notes, after paying
approximately $750,000 in offering expenses. Southern States intends to use the
net proceeds from the sale of the Senior Notes to repay other senior
indebtedness, including but not limited to indebtedness under Southern States'
$200 million three-year revolving credit facility with various commercial banks
that matures in January, 2002 and for other general corporate purposes. At June
30, 2000, Southern States had $140.2 million outstanding under this facility.
Interest rates under this facility are determined by Southern States under one
of three options: on a competitive bid process, LIBOR plus .95%, or a base rate
which is the higher of the prime rate or the federal funds rate plus .50%. As of
June 30, 2000, interest rates on advances under that facility varied from 7.29%
to 7.74% per annum. Amounts are drawn under this facility to fund general
working capital needs. If substantially less than the maximum proceeds are
obtained from the sale of the Senior Notes, and to the extent cash flow from
future operations is not sufficient, Southern States will borrow any necessary
additional funds under its revolving credit facility or other credit facilities
or from other lenders.
10
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial data, except
wholesale volume data, for Southern States are derived from the audited
financial statements of Southern States as of and for each of the years in the
five-year period ended June 30, 2000. The selected historical financial data,
except wholesale volume data, for the Gold Kist Inputs Business are derived from
the audited statements of operations and cash flows of the Gold Kist Inputs
Business for the year ended June 27, 1998. Since October 1998, the Gold Kist
Inputs Business has been operated as part of and incorporated into the financial
statements of Southern States. The following selected historical financial data
should be read together with information appearing in the respective
consolidated financial statements and accompanying notes included in
prospectus.
Southern States Cooperative, Incorporated
<TABLE>
<CAPTION>
As of and for the Fiscal Year Ended June 30
--------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net purchases by patrons.................... $1,470,414 $1,286,224 $1,026,630 $1,097,174 $1,008,841
Net marketing for patrons................... 73,365 76,541 92,863 115,972 110,667
Other operating revenue..................... 3,301 3,595 3,793 2,954 3,141
---------- ---------- ---------- ---------- ----------
Total revenue....................... $1,547,080 $1,366,360 $1,123,287 $1,216,100 $1,122,649
Cost of products purchased and
marketed.............................. 1,256,308 1,114,783 931,436 1,014,440 926,753
---------- ---------- ---------- ---------- ----------
Gross margin................................ 290,772 251,577 191,851 201,659 195,896
Selling, general & administrative........... 273,143 247,635 175,784 166,132 157,809
---------- ---------- ---------- ---------- ----------
Savings on operations................. 17,629 3,942 16,067 35,527 38,087
Other deductions (net)...................... 8,297 5,392 2,496 2,025 3,483
---------- ---------- ---------- ---------- ----------
Savings (loss) before income taxes.... 9,332 (1,450) 13,571 33,502 34,604
Distributions on Capital Securities,
Series A.............................. (3,600)
Income tax expense (benefit)................ 2,423 (597) 2,961 6,036 7,049
Undistributed earnings (loss) of
Statesman Financial Corporation,
net of tax............................ 74 (1,222) 57 35 39
Cumulative effect of change in
accounting method, net of tax......... 1,581 --- --- --- ---
---------- ---------- ---------- ---------- ----------
Net savings (loss).................. $ 4,964 $ (2,075) $ 10,667 $ 7,501 $ 27,594
========== ========== ========== ========== ==========
Distribution of Net Savings (Loss):
Dividends on stock.......................... $ 3,251 $ 1,008 $ 961 $ 805 $ 989
Patronage refunds payable in cash........... --- --- 2,379 6,884 6,669
Patronage refund allocations................ --- --- 3,703 10,591 10,306
Retained in the business.................... 1,713 (3,083) 3,624 9,221 9,630
---------- ---------- ---------- ---------- ----------
Net savings (loss)................... $ 4,964 $ $(2,075) $ 10,667 $ 27,501 $ 27,594
========== ========== ========== ========== ==========
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Statement of Cash Flows and Other
Statement of Operations Data:
Cash flow from (used by) operating
activities.......................... $ (7,042) $ 143,917 $ 33,602 $ 31,430 $ 25,631
Cash flow from (used by) investing
activities.......................... (341) (268,090) (43,833) (20,981) (19,690)
Cash flow from (used by) financing
activities.......................... (958) 127,563 8,730 (11,881) (141)
EBITDA (1).............................. $ 61,745 $ 47,969 $ 48,104 $ 65,704 $ 66,150
Interest expense........................ 27,863 28,413 16,859 15,566 15,237
Depreciation and amortization........... 25,455 22,394 17,612 16,598 16,267
CF Industries, Inc.
patronage dividend (2).............. --- --- 5,513 13,128 12,729
Capital expenditures.................... 31,633 46,603 33,905 19,945 18,529
</TABLE>
<TABLE>
<CAPTION>
As of and for the Fiscal Year Ended June 30
-------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......................... $160,407 $153,507 $ 90,098 $108,682 $103,911
Property, plant and equipment (net)..... 189,848 189,118 129,193 104,002 101,549
Investments............................. 119,815 114,786 103,874 82,369 71,549
Total assets............................ 677,484 681,748 462,296 409,160 385,551
Long-term debt.......................... 187,575 276,562 136,041 109,902 107,523
Selected Ratios:
Ratio of earnings to combined fixed
charges and preferred stock
dividends (3)....................... 1.02x --- 1.63x 2.76x 2.89x
Ratio of EBITDA to interest expense..... 2.22x 1.69x 2.85x 4.22x 4.34x
Long-term debt/EBITDA................... 3.04x 5.77x 2.83x 1.67x 1.63x
Current ratio (4)....................... 1.82x 1.73x 1.71x 2.00x 2.00x
Long-term debt to total
capitalization (5).................. .41x .61x 0.43x 0.38x 0.40x
Wholesale Volume Data (`000's):
Supply
Feed--tons.......................... 1,301 1,276 917 924 895
Fertilizer--tons.................... 2,031 1,891 1,155 1,137 1,054
Seed -pounds, 100 wt................ 1,907 1,948 1,673 1,384 1,305
Petroleum--gallons.................. 349,762 325,527 314,614 349,863 340,556
Marketing
Grain marketing-bushels............. 22,773 22,456 24,830 29,380 27,637
Livestock marketing-head
Cattle........................... 610 596 642 599 N/A
Swine............................ 1,151 1,466 2,689 2,516 N/A
Other............................ 129 136 136 120 N/A
Statesman Financial Corporation (6):
Total assets............................ $284,956 $287,559 $236,143 $152,400 $168,971
Receivables financed.................... 247,194 252,312 202,908 127,717 140,158
Debt.................................... 241,163 250,452 200,795 133,230 150,024
Total equity............................ 35,619 35,541 31,574 18,349 18,078
Net interest income (expense) and fee
income.............................. 5,282 (397) 4,152 3,793 3,560
Net income (loss)....................... 212 (3,611) 134 85 86
</TABLE>
12
<PAGE>
Gold Kist Inputs Business
For the Fiscal Year Ended
June 27, 1998
-------------
(Amounts in thousands)
Summary of Operations:
Net sales.......................................... $480,542
Cost of sales...................................... 393,711
--------
Gross margin..................................... 86,831
Distribution, administrative and general
expenses......................................... 105,291
--------
Loss on operations............................... (18,460)
Other deductions, (net)............................ (1,465)
--------
Loss before income taxes......................... (19,925)
Income tax benefit................................. 7,576
--------
Net loss......................................... $(12,349)
========
Statement of Cash Flows Data:
Net cash used in operating activities.............. $(17,389)
Net cash used in investing activities.............. (5,898)
Net cash provided by financing activities.......... 23,287
Other Data:
EBITDA (1)......................................... $ (1,062)
Interest expense................................... 12,675
Depreciation and amortization...................... 6,188
CF Industries, Inc. patronage dividend (2)......... 3,696
Capital expenditures............................... 4,729
For the Fiscal Year Ended
June 27, 1998
-------------
Selected Ratio:
Ratio of EBITDA/interest expense................... (0.08)x
Wholesale Volume Data (`000's):
Supply
Feed--tons....................................... 272
Fertilizer--tons................................. 1,126
Grain--bushels handled........................... 10,563
Cotton--bales ginned............................. 102
Peanut--tons handled............................. 35
13
<PAGE>
___________
(1) EBITDA is defined as savings (loss) before income tax plus interest,
depreciation and amortization expenses after the cumulative effect of
change in accounting method, net of tax. EBITDA should not be considered
as an alternative to net savings (as determined in accordance with
generally accepted accounting principles), as a measure of operating
performance or as an alternative to net cash provided by operating,
investing and financing activities (as determined in accordance with
generally accepted accounting principles) as a measure of its ability to
meet cash needs. Southern States believes that EBITDA is a measure
commonly reported and widely used by investors as a measure of operating
performance and debt servicing ability because it assists in comparing
performance on a consistent basis without regard to interest, taxes,
depreciation and amortization, which can vary significantly depending upon
capitalization structure, tax status (particularly when comparing a
cooperative company to a non-cooperative company), accounting methods
(particularly when acquisitions are involved) or non operating factors
(such as historical cost). Accordingly, this information and the related
other EBITDA ratios, including ratio of EBITDA to interest expense and long
term debt/EBITDA has been disclosed in this prospectus to permit a more
complete comparative analysis of operating performance relative to
companies within and outside of the industry and of Southern States' debt
servicing ability. However, EBITDA, EBITDA to interest expense and long
term debt/EBITDA may not be comparable in all instances to other similar
types of measures used by other companies in the agricultural industry.
(2) For further information concerning Southern States' relationship to CF
Industries, Inc., see "Business of Southern States--Investments in Other
Companies and Cooperatives."
(3) In the calculation of the ratio of earnings to combined fixed charges and
preferred stock dividends, earnings consist of net savings before income
taxes and the cumulative effect of accounting changes plus interest expense
on indebtedness, amortization of financing costs and the portion of rental
expense representative of the interest factor. Fixed charges consist of
interest expense on indebtedness before deduction of capitalized interest,
amortization of financing costs, the portion of rental expense
representative of the interest factor and the pre-tax earnings required to
cover preferred stock dividends. Earnings were sufficient to cover fixed
charges by $.7 million for the year ended June 30, 2000. Earnings were
insufficient to cover fixed charges by $2.6 million for the year ended June
30, 1999.
(4) Current ratio is defined as total current assets divided by total current
liabilities.
(5) Total capitalization is defined as the total of long-term debt, Capital
Securities, Series A, mandatorily redeemable preferred stock, preferred
stock, capital stock and patrons' equity.
(6) Southern States owns 38.4% of the common stock of Statesman Financial
Corporation. Statesman purchases significant amounts of receivables from
Southern States and provides agricultural production loans, building loans,
equipment loans, renovation loans, revolving credit loans and other loans
to and financing for customers of Southern States. See "Business of
Southern States--Affiliated Financing Services."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the
consolidated financial statements and accompanying notes included in this
prospectus.
General
Management's discussion of sales, operating margins (or losses) and other
factors affecting Southern States' pretax savings (or losses) during the fiscal
years ended June 30, 2000, 1999 and 1998 is based upon the following tables.
Operating margins, as utilized in the tables below, consist of divisional
(segment) operating results, including an allocation of interest expense based
upon divisional assets employed and excluding any allocation of general
corporate overhead.
Divisional Sales and Operating Margins
(in thousands)
<TABLE>
<CAPTION>
Sales for Operating Margins for
the fiscal year ended the fiscal year ended
---------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 1999 1998 2000 1999 1998
---------- ---------- ---------- ------- ------- -------
Crops $ 212,643 $ 193,745 $ 154,825 $15,436 $12,422 $16,866
Feed 178,215 181,287 145,582 9,997 11,826 6,121
Petroleum 276,714 165,645 193,098 9,334 6 1,650
Retail Farm Supply 592,157 532,287 336,260 2,817 (519) 4,855
Farm and Home 208,309 209,564 196,116 7,674 8,326 5,967
Marketing 76,159 79,637 94,517 (943) (380) 1,782
Other 2,883 4,194 2,889 (707) (1,169) (527)
---------- ---------- ---------- ------- ------- -------
Total $1,547,080 $1,366,359 $1,123,287 43,608 30,512 36,714
========== ========== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C>
General corporate overhead (37,876) (31,962) (23,143)
Income tax benefit (expense) (2,423) 597 (2,961)
Cumulative effect of change in accounting method, net of tax 1,581
Undistributed earnings (loss) of Statesman Financial Corp., net of tax 74 (1,222) 57
-------- -------- --------
Net savings (loss) $ 4,964 $ (2,075) $ 10,667
======== ======== ========
</TABLE>
Agriculture is both seasonal and cyclical in nature. As a result, our
sales and operating margins fluctuate greatly on a quarterly basis. The first
quarter is typically the weakest for both sales and operating margins, and
losses are expected. The second quarter also typically results in operating
losses, although sales are stronger than in the first quarter due principally to
increased sales of petroleum products. The third and fourth quarters are the
largest contributors to both sales and profitability for the year. See
"Business of Southern States--Other Factors Affecting the Business of Southern
States--Seasonality."
A major portion of Southern States' business is dependent on the demand of
farmers for the purchase of supplies and services, which is influenced by
weather, the general farm economy and the success of particular crops. Prices
of agricultural supplies are sensitive to world-wide economic and political
factors. Commodities marketed by Southern States on behalf of its members
fluctuate in price, based on the supply of such commodities and the demand for
the raw or processed products.
15
<PAGE>
Recent Developments
On July 31, 2000, Southern States consummated an agreement with Agway Inc.
of De Witt, New York, under which Southern States acquired the right to provide
wholesale product distribution and marketing services to Agway's network of
approximately 500 independent consumer dealers in the northeastern United
States. Under the agreement, Southern States also assumed Agway's existing
lease obligations on two regional distribution centers, one located in
Westfield, Massachusetts, and the other in Elizabethtown, Pennsylvania, and
office space in Syracuse, New York. The aggregate purchase price paid to Agway
by Southern States was approximately $22.4 million, broken down as follows.
Southern States purchased Agway's existing inventory at the distribution centers
for a purchase price of approximately $8.2 million. Southern States also
purchased Agway's existing current accounts receivable due from the Agway dealer
network for a purchase price of approximately $13.4 million. In addition,
Southern States purchased various distribution center equipment and other
related personal property in the transaction for approximately $800,000.
Southern States paid the approximately $22.4 million aggregate purchase price
through a cash payment of approximately $9.1 million and delivery of an
unsecured senior promissory note of Southern States in the principal amount of
$13.3 million, maturing January 31, 2003, bearing interest at the greater of the
weighted average interest rate calculated as of the 15th day preceding the
beginning of each calendar quarter
. paid by Southern States for loans under its revolving credit facility,
. paid by Agway for loans on its bank debt, or
. paid by Agway on letter of credit backed commercial paper notes sold by
Agway.
Interest is payable at the end of each calendar quarter and at maturity.
Under limited circumstances, Southern States may be required to repay all or a
portion of the outstanding purchase price indebtedness to Agway prior to the
date of maturity. Agway is obligated to repurchase any purchased accounts
receivable that are not collected by Southern States within 120 days of closing.
The two regional distribution center lease obligations assumed by Southern
States each expire in August 2006. Rent payments under the two leases aggregate
approximately $890,000 per annum for 2001 and approximately $990,000 per annum
for the remainder of the leases and are subject to a one-time adjustment in 2002
for the remaining five years of the leases based on the consumer price index.
Both leases contain options to renew exercisable by Southern States. The lease
for office space in Syracuse assumed by Southern States expires in August 2005.
Rent payments under that lease aggregate approximately $34,000 per annum for
2001, approximately $41,000 per annum for each of the next four years and
approximately $10,000 for 2005.
Under the terms of the agreement, Southern States also assumed
responsibility for future consumer product distribution to the Agway dealer
network, and all related dealer marketing, development, operations, distribution
and logistics associated with Agway's consumer dealer business. Southern States
has agreed to distribute particular Agway product lines to the Agway dealer
network, and Agway has licensed Southern States to use related Agway trade names
for
16
<PAGE>
this purpose. In this connection, Southern States has agreed to pay Agway
$100,000 on June 30, 2001, and annual payments thereafter, beginning on August
1, 2002, not to exceed $840,000 in any fiscal year, equal to .84% of the dollar
value of gross sales to dealers in the former Agway territory for each of the
years ending June 30, 2002 through 2010. Through this transaction, Southern
States has extended the geographic scope of its farm and home wholesale business
into the northeastern United States.
Acquisition and Integration of the Gold Kist Inputs Business
Effective October 1998, Southern States acquired the agriservices (or
"inputs") business formerly operated by Gold Kist Inc., a major southeastern
agricultural cooperative organization. Through this acquisition, Southern
States acquired an inputs business that was very similar to its own agricultural
supply operations, enabling it to:
. expand its agricultural supply activities and services into the
geographically contiguous, eight-state Gold Kist territory;
. increase its purchasing power with vendors;
. distribute its products through expanded distribution channels;
. increase the opportunity to provide livestock marketing services in the
area served; and
. achieve efficiencies and economies of scale, capitalizing on its
operating expertise as it combines the Gold Kist Inputs Business with
Southern States' operations.
The acquisition of the Gold Kist Inputs Business significantly enlarged
Southern States' operations, increasing its assets at the date of acquisition by
approximately $220 million and its membership base by approximately 29,000, and
on a pro forma basis, its sales by more than 40% at that time. This acquisition
solidified Southern States' position as a principal supplier of agricultural
inputs east of the Mississippi River.
Prior to the acquisition, Southern States developed a business plan to
improve the operating performance and reduce the operating losses the Gold Kist
Inputs Business had experienced in recent years under Gold Kist's management.
This plan contemplated that Southern States would:
. substantially reduce unprofitable business locations, particularly in
the West Texas and Mississippi Delta regions, through divestiture,
closure or other appropriate remedial steps;
. implement Southern States' credit underwriting standards and practices,
which require more stringent policies and controls over the approval and
monitoring of credit transactions;
. implement Southern States' commodity price risk management policies;
. reduce administrative costs through centralization of procurement,
accounting and administration; and
17
<PAGE>
. develop and expand the Southern States private dealer network in the
Gold Kist territory.
Consistent with Southern States' business plan for reducing the pre-
acquisition losses of the Gold Kist Inputs Business, through June 30, 2000, we
have closed or otherwise disposed of 30 store locations acquired as part of the
Gold Kist Inputs Business. These included all of our seven retail locations in
West Texas which we leased to an unrelated third party for a three year period,
also providing the lessee the option to purchase the properties. Southern
States accrued closure costs of approximately $200,000 in fiscal 1999, and
approximately $1.1 million in the first quarter of fiscal 2000, as part of the
opening balance sheet of the Gold Kist Inputs Business. At March 31, 2000, it
was determined that the actual facility closure costs were approximately
$575,000 less than the original estimate; accordingly, Southern States has
reversed the excess amount and reduced the value previously ascribed to the
acquired fixed assets.
Southern States anticipated that the implementation of more stringent
credit underwriting standards, although beneficial in the long run, initially
would adversely impact sales in the former Gold Kist territory because a number
of patrons would no longer qualify for credit approval. For this reason,
Southern States had anticipated an approximate 10% reduction in sales in the
former Gold Kist territory from those in the same period for the prior year.
Actual sales in the former Gold Kist territory for the year ended June 30, 1999,
were 30% lower (by approximately $70 million) than sales during the same period
in the prior year.
This decline was attributable to several factors, as drought conditions
reduced crop yields and low commodity prices reduced dollar sales volume to a
degree much greater than originally anticipated. Although it is difficult to
separate the impact of weather, low prices and more stringent credit standards,
Southern States believes that the imposition of tougher credit standards was the
predominant reason for the lower than expected sales in this territory.
Southern States anticipates a portion of the lost sales in the former Gold
Kist territory will be replaced as leased land is turned over to financially
stronger farmers, as sales to existing customers are expanded through cross-
selling techniques available through new computer systems and as Southern States
achieves an increasing market share through expanded product offerings in the
former Gold Kist territory through a new distribution facility in central
Alabama. In addition, there is substantial sales potential with the addition of
many private dealers and independent cooperatives in the former Gold Kist
territory, most of whom were signed up after the 1999 selling season ended.
Losses in the Gold Kist Inputs Business from unfavorable commodity futures
contracts were eliminated for the year ended June 30, 1999 through the
implementation of Southern States' commodity price risk management policies
concurrent with the date of acquisition. Losses from such transactions in the
former Gold Kist Inputs Business were $4.1 million for the year ended June 27,
1998.
In addition, Southern States achieved savings of approximately $7.0 million
as of June 30, 1999 in procurement, accounting and administration functions
through the immediate consolidation of these functions into Southern States'
existing operations resulting in reduced employment levels as compared to
historical. The consolidation of these functions resulted in
18
<PAGE>
reducing the number of employees in these areas from approximately 1,450 which
were employed at Gold Kist just prior to the purchase to approximately 900 as of
June 30, 1999.
Southern States has rapidly expanded its private dealer network into the
former Gold Kist territory. As of June 30, 2000, 123 new private dealer
locations in this new territory, including 30 independent cooperative locations,
had completed the Southern States certification process and were purchasing
product from Southern States. Nine other private dealer locations were in
various stages of that process. Approximately 30 other private dealers and
independent cooperatives throughout the former Gold Kist territory have been
identified as prospective private dealers for Southern States.
Overall, although Southern States did not achieve its sales goals or its
operating performance goals for the former Gold Kist territory for the year
ended June 30, 1999, it continues to believe that the acquisition of the Gold
Kist Inputs Business enhances Southern States' strategic position and that over
time the business in the new territory will make a significant positive
contribution to Southern States' business. Through savings in employee costs,
avoided credit losses and savings in other areas such as shrinkage, insurance
expenses and the use of precision ag (which is the use of satellite technology
to map areas for the application of fertilizer), Southern States made
substantial progress in reducing the Gold Kist Inputs Business operating losses
of $18.5 million in 1998 to less than $10 million in 1999.
The former Gold Kist Inputs Business is now operated as an integral part of
Southern States, and separate financial statements for that acquired business
are no longer produced. The operations of the former Gold Kist Inputs Business
for the fiscal year ended June 30, 2000, are fully reflected in Southern States'
financial statements for that period, included elsewhere herein, and in the
discussion for each of Southern States' relevant operating divisions under
"--Historical Results of Operations--Fiscal 2000 Compared to Fiscal 1999"
below.
Historical Results of Operations
Fiscal 2000 Compared to Fiscal 1999
While sales and operating margins are typically weak during the first six
months of the fiscal year, they are usually mitigated by sales of petroleum
products. This favorable impact from the sale of petroleum products continued
during the second half of fiscal 2000. Through June 2000, sales and operating
margins in petroleum products were greatly improved due to overall net increases
in worldwide petroleum prices and were partially responsible for the significant
improvement in Southern States' operating margin in the current year. In
addition, the early spring weather in much of Southern States' operating region
resulted in strong sales in the spring which positively impacted operating
results.
Net sales of $1.5 billion for the year ended June 30, 2000, reflected a
13.2% increase of $180.7 million from $1.4 billion million for the comparative
1999 period. Despite the inclusion of the net sales of the Gold Kist Inputs
Business since its October, 1998 acquisition, net sales were lower than
anticipated primarily as a result of lower than projected Feed, fertilizer
(which is
19
<PAGE>
included in the Crops division) and Marketing volumes. These volumes
have continued to be impacted negatively by worldwide supply and demand factors
for fertilizer and grain products.
The net savings for the year ended June 30, 2000 of $5.0 million were $7.1
million higher than the $2.1 million loss for the prior fiscal year. Improved
profitability in Southern States' Petroleum division due to increased volume at
higher prices was partially responsible for the improved operating results.
Southern States recognizes rebates from crop protection and seed suppliers as a
reduction of the cost of products purchased. Due to changes in rebate programs
and additional information available to Southern States, Southern States
recognized an additional $9.3 million of rebates during fiscal 2000. Rebates
recognized in fiscal 2000 as a reduction in cost of products purchased
approximated $27.1 million. It is likely that rebates recognized in fiscal 2001
will be approximately $9.0 million less than those recognized in fiscal 2000. A
gain of approximately $1.6 million resulting from the cumulative effect of an
accounting change also favorably impacted overall results. Effective July 1,
1999, Southern States changed its method of accounting for refunds from the
Southern States Insurance Exchange, as described in Note 21 of the Notes to
Southern States' Consolidated Financial Statements included in this prospectus
at F-33.
Crops
Sales in the Crops division increased $18.9 million (9.8%) from $193.7
million for the fiscal year ended June 30, 1999 to $212.6 million for the
comparative 2000 period. Significant sales increases were recorded in the seed,
fertilizer and crop protection product lines which are the three major
components of the Crops division. Fertilizer sales, which comprised
approximately 68% of the Crops division sales, rose due to an increase in unit
sales primarily occurring in the acquired Gold Kist Inputs Business territory.
The increased unit volume was partially offset by a decrease in sales prices. As
a result, overall fertilizer sales were less than projected for the year. Higher
seed sales were due to improved selling prices.
The operating margin for the Crops division of $15.4 million represented a
$3.0 million improvement compared to the same period in the prior year ($12.4
million). The primary reasons for this greater profitability were an improved
gross margin, gains on the disposal of fixed assets and increased finance
income. The improved gross margin was favorably impacted by $1.7 million of
additional rebates from Southern States' crop protection suppliers. Higher
selling, general and administrative expenses and increased allocated interest
expense partially offset the improved gross margin, finance income and other
gains.
Feed
Feed division sales decreased $3.1 million (1.7%) from $181.3 million for
the fiscal year ended June 30, 1999, to $178.2 million for the comparative 2000
period. The decrease was caused primarily by a decrease in average unit selling
prices.
The operating margin for the Feed division decreased approximately $1.8
million from $11.8 million for the fiscal year ended June 30, 1999, to $10.0
million for the comparative 2000 period. The decrease in operating margin
resulted from increased administrative expense, higher compensation and
increased selling expense.
20
<PAGE>
Petroleum
Petroleum division sales increased $111.1 million (67.1%) from $165.6
million for the fiscal year ended June 30, 1999, to $276.7 million for the
comparative 2000 period. The overall sales revenue increase resulted from a
72.5% average unit price increase and a 7.7% increase in gallons sold.
The Petroleum division's operating margin increased $9.3 million from a
break even level for the year ended June 30, 1999, to a profit of $9.3 million
for the 2000 period. Higher unit prices not only produced higher sales revenues
but also resulted in an increased gross margin both in total and on a per gallon
basis for gasoline and fuel oil products. The improved unit margin was due to
selling inventory purchased at prices lower than current market prices. With
market prices at historical highs, prices will most likely return to more normal
levels in fiscal 2001, therefore reducing profit margins as compared to the
current year. In fiscal 1999, Southern States recorded a $3.0 million provision
for environmental remediation, which negatively impacted results for the
Petroleum division in that year. The Petroleum division experienced increased
operating expenses, particularly in the retail portion of the division, due to
increased employee expenses and higher vehicle operating costs.
Retail Farm Supply
Sales of the Retail Farm Supply division increased $59.9 million (11.2%)
from $532.3 million for the fiscal year ended June 30, 1999, to $592.2 million
for the comparative 2000 period. The substantial sales increase is primarily
attributable to the sales increase in the acquired Gold Kist Inputs Business
territory of approximately $61.5 million. This increase reflected sales in that
territory for twelve months, whereas sales in the prior year only included
approximately nine months for the Gold Kist Inputs Business. Sales in the
acquired Gold Kist territory in both periods were adversely impacted by
continued price deflation and drought conditions in portions of the
Southeast.
Retail Farm Supply's operating margin at $2.8 million for fiscal 2000 was
$3.3 million higher than the $.5 million operating loss recorded in fiscal 1999.
The improved operating margin in the current year was largely due to gross
margin increases in fertilizer, feed and crop protection products. Specifically,
the margin on crop protection products and seed products benefited from $7.6
million of increased rebates from Southern States' suppliers of these products.
Income from finance charges also improved substantially. Higher salaries and
related compensation costs, an increase in allocated interest expense as well as
additional expenses for leased equipment, resulted in an increase in expense in
the current year. In addition, an increase of $1.1 million in the reserve for
environmental remediation liabilities decreased operating margin by the same
amount.
Farm and Home
Sales in the Farm and Home division decreased $1.3 million (.6%) from
$209.6 million for the fiscal year ended June 30, 1999, to $208.3 million for
the 2000 period. This decrease is
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primarily the result of a $1.8 million (3.1%) decrease in the sales recorded at
Wetsel, Inc., an independently operated, wholly-owned subsidiary of Southern
States. Sales increased in the first three quarters of fiscal 2000 primarily due
to additional sales of snow and ice removal products resulting from winter
storms in January and the earlier than normal sale of farm supplies resulting
from the early spring weather in much of Southern States' territory. This
increase was offset by slow sales in the late spring caused by the cooler and
wetter than normal weather which negatively impacted the sales of garden
products.
Operating margin for the Farm and Home division decreased $.7 million from
$8.3 million for the year ended June 30, 1999, to $7.7 million for the 2000
period. The lower operating margin resulted from higher operating expenses in
the Farm and Home division that were attributable to higher employee costs,
increased depreciation and amortization, and higher advertising and promotion
expense. The increased operating expenses in the Farm and Home division were
partially offset by a gain from the disposal of fixed assets. An improved gross
margin at Wetsel also partially negated the effects of higher operating
expenses.
Marketing
Sales in the Marketing division, including Michigan Livestock Exchange,
decreased $3.5 million (4.4%) from $79.6 million for the fiscal year ended June
30, 1999 to $76.2 million for the 2000 period. This decrease is primarily
attributable to reduced soybean and corn unit sales volume at lower selling
prices within the Grain Marketing Division. Sales of wheat were down in the
current period due to lower selling prices. The decline in grain marketing
revenue resulted from a combination of influences. Drought conditions in the
summer of 1999 impacted the quality and the quantity of wheat and corn produced
in Southern States' Mid-Atlantic territory and resulted in a lower than
anticipated volume in bushels marketed. A large United States grain harvest
resulted in a $.15 (4.3%) reduction in the average unit price per bushel for
grain marketed. Sales for the Michigan Livestock Exchange also decreased during
this period due primarily to a decrease in livestock volume and the closure of
operations of a significant customer in the prior fiscal year.
Operating margin for the Marketing division decreased $.6 million from $.4
million loss for the year ended June 30, 1999, to a $.9 million loss for the
2000 period. The decrease in operating margin was primarily revenue related.
In addition, the grain marketing division also experienced increased expenses
mainly due to higher utilities, insurance and allocated interest expense.
Michigan Livestock Exchange realized lower operating expenses primarily through
decreased compensation, rent and vehicle operating expense.
General Corporate Overhead
General corporate overhead, consisting primarily of general and
administrative costs not allocated to the divisions (such as information
systems, human resources and central management costs offset by various
miscellaneous income items), increased $5.9 million, from $32.0 million for the
year ended June 30, 1999, to $37.9 million for the comparative 2000 period. The
increase was due mainly to higher compensation expenses related to the acquired
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Gold Kist Inputs Business, which Southern States owned for the entire fiscal
year 2000, as opposed to only approximately nine months in the prior fiscal
year. Depreciation, merchandising and promotion, and professional services also
increased.
Excluding distributions on capital securities, company-wide interest
expense which is substantially allocated to operating divisions based on assets
employed and included as a charge against divisional margins, decreased
approximately $.6 million (2.0%) from $28.4 million for the year ended June 30,
1999, to $27.9 million for the 2000 period. Receivables from the additional
sales generated in the former Gold Kist territory resulted in additional
discounts on receivables sold to Statesman Financial Corporation, which are
classified as interest expense. These discounts partially offset the reduced
interest expense on debt.
Interest Income and Service Charges
Interest income including finance charges increased $.5 million due to
Southern States benefiting from owning accounts receivable arising in the former
Gold Kist territory for the entire fiscal 2000 as compared to approximately nine
months in fiscal 1999.
Miscellaneous Income, net
Miscellaneous income, net decreased $4.0 million from $11.8 million for the
year ended June 30, 1999 to $7.8 million for the comparative 2000 period. The
current year includes a $.3 million loss on discontinued programs whereas the
amount recorded in the prior year was insignificant. The current year reflects
the expensing of $1.1 million of fees related to a discontinued public offering
of debt securities. The prior year included contract settlement income totaling
$1.3 million from the closure of operations of a significant customer and
additional income from joint ventures that totaled approximately $.5 million.
These unfavorable variances were partially offset by an increase in the gain on
the disposal of fixed assets in the current year.
Provision for Income Tax Expense (Benefit)
The income tax expense for fiscal year 2000 increased from an income tax
benefit of $.6 million in fiscal year 1999 to an expense of $2.4 million for
fiscal 2000, an increase of $3.0 million. Southern States' increase in savings
before income taxes was primarily responsible for the additional income tax
expense. The effective tax rate was 42.3% in fiscal 2000 and was 41.2% in fiscal
1999.
Undistributed Earnings (Loss) of Statesman Financial Corporation
During fiscal 2000, Southern States' undistributed earnings from its
interest in Statesman Financial Corporation, net of income taxes, were
approximately $74,000 compared to a loss in fiscal 1999 of $1.22 million, net of
income taxes, resulting in an increase of $1.3 million. The improvement was due
to a lower provision for credit losses and reduced general and administrative
expenses in fiscal 2000.
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<PAGE>
Fiscal 1999 Compared to Fiscal 1998
Net sales of $1.4 billion increased approximately $243 million (21.6%) from
$1.1 billion in 1998. The higher net sales, which is reflected in the Retail
Farm Supply, Feed and Crops divisions, were due to the additional volume from
the acquisition of the Gold Kist Inputs Business in October, 1998. These
increases were partially offset in the Petroleum, Marketing and Feed divisions
which experienced decreases in average commodity prices ranging from 4.9% in
fertilizer to 20.6% in petroleum. Net loss for 1999 amounted to $2.1 million, a
decrease of approximately $12.8 million from a net savings of $10.7 million in
1998. Petroleum and grain prices in particular were related to world-wide
supply and demand factors.
Crops
Sales of the Crops division increased $38.9 million (25.1%) from $154.8
million in 1998 to $193.7 million in 1999. Fertilizer sales, which comprise
approximately 68.6% of Crops division sales, increased approximately 45.6%. A
63.8% increase in fertilizer tonnage was partially offset by a 4.9% decline in
selling prices. The majority of this increase in tonnage resulted from
increased sales of fertilizer and crop protection products primarily in the
former Gold Kist Inputs Business territory. Sales of seed, which comprise
approximately 12.8% of Crops division sales, were flat. Sales of crop
protection products, which comprise approximately 18.6% of Crops division sales,
increased by 14.7% from 1998 to 1999.
Operating margin for the Crops division decreased by $4.4 million from
$16.9 million in 1998 to $12.4 million in 1999. The decrease was the result of
higher employee costs ($3.7 million), increased allocated interest ($2.0
million) and lease expense ($1.1 million) in the seed and crop protection areas
and are attributable to the acquisition of the Gold Kist Inputs Business in
October, 1998.
Feed
Sales of the Feed division increased $35.7 million (24.5%) from $145.6
million in 1998 to $181.3 million in 1999. This increase resulted primarily
from a 39.2% increase in tonnage, partially offset by a 13% decrease in the
average unit-selling price. The majority of the increased tonnage is
attributable to the acquisition of the Gold Kist Inputs Business in October,
1998.
Operating margin for the Feed division increased $5.7 million from $6.1
million in 1998 to $11.8 million in 1999. The increase in operating margin
primarily resulted from the increase in tonnage. This was partially offset by
the lower selling prices and increased employee expenses resulting from the
acquisition of the Gold Kist Inputs Business. Feed division operating margin as
a percentage of sales for the 1999 fiscal year increased from 4.2% for the prior
period to 6.5% for the comparative 1999 period. This increase in profit
primarily resulted from a 16% decrease in the cost of raw materials which was
partially offset by a 13% reduction in average selling prices.
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<PAGE>
Petroleum
Sales of the Petroleum division decreased $27.5 million (16.6%) from $193.1
million in 1998 to $165.6 million in 1999. The overall sales revenue decline
resulted from the net impact of an average unit selling price decrease of
approximately 20.6%. In addition, the decrease in heating degree-days in 1999
led to significantly less demand for heating oil. This was partially offset by
a volume increase of 3.5%. Higher gasoline sales produced most of this
increase.
The Petroleum division's operating margin decreased from $1.7 million for
1998 to break even ($0 operating margin) for 1999. In the second quarter of
fiscal 1999, the Petroleum division recorded a $3.0 million provision related to
the estimated cost to remediate ground water contamination at an operating site.
Offsetting this were improvements in the gross margin due to favorable purchase
variances when compared to the prior year as well as a reduction in retail
operating expenses.
Retail Farm Supply
Sales of the Retail Farm Supply division increased $196 million (36.8%)
from $336.3 million in 1998 to $532.3 million in 1999. The increase in sales
was primarily attributable to sales in the former Gold Kist Inputs Business of
approximately $206 million in revenue since its acquisition in October, 1998.
The addition of the Gold Kist Inputs Business increased unit volume in seed,
fertilizer and crop protection products. These increases were slightly offset
by a decrease in petroleum revenues due to the net decline in worldwide
petroleum pricing compared to the corresponding 1998 period.
Operating margin for the Retail Farm Supply division decreased $5.4 million
from $4.9 million for 1998 to a loss of $.5 million for 1999. The increase in
operating losses was primarily attributable to losses in the acquired Gold Kist
Inputs Business territory of approximately $5 million since its acquisition in
October, 1998. These increased losses mainly resulted from increased employee
related costs, additional operating lease expense and depreciation resulting
from the acquisition.
Farm and Home
Including sales of Wetsel, Inc., sales of the Farm and Home division
increased $13.5 million (6.9%) from $196.1 million for 1998 to $209.6 million
for 1999. This increase resulted from the higher sales volume of Wetsel, Inc.,
which grew by $2.3 million (4.0%), as well as higher sales in the urban and
suburban area stores over the same period.
Farm and Home operating margin increased by $2.3 million from $6.0 million
in 1998 to $8.3 million in 1999. The increase in operating margin primarily
resulted from higher sales volume at a flat margin percentage in both the urban
and suburban stores and at Wetsel, Inc.
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Marketing
Sales in the Marketing division decreased $14.9 million (15.8%) from $94.5
million in 1998 to $79.6 million in 1999. Livestock marketing revenues of $10.9
million, attributable to the acquisition of Michigan Livestock Exchange on April
1, 1998, served to partially offset the decrease. Grain bushels marketed
decreased 9.6% from 1998 to 1999 with large decreases in wheat, corn and barley
bushels marketed, which were partially offset by an increase in soybean bushels
marketed.
Operating margin for the Marketing division decreased $2.2 million, from
$1.8 million in 1998 to a loss of $.4 million in 1999. Decreased profitability
primarily resulted from lower grain marketing volume and a relative increase in
the cost of marketing which combined to produce a $1.3 million decrease in the
gross margin. In addition, increased employee related expenses and
administrative expenses unfavorably impacted the results for the Michigan
Livestock Exchange.
General Corporate Overhead
General corporate overhead increased approximately 37.3% from $23.3 million
for 1998 to $32.0 million for 1999. The increase resulted primarily from
increased employee related expenses ($8.2 million) and higher retail support
services, ($1.0 million). Company wide interest expense, which is substantially
allocated to operating divisions based on assets employed and included as a
charge against divisional margins, increased $11.6 million (68.6%) from $16.9
million in 1998 to $28.4 million in 1999. This was primarily as a result of
higher borrowing levels to finance the acquisition of the Gold Kist Inputs
Business.
Interest Income and Service Charges
Interest income, including finance charges, increased $3.4 million due to
the growth of the Company's accounts receivable portfolio which resulted in
increased finance charges of approximately $2.6 million. The growth in accounts
receivable was mainly due to the addition of receivables purchased in the
acquisition of the Gold Kist Inputs Business on October 13, 1998. Interest
income increased approximately $856,000 due to accrued interest on the purchase
price adjustments relating to the Gold Kist acquisition.
Miscellaneous Income, net
Miscellaneous income, net increased by $5.2 million from $6.6 million in
fiscal 1998 to $11.8 million in 1999. The increase reflects a $1.3 million
increase in the gain on the disposal of fixed assets in the current year, a $1.3
million increase in contract settlement income from the closure of operations of
a significant customer and $2.0 million increase from numerous sources, none of
which, individually, was material.
Provision for Income Tax Expense (Benefit)
Income taxes in 1999 were a benefit of $.6 million, a decrease of $3.6
million from $3.0 million expense in 1998 primarily due to a $15.0 million
decrease in pretax net savings. The effective income tax rate was 41.2% in 1999
versus 21.8% in 1998. Because the Company did
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not pay patronage refunds during fiscal year 1999, the effective tax rate
increased from the corresponding period in 1998. Also, see Note 12 of Notes to
Southern States' Consolidated Financial Statements for an analysis of the
differences between the statutory income tax rate and Southern States' effective
income tax rate.
Undistributed Earnings (Loss) of Statesman Financial Corporation
During 1999, Southern States' undistributed loss from its interest in
Statesman Financial Corporation, net of income taxes, was $1.2 million as
compared to a small gain on its investment in 1998 of $56,721, net of taxes.
The primary reasons for the drop in Southern States' equity earnings in
Statesman Financial Corporation are a decrease in net interest income, including
the provision for credit losses, and an increase in general and administrative
expenses.
[next page is 29]
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Liquidity and Capital Resources at June 30, 2000
In January, 1999, Southern States entered into a new $200 million three-
year revolving credit facility with various commercial banks that matures in
January, 2002. Except for obligations to CoBank under this credit facility as
described below, Southern States' obligations under this credit facility are
unsecured. This facility replaced the $140 million in short-term and long-term
revolving credit facilities with CoBank, ACB that were in place at December 31,
1998, and the $92 million in uncommitted facilities with various commercial
banks. Under the terms of this new facility, Southern States must maintain a
ratio of funded indebtedness to capitalization of not more than .50 to 1, have
tangible net worth of at least $256 million plus 25% of net income in each
fiscal year after 1999, and at the end of each fiscal quarter, have a ratio of
consolidated cash flow to consolidated interest expense and distribution on
capital securities of greater than 1.50 to 1. At June 30, 2000, Southern States
was in compliance with all applicable financial ratio and net worth requirements
under this facility.
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Interest rates under this facility are determined by Southern States under
one of three options: on a competitive bid basis; LIBOR plus .95%, or base rate
which is the higher of the prime rate or the Federal Funds Rate plus .50%.
There is also a facility fee of .30% on this revolver. Amounts are drawn under
this facility to fund general working capital needs. At June 30, 2000, Southern
States had $140.2 million outstanding under this facility, with interest rates
on advances under this facility varying from 7.29% to 7.74% per annum.
At June 30, 2000, Southern States (excluding Wetsel, Inc., which is
separately discussed below) also had outstanding $33 million in term notes held
by CoBank that are payable at various dates with a final maturity of November 1,
2004. Amortization on this term loan is $2 million due on November 1, 2000, $7
million due on November 1, 2001 and November 1, 2002, $9 million due November 1,
2003 and $8 million due November 1, 2004. Interest on this term loan is at:
fixed quoted rates, variable quoted rates or at LIBOR plus .95%. Interest rates
on this term loan vary from 5.9% to 7.5%. Proceeds of this term loan were used
for general working capital purposes. The financial covenants are the same as
those under the three-year revolving credit facility discussed above. The term
notes and all other obligations of Southern States to CoBank, including its
obligations under the revolving credit facility, are partially secured by shares
of CoBank owned by Southern States. As of June 30, 2000, CoBank's maximum
commitment to lend to Southern States under the revolving credit agreement was
$62.2 million. On the same date, its outstanding advances to Southern States
under that facility were $62.2 million. See Note 9 of the Notes to Southern
States' Consolidated Financial Statements on page F-17.
At June 30, 2000, Southern States also had outstanding balances of
approximately $11.8 million in three industrial revenue bonds. These bonds,
which are secured by mortgages on the properties financed, carry variable rates
of interest that at June 30, 2000, ranged from 4.70% to 5.00%. A $2.1 million
bond has a final maturity date of August 1, 2004, a $3.0 million bond has a
final maturity date of September 1, 2005, and the $6.7 million bond has a final
maturity date of January 1, 2016.
In October, 1998, Southern States borrowed $218.3 million under a 180-day
"bridge" loan facility with NationsBank, N.A., First Union National Bank and
CoBank to finance the purchase of the Gold Kist Inputs Business. In January,
1999, this facility was paid down by $118.3 million utilizing proceeds of the
new Southern States' syndicated three-year revolving credit facility discussed
above. On September 7, 1999, this facility was further paid down by $25.9
million. Funds used to retire this debt were primarily proceeds from the final
purchase price settlement relating to the Gold Kist acquisition. On October 5,
1999, the remaining outstanding balance of approximately $74 million was paid
off through the sale of securities by Southern States and Southern States
Capital Trust I pursuant to the financing commitment with Gold Kist described
below.
On October 5, 1999, Southern States Capital Trust I, a trust subsidiary of
Southern States, issued to Gold Kist $60 million liquidation amount of Capital
Securities, Series A ("Series A"), for which it received $59.0 million in gross
proceeds, net of a placement fee and issuance costs of $995,000. Distributions
on the Series A securities are cumulative at a rate of 8% per annum,
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increasing to 8.5% on July 5, 2000, and to 8.75% on July 5, 2001. The Series A
securities mature on October 5, 2029. Southern States Capital Trust I used the
proceeds from the sale of the Series A securities to purchase from Southern
States subordinated debentures in an equal principal amount, bearing interest at
the same rates of interest payable on, and maturing on the same date as, the
Series A securities. Southern States Capital Trust I will use payments by
Southern States on the subordinated debentures to make payments on the Series A
securities issued by the trust. Also on October 5, 1999, Southern States issued
to Gold Kist $40 million liquidation amount of Series B Cumulative Redeemable
Preferred Stock, $100 par value per share ("Series B"), for which it received
$39.0 million in gross proceeds, net of a placement fee and issuance costs of
$958,000. Cash dividends on the Series B securities are cumulative at an initial
rate of 7.5% per annum, increasing to 8% on July 5, 2000, and to 8.25% on July
5, 2001.
Distributions on the Series A securities and dividends on the Series B
securities are both payable quarterly, in arrears, on January 5, April 5, July 5
and October 5 of each year.
The proceeds from the sale of both the Series A and the Series B securities
were used to reduce Southern States' indebtedness and pay off the bridge loan
facility which had been utilized to finance the Gold Kist acquisition.
The Series A and Series B securities are subject to mandatory redemption
for as long as they are held by Gold Kist, at a redemption price equal to the
liquidation amount of the securities redeemed plus all unpaid and accumulated
amounts distributable with respect to the securities, from the proceeds of any
sale by Southern States of substantially similar securities. To the extent
Southern States places with other purchasers capital and/or equity securities
similar to the Series A and Series B securities in an amount less than $100
million, the Series A and Series B securities owned by the Gold Kist shall be
redeemed correspondingly on a dollar-for-dollar basis.
Southern States' wholly-owned subsidiary, Wetsel, Inc., maintains separate
credit facilities. Except for obligations to CoBank under these facilities,
Wetsel's obligations under these facilities are unsecured. On July 1, 1999,
Wetsel's credit facilities were revised. Wetsel has an uncommitted short term
credit facility with CoBank that fluctuates from $8 million in amount during the
period from March 1, 2000, to June 30, 2000; to $4 million from July 1, 2000, to
December 31, 2000, to $8 million from January 1, 2001 through February 28, 2001.
The facility matures on February 28, 2001. This facility had a $1.0 million
outstanding balance at June 30, 2000 and an interest rate of 7.69%. In
addition, Wetsel has a committed $5 million long-term revolver that matures
March 1, 2003. This entire amount committed hereunder was outstanding at June
30, 2000 at a rate of 7.74%. This revolver carries a facility fee of .30%.
Interest rates on these lines are, at the subsidiary's option, at CoBank's
National Variable Rate plus .25%, quoted fixed rates or at a preset rate of
LIBOR plus 1.05%. Wetsel also has a $1 million term note with CoBank maturing
January 15, 2001. The interest rate on this term loan is 6.65%. All of
Wetsel's obligations to CoBank are partially secured by shares of CoBank owned
by Wetsel.
Southern States and Statesman Financial Corporation are parties to an
agreement under which Statesman purchases receivables from Southern States
without recourse. Under the terms of the agreement, Southern States pays fees
on receivables sold to Statesman. Receivables sold
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to Statesman totaled approximately $1.3 billion and $1.2 billion for years ended
June 30, 2000 and 1999, respectively. Statesman pays volume incentive fees to
Southern States at the end of the fiscal year in connection with the purchase of
receivables. In addition, under the terms of the agreement, Southern States was
obligated to maintain a computed minimum investment in Statesman's preferred
stock of $21.6 million and $21.2 million at June 30, 2000 and 1999,
respectively. See Note 5 of the Notes to Southern States' Consolidated Financial
Statements included in this prospectus.
Cash and cash equivalents at June 30, 2000 were $10.4 million, which
represents a decrease of $8.3 million from $18.7 million at June 30, 1999. Net
cash (used) provided by operating activities for the year ended June 30, 2000
and 1999 amounted to ($7.0) million and $143.9 million, respectively. The
unfavorable net cash flow from operating activities resulted from increases in
receivables (after a purchase price adjustment with Gold Kist) and a decrease in
accounts payable. Undistributed earnings of finance companies and joint
ventures also negatively impacted cash flow from operating activities. Net cash
used by investing activities for the year ended June 30, 2000, amounted to $.3
million, compared to $268.1 million used in investing activities over the
comparable period in 1999. This difference was principally the result of
Southern States' net investment of $203.1 million for the acquisition of the
Gold Kist Inputs Business in the fall of 1998. In the current year, Southern
States received a $19.9 million purchase price adjustment relating to the return
of accounts receivable to Gold Kist. In addition, capital expenditures
decreased in the current year by $15.0 million. Net cash used by financing
activities for the year ended June 30, 2000, of $1.0 million was primarily the
result of repayments of debt being offset by additions to long-term debt and the
sale of securities. For the year ended June 30, 1999 cash provided from
financing activities was $127.6 million due to proceeds from a bridge loan of
$218.3 million to finance the Gold Kist acquisition.
Cash and cash equivalents at June 30, 1999 were $18.7 million, which
represents an increase of $3.3 million from $15.4 million at June 30, 1998. Net
cash provided by operating activities for the year ended June 30, 1999 and 1998
amounted to $143.9 million and $33.6 million, respectively. The increase in net
cash provided by operating activities resulted from an increase in accounts
payable and a decrease in net receivables partially offset by a decrease in
advances from managed local cooperatives, an increase in inventories and lower
net savings. Net cash used in investing activities for the year ended June 30,
1999 amounted to $268.1 million, an increase of $224.3 million from cash used in
investing activities in the corresponding 1998 period. This increase resulted
primarily from investment in Gold Kist ($218.3 million) and a $12.7 million
increase in capital expenditures over the prior year. Net cash provided by
financing activities for the year ended June 30, 1999, of $127.6 million and net
cash used by financing activities for the year ended June 30, 1998, were
primarily the result of net borrowing activities.
Capital expenditures for the year ended June 30, 2000, totaled $31.6
million. Southern States had outstanding commitments for the construction and
acquisition of property, plant and equipment totaling approximately $3.6 million
at June 30, 2000. Southern States also maintains an accrual for environmental
expenditures that totaled $3.6 million at June 30, 2000. See Note 13 of the
Notes to Southern States' Consolidated Financial Statements included in this
prospectus.
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Capital expenditures for the year ended June 30, 1999, totaled $46.6
million which compares to $33.9 million in capital expenditures for the year
ended June 30, 1998. Of this 1999 amount, approximately $1.02 million related
to compliance with environmental regulations. Southern States had outstanding
commitments for the construction and acquisition of property, plant and
equipment totaling approximately $2.2 million at June 30, 1999 and approximately
$7.1 million at June 30, 1998. Southern States also maintains a reserve for
environmental expenditures which totaled $3.2 million at June 30, 1999 and $2
million at June 30, 1998.
Southern States anticipates capital expenditures of approximately $20.0
million in the fiscal year ending June 30, 2001. Also, included in projected
capital expenditures is $1.5 to $3.0 million in anticipated costs for
environmental remediation projects in the year ending June 30, 2001.
Management believes that Southern States' cash on hand, anticipated funds
from operations, and amounts currently available under its various credit
facilities will be sufficient to cover its working capital needs, capital
expenditures, debt service requirements and tax obligations over the twelve-
month period ending June 30, 2001. Additional working capital needs resulting
from the Agway transaction described above under "--Recent Developments" are
being financed through the $13.3 million deferred portion of the purchase price,
payable by Southern States 30 months from closing, and by an increase of $15
million in the commitment of one of its lenders under its revolving credit
facility. Southern States' current revolving credit facility terminates in
January 2002. Southern States expects to renew this revolving credit facility at
that time. Southern States intends to maintain and further strengthen its
financial condition and, in its efforts to do so, may from time to time consider
other possible transactions, including acquisitions, other capital market
transactions or dispositions of businesses that no longer meet its strategic
objectives.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS No. 137 and 138, which is
effective for fiscal quarters beginning after June 15, 2000. SFAS No. 133
establishes new accounting and reporting standards for companies to report
information about derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company adopted SFAS 133 on July 1, 2000.
Management has concluded that the adoption of this statement will be immaterial
to its financial position and results of operations.
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Market Risks from Changing Commodity Prices and Interest Rates
The principal market risks affecting Southern States are exposure to
changes in commodity prices and changes to interest rates on borrowings.
Although Southern States has international sales volume and related accounts
receivable for foreign customers, Southern States considers the foreign currency
exchange risk in such activities to be immaterial.
Interest Rate Risk. Southern States uses interest rate swaps to hedge
interest rate changes on a portion of its borrowings. At June 30, 2000, Southern
States had outstanding nine variable to fixed interest rate swaps with a $180
million notional amount and a fair market value of approximately $6.0 million
with terms ranging from three to seven years. The swaps carried coupons with a
weighted average rate of 6.02% and 5.8% at June 30, 2000 and 1999, respectively.
Assuming June 30, 2000 variable rates and borrowings, a one-hundred-basis-point
change in interest rates would impact Southern States' net interest expense by
approximately $1.4 million on an annualized basis, net of the effect of the
swaps.
Commodities Risk. The table below provides information about Southern
States' petroleum, grain and agricultural commodity inventories and related
futures contracts that are sensitive to changes in commodity prices. For
inventories, the table presents the carrying amount and fair value at June 30,
2000. For futures contracts, the table presents the notional amounts in the
unit of measure for the particular item that is being hedged, the weighted
average of the contract prices and the fair value of those contracts. Contract
amounts are used to calculate the contractual payments and quantity of commodity
to be exchanged under the futures contracts.
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On-Balance Sheet Commodity Position and Related Derivatives
-----------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 2000
-------------
Balance Sheet Position Carrying Amount Fair Value
---------------------- --------------- ----------
<S> <C> <C>
Petroleum.................................... $ 11,927,928 $ 15,604,894
Grain........................................ 8,184,541 8,184,541
Feed......................................... 7,049,613 8,023,903
Expected Maturity
Futures Contracts (Short) Year 2000 Fair Value
------------------------ --------- ----------
Petroleum Contract - Gallons................. 4,158,000 N/A
Petroleum Contract Amount.................... $ 3,817,000 $ 3,721,000
Grain Contract - Bushels..................... 8,384,434 N/A
Grain Contract Amount........................ $ 25,206,442 $ 22,625,128
Agriculture Commodities - Bushels............ 0 N/A
Agriculture Commodities Contract
Amount.................................... $ 0 $ 0
Expected Maturity
Futures Contracts (Long) Year 2000 Fair Value
----------------------- --------- ----------
Petroleum Contract - Gallons................. 42,000 N/A
Petroleum Contract Amount.................... $ 27,000 $ 31,000
Grain Contract - Bushels..................... 3,845,537 N/A
Grain Contract Amount........................ $ 11,887,180 $ 10,066,039
Agriculture Commodities - Bushels............ 3,072 N/A
Agriculture Commodities Contract
Amount.................................... $ 7,327 $ 6,013
</TABLE>
See "Business of Southern States--Other Factors Affecting the Business of
Southern States--Commodity Price Hedging Activities" for information concerning
hedging activities utilized by Southern States to minimize the risk of change in
commodity prices on various commodities bought and sold in its business.
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SOUTHERN STATES
General
Southern States is a regional farmers' supply and marketing cooperative.
With fiscal 2000 sales of $1.5 billion, we are one of the largest agricultural
cooperatives east of the Mississippi River. We serve a wide range of rural and
urban customers in our traditional six-state Mid-Atlantic territory of Delaware,
Maryland, Virginia, West Virginia, Kentucky and North Carolina and, more
recently in Michigan, Ohio and Indiana. We also expanded our operations in
October, 1998 into the Southeastern and South Central states through the
acquisition of the Gold Kist Inputs Business. We are owned by over 300,000
farmer and local cooperative members. We are the principal cooperative in a
cooperative distribution system that now encompasses over 700 retail locations
serving farmer members and other customers through both company-owned facilities
and a network of local agricultural cooperatives and private dealers. See "--The
Southern States Distribution System" below.
Founded in 1923, Southern States operated for many years exclusively as a
supply (or "inputs") cooperative, procuring, manufacturing, processing and
distributing fertilizer, crop protectants, feed and seed and other farm supply
items on behalf of its farmer members. Since 1977, we also have marketed grain
for members and currently market approximately 25 to 30 million bushels of grain
annually, primarily in our traditional Mid-Atlantic territory. In 1998, we
entered the livestock marketing business through the acquisition of Michigan
Livestock Exchange, a 75-year old, livestock marketing cooperative operating in
the four-state territory of Michigan, Ohio, Indiana and Kentucky. As a result,
we believe that we are one of the largest livestock marketing cooperatives in
the United States.
Our members must be agricultural producers or agricultural cooperative
associations comprised of agricultural producers. Business with members is
conducted on a cooperative basis, and patrons who are members or who are
eligible to be members are qualified to receive patronage refunds out of net
savings on their business. See "--Cooperative Structure." We also engage in
supply and marketing transactions with other customers who are not eligible for
membership and who do not qualify for patronage refunds. In addition, we engage
in non-cooperative activities through several subsidiaries.
The Southern States Distribution System
We are the principal cooperative in a cooperative distribution system that
serves our farmer members in our Mid-Atlantic territory and the Southeastern and
South Central states through:
. 215 company-owned retail farm supply and petroleum outlets and 25
company-owned urban and suburban retail locations,
. 70 local agricultural or petroleum cooperatives operating at 87
locations under standardized management contracts with Southern States,
. 46 independently owned and operated local retail cooperatives that
distribute Southern States supplies and products at 69 locations, and
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. A network of over 850 private dealers operating approximately 900
locations who sell Southern States supplies and products at retail under
retail distribution agreements with Southern States.
Unless specifically noted otherwise, all location numbers are given as
of July 31, 2000.
Company-Owned Facilities. As described in greater detail below, we sell
a significant portion of our product and service volume through our retail farm
supply locations, urban and suburban retail locations and retail petroleum
facilities. To support this retail distribution network, we operate a number of
owned and leased bulk manufacturing and distribution facilities. See "Business
of Southern StatesAgricultural Inputs and Services--Petroleum," "--Retail Farm
Supply" and "--Farm and Home." In fiscal 2000, Southern States sold
approximately 53% of its total product and service volume through these company-
owned facilities.
Managed Local Cooperatives. The 70 managed local cooperatives, usually
organized on a county level, are a significant component of our distribution
system. The managed local cooperatives have their own local membership and
locally-elected boards of directors, but each is a member of Southern States and
each operates under a standardized management agreement with Southern States. In
almost all instances, the managed local cooperatives use the name "Southern
States" in their operations. Sales to the managed local cooperatives accounted
for approximately 15% of our total product and service volume in fiscal
2000.
We have no equity interest in the managed local cooperatives and no
representation on the boards of directors, but we manage day to day operations
and recommend policies to their boards of directors. The standardized management
agreements are renewed annually, and may be canceled by either party at the end
of any year provided there is no outstanding indebtedness owed Southern States.
We assess a management, accounting and administrative fee which approximates the
actual cost of service. No management agreements with local cooperatives have
been canceled in our history other than as a result of mergers of local
cooperatives into Southern States or, in a few cases, liquidation of a local
managed cooperative.
Private Dealers. We also distribute supplies and products through a
network of over 850 independent, privately-owned dealers, operating a total of
approximately 900 dealer locations. Prior to our agreement with Agway, which
closed on July 31, 2000, we distributed supplies through approximately 340
dealers operating approximately 360 locations. The Agway agreement added over
500 dealers and locations throughout the northeastern United States. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments" above. These dealers agree to sell our supplies
and products at retail to our members and others and to maintain adequate
records of sales in order that we may allocate any patronage refund to these
members. Sales to private dealers accounted for approximately 10% of our total
product and service volume in fiscal 2000.
Independent Cooperatives. We also distribute supplies and products to 46
independently owned and operated local cooperatives operating 69 locations.
These cooperatives are members of Southern States and use Southern States as a
major supply source, but do not operate under a management contract with
Southern States and do not use the "Southern States" name. Sales to
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independent cooperatives represented approximately 3% of our total product and
service volume in fiscal 2000.
Commercial and Other Accounts. In addition to the component parts of the
Southern States distribution system within our territory, we sell products to
over 4,000 commercial and other accounts, including other cooperatives located
outside our territory, who purchase supplies from us. Commercial accounts
include resellers who do not have a private dealer agreement with us, as well as
non-agricultural consumers. Commercial accounts are not eligible for membership
in Southern States and are not eligible for patronage refunds. Other accounts
include producers of agricultural products who purchase on a wholesale basis and
other regional cooperatives. These accounts are eligible for membership and for
wholesale patronage refunds. Sales to commercial and other accounts in fiscal
2000 accounted for approximately 19% of our total product and service
volume.
Cooperative Structure
Members and Membership Stock. Members of Southern States must be
agricultural producers or agricultural cooperative associations comprised of
agricultural producers. Members must own at least one share of membership stock.
An agricultural producer who qualifies for membership but is not already a
member will automatically receive the first $1.00 of any patronage refund in the
form of one share of membership common stock. Under Virginia law and our
articles of incorporation and bylaws, the issuance or transfer of our membership
common stock is limited to:
. bona fide agricultural producers who use our services or supplies, and
. cooperatives whose membership is comprised of such persons.
Each member, regardless of the number of shares of membership common stock
registered in the member's name, is entitled to only one vote in the affairs of
Southern States. Under various circumstances, like the death of a stockholder,
we repurchase common stock from our members at par value ($1 per share) plus
declared and unpaid dividends, if any. In the event of liquidation or other
disposition of our assets, the holders of common stock, after satisfaction of
obligations to creditors and to holders of all preferred stock, would be
entitled to receive a maximum of the $1 per share par value plus declared and
unpaid dividends, if any, for each share of common stock held. Our board of
directors may from time to time issue any and all of the authorized but unissued
common stock without first offering such shares to existing holders of common
stock, on such terms as it deems advisable, but not for less than par value.
Governance. The members of Southern States annually elect on a staggered
basis members of the board of directors to serve for three-year terms. Only our
members or members of a retail agricultural purchasing cooperative handling
supplies of Southern States are eligible to be elected by the members to serve
on the board of directors. At the present time, the board of directors consists
of 23 persons, 17 of whom are member-elected. Six additional directors,
designated by statute as public directors, are appointed for three-year terms,
on a staggered basis, by the director of agricultural extension for the
Commonwealth of Virginia. Each of these appointed directors represents a
different state in our traditional Mid-Atlantic territory. Public
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directors need not be members or stockholders of Southern States. See
"Management--Directors."
Our bylaws provide for a division of the territory in which we operate into
nine or more election districts. These election districts are determined on the
basis of the annual volume of business done with Southern States by customers,
with consideration given to the business done with members in, and geographical
area of, each election district. The bylaws further provide that the Board may
modify and redistrict whenever, in its discretion, it is advisable in order to
maintain substantial equality in the volume of business done in the different
districts.
Under our bylaws, each election district is to be represented on the board
by one director, elected at an election district meeting by delegates to the
meeting. The members served by each private dealer, each retail branch of
Southern States, and each retail agricultural supply cooperative handling
supplies of Southern States are entitled to vote in the election of delegates to
election district meetings. Delegates are elected by our membership and the
membership of the retail agricultural purchasing cooperatives at their local
annual meetings. The directors elected by each election district are then
presented to the annual meeting of our members. Our bylaws only permit voting in
person at election district meetings.
Our officers are elected by our board of directors to serve on a full-time
salaried basis.
Patronage Refunds. As a cooperative, we operate for the benefit of our
members and other patrons who qualify for membership. We are obligated by our
bylaws to return at the end of the fiscal year all net savings from patronage-
sourced business, after payment of dividends on capital stock and additions to
reserves, to the members and other patrons eligible for membership in proportion
to their respective purchases. These net savings are the equivalent of profits
and are allocated to each member patron and each patron eligible for membership
in the form of patronage refunds on the basis of each person's percentage
patronage.
In fiscal 2000, approximately two-thirds of our supply business was with
members and subject to patronage refunds. We also engage in supply and marketing
transactions with other customers who are not eligible for membership and who
therefore do not qualify for and do not receive patronage refunds. In addition,
through several subsidiaries, we engage in non-cooperative activities that do
not generate patronage refunds.
Patronage refunds are normally paid partially in cash and partially in the
form of non-interest bearing patronage refund allocations. Beginning with the
fiscal year ended June 30, 1974, the policy of the board of directors regarding
patronage refunds changed from payment of the non-cash portion of the refund in
shares of membership capital stock or debentures to payment in the form of
patronage refund allocations, which are participations not bearing interest or
paying dividends. Since 1974, patronage refunds have been paid 40% in cash and
60% in patronage refund allocations. The Internal Revenue Code requires a
minimum cash component of 20%.
We believe our policy of paying a higher cash component than is required by
law contributes to continued patronage.
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<PAGE>
Our bylaws further require that issuance of patronage refund allocations be
in annual series, and identified by year issued. The bylaws require that the
redemption of patronage refund allocations take place proportionately in the
order of issuance when the board of directors determines that sufficient funds
are available. An exception is made to this policy for redemption upon the death
of a holder or to settle amounts in default owed to Southern States.
In February 1996, we redeemed our 1974 patronage refund allocations, which
totaled slightly over $6 million. In February 1997, we redeemed our 1975
patronage refund allocations, which also totaled approximately $6 million. In
March 1998, we redeemed our 1976 patronage refund allocations, which totaled
approximately $4.6 million. To provide continued support to our equity base, in
1997 and 1998, a number of our managed local cooperatives exchanged
approximately $1.2 million and $800,000, respectively, of their revolved
patronage refund allocations for an equivalent value in shares of Southern
States' membership common stock. In fiscal 2000 and fiscal 1999, we did not
redeem any patronage refund allocations.
Our bylaws require that all of our debts shall be entitled to priority over
patronage refund allocations. In the event of operating losses, these losses may
be charged in the order of issuance by years to patronage refund allocations and
to operating capital reserves. We are deemed to have a lien upon and security
interest in patronage refund allocations as collateral for any indebtedness owed
to Southern States by the holder.
Operating Capital. Annually, from fiscal year net savings, our board of
directors has made additions to operating capital. These reserves are used for
general purposes and are analogous to retained earnings. The equities of member
patrons in such additions are recognized by Southern States. Further, our bylaws
provide that in the event the board of directors determines these reserves have
served their purpose, if any balance remains, it shall be returned to the member
patrons in proportion to their interests. Otherwise, these reserves will be
returned to the member patrons only upon dissolution of Southern States.
Cooperative Taxation. A cooperative is a corporation for federal income tax
purposes. We compute our taxable income and federal income tax liability in
essentially the same manner as any ordinary corporation. However, to the extent
that we, as a cooperative, declare and pay patronage refunds to our members, we
are allowed to deduct those amounts from our pre-tax income. Patronage refunds
may be paid in the form of cash or credits, which are sometimes referred to as
patronage refund allocations, or a combination of both.
A cooperative may deduct from its pre-tax income both the amount of the
cash patronage refund and the face amount of any credits or noncash patronage
refund allocations. A cooperative's members, however, must recognize both those
amounts in the computation of their respective taxable incomes. In order to
qualify for the federal income tax deduction for patronage refunds, the
cooperative must pay at least 20% of the patronage refund in cash. Our board of
directors determines the amount and form in which we pay our patronage refunds.
See "--Patronage Refunds" above.
To the extent that we distribute notices of allocation that do not qualify
for the federal income tax deduction for patronage refunds, have income from
transactions with nonmember customers or have income from non-patronage sources,
we are taxed at the normal corporate
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<PAGE>
rate. We have subsidiaries that are not cooperatives; all the income of these
subsidiaries is subject to corporate income taxes.
BUSINESS OF SOUTHERN STATES
We are both a supply and a marketing cooperative. We function as a supply
cooperative providing agricultural inputs and services to our members and others
through our Crops, Feed, Petroleum, Retail Farm Supply, and Farm and Home
divisions. We function as a marketing cooperative marketing our members'
products through our Grain Marketing and Livestock Marketing divisions.
Business Strategy
As a farmer-owned agricultural cooperative, our primary function is to
enhance our members' economic welfare and bargaining power. To fulfill this
function, Southern States pursues business initiatives that increase its
purchasing power with vendors, lower its production, processing and distribution
costs, increase its customer base and capitalize upon its management expertise.
Our ultimate objective is to position ourselves as the business of choice for
meeting the needs of our members and other customers for products and value-
added services. To achieve this goal, we seek to:
. Offer a Full Line of Superior Products and Services: Southern States
offers a full selection of high quality products and services at
competitive prices designed to meet the diverse needs of its farmer
membership base. The ability to use its purchasing power and its
manufacturing/processing expertise allows it to be price competitive
within its defined market areas.
. Develop Value-Added, Technologically Advanced Products and Services: In
addition to its more traditional services, such as fertilizer spreading,
crop protectant application and insect scouting, Southern States offers
technologically advanced services, supported by reliable equipment and
highly trained service technicians in order to increase market share
with existing customers and attract new customers. For example, Southern
States' Growmaster program uses Global Positioning Satellites and
computerized delivery vehicles in selected locations to optimize the
application of plant nutrients on farmers' fields, maximizing production
in an environmentally responsible manner. In addition, Southern States
completed a research and development program in the field of
aquaculture, one of the fastest growing segments in the agriculture
industry, in order to provide its farmer members with a viable
alternative product line, including fish stock, fish feed and guaranteed
grower payment to farmer producers for harvested fish. We are now
actively marketing this program.
. Use Multiple Distribution Channels to Maximize Market Penetration:
Southern States uses a variety of distribution channels to create
multiple outlets for its product offerings in order to generate
increased business volumes and economies of scale. The use of several
diverse distribution channels enables Southern States to reach many
different types of customers and maximize market penetration.
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. Access State-of-the-Art Products and Technology through Partnerships and
Strategic Alliances: Southern States seeks to access products and
technology through partnerships and strategic alliances, thereby
significantly expanding Southern States' scope with minimal additional
capital requirements. Investments with other interregional cooperatives
in the U.S. and abroad afford Southern States access to world class
sources of fertilizer products, seeds, animal genetics, and other
ingredients required for Southern States' operations. The 1998
acquisition of Michigan Livestock Exchange is expected to lead to
alliances up and down the food chain, from the producer to the retailer.
. Evaluate Opportunities to Enter New Markets and Achieve Operating
Efficiencies and Maximize Buying Power: Southern States has and will
continue to capitalize on acquisition opportunities that will enable it
to enter new markets, increase its scale of operations and achieve
operating efficiencies in order to better service the economic interests
of its farmer-members. In 1998, through its acquisition of Michigan
Livestock Exchange, Southern States became one of the largest
cooperative marketers of livestock in the United States and now is able
to offer Michigan Livestock Exchange's marketing and other value-added
services, such as genetics, specialized financing programs and feeding
and animal health programs, to Southern States' customers in its
traditional Mid-Atlantic territory.
. Adapt its Business in Selected Locations to Accommodate Changing
Demographics and the Increasing Urbanization of its Customer Base: Many
rural areas have become urban or suburban markets, reflecting well-
documented demographic changes. Southern States continues to adapt its
business to better serve this changing customer base. Products and
services sold through the Farm and Home and Retail Farm Supply segments
cater to the needs of the urban and suburban consumer, and include lawn
and garden supplies, pet supplies and homeowner services. Sales of these
products and services to urban and suburban consumers can, in part,
offset the cyclical nature of Southern States' agricultural operations.
Agricultural Inputs and Services
We operate our agricultural inputs and services business through six
operating divisions: Crops, Feed, Petroleum, Retail Farm Supply, Farm and Home,
and Marketing. Our purchase of the Gold Kist Inputs Business has significantly
bolstered these operating divisions. We have integrated the Gold Kist Inputs
Business into our pre-existing operating divisions as described below. The
results for each division below include each division's allocated portion of the
Gold Kist Inputs Business for the period from October 13, 1998 to June 30, 2000.
We do not prepare separate financial statements for the former Gold Kist Inputs
Business.
Crops
Through our Crops division, we procure, manufacture, process and distribute
fertilizer, seed, and crop protectants to our members and others through the
Southern States distribution system. We believe that we are the largest provider
in our Mid-Atlantic territory of fertilizer, seed and crop protectants in large
part as a result of our ability to custom-supply fertilizer, seed
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and crop protectant products and our extensive and diverse distribution system.
Sales of the Crops division in fiscal 2000 were $212.6 million.
We distribute granular, blended and liquid fertilizer and fertilizer
materials in bagged and bulk form. Our annual fertilizer sales volume is
approximately 2.0 million tons, with approximately 1.3 million tons sold through
company-owned retail facilities and the managed local cooperatives. The
remainder is shipped directly to private dealers, independent cooperatives and
commercial accounts. See "Southern States--The Southern States Distribution
System."
Our Crops division has an annual production capacity of approximately 2
million tons of fertilizer at 10 strategically located plants. We procure
approximately 50% of the fertilizer we sell from CF Industries, Inc., a
cooperative owned by 9 regional cooperatives including Southern States, which
produces and supplies fertilizer materials to its members. See "--Investments in
Other Companies and Cooperatives" below. CF Industries is one of North America's
largest commercial fertilizer manufacturers and distributors. We purchase the
remainder of our fertilizer materials from more than 40 other suppliers.
Through our Crops division, we produce and sell field and vegetable seeds,
including small grains, soybeans, grasses, and legumes. We also procure,
manufacture and distribute crop protection products such as herbicides and
pesticides through our Retail Farm Supply and Farm and Home divisions and to
other cooperatives and dealers. Sales of crop protectants are enhanced by our
ability to cross-sell seed products and offer superior application services
through quality equipment and highly trained personnel.
The Crops division operates five bulk crop protectant storage facilities in
the former Gold Kist territory and distributes agricultural and specialty crop
protectants, including pesticides, growth regulators and surface-active agents
that it purchases from approximately 15 manufacturers. Competition for sales of
crop protectants is primarily on the basis of price and service since most
retailers have access to the same inventory of products produced by the major
manufacturers. The Crops division also provides aerial application of fertilizer
for forestry customers and ground application of fertilizer and crop protectants
for turf customers.
The Crops division has successfully applied licensed genetic technology to
finished products, for example, by incorporating the Roundup(R) resistant gene
into its soybean seed products so that Roundup(R) destroys weeds but not the
plant. This ability, coupled with the division's access to Southern States'
extensive and diverse distribution system, makes us an attractive partner for
bio-tech firms. For instance, we are a member-owner of FFR, Incorporated, which
is owned by Southern States and three other regional cooperatives. FFR,
Incorporated employs skilled plant breeders who use various facilities and
regional test stations to develop improved varieties of corn, soybeans, alfalfa,
clover, grass and sorghum-sudan.
Feed
Through our Feed division, we procure and manufacture dairy, livestock,
equine, poultry, pet and aquacultural feeds. Our feed products are manufactured
in 15 feed mills, four of which were acquired in the purchase of the Gold Kist
Inputs Business. Feed products are distributed at
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wholesale and retail throughout our territory. See "Southern States--The
Southern States Distribution System." Approximately 65% of the feed distributed
in fiscal 2000 was delivered in bulk form directly from the feed mill to the
farm with the remainder sold in bag form.
Fiscal 2000 production of the mills was approximately 1.0 million tons,
with resulting sales of $178.2 million. We believe that we are the largest feed
company in our Mid-Atlantic territory. We are currently ranked in the top ten
commercial feed companies in the United States.
Our feed mills are batch process mills in which ingredients are weighed.
These mills are capable of precision feed mixing. Our mill operations produce
and market approximately 7,500 different feeds, including custom blended feeds
and feeds containing various medications.
Feed ingredients are purchased in the marketplace from many sources,
including major grain companies. Feed formulation is based on the cost of
various alternative ingredients in a given week. Our Feed division partners with
others in the industry in order to have access to national brands and
technological developments in the field without incurring substantial capital
outlays and the associated risks. In November 1996, we joined with six other
cooperatives in a pet food joint venture in Ohio, known as Pro Pet. In February,
1998, we completed a cooperative milling joint venture in Pennsylvania with
Agway. In addition, we participate with eight other cooperatives in Cooperative
Research Farms, a network of two research farms, each devoted to a specified
branch of animal husbandry. Cooperative Research Farms provides extensive feed
research permitting its members to formulate improved feeds and feeding programs
and is one of the largest private research efforts in the world for large animal
feeding.
Petroleum
Through our Petroleum division, we distribute all grades of gasoline,
kerosene, fuel oil, diesel fuel and propane, and other related petroleum
products. Approximately 79% of petroleum sales in fiscal 2000 were made to non-
members of the cooperative. Our farm delivery services distinguish us from our
competition in the petroleum business. The division experiences seasonal
increases in sales and working capital requirements in the fall and winter
months, as a result of its emphasis on oil and propane heating fuels.
Approximately 65% of the Petroleum division's products were purchased on a
contract basis, with the balance purchased on the spot market. We own two bulk
terminals with aggregate storage capacity of approximately 6.5 million gallons
of product. We manage the throughput of our products at 26 dedicated storage
terminals.
We also own and operate 16 retail petroleum distribution locations and
distribute petroleum products through four managed local cooperatives. Current
sales volume for the division approximates 350 million gallons annually.
Petroleum sales for fiscal 2000 were $276.7 million.
Retail Farm Supply
We distribute agricultural supplies through our Retail Farm Supply
division, which as of July 31, 2000, operated approximately 190 company-owned
and managed local cooperative
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retail farm supply locations in its Mid-Atlantic territory and, as of July 31,
2000, an additional 88 retail locations in its Southeastern and South Central
territory. The retail store locations act as distribution centers, supplying
members and others with agricultural production materials procured or
manufactured through our Crops, Feed and Petroleum divisions.
Although the retail stores may vary considerably from location to location,
the typical store is a complete farm supply center offering for sale many
agricultural products including feeds, animal health products, fertilizers,
pesticides, seeds, petroleum, farm supplies and equipment. The typical store
also offers farm delivery and crop protectant application services, precision
farming, customized fertilizer spreading, field mapping, soil testing, insect
scouting and agronomic and animal nutrition advice. Approximately 50 locations
sell petroleum products.
The retail farm supply stores sell supplies and services to our members,
other farmers and to a lesser extent to contractors and home owners. Southern
States believes the quality "on the farm" services provided by the Retail Farm
Supply division in conjunction with the products sold through them, in essence
offering "one-stop-shopping," distinguish our retail farm supply operations from
other options available to our customer base.
As a result of the acquisition of the Gold Kist Inputs Business and as of
July 31, 2000, the Retail Farm Supply division operates separate receiving and
storage facilities at 16 locations, with an aggregate storage capacity of
approximately seven million bushels, for handling unprocessed farm commodities
such as soybeans, corn and other grains. Nearly all of these storage facilities
are licensed by the federal or state government and can issue negotiable
warehouse receipts.
In addition, as a result of the acquisition of the Gold Kist Inputs
Business, the Retail Farm Supply division acquired and now operates five cotton
ginning and storage facilities at various locations in the former Gold Kist
territory through which we provide ginning and storage services to members and
non-members.
The Retail Farm Supply division accounts for approximately 38% of our total
product and service volume at June 30, 2000. Sales through these facilities in
fiscal 2000 were $592.2 million.
Farm and Home
The Farm and Home division distributes farm and home products at wholesale
and retail. Sales of the Farm and Home division for fiscal 2000 were $208.3
million.
Wholesale. The division provides wholesale purchasing and distribution of
farm and home products through centralized purchasing and four distribution
centers. In fiscal 2000, approximately 36% of the Farm and Home division's sales
volume was generated through its distribution centers, with the remaining 64% of
its sales volume attributed to direct shipments from the vendor to customer. The
largest customers of Farm and Home wholesale operations are our Retail Farm
Supply stores, which accounted for approximately 54% of Farm and Home sales
volume in fiscal 2000, and the independent private dealers, which accounted for
approximately 27% of its sale volume for the same period. Other customers
include the Farm and Home retail stores discussed below and a number of
diversified U. S. commercial and international accounts.
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Retail. The Farm and Home division also operates 25 urban and suburban
retail locations. These locations, which are in the process of converting to the
trade name of Garden South, offer a wide array of products and services,
including lawn and garden supplies and tools, power equipment, pet food, bird
seed, hunting and equestrian supplies and landscape consulting services. These
urban retail stores also provide technical and sales services in the form of
knowledgeable in-store assistance and home delivery, which help distinguish
Southern States' Farm and Home retail operations from its competitors.
Wetsel. Wetsel, Inc., an independently-operated, wholly-owned subsidiary of
Southern States, also serves as a wholesale distributor of agronomic supplies to
dealers and commercial accounts in several eastern and midwestern states. Sales
to lawn and garden centers in fiscal 2000 accounted for approximately 53% of
Wetsel's sales, with the balance of its sales made to the turf industry (22%),
greenhouse industry (15%) and farms (10%). Wetsel also operates one retail store
in Harrisonburg, Virginia.
Marketing Services
Grain Marketing
Through our Grain Marketing division, we purchase corn, soybeans, wheat and
barley from our members and market these grain products, assuming all risks
related to selling such grain. Grain is priced in the United States principally
through bids based on organized commodity markets.
The Grain Marketing division, centrally managed from Richmond, Virginia,
consists of 14 grain elevators located primarily along the eastern seaboard and
at a single location in central Kentucky. Storage capacity for those grain
elevators as of July 31, 2000 was approximately 10.6 million bushels. The
division markets approximately 22.8 million bushels of grain annually, primarily
corn, soybeans, wheat and barley, selling approximately 11% of this volume to
our Feed division. The balance is sold to other customers which include large
commercial grain buyers. Grain Marketing sales for fiscal 2000 were $66.1
million.
Livestock Marketing
Effective April 1, 1998, we acquired, through merger, Michigan Livestock
Exchange, a 75-year old, Michigan livestock marketing cooperative with
approximately 60,000 members in its four-state territory of Michigan, Indiana,
Ohio and Kentucky. The addition of Michigan Livestock Exchange provides us with
an expanded membership base and cross-selling opportunities for our other farm
products in a territory outside, but contiguous to our Mid-Atlantic territory.
Moreover, as a supplier of agricultural inputs to farmers, we intend to use our
livestock marketing operations as a means to further integrate ourselves into
the conception-to-consumption system which is emerging in the food industry.
This coordinated system links inputs, producers, processors, distributors and
the ultimate consumer to promote operational efficiency and product consistency
and to enhance farmer profitability.
Through Michigan Livestock Exchange, which has become the Livestock
Marketing division, Southern States operated 11 traditional livestock auction
facilities and 13 swine buying stations as of July 31, 2000. We also offer a
vertically coordinated approach intended to help
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farmers produce and market their products through the packers to the customers.
We do so by providing inputs to the livestock producer in an efficient, low-cost
manner and then by marketing the livestock products to meet the expectations of
the ultimate consumers for uniform, high-quality products.
In addition to providing livestock marketing services for members on a
commission basis and through purchases as principal, the division provides price
contracts, animal health sales and livestock marketing strategies. During the
twelve months ended June 30, 2000, Michigan Livestock Exchange marketed
approximately 1,151,000 hogs and 610,000 head of cattle.
Acquisition of the Gold Kist Inputs Business
In October 1998, Southern States purchased from Gold Kist Inc., a major
southeastern marketing and supply cooperative, the Gold Kist Inputs Business.
Through this portion of its business, Gold Kist purchased, manufactured and
processed a wide range of farm supply items for distribution and sale in the
eight-state territory of Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi, South Carolina and Texas. The assets acquired in October 1998
included:
. four fertilizer plants, one of which is leased;
. four crop protectant distribution centers, one of which is leased;
. 23 grain elevators, five of which are leased;
. 15 peanut buying stations, six of which are leased;
. five cotton gins, two of which are leased;
. four feed mills;
. one seed processing plant; and
. approximately 100 retail farm supply stores and branch facilities.
The acquisition also included a number of owned and leased distribution and
storage facilities and substantially all inventory and other agreed upon assets
associated with the Gold Kist Inputs Business. The purchased assets did not
involve the existing Gold Kist poultry, pork, aquaculture, seed marketing,
cotton marketing and other businesses. The final adjusted purchase price paid by
Southern States to Gold Kist for the Gold Kist Inputs Business was approximately
$198 million. See Note 18 of the Notes to Southern States' Consolidated
Financial Statements on page F-29 for additional information concerning the
initial estimated purchase price paid by Southern States, the post-closing
purchase price adjustment made between Southern States and Gold Kist, and other
financial information related to the acquisition of the Gold Kist Inputs
Business.
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As described above, the Gold Kist Inputs Business has been integrated into
Southern States' various operating divisions. We do not compile separate
financial statements for the Gold Kist Inputs Business. For a discussion of our
efforts to integrate the Gold Kist Inputs Business, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Acquisition and
Integration of the Gold Kist Inputs Business."
Representations and Warranties. The asset purchase agreement contains
customary representations and warranties concerning the status of the Gold Kist
Inputs Business and the assets purchased. Most representations and warranties
survived the closing and do not expire until June 30, 2001. Gold Kist has agreed
to indemnify Southern States for losses arising out of environmental
representations and warranties for a ten year period following the closing, up
to an aggregate maximum of $35 million. The Gold Kist indemnity for
environmental claims will be effective only when the aggregate amount of
Southern States' losses for each individual claim exceeds $25,000. Gold Kist has
agreed to indemnify Southern States for any loss other than environmental loss
arising from breaches of the representations and warranties to the extent that
such losses do not exceed $10 million. There is a $500,000 threshold for losses
other than environmental losses before a claim may be asserted against Gold
Kist.
Non-Competition. Under the asset purchase agreement, Gold Kist agreed to a
five-year non-competition agreement within the territory in which Gold Kist
presently does business.
Financing Commitment. In connection with the closing of Southern States'
purchase of the Gold Kist Inputs Business, Southern States and Gold Kist entered
into a separate agreement under which Gold Kist agreed to purchase on or before
April 5, 1999 (later extended to October 5, 1999), up to $100 million of
preferred stock or other specified equity-type securities from Southern States
or an affiliated entity of Southern States if Southern States had not been able
to sell an equal amount of similar securities by that date. As described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources at June 30, 2000," on October 5,
1999, Southern States sold to Gold Kist pursuant to this commitment $40 million
liquidation amount of preferred stock and $60 million of capital securities
issued by Southern States Capital Trust I.
Properties
Our principal operating facilities are our feed mills, fertilizer plants,
petroleum storage and distribution facilities, our other farm supply storage and
distribution facilities and our retail store facilities. These facilities are
described elsewhere in this prospectus in the sections describing our various
operating divisions. See "--Agricultural Inputs and Services" and "--Marketing
Services" above.
Our corporate headquarters building, containing approximately 200,000
square feet of office space, is located on 11.8 acres in Richmond, Virginia. An
unrelated third-party constructed the headquarters building on land owned by
Southern States and leased to the owner of the building for a 70-year period
expiring in 2048. We lease and occupy approximately 170,000 square feet of the
building. See Note 13 of the Notes to Southern States' Consolidated Financial
Statements included in this prospectus for additional information concerning
Southern States' lease arrangement for its corporate headquarters and for other
operating leases.
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Information Systems
The information systems used to support our business operations consist of
a number of networked computer components running a mixture of internally
developed and purchased software applications. Our strategy has been to move
away from large mainframe systems towards smaller, more flexible minicomputer
and server based systems. This allows us to take advantage of new technology,
and provides us the flexibility to tailor computing needs to the application,
and ultimately to the needs of the business units such technology supports.
This strategy permits us to upgrade or expand only where it is needed and avoid
excess capacity where it is not needed, resulting in cost efficiencies for the
processes that require support.
We still have a variety of older applications that are processed under a
timesharing agreement on a mainframe computer. The timesharing agreement has
enabled us to significantly reduce operating costs and to maintain a core
application solution as we focus on other prioritized applications. We now own
and utilize in excess of 300 file servers in support of our Retail Store
operations and over 30 file servers to support other applications used
throughout Southern States. Other integrated computer systems support our
distribution and manufacturing functions, our feed, fertilizer, petroleum, grain
and related functions, and financial, payroll and human resources systems.
We believe that our information systems are sufficient to meet our current
needs and future expansion plans.
Affiliated Financing Services
Through two affiliated entities, Statesman Financial Corporation and
Statesman's wholly-owned subsidiary, Michigan Livestock Credit Corporation,
Southern States provides a variety of financing programs to its members and
other customers. These programs, which are intended to enhance "one-stop-
shopping" services, support our ability to sell our products, generate profits
and provide an important source of liquidity through the purchase of significant
amounts of receivables from Southern States. Through our direct investments in
Statesman and Michigan Livestock Credit and our financing services agreements
with each of them, we are exposed to credit and interest rate risk resulting
from the ongoing operations of Statesman and Michigan Livestock Credit.
Statesman Financial Corporation
Statesman Financial Corporation is owned 38.4% by Southern States and 36.1%
by 62 of the managed local cooperatives. The remaining 25.5% is owned by Land
O'Lakes, Inc., a regional farm supply cooperative headquartered in Minneapolis,
Minnesota; MFA, Incorporated, a regional farm supply cooperative headquartered
in Columbia, Missouri; and MFA Oil Company, a regional petroleum cooperative
headquartered in Columbia, Missouri. Southern States accounts for its ownership
in Statesman by the equity method.
Statesman engages in a variety of financing programs with us and our
customers. These programs include accounts receivable financing, consumer retail
financing, leasing services,
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asset based financing and agrifinancing. The consumer retail financing
receivables, asset-based loans, and agrifinancing receivables are primarily
obligations of customers of Southern States. See Note 5 of the Notes to Southern
States' Consolidated Financial Statements included in this prospectus.
Statesman and Southern States have entered into a financing services and
contributed capital agreement setting forth the terms under which Statesman
purchases accounts receivable from us and defining other financing programs that
Statesman may provide to our customers. Under the terms of the agreement, we are
obligated to maintain a computed minimum investment in Statesman's noncumulative
preferred stock, based on the average daily balances of receivables sold to
Statesman. The amount of this preferred stock held by Southern States was $23.4
million as of June 30, 2000.
The parties have entered into this financing services and contributed
capital agreement so that, by selling these receivables to Statesman, we are
able to obtain more favorable financing than if we held these obligations for
our own account and financed those additional assets ourselves.
Accounts Receivable Financing. From time to time and subject to acceptance
by Statesman, Statesman purchases the following types of receivables from us:
. retail customer accounts receivable;
. grain marketing customer accounts receivable;
. advances that we make to managed member cooperatives under the
management agreement between us and each managed member cooperative; and
. wholesale customer accounts receivable.
Under the terms of the financing services and contributed capital
agreement, we sell these receivables to Statesman on a discounted basis. These
discounts provide Statesman with revenues sufficient to cover anticipated
interest charges and average historical charge-offs. These discounts are
calculated based on historical credit losses, current delinquency status and the
anticipated cost of carrying the purchased accounts receivable. The credit
losses component of the discount rate has a minimum percentage provision that
may be modified from time to time as agreed by Statesman and Southern States.
For the twelve-month period ended June 30, 2000, these discounts ranged from
.05% to .35% of the receivables purchased.
Receivables purchased by Statesman through June 30, 2000 and 1999 totaled
approximately $1.3 billion and 1.2 billion, respectively. Statesman paid volume
incentive fees to Southern States related to this program of approximately $2.4
million and $1.9 million for the years ended June 30, 2000 and 1999,
respectively.
Consumer Retail Financing. Through its consumer retail financing arm,
Statesman provides a private label credit card program for retail customers who
may present their credit cards at our retail branch locations, managed member
cooperative locations, and participating independent market locations.
Statesman assesses a merchant discount ranging from 1.25% to
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1.75% of the transaction amount. Customers may elect to revolve their balances
and pay finance charges at an APR no greater than 18% based on the average daily
balance. Statesman assesses late payment fees of up to $14.50 each month against
customers who fail to make payments within the terms of the program. All
merchant discounts, finance charges and late payment fees constitute income to
Statesman.
Statesman also offers an installment sales financing program for retail
customers who wish to finance single purchase transactions over a period ranging
from three to sixty months. These transactions are documented on installment
sales contracts that are offered to Statesman for purchase. Finance charges do
not exceed 24% APR. This is a seldom used program. The volume outstanding
under this program at any one time rarely exceeds $250,000.
Statesman's consumer retail finance charge income was approximately $1.4
million for each of the years ended June 30, 2000 and 1999. In addition,
Statesman's merchant discount and late payment fee income totaled approximately
$260,000 and $255,000 for the years ended June 30, 2000 and 1999, respectively.
Statesman paid no volume incentive fees to Southern States related to this
program for the years ended June 30, 2000 and 1999.
Leasing Services. Statesman, as lessor, has entered into operating leases
with Southern States and our patrons for computer equipment, liquid propane
tanks, credit bureau terminals and agricultural equipment. The net book value
of the equipment was approximately $5.4 million and $5.1 million as of June 30,
2000 and 1999, respectively. This program generated revenues for Statesman of
approximately $1.4 million and $2.1 million for the years ended June 30, 2000
and 1999, respectively. Our payments to Statesman for leasing services amount
to approximately 96% of Statesman's total leasing revenue. Statesman paid
volume incentive fees to Southern States related to this program of
approximately $200,000 and $175,000 for the years ended June 30, 2000 and 1999,
respectively.
Asset Based Financing. Statesman offers working capital financing to
credit-approved private dealers of our products and independent cooperatives
through a revolving line of credit program collateralized by the debtor's
accounts receivable and inventories. Interest is charged on a floating interest
rate basis and these contract maturities are periodically reviewed for renewal.
This program generated revenues of approximately $851,000 and $748,000 for the
years ended June 30, 2000 and 1999, respectively.
Agrifinancing. Statesman offers nonrecourse extended crop, livestock and
feed financing for one to five year periods to our selected customers. The
notes are collateralized by the debtor's real estate, livestock or other
tangible holdings. This program generated revenues of approximately $(37,000)
and $157,000 for the years ended June 30, 2000 and 1999, respectively.
Croptime financing. Statesman provides collateralized operating loans to
approved borrowers that require financing beyond inputs for crop farming.
Croptime loans may be used for land rent, custom spraying, harvest costs, labor,
irrigation and other expenses related to crop production. Payment is timed to
harvest and/or marketing dates. The program began in January 1999 and has
generated revenues of approximately $899,000 for the year ended June 30,
2000.
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There was no volume incentive fee paid to Southern States related to this
program for the year ended June 30, 2000.
Michigan Livestock Credit Corporation
Effective April 1, 1998, Michigan Livestock Credit, all of whose shares of
common stock were owned by Michigan Livestock Exchange, was merged into a
wholly-owned subsidiary of Statesman coincident with the merger of Michigan
Livestock Exchange with Southern States. Upon the effective date of the merger,
the name of the Statesman subsidiary was changed to Michigan Livestock Credit
Corporation.
Michigan Livestock Credit was organized in 1989 for the purpose of assuming
various lending operations previously conducted by Michigan Livestock Exchange.
The primary lines of business are loans (primarily for buildings, equipment,
livestock and operating needs), a livestock feeding program, a beef improvement
program and livestock leasing. Its loans are substantially collateralized by
livestock, buildings or other property. As of June 30, 2000, the building loan
portion of the portfolio was approximately $39.2 million or 78% of Michigan
Livestock Credit's total portfolio. The Livestock Feeding Program is a bailment
program in which the livestock are owned by Michigan Livestock Credit and the
farmers/producers house and feed the animals in their facilities. Livestock
Feeding Program loans aggregated $10.9 million at June 30, 2000. At June 30,
2000, the beef improvement and livestock leasing programs amounted to only
$378.8 thousand.
Southern States has a financing support agreement with Michigan Livestock
Credit similar to the agreement it has with Statesman. Under the terms of the
agreement, we are obligated to maintain a computed minimum investment in
Michigan Livestock Credit preferred stock, based on the average balance of
receivables outstanding at Michigan Livestock Credit. The amount of preferred
stock held by Southern States under this agreement was $14.2 million at June 30,
2000.
Investments in Other Companies and Cooperatives
Apart from our interest in our affiliated financing companies, we have
substantial investments in other companies and cooperatives, including CF
Industries and the Southern States Insurance Exchange, totaling approximately
$83.4 million as of June 30, 2000. Our largest investments are in other
cooperatives from which we purchase supplies or services and from which we in
turn receive patronage dividends. The patronage dividends received from these
investments can vary greatly from year to year depending on the performance of
the underlying cooperative.
Our largest single investment is in CF Industries. See "--Agricultural
Inputs and Services--Crops" above. At June 30, 2000, Southern States'
investment in CF Industries was $43.5 million represented by ownership of
preferred stock issued to Southern States and other members in accordance with a
base capital plan that is based upon each member's purchases from CF Industries
over a rolling 5-year period. Under the plan, annual adjustments are made to
each member's required preferred stock ownership. Our preferred stock ownership
represented approximately 5.6% of the outstanding preferred stock of CF
Industries at June 30, 2000. There
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was no patronage refund paid to us by CF Industries for the fiscal years ended
June 30, 2000 and 1999, respectively. The patronage refund paid to us by CF
Industries was $5.5 million for the fiscal year ended June 30, 1998.
Our second largest investment in other companies and cooperatives, apart
from our affiliated financing companies, is in Southern States Insurance
Exchange (the Exchange). The Exchange is a Virginia-domiciled insurance
reciprocal licensed to write lines of insurance in Southern States' Mid-Atlantic
territory and Pennsylvania. The Exchange provides a wide-range of property and
casualty coverages for its subscribers (policyholders). Subscribers of the
Exchange include Southern States, the managed local cooperatives, private
dealers and other parties. At the discretion of the Advisory Committee, the
Exchange pays cash dividends from its operating income to its subscribers and
allocates its remaining net income to individual subscriber accounts in
accordance with the subscriber agreement. In addition, the Exchange returns
prior years' subscriber savings when, in the judgment of its board of directors,
it is prudent to do so.
At June 30, 2000, our investment in the Exchange was $16.4 million,
representing the accumulated unreturned savings in Southern States' subscriber
account. Southern States recorded cash dividends and undistributed savings of
$7.1 million, $4.0 million and $3.4 million for each of the fiscal years ended
June 30, 2000, 1999 and 1998, respectively. The Insurance Exchange is operated
by its attorney-in-fact and manager, Southern States Underwriters, Inc., a
subsidiary of Southern States. The Insurance Exchange carries A.M. Best's
highest rating of A+ Superior.
Our investments are stated at cash invested plus unpaid qualified written
notices of allocation. See Note 6 of the Notes to Southern States' Consolidated
Financial Statements included in this prospectus.
Other Factors Affecting the Business of Southern States
Seasonality
Our business is highly seasonal. The first and second fiscal quarters
historically have lower sales revenue and unit volume than the third and fourth
quarters. The majority of sales and greatest demand for working capital for our
agricultural operations occur in late winter and spring, which represents the
prime planting season for our customer base.
For the Retail Farm Supply and Farm and Home divisions, with an emphasis on
farm-related and yard and garden products, the majority of sales and the
greatest demand for working capital also occur in late winter and spring. A
majority of our sales in our Crops division occurs in the spring.
Offsetting such seasonal effects to some degree, sales related to our grain
and feed operations tend to be highest during fall and winter. In addition, we
place a product emphasis on oil and propane heating fuels in the late fall and
early winter months. The grain, feed and petroleum operations create seasonal
increases in sales and working capital requirements during the fall and winter
months.
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Competition
We are one of the principal suppliers of agricultural input east of the
Mississippi River. We are also one of the largest livestock marketing
cooperatives in the United States in terms of the number of head of livestock
sold for member producers.
Competition in feed, fertilizer, seed, grain, livestock, petroleum and farm
supplies exists with large national and regional manufacturers and suppliers as
well as small independent businesses operating in our territory. However, major
competitors vary from area to area. No single competitor competes throughout
our entire territory. We believe we have a competitive advantage because
through our extensive and diverse distribution system, we offer a full line of
basic farm supplies and services at locations convenient to patrons rather than
limiting our sales to a single line such as feed, seed or fertilizer. We
believe that member ownership, name recognition, reputation for quality service
and value, competent personnel and a long tradition of leadership enhance our
competitive position.
Employee Relations
As of July 31, 2000, we employed approximately 5,425 persons.
Additionally, the managed local cooperatives employed approximately 900 persons.
Approximately 60 company employees at two locations are members of labor unions.
There have been no work stoppages for more than 15 years. We consider our
relationship with employees to be good.
Matters Involving the Environment
We are subject to stringent and changing federal, state and local
environmental laws and regulations, including those governing the labeling, use,
storage, discharge, disposal and cleanup of hazardous materials as well as those
governing the use, labeling and disposal of crop protectants, fertilizers and
seed products. We believe that our operations are in substantial compliance
with all applicable environmental laws and regulations as currently interpreted
and that we have obtained or applied for the necessary permits to conduct our
business. Because we use regulated substances and generate hazardous materials
in our business, from time to time we are involved in administrative or judicial
proceedings and inquiries relating to environmental matters. Changes in
environmental requirements or an unanticipated significant adverse environmental
event could have a material adverse effect on our business, financial condition
or results of operations.
As of June 30, 2000, Southern States had four sites at which environmental
investigation and remediation is ongoing and costs may be significant. At one
site, we are investigating and remediating soil and groundwater petroleum
contamination under an order issued by the Kentucky Department for Environmental
Protection. All necessary permits have been obtained and the remediation plan
has been implemented. We believe that future investigation and remediation
costs at this site will be between $1.4 million and $3.1 million.
At a second site, we continue to monitor nitrate contamination of the soil
and groundwater under a consent agreement under the Virginia Voluntary
Remediation Program. We have completed a soil remediation program related to
the immediate site and are in
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discussions with the Virginia Department of Environmental Quality regarding the
appropriate scope of investigation of possible groundwater contamination
relating to the site. Based on the information presently known, we believe that
future monitoring and remediation costs at this site will be in the range of
$500,000 to $1.1 million.
At the third site, we expect that we will incur expenses of approximately
$30,000 per year for an as yet undetermined period on future operations and
maintenance costs associated with a groundwater remediation system implemented
to address nitrate contamination. The costs for the third site are subject to
reimbursement by the prior owner of the site pursuant to an indemnification
agreement.
At a fourth site, formerly used by Southern States as a petroleum bulk
storage plant, on-going remediation and monitoring activities have resulted in a
decision to implement a more aggressive plan of remediation. The anticipated
costs of this plan of remediation are in the range of $420,000 to $1.6
million.
During fiscal 2000, 1999 and 1998, Southern States incurred expenditures of
$1,456,059, $2,247,510 and $872,036, respectively, for environmental
investigation and remediation at all owned or leased properties. As of June 30,
2000, we had accruals of $3.56 million for future investigation and remediation
costs associated with all currently or formerly owned or leased properties,
including the four sites discussed above. Based on current information and
regulatory requirements, we believe that the accruals established for
environmental expenditures are adequate.
In addition, as a result of off-site disposal activities, we have been
identified as a potentially responsible party under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 at two sites that
are listed on the Superfund National Priorities List. CERCLA imposes joint and
several liability on specified parties for the costs of investigation and
remediation of contaminated properties, regardless of fault or the legality of
the original disposal. Southern States has executed de minimis settlement
agreements for both of these sites. The de minimis agreements provide us with
statutorily authorized protection from private actions by third parties seeking
to recover site clean-up costs, and further provide that the EPA will not
institute proceedings against us relating to the clean-up of the sites. The
agreements can be set aside by the EPA only if we failed to disclose material
facts with respect to our involvement in the sites or if aggregate site clean-up
costs exceed a dollar threshold specified in the agreements, which is ordinarily
set at a multiple of anticipated clean-up costs.
Under the agreement to purchase the Gold Kist Input Business, Southern
States acquired 20 properties specifically identified as having potential
environmental liabilities. Gold Kist has agreed to assume responsibility for
these liabilities, and has agreed, during the 10 years following the
acquisition, to indemnify Southern States for environmental claims when the
aggregate amount of Southern States' losses for each individual claim exceeds
$25,000, up to a maximum limit of $35 million in the aggregate. We do not
consider our risk of incurring material environmental costs with respect to
these properties to be significant in light of its indemnification agreement
with Gold Kist.
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We have expended, and expect in the future to expend, funds for compliance
with environmental laws and regulations. These expenditures may impact Southern
States' future net income. We do not anticipate, however, that our competitive
position will be adversely affected by these expenditures or by new
environmental laws and regulations. Environmental expenditures are capitalized
when the expenditures provide future economic benefits.
During fiscal 2000, Southern States had environmental capital expenditures
of approximately $400,000. We estimate that environmental capital expenditures
for fiscal 2001 will be in the range of $1.0 million to $2.0 million, and that
reasonably foreseeable future levels of capital expenditures for environmental
compliance will be comparable. However, there can be no assurance that
expenditures will not be higher because of continually changing environmental
compliance standards and technology.
Government Regulation
Southern States' business is impacted by numerous federal, state and local
laws that have been enacted to promote fair trade practices, safety, health and
welfare. We believe that our operating procedures conform to the intent of
these laws and that we are currently in substantial compliance with all of these
laws, the violation of which could have a material adverse effect on us.
In addition to the environmental laws discussed in the preceding section,
policies may be implemented from time to time by the United States Department of
Agriculture, the Department of Energy or other governmental agencies which may
impact the demands of farmers for our products or which may impact the methods
by which our operations are conducted. These policies may impact our farm
supply and grain storage and marketing operations.
In 1996, the Federal Agriculture Improvement and Reform Act ("FAIR") was
signed into law. The FAIR legislation, which is sometimes referred to as the
1996 "Freedom to Farm" law, represented the most significant change in
government farm programs in more than 60 years. Under FAIR, the former system
of variable price-linked subsidy payments to farmers was replaced by a program
of fixed payments which decline over a seven-year period. In addition, FAIR
eliminated federal planting restrictions and acreage controls. Southern States
believes that FAIR was intended to accelerate the trend toward greater market
orientation and reduced government influence on the agricultural sector.
Whether this legislation favorably impacts the agriculture sector or our
business depends in large part on whether U.S. agriculture becomes more
competitive in world markets as the agriculture industry moves toward greater
market orientation, the extent to which governmental actions expand
international trade agreements and whether market access opportunities for U.S.
agriculture are increased.
In October 1998, Congress passed legislation that temporarily increased the
subsidy payments that were being phased out by the 1996 FAIR legislation. The
1998 legislation was enacted in response to a variety of world-wide economic
conditions adversely affecting agriculture, including substantial decreases in
the prices of various farm commodities from levels prevailing at the time the
FAIR legislation was enacted. We are not able to predict how this most recent
legislation might affect our business.
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In late 1999, Congress enacted legislation providing $8.7 billion in
emergency relief for farmers impacted by low commodity prices and natural
disasters. This legislation further undercut the philosophy that motivated
passage of the FAIR legislation in 1996.
Commodity Price Hedging Activities
We use commodities futures contracts to minimize the risks associated with
the fluctuation in market prices of grains and petroleum products. These
futures contracts are commitments to either purchase or sell designated amounts
of grains, soybeans and petroleum products at a future date, and may be settled
in cash or through delivery. We maintain hedged positions on our petroleum
products on a periodic basis. With respect to grain, however, our strategy is
to maintain fully hedged positions to the greatest extent possible. Our hedging
activities are for the sole purpose of eliminating the risk of market price
fluctuations. No futures contracts are purchased or sold for purely speculative
purposes. For additional information on commodity price hedging, see Note 15 of
the Notes to Southern States' Consolidated Financial Statements included in this
prospectus.
Southern States maintains hedged positions on petroleum products inventory
to protect against price declines from the time it purchases product to the time
the product is sold. Due to historical market behavior, which results in high
market prices eventually returning to more normalized levels, we perceive our
risk from a decrease in market prices as being greater as the level of market
price increases. For that reason, we seek to hedge a larger proportion of
product "imbalance" when prices are high. A product imbalance occurs when
Southern States has entered into an agreement to sell more product (inventory)
than it has purchased (i.e., a short position) or when Southern States has
purchased more product (inventory) than it has agreements to sell (i.e., a long
position). For example, at a price level below $.50/gal., Southern States
typically hedges only 10%-20% of the product imbalance; at a price level of
$.75/gal., Southern States ordinarily hedges approximately 80% of the imbalance.
The hedge is usually a contract to sell either Number 2 heating oil or gasoline.
The term of the contract is usually 30 to 60 days. Average inventory held by
Southern States ranges from approximately 10 to 12 million gallons. Company
policy limits the maximum number of gallons that can be hedged at any one time
to 12.6 million gallons or 300 contracts.
We also seek to minimize price risks inherent in our grain marketing
operations by engaging in hedging activities in which we enter into obligations
to both purchase grain for a set price on a specific date and to sell grain at a
set price on a specific date to protect the value of open purchase contracts,
open sales contracts and grain inventory from adverse price changes in the corn,
wheat and soybean markets. Company policy limits the aggregate unhedged
position in wheat, corn and soybeans to a maximum of 100,000 bushels. Any
imbalance resulting from the receipt of more or less grain than anticipated is
hedged the day immediately following receipt through the use of additional
futures contracts or through balancing against other receipts or sales. During
harvest periods when deliveries are at their heaviest volume, we will "pre-
hedge" the day's projected receipts to avoid large unhedged overnight positions.
A pre-hedge contract is a management decision to sell short in the market in
anticipation of overnight purchases. Receipts are anticipated based upon
discussions with local growers about their anticipated
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delivery date and time and also based upon specific crop harvest knowledge in a
given region. Commodity futures are traded only on regulated exchanges such as
the Chicago Board of Trade.
We are also a purchaser of agricultural commodities used for the
manufacture of feeds. We use commodity futures for hedging purposes to reduce
the effect of changing commodity prices on a portion of our commodity
inventories and related purchase and sale contracts. We typically enter into
contracts to sell 30% to 35% of our feed inventory at a future date for a set
price. Feed ingredients futures contracts, primarily corn and soybean meal, are
recognized when closed and are accounted for at market. Gains and losses on the
transactions are recorded as a component of product cost. At June 30, 2000, the
fair value of our outstanding commodity futures positions for feed ingredients
was not material.
Legal Proceedings
Southern States is involved in various legal proceedings that arise in the
normal course of business. Based upon our evaluation of the information
currently available, we believe that the ultimate resolution of these
proceedings will not have a material adverse effect on our financial position,
liquidity or results of operations.
We maintain general liability and property insurance and an umbrella and
excess liability policy in amounts we consider adequate and customary for our
business. However, we expect that from time to time we will experience legal
claims in excess of our insurance coverage or claims that ultimately will not be
covered by insurance. Several insurance coverages carried by Southern States
are underwritten by Southern States Insurance Exchange. See "--Investments in
Other Companies and Cooperatives" above.
MANAGEMENT
Directors
The board of directors of Southern States presently consists of 23 persons.
Our members annually elect, on a staggered basis, members of the board of
directors to serve for three year-terms. Members are elected through an
election district process, on a district representation basis. The districts
are redrawn from time to time by the board of directors to provide for equitable
representation of members in our territory. At the present time, 17 of the 23
members of the board of directors are member-elected, or member-designated. The
other six current members of the board, designated by Virginia law as public
directors, are appointed for three-year terms, on a staggered basis, by the
director of agricultural extension for the Commonwealth of Virginia. Each of
these appointed directors represents a different state in our traditional Mid-
Atlantic territory. Public directors need not be members of Southern States.
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<PAGE>
The directors of Southern States are as follows:
<TABLE>
<CAPTION>
Expiration Years
Age as of of Present Served
July 31, Term as as
Name 2000 Position(s) Held Director Director Residence
---- ---- ---------------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Michael W. Beahm 49 Member & Institutional 2002 3 Roanoke, Virginia
Relations Committee
Cecil D. Bell, Jr.* 59 Audit Committee, Chairman 2001 10 Georgetown, Kentucky
Floyd K. Blessing 73 Executive and Budget 2001 16 Houston, Delaware
Committees
James E. Brady, Jr. 64 Executive and Audit 2001 1 Marion, Alabama
Committees
Earl L. Campbell 59 Chairman of the Board; 2000 14 Harrodsburg, Kentucky
Executive Committee
Jere L. Cannon 59 Audit Committee 2002 24 Flemingsburg, Kentucky
William F. Covington* 74 Member & Institutional 2000 13 Mebane, North
Relations Committee, Carolina
Chairman; Executive
Committee
Herbert A. Daniel, Jr. 48 Audit Committee 2001 1 Claxton, Georgia
H. Michael Davis 49 Budget Committee 2000 1 Valdosta, Georgia
John B. East 49 Member & Institutional 2002 Elected Leesburg, Alabama
Relations Committee Nov. 1999
George E. Fisher 67 Member & Institutional 2002 12 Gordonsville,
Relations Committee Virginia
R. Bruce Johnson 48 Budget Committee 2000 5 West Point, Virginia
James A. Kinsey* 50 Executive and Audit 2000 8 Flemington, West
Committees Virginia
J. Wayne McAtee 56 Budget Committee 2000 17 Cadiz, Kentucky
Richard F. Price 70 Member & Institutional 2001 31 Phoenix, Maryland
Relations Committee
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
William G. Pridgeon 48 Executive and Member & 2000 2 Montgomery,
Institutional Relations Michigan
Committees
Curry A. Roberts* 42 Audit Committee 2001 7 Richmond, Virginia
John Henry Smith 50 Vice Chairman of the 2000 8 Rosedale, Virginia
Board; Executive
Committee, Chairman
James A. Stonesifer* 57 Budget Committee 2002 3 Union Bridge,
Maryland
William W. Vanderwende* 66 Budget Committee, Chairman 2002 18 Bridgeville,
Delaware
Raleigh O. Ward, Jr. 49 Member & Institutional 2002 Elected Effingham, South
Relations Committee Nov. 1999 Carolina
Wilbur C. Ward 61 Audit Committee 2001 6 Clarkton, North
Carolina
Charles A. Wilfong 42 Member & Institutional 2001 4 Dunmore, West
Relations Committee Virginia
</TABLE>
* Messrs. Bell (Kentucky), Covington (North Carolina), Kinsey (West
Virginia), Roberts (Virginia), Stonesifer (Maryland) and Vanderwende (Delaware)
are designated public directors.
In connection with the April, 1998, acquisition of Michigan Livestock
Exchange, which expanded our operations into the states of Michigan, Ohio and
Indiana, the board of directors was expanded by one seat. Mr. Pridgeon,
formerly the chairman of the board of directors of Michigan Livestock Exchange,
was designated by the membership of Michigan Livestock Exchange to represent the
Michigan Livestock Exchange territory on the board of directors for a term
expiring in 2000.
In connection with the October, 1998, acquisition of the Gold Kist Inputs
Business, the board of directors was expanded by six additional seats. Under
the terms of the agreement for the purchase of the Gold Kist Inputs Business,
Southern States amended its bylaws to provide for the election by the board of
directors of Gold Kist Inc., sitting as delegates to a special election district
for the Gold Kist territory, of six additional directors for staggered terms
from among the new members in the Gold Kist territory.
Under the staggered terms, two directors initially will serve for one year,
two for two years, and two for three years. Upon the expiration of these terms,
two directors from the Gold Kist territory will be elected annually for three-
year terms. Messrs. Davis, Daniel, and Brady each of whom previously served as
and will continue to serve as a director of Gold Kist, and Messrs. R. Ward and
East, have been elected as directors from the territory formerly served by the
Gold Kist Inputs Business. A sixth individual, Mr. W. P. Smith, Jr., was
elected to serve as a director for Southern States from the Gold Kist territory
for a two year term, but died
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<PAGE>
unexpectedly in November, 1998. The vacancy on the board created by Mr. Smith's
death has not been filled.
During the past five years, each of the directors has owned and/or managed
substantial farming operations, producing a wide range of agricultural products.
While the size and type of products produced on, and the number of personnel
employed at, each of the director's farms varies, each director's business
activities have been primarily related to owner-managed agribusiness
enterprises.
There are no family relationships among any of the directors and executive
officers.
Mr. Price is a member of the board of directors of CoBank, ACB, which has
various lending relationships with Southern States. Mr. Kinsey is a member of
the board of directors of Agfirst Bank, FCB, a farm credit bank that
participates in CoBank's commitments under Southern States' revolving credit
facility. Mr. Brady is a director of The Perry County Bank, Marion, Alabama;
Mr. Price is also a director of Sparks State Bank, Sparks, Maryland; and Mr.
Wilfong is a director of Farm Family Holdings, Inc., Glenmont, New York.
Compensation Committee Interlocks and Insider Participation
Messrs. J. H. Smith (Chairman), Campbell, Blessing, Covington, Brady and
Pridgeon, serve as members of our executive committee which functions as our
compensation committee. None of these directors, nor any of our executive
officers, has any of the relationships to Southern States that are required to
be disclosed by the regulations of the Securities and Exchange Commission.
Director Compensation
Our bylaws provide that compensation and expense reimbursement policies for
directors shall be established periodically by the board of directors.
Currently, directors receive a per diem of $400, with the chairman receiving a
per diem of $600, plus expenses incurred while traveling to and from and
attending meetings of the board of directors or other official meetings or
conferences.
Directors Deferred Compensation Plan. The Southern States directors
deferred compensation plan permits non-employee directors to defer all or part
of their meeting fees, retainers or other remuneration received. The amount to
be deferred and the period for deferral is specified by an election made prior
to the beginning of the fiscal year for a term of three years. Payments begin
under the plan generally upon the director's death or the date specified by the
director in his deferral election. The director's deferred account balance is
credited with interest at a rate determined by the administrator for each
deferral cycle. Distributions are made in quarterly installments over 10 years.
All amounts accrued under the plan have been funded in a trust which is secure
against all contingencies except insolvency of Southern States.
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<PAGE>
Transactions With Directors Who Are Members and Customers
Our members, including our directors, are also our customers and/or
customers of our affiliated financing companies. They purchase products from us
in the normal course of operating their farm businesses and may sell certain
agricultural products to us at market price. The prices, terms and conditions
of any purchase or sale transaction are on the same basis for all of our
members.
Executive Officers
The executive officers of Southern States are as follows:
<TABLE>
<CAPTION>
Age as of
Name July 31, Positions and Offices Held
---- 2000 --------------------------
----
<S> <C> <C>
Wayne A. Boutwell 56 President and Chief Executive Officer -- Mr. Boutwell began his
career in 1970 with the USDA in Washington, D.C. He served as
President and CEO of the National Council of Farmer Cooperatives
from 1983 until 1996. In September 1996, Mr. Boutwell was named
President and Chief Executive Officer - Elect of Southern
States. He became President and Chief Executive Officer of
Southern States in February 1997. Mr. Boutwell serves on the
boards of SunTrust Bank-Mid-Atlantic, SunTrust Bank-Richmond
Community Board, CF Industries, Inc., the National Council of
Farmer Cooperatives, Mississippi State University Agribusiness
Institute and the International Food and Agribusiness Management
Association. Mr. Boutwell received his B.S. and M.S. degrees in
Agricultural Economics from Mississippi State University and his
Ph.D. from Virginia Tech.
K. Gene McClung 56 Group Vice President, Marketing & Logistical Services - Mr.
McClung commenced his career with Southern States in 1964. He
has served in a variety of local, regional and headquarters
managerial positions. He was promoted to his present position
effective April 1, 1998, after serving as Vice President of
Planning, Logistics and Business Development. Mr. McClung also
served Southern States for a number of years as Director, Credit
and Financial Services and as President of Statesman Financial
Corporation. Mr. McClung received his B.A. degree from
Tri-State Baptist College.
George W. Winstead 57 Group Vice President, Ag Inputs & Services -- Mr. Winstead began
his career with Southern States in 1968. He has been in his
present position since July 1, 1993, having previously served in
a variety of local, regional and headquarters managerial
positions. Mr. Winstead serves as chairman of the board of
Universal Cooperatives Inc. and Cooperative Milling, Inc. Mr.
Winstead received his B.S. from East Carolina University.
</TABLE>
62
<PAGE>
<TABLE>
<S> <C> <C>
Jonathan A. Hawkins 61 Senior Vice President and Chief Financial Officer -- Mr. Hawkins
was named to his current position in 1990. He joined Southern
States in 1980 and was promoted to Vice President and Treasurer
in 1983. Prior to joining Southern States, Mr. Hawkins served
as a Vice President of Bank of Virginia in Richmond, Virginia.
He currently serves as Chairman of the Board of the Institute of
Cooperative Financial Officers. Mr. Hawkins received his B.A.
in Mathematics from the University of Richmond.
Gene R. Anderson 60 Senior Vice President, Corporate and Member Services -- Mr.
Anderson joined Southern States on May 1, 1986, as Vice
President for Human Resources. He was promoted to his present
position on October 15, 1998, having previously served in
several headquarters managerial capacities. Before joining
Southern States, Mr. Anderson worked for 23 years for E.I. Du
Pont de Nemours & Co. Mr. Anderson has a B.A. in Industrial
Relations from the University of North Carolina.
C.A. Miller 61 Senior Vice President, Corporate Information and Support
Services -- Mr. Miller joined Southern States as Director of
Information Systems in 1979 and was later promoted to Vice
President. Mr. Miller was promoted to his current position on
October 15, 1998. Prior to joining Southern States, Mr. Miller
served as Vice President of Deposit Guaranty National Bank in
Jackson, Mississippi, and then as Senior Vice President of the
First National Bank of Birmingham, Alabama. Mr. Miller has a
B.A. in Banking and Finance and an M.B.A. in Finance and
Economics from the University of Mississippi.
N. Hopper Ancarrow, Jr. 55 Vice President, General Counsel and Secretary -- Mr. Ancarrow
joined Southern States' legal staff in 1971 and from 1972 until
1987 served as Assistant Secretary of Southern States. In 1987,
he was named Vice President, General Counsel and Secretary. Mr.
Ancarrow earned his B.A. from the University of North Carolina
and his J.D. from the College of William & Mary - Marshall Wythe
School of Law.
Richard G. Sherman 53 Vice President, Human Resources -- Mr. Sherman joined Southern
States in June 1988 as Director of Human Resources at the
central office in Richmond, Virginia. He was promoted to his
current position in August 1989. Before joining Southern
States, Mr. Sherman worked for Texas City Refining Inc. and
Agway Inc. He has a B.A. in Economics and Business from Rider
College, an M.A. in Human Resources from the University of
Houston and holds a Senior Professional in Human Resources
designation.
</TABLE>
Our officers serve for a term of one year and until their successors are
elected by the board of directors. During the past five years, the principal
occupation of each of the above named executive officers, other than Mr.
Boutwell, has been as an officer or employee of Southern States.
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<PAGE>
Executive Compensation
The following table shows, for the fiscal years ended June 30, 2000, 1999
and 1998, all compensation paid or accrued by Southern States and its
subsidiaries to its chief executive officer and each of the four other most
highly compensated executive officers.
You should read the following information with the data in the table below:
. "Salary" reflects salary before pretax contributions under the Southern
States thrift plan and before pretax contributions under the Southern
States flexible benefits plan.
. "Bonus" reflects share of earnings fund and executive bonus, if any,
accrued for each of the fiscal years under the Southern States deferred
compensation plan, including the incentive compensation awards in addition
to the deferral rights. The various incentive compensation awards are
described below. For the fiscal year ended June 30, 1999, $286,714 was
subtracted from Mr. Boutwell's incentive account as a result of incentive
shortfalls for the respective years. However, the balance was not reduced
below $0, and effective for fiscal years beginning on or after July 1,
1999, there will be no further subtractions from Mr. Boutwell's incentive
account as a result of incentive shortfalls. Any balance in the incentive
account is subject to forfeiture. See "--Bonus and Deferred Compensation--
CEO Incentive Program" below.
. "Other Annual Compensation" reflects, in the case of Messrs. Hawkins and
Ancarrow, that portion of the interest earned under the Southern States
deferred compensation plan above 120% of the applicable federal rate in
those accounts not deemed invested in externally managed investments, as
well as amounts attributable to Southern States' payment of certain taxes
on their behalf. Other than such amounts, for the fiscal years ended June
30, 2000, 1999 and 1998 no amount of "Other Annual Compensation" was paid
to any of the executive officers listed in the table, except for
perquisites and other personal benefits which for each named executive
officer did not exceed the lesser of $50,000 or 10% of the amounts reported
as salary and bonus for such individual.
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<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------
Year
Ending Other Annual All Other
Name and Principal Position June 30 Salary Bonus Compensation Compensation
--------------------------- ------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Wayne A. Boutwell 2000 $448,651 --- --- $11,702(1)
President and Chief Executive 1999 419,910 --- --- 11,500(1)
Officer (1) 1998 381,429 $29,615 --- 13,033(1)
George W. Winstead 2000 $196,038 $41,682 --- $ 7,548(2)
Group Vice President 1999 180,512 --- --- 7,873(2)
Ag Inputs & Services 1998 169,778 15,826 --- 7,471(2)
K. Gene McClung 2000 $187,215 $40,665 --- $ 7,087(3)
Group Vice President 1999 166,292 --- --- 7,152(3)
Marketing & Logistical Services 1998 133,428 17,712 --- 6,877(3)
Jonathan A. Hawkins 2000 $182,563 $44,332 $2,429 $ 9,203(4)
Senior Vice President and 1999 172,008 --- 2,150 9,208(4)
Chief Financial Officer 1998 154,591 25,630 1,924 9,168(4)
N. Hopper Ancarrow, Jr. 2000 $156,087 $37,356 $1,318 $ 6,036(5)
Vice President, General Counsel 1999 150,128 24,986 1,160 5,937(5)
and Secretary 1998 144,409 22,731 1,046 5,853(5)
</TABLE>
(1) Mr. Boutwell became president and chief executive officer effective
February 1, 1997. Reflects $2,602, $2,400 and $3,934 contributed or matched by
Southern States or its subsidiaries for fiscal years 2000, 1999 and 1998,
respectively, under the Southern States thrift plan. The remaining amount shown
for each fiscal year was paid by Southern States for life insurance premiums
under a split dollar life insurance agreement. Southern States will recover the
cost of premium payments from the cash value of the policies.
(2) Reflects $2,541, $2,867 and $2,465 contributed or matched by Southern
States or its subsidiaries for fiscal years 2000, 1999 and 1998, respectively,
under the Southern States thrift plan. The remaining amount shown for each
fiscal year was paid by Southern States for life insurance premiums under a
split dollar life insurance agreement. Southern States will recover the cost of
premium payments from the cash value of the policies.
(3) Reflects $2,579, $2,644 and $2,369 contributed or matched by Southern
States or its subsidiaries for fiscal years 2000, 1999 and 1998, respectively,
under the Southern States thrift plan. The remaining amount shown for each
fiscal year was paid by Southern States for life insurance premiums under a
split dollar life insurance agreement. Southern States will recover the cost of
premium payments from the cash value of the policies.
(4) Reflects $2,576, $2,520 and $2,481 contributed or matched by Southern
States or its subsidiaries for fiscal years 2000, 1999 and 1998, respectively,
under the Southern States thrift plan. The remaining amount shown for each
fiscal year was paid by Southern States for life insurance premiums under a
split dollar life insurance agreement. Southern States will recover the cost of
premium payments from the cash value of the policies.
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<PAGE>
(5) Reflects $2,317, $2,218 and $2,134 contributed or matched by Southern
States or its subsidiaries for fiscal years 2000, 1999 and 1998, respectively,
under the Southern States thrift plan. The remaining amount shown for each
fiscal year was paid by Southern States for life insurance premiums under a
split dollar life insurance agreement. Southern States will recover the cost of
premium payments from the cash value of the policies.
Bonus and Deferred Compensation
The Southern States executive incentive plan is an incentive compensation
program as well as an elective deferred compensation plan. The executive
incentive plan, formerly known as the Southern States deferred compensation
plan, permits eligible employees to elect to defer salary as well as incentive
compensation. Amendments to the executive incentive plan effective July 1, 2000
included changing the name of the plan as well as altering the structure of the
bonus program. A summary of benefits under both the current and prior plan
appears below.
Earnings Fund Program. The earnings fund program was an incentive
compensation program effective during fiscal years prior to July 1, 2000. Under
the program, all regular employees other than the chief executive officer who
were designated as eligible by the board were entitled to a proportionate share
of an earnings fund for each fiscal year. The earnings fund share provided to
each employee was dependent on the employee's position, fiscal year salary and
Southern States' fiscal year performance. The earnings fund included amounts by
which Southern States exceeded a threshold level of performance. Distributions
under the program were made annually after the close of the fiscal year. For the
fiscal year ending June 30, 2000, the chief financial officer and the two group
vice presidents were entitled to the greater of their earnings fund share or any
award granted under the CFO and group vice presidents incentive program
described below. This program was eliminated effective July 1, 2000.
CEO Incentive Program. The CEO incentive program, which was in effect prior
to July 1, 2000, was a long term incentive program under which the chief
executive officer was granted an award equal to 1.5% of the amount by which
earnings before taxes exceeded 10% of total stockholders' and patrons' equity.
Each award was placed in an incentive account that was established with an
initial balance of $150,000. One-third of the incentive account balance was
distributed at the end of each fiscal year. No distribution, however, was made
for fiscal years in which Southern States incurred losses. The board retained
the right to adjust earnings used for determining the award in the event of
unusual gains or losses during the fiscal year. The board could not reduce the
balance in the incentive account or defer a scheduled payment for which no
deferral election had been filed. The account balance was subject to forfeiture
upon the chief executive officer's early termination of employment. This program
was eliminated effective July 1, 2000.
CFO and Group Vice Presidents Incentive Program. For the fiscal year ending
June 30, 1999, the chief financial officer (Mr. Hawkins) and the two group vice
presidents (Messrs. Winstead and McClung) were eligible for incentive awards
equal to .40% of the amount by which earnings before taxes exceeded a 4% return
on total assets. No awards were made for that year. Awards made under this
program were to be placed in an incentive account established on Southern
States' books. One-half of the incentive account balance was to be distributed
at the
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<PAGE>
end of each fiscal year. The accumulated balance was to be paid at the end of
the fiscal year following the executive's termination of employment for any
reason. For the fiscal year ending June 30, 2000, these executives will be
awarded the greater of the incentive award bonus described in this paragraph or
their share of the awards made under the earnings fund plus executive bonus
programs. This program was eliminated effective July 1, 2000.
Executive Bonus. For fiscal years beginning on or after July 1, 2000, each
executive officer designated by the board of directors is eligible for an
executive bonus. The amount is determined by, and in the sole discretion of, the
chief executive officer. Executive bonuses are awarded based on an assessment of
the executive's performance during the preceding 12 months and are payable after
the close of the fiscal year. For fiscal years beginning on or after July 1,
2000, the executive bonuses awarded to the chief financial officer, the two
group vice presidents and Series 200 executives (who are vice presidents) may
not exceed 15% of their base salary as of the fiscal year-end, and bonuses
awarded to Series 100 executives (who are titled as directors of various
Southern States divisions) may not exceed 10% of their base salary as of the
fiscal year-end.
Corporate Incentive Award. Corporate incentive awards are available for
fiscal years beginning after June 30, 2000. Each employee designated by the
board as eligible for the award will receive a percentage of earnings before tax
(EBT) in excess of 8% of stockholders' and patrons' (S&P) equity as follows:
Chief Executive Officer 1.50% of EBT in excess of 8% of S&P equity
Chief Financial Officer 0.35% of EBT in excess of 8% of S&P equity
Group Vice Presidents 0.35% of EBT in excess of 8% of S&P equity
Others in 200 Pay Series 0.25% of EBT in excess of 8% of S&P equity
100 Pay Series Employees 0.15% of EBT in excess of 8% of S&P equity
For this purpose, "earnings before tax" means the amount appearing on the
audited consolidated financial statements of Southern States as "Savings from
continuing operations before income taxes and cumulative effect of change in
accounting principles" adjusted to exclude the equity in undistributed earnings
(losses) of associated companies for the fiscal year, net of deferred income
taxes. "Stockholders' and patrons' equity" means the sum of stockholders' and
patrons' equity determined based on audited consolidated financial statements of
Southern States at the end of the prior fiscal year adjusted to exclude
preferred stocks and accumulated equity in undistributed earnings (losses) of
associated companies, net of deferred income taxes.
Distribution and Deferral of Corporate Incentive Award and Executive Bonus
and Phantom Unit Account. Participants who have not reached age 59 at the end of
a fiscal year will have 25% of their corporate incentive award and/or executive
bonus credited to an individual book reserve account (called the participant's
phantom unit account). The amount credited to the phantom unit account will be
stated as a number of units determined by dividing the amount of the deferred
corporate incentive award and/or executive bonus by the value of one unit. Each
unit shall have a value determined by dividing stockholders' and patrons' equity
as of the beginning of the fiscal year by 12 million.
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<PAGE>
Payment of the phantom unit account to the participant or his beneficiary
will begin as soon as practical following the first July 1 or January 1
following the participant's cessation of employment for whatever reason.
Participants may elect to receive payment in a lump sum or in substantially
equal quarterly installments over a term of five years. Each unit in the
participant's account will have a value determined by dividing stockholders' and
patrons' equity as of the January 1 or July 1 nearest the participant's
termination of employment by 12 million.
The remaining 75% of the corporate incentive award and/or executive bonus
for participants who are under age 59 as of the end of the fiscal year and 100%
of such awards and/or bonuses for participants who are 59 or older as of the end
of the fiscal year may be paid in cash to the participant as soon as reasonably
practical following the determination of the awards and/or bonuses, or may be
deferred under the deferred compensation provisions described below.
Deferred Compensation. The amount to be deferred and the period of deferral
is specified by an election made before the beginning of each fiscal year.
Payments begin under the plan upon the executive's death, disability, or
cessation of employment, or upon election not later than the executive's 65th
birthday. The executive's deferred account balance is credited with earnings and
losses based on deemed investments selected by the executive from the same funds
available for actual investment under the Southern States thrift plan.
Distributions are made in quarterly installments over 10 years. All vested
amounts accrued under the plan have been funded in a trust which is secure
against all contingencies except the insolvency of Southern States. Amounts
deferred pursuant to the plan for the accounts of the named individuals during
the fiscal years ended June 30, 1998, 1999, and 2000 are included under the
salary and bonus columns in the cash compensation table.
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<PAGE>
Retirement Benefits
The following table shows the estimated annual benefits payable in the form
of a single life annuity upon retirement under Southern States' retirement
program, consisting of the retirement plan for employees of Southern States and
the Southern States supplemental retirement plan, to persons in specified years
of service and average earnings classifications, before offset of Social
Security benefits, assuming retirement at 65 or at or after 62 with 30 years of
creditable service:
Estimated Annual Benefits For Years of Service Indicated
--------------------------------------------------------
Highest 36
Month
Average
Earnings 10 15 20 25 30 or more
-------- -- -- -- -- ----------
$ 50,000 $ 10,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000
100,000 20,000 30,000 40,000 50,000 60,000
150,000 30,000 45,000 60,000 75,000 90,000
200,000 40,000 60,000 80,000 100,000 120,000
250,000 50,000 75,000 100,000 125,000 150,000
300,000 60,000 90,000 120,000 150,000 180,000
350,000 70,000 105,000 140,000 175,000 210,000
400,000 80,000 120,000 160,000 200,000 240,000
450,000 90,000 135,000 180,000 225,000 270,000
500,000 100,000 150,000 200,000 250,000 300,000
Compensation covered by the Plan includes compensation set forth in the
columns entitled "Salary" and "Bonus" in the Summary Compensation Table reduced
by the bonus amounts that are electively deferred by executives under the
Southern States deferred compensation plan. The credited years of service as of
June 30, 2000, under the retirement income plan for the five executive officers
listed in the summary compensation table are as follows: Mr. Boutwell (3); Mr.
Winstead (31); Mr. McClung (31); Mr. Hawkins (19); and Mr. Ancarrow (28).
Security Ownership of Beneficial Owners and Management
Our stockholder equity consists of our membership common stock and our
preferred stock. Only the shares of membership common stock have voting rights.
Under our articles of incorporation and under applicable Virginia law, each
of our members has only one vote in our business affairs, regardless of the
number of shares of common stock owned. See "Southern States--Cooperative
Structure--Members and Membership Stock."
The table below shows, as of August 31, 2000, the number of shares of
Southern States' membership common stock held by persons known by Southern
States to own more than five percent of Southern States' issued and outstanding
membership common stock, each of Southern States' directors, the executive
officers named in the Annual Compensation table, and all of
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<PAGE>
Southern States' directors and named executive officers as a group. No member of
the board of directors or of senior management owns any shares of preferred
stock of Southern States.
Shares of Membership
Directors Common Stock Owned
--------- ------------------
Michael W. Beahm -- (1)
Cecil D. Bell, Jr. -- (1)
Floyd K. Blessing -- (1)
James E. Brady, Jr. 1.00
Earl L. Campbell 2.00
Jere L. Cannon -- (1)
William F. Covington/Covington Dairy Farm Inc. 1.00
Herbert A. Daniel, Jr. 1.00
H. Michael Davis 1.00
John B. East 1.00
George E. Fisher 1.00
R. Bruce Johnson 1.00
James A. Kinsey 161.66
J. Wayne McAtee/McAtee Farms 1.00
Richard F. Price 4,934.06 (2)
William G. Pridgeon/Pridgeon Farms 1.00
Curry A. Roberts --
John Henry Smith -- (1)
James A. Stonesifer 2.00
William W. Vanderwende 35.92
Raleigh O. Ward, Jr. 1.00
Wilbur C. Ward 1.00
Charles A. Wilfong -- (1)
Shares of Membership
Executive Officers Common Stock Owned
------------------ ------------------
Wayne A. Boutwell --
K. Gene McClung --
George W. Winstead --
Jonathan A. Hawkins --
N. Hopper Ancarrow, Jr. 1.00 (3)
All directors and named executive
officers as a group 5,147.64
--------------------------
(1) Those directors who do not own shares of membership common stock in
Southern States, other than Mr. Curry, own shares of a managed local cooperative
which itself is a member of Southern States. Mr. Curry does not qualify as an
"agricultural producer" and therefore is not qualified to own a share of our
membership common stock.
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<PAGE>
(2) The relatively large number of shares of membership common stock owned
by Mr. Price is attributable to the fact that he has been a member of Southern
States for many years, and in years prior to 1974 patrons received shares of
membership common stock as the non-cash portion of patronage refunds paid by
Southern States.
(3) Mr. Ancarrow is the only member of senior management who qualifies as
an "agricultural producer" and is consequently eligible to own a share of
membership common stock.
At June 30, 2000, none of our directors or executive officers listed in the
above table, either individually or as a group, beneficially owned in excess of
one percent of Southern States' membership common stock or any other class of
Southern States' capital stock.
At June 30, 2000, no person or entity beneficially owned more than five
percent of any class of our capital stock.
It is important for readers of the above table to understand that each
member of Southern States, regardless of the number of shares of membership
common stock owned, has only one vote on matters submitted to our members for a
vote.
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DESCRIPTION OF THE SENIOR NOTES
The term "Senior Notes" describes the notes we are offering by this
prospectus. We will issue the Senior Notes in multiple series under an Indenture
between us and First Union National Bank, as trustee. The Indenture will be
qualified under the Trust Indenture Act of 1939. We have summarized the material
provisions of the Indenture below. The forms of the Senior Notes have been
included as exhibits to the Indenture, which has been filed as Exhibit 4.1 to
the registration statement of which this prospectus is a part. You should read
the Indenture and the forms of the Senior Notes for provisions that may be
important to you. In the summary below, we have included references to section
numbers of the Indenture so you can easily locate these provisions. Capitalized
terms used in the summary have the meanings specified in the Indenture.
Under this prospectus, Southern States is offering the following Senior
Notes, issuable in series, as follows:
Minimum
Series Initial Investment
----------------------------------------------- ----------------------
Six month, Series A (Standard Certificate) $ 1,000
Six month, Series B (Large Certificate) 10,000
Six month, Series C (Jumbo Certificate) 100,000
One year, Series D (Standard Certificate) 1,000
One year, Series E (Large Certificate) 10,000
Two year, Series F (Standard Certificate) 1,000
Two year, Series G (Large Certificate) 10,000
Five year, Series H (Standard Certificate) 1,000
Five year, Series I (Large Certificate) 10,000
Seven year, Series J (Standard Certificate) 1,000
Seven year, Series K (Large Certificate) 10,000
Ranking
The Senior Notes will be our direct, unsecured obligations and will rank
equally with all other unsecured and unsubordinated debt of Southern States. As
of June 30, 2000 Southern States had outstanding unsecured indebtedness of
approximately $170.2 million that ranked equal to the Senior Notes. The Senior
Notes will be effectively subordinated to all of our secured debt, which
aggregated approximately $22.2 million at June 30, 2000. This secured debt
included three tax-exempt bond financings, one capital lease obligation and a
portion of the indebtedness held by CoBank. Each of these obligations was
separately secured by specific properties.
The Indenture does not limit the amount of Senior Notes that we may issue
under it. We may issue Senior Notes from time to time under the Indenture in one
or more series by entering into supplemental indentures, by a resolution of our
board of directors or by action taken
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pursuant to a board resolution and set forth in an officers' certificate.
(Section 3.01 of the Indenture.)
The Indenture also does not limit the amount of other securities that may
be issued by Southern States or other indebtedness that may be incurred by
Southern States, either secured or unsecured, superior or subordinate to the
Senior Notes, and does not protect the holders of Senior Notes if we engage in a
highly leveraged transaction.
None of Southern States' credit facilities or other borrowing agreements
prohibit the issuance of additional senior debt as long as the additional debt
is unsecured and does not cause a default of the financial covenants in Southern
States' various loan agreements. The most restrictive debt limitation covenant
in any of Southern States' loan agreements limited Southern States' aggregate
senior indebtedness, whether secured or unsecured, to approximately $274.5
million at June 30, 2000, based on Southern States' capitalization at that date.
Maturities
The maturity date for each Senior Note will be calculated from the date of
original issuance. The date of original issuance will be set forth on the Senior
Note certificate for each Senior Note purchased and will be the date on which
the full purchase price is received by Southern States. For example, in the case
of a five year Senior Note issued on April 1, 2001, the maturity date will be
March 31, 2006. In the case of a seven year Senior Note issued on June 15, 2002,
the maturity date will be June 14, 2009. In the case of all Senior Notes, the
payment of the principal amount, together with any accrued but unpaid interest
to the date of maturity, will be made at maturity. Payment will be made at
maturity only upon presentation and surrender to the paying agent of a Senior
Note that has matured. No interest will accrue on or after the date of maturity,
regardless of the date of presentation and surrender of any Senior Note.
Denominations
The Senior Notes will be sold in minimum denominations ranging from $1,000
to $100,000. The Series A, D, F, H and J Senior Notes (the "Standard Certificate
Notes") will be sold in minimum denominations of $1,000 and increments of $100
above that amount. Holders of Standard Certificate Notes electing to reinvest
interest, however, may hold Standard Certificate Notes in any principal amount
over $1,000.
The Series B, E, G, I and K Senior Notes (the "Large Certificate Notes")
will be sold in minimum denominations of $10,000 and increments of $500 above
that amount. Holders of Large Certificate Notes who elect to reinvest interest,
however, may hold Large Certificate Notes in any principal amount over $10,000.
The Series C Senior Notes (the "Jumbo Certificate Notes") will be sold in
minimum denominations of $100,000 and increments of $1,000 above that amount.
Holders of Jumbo Certificate Notes who elect to reinvest interest, however, may
hold Jumbo Certificate Notes in any principal amount over $100,000. (Sections
3.01 and 3.02 of the Indenture.)
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Interest Rates
The rates of interest paid on the Senior Notes will be determined from time
to time by the board of directors of Southern States or its delegate(s), after
giving consideration to the current rates of interest paid on similar securities
in the various money markets and Southern States' need for funds. Interest
payments will be calculated based on a 365-day year.
All Senior Notes of the same series issued during a particular calendar
month will bear the same interest rate. A new interest rate for each series of
Senior Notes will be established each month as of the first business day of the
month. Any change in the interest rates to be paid on the Senior Notes will not
affect the interest rate on any Senior Note already issued. The interest rates
established for each series of Senior Notes are set forth in the table on page 2
of the Summary.
Whenever the interest rates are changed, we will supplement this prospectus
to specify the interest rates in effect for Senior Notes issued after the date
of the change. We will also set forth the applicable interest rate for each
Senior Note in the confirmation of purchase you receive in connection with the
purchase of a Senior Note purchased by you. In addition, each Senior Note will
state on its face the rate of interest that particular Senior Note will bear.
Interest Payments
Interest will be payable on the Senior Notes as follows:
. in the case of six month Senior Notes, interest will be payable only at
maturity; and
. in the case of all other Senior Notes, interest will be paid quarterly
on January 1, April 1, July 1 and October 1, to holders of record on the
15th day of the preceding month (or, if originally issued between the
record date and the payment date, to the holder on the date of original
issuance except that in the case of original issuances made on or after
the 15th day of March, June, September and December and prior to the
1st day of the next succeeding month, interest from the date of
original issuance through the end of the month in which such purchase
was made will be paid at the time of and together with the next full
quarterly interest payment.)
As the holder of a Senior Note, you will have the option of receiving interest
(and principal) payments by check or by electronic fund transfer to an account
designated by you. (Sections 3.07 and 6.01 of the Indenture.)
Interest Reinvestment Option
At the time of application for purchase of a Senior Note (other than a six
month Senior Note), or at any time thereafter, the holder, by written notice to
Southern States, may elect to have all interest payable on the Senior Notes
reinvested automatically. In the event a holder elects the interest reinvestment
option, the interest due on each quarterly interest payment date will, until the
date of maturity or until the holder's earlier revocation of the interest
reinvestment option election, be added to the principal amount of the Senior
Note and will earn interest
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thereafter on the same basis and at the same rate as the original principal
amount. As a holder, you may revoke the election as to future interest payments
at any time by written notice to Southern States. Notice will be effective on
the date it is received by Southern States. Interest reinvested will be subject
to federal income tax as if the interest had been received by the holder at the
time reinvested. Any election of the interest reinvestment option will
automatically terminate upon any event of default. If Southern States thereafter
cures the default, the holder of a Senior Note will again have the right to
elect the interest reinvestment option, by providing written notice to Southern
States of the election. (Section 3.07 of the Indenture.)
Redemption at the Option of Holders
Southern States will redeem Senior Notes prior to maturity at the request
of the holder subject, except in limited circumstances, to the imposition of an
interest payment penalty. We will not apply an interest penalty to redemptions:
. in the case of death of a holder of Senior Notes, upon written request
and delivery of satisfactory proof of death and other documentation and
in accordance with applicable laws; or
. in the case of Senior Notes held in an individual retirement account
established under section 408 of the Internal Revenue Code (an "IRA"),
upon written request, to the extent necessary to satisfy mandatory
withdrawals from the IRA which are required by the Internal Revenue
Code. (In general, the Internal Revenue Code requires mandatory
withdrawals from an IRA to commence on April 1 following the calendar
year in which the beneficiary reaches the age of 70 1/2 years).
In either one of these events, redemption will be in an amount equal to the
full principal amount of the Senior Note being redeemed, plus interest accrued
and unpaid to the date of redemption. (Sections 3.01 and 5.01 of the Indenture.)
Interest Penalties for Early Redemption. Southern States will impose an
interest penalty for redemptions made at the request of a holder prior to
maturity for reasons other than death or mandatory IRA withdrawals. In the case
of six month and one year Senior Notes, the penalty will be equal to three
months' interest. In the case of Senior Notes with a maturity date of more than
one year, the penalty will be equal to six months' interest. In all cases, the
interest penalty will be computed at the nominal (simple interest) rate shown on
the Senior Note being redeemed. This penalty will be deducted from your proceeds
upon redemption regardless of the length of time the Senior Note has been
outstanding. The penalty could exceed the amount of interest paid or accrued on
the Senior Note to the redemption date, thus resulting in a redemption price
that is less than the principal amount of the Senior Note. (Section 5.01 of the
Indenture.)
Redemption prior to maturity will be made at the face value of the Senior
Notes plus accrued interest, less any applicable interest penalty for early
redemption. The following examples illustrate the calculation of the redemption
price assuming the stated principal amounts and interest rates and assuming that
the Senior Note is being redeemed for a reason other than death or mandatory IRA
withdrawals. The total redemption price in each example will vary with different
interest rates and principal amounts.
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. For a one year Senior Note in the principal amount of $1,000 bearing
interest at 6.5%, purchased on December 1, 2001, and redeemed at the
request of the holder on January 15, 2002, the redemption price would
equal:
$1,000.00 (Principal amount)
plus 8.02 (45 days' accrued interest at 6.5% per annum)
---------
1,008.02
less 16.25 (3 months' simple interest at 6.5% per annum)
---------
$ 991.77 (Total Redemption Price)
. For a five year Senior Note in the principal amount of $5,000 bearing
interest at 7.0%, purchased on October 1, 2001, and redeemed at the
request of the holder on June 15, 2002, the redemption price would
equal:
$5,000.00 (Principal amount)
plus 71.92 (75 days' accrued interest at 7.0% per annum,
---------
since the last payment date)
5,062.92
less 175.00 (6 months' simple interest at 7.0% per annum)
---------
$4,896.92 (Total Redemption Price)
Redemption at the Option of Southern States
At any time after two years from the date of original issuance but prior to
maturity, at the option of Southern States, Southern States may redeem all, or a
portion, of the five year and seven year Senior Notes. This redemption may be
made on not less than fifteen days' written notice to the holder, at the face
value of the Senior Note plus accrued interest to the date of redemption only.
The Indenture permits Southern States to select at its discretion which Senior
Notes to redeem. (Section 4.01 of the Indenture.)
Payment and Paying Agent
Southern States will serve as its own paying agent for the Senior Notes. In
our capacity as paying agent, we will operate through the Southern States'
headquarters in Richmond, Virginia. We may, however, change or add paying agents
or approve a change of the office through which a paying agent acts. (Section
6.04 of the Indenture.)
The paying agent will pay the principal of any Senior Notes at maturity (or
upon any redemption or repayment) and upon the receipt of certificates for
Senior Notes that are surrendered to it. The paying agent will pay principal and
interest on the Senior Notes, subject to the return of the certificate
evidencing the Senior Note, at its office or, at the option of the holder of the
Senior Note:
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. by electronic fund transfer to an account at a banking institution in
the United States that is designated in writing to the paying agent; or
. by check mailed to the address of the person entitled to the payment, as
that address appears in the security register for those Senior Notes.
(Sections 3.07 and 6.01 of the Indenture.)
Any money that we have paid to a paying agent, or have held in trust, for
principal or interest on the Senior Notes that remains unclaimed at the end of
two years after that principal or interest has become due will be repaid to us
at our request. After repayment to Southern States, holders of the Senior Notes
should look only to us for those payments. (Section 6.06 of the Indenture.)
Transferability
The Senior Notes are transferable on the books of Southern States when
properly endorsed but are not negotiable.
Each of the Senior Notes is transferable, in whole but not in part, upon
the delivery to the transfer agent of a written instrument of transfer duly
executed by the holder of the Senior Note(s) to be transferred or by his duly
authorized attorney or legal representative. Southern States will serve as its
own transfer agent for the Senior Notes. (Section 3.05 of the Indenture.)
Modification of the Indenture
The Indenture contains provisions permitting Southern States and the
trustee to enter into one or more supplemental indentures without the consent of
the holders of any of the Senior Notes only:
. to reflect the succession of another corporation to Southern States and
the assumption by the successor of the covenants and obligations of
Southern States, including the Senior Notes issued and any related
interest;
. to add to the covenants of Southern States for the benefit of the
holders of all or any series of Senior Notes issued under the Indenture
or to surrender any right or power conferred upon Southern States under
the Indenture;
. to add any additional events of default with respect to all or any
series of Senior Notes issued under the Indenture;
. to change or eliminate any of the provisions of the Indenture relating
to one or more series of Senior Notes issued under the Indenture;
however, no change or elimination shall become effective until there are
no longer any Senior Notes outstanding of any series that is entitled to
the benefit of such provision before the execution of such supplemental
indenture;
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. to create a new series of Senior Notes under the Indenture and establish
the form or terms of new series of Senior Notes;
. to reflect the appointment of, and provide for the acceptance of
appointment by, a successor trustee with respect to the issued Senior
Notes and to add to or change any of the provisions of the Indenture as
necessary to allow for the administration of the trust by more than one
trustee;
. to cure any ambiguity or correct or supplement any provision in the
Indenture that may be inconsistent with any other provision in the
Indenture or to add new provisions with respect to matters or questions
arising under the Indenture as long as the new provisions are not
inconsistent with the existing provisions of the Indenture and do not
adversely affect in any material respect the interests of the holders of
any series of Senior Notes issued under the Indenture;
. to modify, eliminate or add to the provisions of the Indenture to the
extent required to qualify the Indenture under the Trust Indenture Act
or under any similar federal statute subsequently enacted; or
. to provide for the issuance of uncertificated Senior Notes and to permit
registration, transfer and exchange of Senior Notes by book-entry.
(Section 12.01 of the Indenture.)
We may also enter into one of more supplemental indentures with the trustee
to modify our rights and obligations and the rights of the holders as long as we
have the consent of the holders of a majority in aggregate principal amount of
the outstanding Senior Notes of each series affected by the modification. Except
with respect to the postponement of overdue interest payments discussed below,
however,
. no modification of the principal or interest payment terms;
. no modification reducing the percentage in aggregate principal amount of
Senior Notes of any series required for consent to a modification under
the Indenture on behalf of all holders of that series; and
. no modification changing our obligation to maintain an office for the
transfer, exchange, redemption and payment of Senior Notes and delivery
of notices and demands to or on Southern States with respect to the
Senior Notes
is effective against any holder without that holder's consent. (Section 12.02 of
the Indenture.)
Defaults and Notice of Default; Waiver
An "event of default" with respect to the Senior Notes means any of the
following:
. our failure to pay the principal of the Senior Notes when due;
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. our failure to pay any interest on the Senior Notes within 60 days of
becoming due;
. the adjudication of Southern States as bankrupt by a court of competent
jurisdiction, unless the judgment is vacated within 90 days;
. the entry of an order approving a petition seeking reorganization of
Southern States under federal or state bankruptcy laws, unless the order
is vacated within 90 days;
. the appointment of a trustee or receiver of all or substantially all of
our property, unless the appointment is vacated within 90 days or we
consent to the appointment;
. our filing of a voluntary petition in bankruptcy, of a petition or
answer seeking reorganization under federal or state bankruptcy laws, or
of a petition to take advantage of any insolvency act;
. our making of an assignment for the benefit of creditors; or
. our failure to perform any other covenant or agreement contained in the
Indenture for a period of 90 days after the trustee or the holders of at
least a majority in aggregate principal amount of the Senior Notes of a
particular series have made a written demand on us to perform. (Section
8.01 of the Indenture.)
The occurrence of an event of default for a particular series of Senior
Notes does not necessarily constitute an event of default for any other series
of Senior Notes issued under the Indenture. (Sections 8.02 and 8.03 of the
Indenture.)
The Indenture provides that the trustee shall within 90 days after the
occurrence of an event of default, not including periods of grace, give the
holders of the affected series of Senior Notes notice of the default, unless the
default has been cured. The trustee may, however, withhold notice to the holders
of Senior Notes of any default (except a default in the payment of principal or
interest) if the trustee considers the withholding of notice to be in the
interests of the holders. (Section 8.02 of the Indenture.)
The holders of a majority in aggregate principal amount of the outstanding
Senior Notes of any series under the Indenture with respect to which a default
has occurred and is continuing may waive a default for that series, except a
default in the payment of principal or interest on the Senior Notes or a default
with respect to a covenant or provision that cannot be amended or modified
without the consent of the holder of each outstanding Senior Note of the series
affected. (Sections 8.03 and 8.05 of the Indenture.)
If an event of default for any series of Senior Notes occurs and continues,
the trustee or the holders of at least 25% in aggregate principal amount of the
Senior Notes of that series may declare the entire principal of the Senior Notes
of that series and all interest accrued thereon due and payable immediately upon
written notice to Southern States and the trustee if given by the holders.
However, in the case of the occurrence of one of the specific events of default
relating to the bankruptcy, insolvency or reorganization of Southern States, all
Senior Notes will become due and payable without further action or notice.
(Section 8.03 of the Indenture.)
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Southern States is bound by various loan agreements that govern its
outstanding indebtedness. Under those loan agreements, if, as a result of any
event of default under the Indenture, Southern States' obligation to pay
principal of or interest on the Senior Notes of any series is accelerated, the
indebtedness payable by Southern States under the loan agreements could be
accelerated as well.
The Indenture provides that the trustee may sue Southern States in the case
of our failure to pay the principal of any Senior Note when due and payable, or
in the case of our failure to pay the interest on any Senior Note within 60 days
after such interest is due. The Indenture further provides that the right of any
holder to receive payment of the principal of and interest on any Senior Note,
or to institute a suit for the enforcement of any payment, may not be impaired
without the consent of that holder, unless, with regard to overdue interest
payments, holders of 75% in aggregate principal amount of the outstanding Senior
Notes of the affected series consent, on behalf of the holders of all the Senior
Notes of the affected series, to the postponement of the overdue interest
payments for up to three years from the interest due date. The Indenture also
provides that the holders of at least a majority in aggregate principal amount
of the outstanding Senior Notes of each series have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the trustee or to consent, on behalf of the holders of all Senior Notes of such
series, to the waiver of any past default and its consequences, except for a
default in the payment of principal or interest. (Sections 8.04, 8.05 and 8.06
of the Indenture.)
The trustee will perform only those duties that are specifically set forth
in the Indenture unless an event of default occurs and continues. The trustee is
under no obligation to exercise any of its powers under the Indenture at the
request of any holder of a Senior Note unless that holder offers reasonable
indemnity to the trustee against the costs, expenses and liabilities which it
might incur as a result. (Sections 8.06 and 9.04 of the Indenture.)
The holder of any Senior Note will have an absolute and unconditional right
to receive payment of the principal of and interest on any Senior Note on its
maturity date or redemption date and, except with respect to the postponement of
overdue interest payments discussed above, to institute suit to enforce those
payments. (Section 8.05 of the Indenture.)
The Indenture provides that interest payments which are not paid when due,
and interest on such defaulted interest payable at the same rate as the interest
payable on the Notes which has not been paid when due, will cease to be payable
to the holder of record on the record date for such defaulted interest payment.
Southern States may elect to pay any defaulted interest, together with interest
on the defaulted interest to the extent lawful, to holders of record on a
special record date fixed by the trustee. Notice of any such special record date
will be mailed to each then holder of record not less than 10 days prior to such
special record date. Alternatively, Southern States may make payment of any
defaulted interest in any other lawful manner if Southern States gives written
notice of its proposed payment to the trustee, and the trustee deems the manner
of that payment to be practicable. (Section 3.07 of the Indenture.)
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Action by Holders
Whenever the Indenture requires an action (such as making a demand or
request or giving a consent) to be taken by holders of a specific percentage in
aggregate principal amount of the Senior Notes, holders can demonstrate that the
requisite percentage joined in the action through:
. a writing or writings executed by the holders in person or by duly
appointed proxies;
. the record of holders voting in favor of the action at a properly called
meeting of holders; or
. a combination of such writing or writings and the record of votes in
favor at a properly called holders' meeting. (Section 10.01 of the
Indenture.)
At any time before, but not after, the demonstration to the trustee or Southern
States of such action, the holder of any Senior Note shown to have joined in the
action may revoke such action with respect to the Senior Note by submitting
written notice to the same party. (Section 10.05 of the Indenture.)
Under the Indenture, the trustee may call a holders' meeting at any time to
take any action authorized by the Indenture. These actions by the holders
include:
. giving notice to Southern States;
. giving notice or directions to the trustee;
. consenting to the waiver of an event of default;
. removing the trustee or appointing a successor trustee; or
. consenting to the execution of a supplemental indenture. (Sections 11.01
and 11.02 of the Indenture.)
If requested by Southern States or by holders of at least 10% in aggregate
principal amount of the Senior Notes of any series, the trustee must call a
holders' meeting. The trustee will determine the time and location of the
meeting. Under the Indenture, the trustee must mail written notice of the time,
location and general purpose of the meeting to all holders of the series of
Senior Notes affected at least 20 days, but no more than 120 days, in advance of
the meeting. (Sections 11.02 and 11.03 of the Indenture.)
At any meeting of holders, the chairman and secretary of the meeting shall
be elected by vote of the holders of a majority in principal amount of the
Senior Notes represented at the meeting and entitled to vote. Votes at a
holders' meeting may be cast either by a holder of one or more Senior Notes
entitled to vote at the meeting or by such holder's duly appointed proxy. Votes
shall be by written ballot, signed by the holder or representative. Each holder
or proxy is entitled to one vote for each $1,000 or portion thereof in principal
amount of Senior Notes held or represented by him. Two inspectors of votes,
appointed by the chairman, shall count all votes cast at a holders' meeting and
shall file with the secretary of the meeting their reports of all votes
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cast at the meeting. The secretary shall prepare and deliver to Southern States
and the trustee a record of the meeting, signed and verified by the chairman and
secretary, with the trustee's record also to contain the reports of the
inspectors of votes. The signed and verified record of the meeting shall be
conclusive evidence of the matters stated in the record. (Sections 11.04, 11.05
and 11.06 of the Indenture.)
Authentication and Delivery
The Senior Notes may be authenticated and delivered, upon the written order
of Southern States, by the trustee or an authenticating agent appointed by the
trustee without any further corporate action. (Sections 3.01 and 3.03 of the
Indenture.)
Satisfaction and Discharge
Southern States may discharge its obligations under the Indenture (except
those described below) with respect to any one or more series of Senior Notes,
in whole but not in part, to holders of the Senior Notes whose notes have not
already been delivered for cancellation and either have become due and payable
or are by their terms due and payable within one year or may be called for
redemption within one year. We may discharge our obligations by depositing with
the trustee an amount certified to be sufficient to pay when due the principal
of and interest on all outstanding Senior Notes of the series. However, some of
our obligations under the Indenture with respect to the series will survive,
including our obligations with respect to the following:
. remaining rights of holders to register the transfer, conversion,
substitution or exchange of Senior Notes of the applicable series;
. rights of holders to receive payments of principal of, and any interest
on, the Senior Notes of the applicable series, and other rights, duties
and obligations of the holders of Senior Notes with respect to any
amounts deposited with the trustee;
. in the case of Senior Notes evidenced by physical certificates, rights
of holders regarding replacement of lost, stolen or mutilated Senior
Notes; and
. the rights, obligations and immunities of the trustee under the
Indenture. (Section 14.01 of Indenture.)
Any satisfaction and discharge of the Indenture by Southern States with respect
to one series will have no effect on any other series of Senior Notes for which
Southern States has not satisfied and discharged its obligations under the
Indenture.
Covenants
Under the Indenture we agree to:
. pay the principal of and interest on each Senior Note when due;
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. maintain an office where the Senior Notes may be presented for transfer,
exchange, redemption and payment and delivery of notices and demands to
or on Southern States with respect to the Senior Notes or the Indenture
may be served, and to notify the trustee of the location of such office;
. appoint a successor trustee meeting the requirements described in the
Indenture whenever necessary to avoid or fill a vacancy in the office of
trustee under the Indenture;
. deposit sufficient funds with any third-party paying agent, or if acting
as our own paying agent with respect to the Senior Notes, set aside and
hold in trust for the benefit of the holders sufficient funds, on or
before each due date of the principal of or interest on any Senior
Notes;
. to notify the trustee in writing of the interest rates payable on the
Senior Notes when the rates are established; and
. deliver an officers' certificate to the trustee under the Indenture at
the end of each fiscal year confirming our compliance with our
obligations under the Indenture. (Sections 6.01, 6.02, 6.03, 6.04, 6.05
and 7.05 of the Indenture.)
Consolidation, Merger or Sale
The Indenture provides that Southern States may consolidate or merge with
or into, or sell all or substantially all of its properties and assets to,
another corporation or other entity, provided that any successor assumes
Southern States' obligations under the Indenture and the Senior Notes issued
under the Indenture. We must also deliver an opinion of counsel to the trustee
affirming our compliance with all conditions in the Indenture relating to the
transaction. When the conditions of the Indenture are satisfied, the successor
will succeed to and be substituted for Southern States under the Indenture, and
we will be relieved of our obligations under the Indenture and the Senior Notes
issued under them. (Sections 13.01, 13.02 and 13.03 of the Indenture.)
Statements as to Compliance
The Indenture requires Southern States to file with the trustee annually an
officers' certificate affirming the absence of defaults under the terms of the
Indenture. (Section 7.05 of the Indenture.)
Information Concerning the Trustee
First Union National Bank is the trustee under the Indenture. We and
certain of our affiliates maintain deposit accounts and banking relationships
with First Union National Bank. The trustee also serves as trustee under another
indenture pursuant to which securities of ours and of certain of our affiliates
are outstanding.
83
<PAGE>
PLAN OF DISTRIBUTION
The offering of Senior Notes made by this prospectus is not underwritten.
Sales of the Senior Notes offered hereby will be solicited through direct
mailings and through personal contact by designated employees of Southern States
as described below. No commission will be paid to any employee of Southern
States in connection with the sale of the Senior Notes. The individual
employees of Southern States who participate in the sale of the Senior Notes may
be deemed to be underwriters of this offering within the meaning of that term as
defined in Section 2(11) of the Securities Act. If any of these employees is
determined by a court of competent jurisdiction to be an "underwriter," he or
she may be deemed to be liable to purchasers of the Senior Notes to the extent
provided for under the Securities Act.
The Senior Notes will be offered for sale only in those states of the
United States where it is legal to make such offers. Southern States has
registered or qualified the sale of the Senior Notes in all states where it is
offering the Senior Notes and registration or qualification is required.
Southern States has also registered as a broker-dealer or issuer-dealer under
the state laws of all states where it is offering the Senior Notes and its
registration as a broker-dealer or issuer-dealer is required. The employees of
Southern States who are participating in the sale of the Senior Notes have
registered as agents under the state laws of all states where their registration
as agents is required. Southern States will not issue any Senior Notes to
persons residing in those states where Southern States and its designated
employees have not complied with these state law requirements.
The Senior Notes offered hereby may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any Senior Notes be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdictions. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any Senior Notes offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
The individual employees of Southern States who will be responsible for the
offer and sale of the Senior Notes are the Manager of Structured Finance and the
Assistant Manager of Structured Finance, each of whom is an officer and employee
of Southern States. Each of these employees is relying on Rule 3a4-1 of the
Exchange Act as a "safe harbor" from registration as a broker in connection with
the offer and sale of the Senior Notes. In order to rely on the "safe harbor"
provisions of Rule 3a4-1, each of these employees must meet the following
requirements:
(1) not be subject to any statutory disqualification;
(2) not be compensated in connection with his or her participation in the
offer and sale of the Senior Notes by the payment of commissions or other
remuneration based either directly or indirectly on sales of the Senior Notes;
(3) not be an associated person of a broker or dealer; and
84
<PAGE>
(4) satisfy any one of the following:
. restrict his or her participation to only certain types of
transactions involving offers and sales of the Senior Notes;
. perform substantial duties for the issuer, after the close of the
offering, not connected with transactions in securities, and not
have been associated with a broker or dealer for the preceding 12
months, and not participate in selling and offering securities for
any issuer more than once every 12 months; or
. restrict his or her participation to preparing or delivering written
communications or responding to inquiries of potential purchasers,
or performing ministerial or clerical work in connection with
effecting any securities transactions.
Neither the Manager of Structured Finance nor the Assistant Manager of
Structured Finance is a registered broker/dealer or an associated person of a
broker/dealer as those terms are defined under the Exchange Act, and each
otherwise complies with the "safe harbor" provisions of Rule 3a4-1.
This prospectus contains the current interest rate information for each of
the series of Senior Notes offered by this prospectus. When the interest rates
for new notes are reset as of the first business day of each month, we will
supplement this prospectus to specify the interest rates then in effect for new
notes. An interested person may obtain the current interest rates for newly
issued Senior Notes by calling the Department of Structured Finance at Southern
States (toll free: 1-877-591-3367) or visiting a Southern States retail
location. In addition, each purchaser of a Senior Note will receive from
Southern States a complete prospectus, as supplemented, containing the interest
rates in effect on the date of purchase, along with his confirmation of
purchase. The confirmation will specify the specific series, denomination and
maturity of the Senior Note purchased. Each Senior Note certificate will also
state the date of original issuance and the applicable rate of interest for the
Senior Note represented thereby.
ABSENCE OF PUBLIC MARKET, REDEMPTION AND MARKET RISK
There is no present market for the Senior Notes and there is no intent on
the part of Southern States to create or encourage a trading mechanism for the
securities. Southern States does not intend to apply for listing of the Senior
Notes on any securities exchange. Any secondary market for, and the market
value of, the Senior Notes will be affected by a number of factors independent
of the creditworthiness of Southern States, including the level and direction of
interest rates, the remaining period to maturity of the securities, the right of
Southern States to redeem the securities, the aggregate principal amount of the
Senior Notes and the availability of comparable investments. In addition, the
market value of the Senior Notes may be affected by numerous other interrelated
factors, including factors that affect the U.S. corporate debt market generally,
and Southern States specifically. See the "Risk Factors" section of this
prospectus beginning on page 6.
85
<PAGE>
LEGAL MATTERS
Mays & Valentine, L.L.P., Richmond Virginia, will issue an opinion for
Southern States concerning the legality of the securities.
EXPERTS
The consolidated financial statements as of June 30, 2000 and 1999 and for
each of the three years in the period ended June 30, 2000, included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, appearing elsewhere in this
prospectus, given on the authority of said firm as experts in auditing and
accounting.
The statements of operations and cash flows of the Gold Kist Inputs Business
for the year ended June 27, 1998 have been included in this prospectus in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere in this prospectus, and upon the authority of that firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
Southern States has filed a registration statement on Form S-1 under the
Securities Act of 1933, of which this prospectus is a part. This prospectus
does not contain all of the information set forth in the registration statement,
parts of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. Reference is made to the registration
statement for further information with respect to Southern States and the Senior
Notes offered by this prospectus. While statements contained in this prospectus
concerning the provisions of documents are necessarily summaries, Southern
States believes that all material terms of those documents have been provided in
the prospectus.
Following the offering of the Senior Notes, Southern States will file annual,
quarterly and other periodic reports with the Commission as required by the
Securities Exchange Act of 1934. Although Southern States will not be required
to provide holders of the Senior Notes with an annual report to shareholders
containing audited financial statements, the annual reports on Form 10-K filed
with the Commission will contain audited consolidated financial statements of
Southern States. These reports and other materials filed with the Commission
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: 7 World Trade Center, Suite 1300,
New York, New York 10048; and Northwestern Atrium, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of this material also may be
obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Southern States' filings will also be available to the
public at the Commission's Internet site (http://www.sec.gov).
-------------------
86
<PAGE>
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements, including statements
regarding Southern States' expected financial position, business and financing
plans. These forward-looking statements reflect Southern States views with
respect to future events and financial performance. The words "believe,"
"expect," "plans" and "anticipate" and similar expressions as used with respect
to the operations of the Gold Kist Inputs Business following our acquisition of
that business, and otherwise, identify forward-looking statements. Although
Southern States believes that the expectations reflected in such forward-looking
statements are reasonable, Southern States can give no assurance that such
expectations will prove to be correct. Important factors that could cause
actual results to differ materially from such expectations are disclosed in this
prospectus, including the risks and uncertainties described under "Risk
Factors." All subsequent written and oral forward-looking statements
attributable to Southern States or persons acting on Southern States behalf are
expressly qualified in their entirety by these cautionary statements. Southern
States cautions you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this prospectus.
_____________________
Trademarks and service marks are italicized where they appear in this
prospectus. Roundup(R) is a registered trademark of the Monsanto Company.
87
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Audited Financial Statements
Page
<S> <C>
Southern States Cooperative, Inc. and Subsidiaries
Report of Independent Accountants.............................. F-2
Consolidated Balance Sheet at June 30, 2000 and 1999........... F-3
Consolidated Statement of Operations for the Years Ended
June 30, 2000, 1999, and 1998................................ F-5
Consolidated Statement of Patrons' Equity for the Years Ended
June 30, 2000, 1999, and 1998................................ F-6
Consolidated Statement of Cash Flows for the Years Ended
June 30, 2000, 1999, and 1998................................. F-7
Notes to Consolidated Financial Statements..................... F-8
Inputs Business of Gold Kist Inc.
Independent Auditors' Report................................... F-34
Statement of Operations for the Year Ended June 27, 1998....... F-35
Statement of Cash Flows for the Year Ended June 27, 1998....... F-36
Notes to Financial Statements.................................. F-37
Unaudited Interim Financial Statements
Inputs Business of Gold Kist Inc.
Statements of Operations for the Three Months Ended
September 26, 1998 and September 27, 1997................... F-41
Statements of Cash Flows for the Three Months Ended
September 26, 1998 and September 27, 1997................... F-42
Notes to Financial Statements.................................. F-43
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors of
Southern States Cooperative, Incorporated:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, patrons' equity and cash flows present
fairly, in all material respects, the financial position of Southern States
Cooperative, Incorporated and Subsidiaries (the "Company") at June 30, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 21 to the financial statements, the Company changed its
method of accounting for its investment in an affiliated insurance exchange.
/s/ PricewaterhouseCoopers LLP
September 15, 2000
Richmond, Virginia
F-2
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, June 30, 2000 and 1999
___________________
<TABLE>
<CAPTION>
ASSETS 2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1k) $ 10,402,453 $ 18,742,408
Receivables, net (Notes 3 and 5) 117,708,044 117,375,357
Inventories (Notes 1c and 4) 210,729,344 213,141,319
Prepaid expenses 8,436,701 7,241,450
Deferred income taxes (Notes 1h and 12) 6,431,810 6,689,496
Deferred charges 2,327,370 840,022
-------------- --------------
Total current assets 356,035,722 364,030,052
-------------- --------------
Investments and other assets:
Investments:
Statesman Financial Corporation (Notes 1a and 5) 23,699,734 23,651,051
Michigan Livestock Credit Corporation (Notes 1a and 5) 12,751,318 12,718,722
Other companies (principally cooperatives) (Notes 1f and 6) 83,363,476 78,416,407
Receivables (Notes 3 and 5) 1,422,567 1,544,553
Other assets 10,362,901 12,269,263
-------------- --------------
Total investments and other assets 131,599,996 128,599,996
-------------- --------------
Property, plant and equipment (Notes 1d and 7) 394,545,596 378,196,657
Less accumulated depreciation 204,697,760 189,079,016
-------------- --------------
Property, plant and equipment, net 189,847,836 189,117,641
-------------- --------------
$ 677,483,554 $ 681,747,689
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, June 30, 2000 and 1999
_________________
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' AND
PATRONS' EQUITY 2000 1999
------------ ------------
<S> <C> <C>
Current liabilities:
Short-term notes payable (Note 8) $ 1,000,000 $ 5,600,000
Current maturities of long-term debt (Note 9) 3,811,298 3,836,938
Accounts payable 115,589,789 138,486,921
Accrued expenses:
Environmental remediation (Note 1g and 13b) 930,715 972,477
Payrolls, employee benefits, related taxes and other 49,353,260 39,801,159
Accrued income taxes 2,503,451 2,050,129
Dividends payable 852,326 380,106
Advances from managed member cooperatives (Note 2) 21,588,136 19,395,311
------------------ ------------------
Total current liabilities 195,628,975 210,523,041
------------------ ------------------
Long-term debt:
Bridge loan facility (Note 9) 100,000,000
Long-term debt (Note 9) 187,575,364 176,562,296
------------------ ------------------
Total long-term debt 187,575,364 276,562,296
------------------ ------------------
Other noncurrent liabilities:
Employee benefits 7,492,892 7,070,509
Deferred income taxes (Notes 1h and 12) 3,536,573 2,969,365
Environmental remediation (Note 1g and 13b) 2,629,448 2,218,664
Miscellaneous 5,290,919 4,538,213
------------------ ------------------
Total other noncurrent liabilities 18,949,832 16,796,751
------------------ ------------------
Capital Securities, Series A (Note 10) 59,322,440
Redeemable preferred stock (Note 10) 2,104,900 2,114,100
Stockholders' and patrons' equity:
Stockholders' equity:
Capital stock (Note 10):
Preferred 41,442,900 1,485,000
Common 11,827,743 12,147,082
------------------ ------------------
Total stockholders' equity 53,270,643 13,632,082
Patrons' equity 160,631,400 162,119,419
------------------ ------------------
Total stockholders' and patrons' equity 213,902,043 175,751,501
------------------ ------------------
$ 677,483,554 $ 681,747,689
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended June 30, 2000, 1999 and 1998
__________________
<TABLE>
2000 1999 1998
----- ---- ----
<S> <C> <C> <C>
Sales and other operating revenue:
Net purchases by patrons (Note 2) $1,470,414,359 $1,286,224,242 $1,026,630,260
Net marketing for patrons 73,365,133 76,540,489 92,862,915
Other operating revenue 3,300,765 3,594,761 3,793,343
---------------- -------------- --------------
1,547,080,257 1,366,359,492 1,123,286,518
Cost of products purchased and marketed and other operating costs
(Notes 1c, 6 and 13b) 1,256,308,678 1,114,782,525 931,435,923
---------------- -------------- --------------
Gross margin 290,771,579 251,576,967 191,850,595
Selling, general and administrative expenses 273,142,962 247,634,813 175,783,844
---------------- -------------- --------------
Savings on operations 17,628,617 3,942,154 16,066,751
---------------- -------------- --------------
Other deductions (income):
Interest expense (Notes 5, 8, and 9) 27,862,517 28,413,129 16,859,373
Interest income and service charges (Note 2) (11,747,786) (11,209,244) (7,800,390)
Miscellaneous income, net (7,817,887) (11,812,081) (6,562,688)
---------------- -------------- --------------
8,296,844 5,391,804 2,496,295
---------------- -------------- --------------
Savings (loss) before distribution on Capital Securities,
Series A, income tax expense (benefit), undistributed
savings (loss) in Statesman Financial Corporation and
cumulative effect of change in accounting method 9,331,773 (1,449,650) 13,570,456
Distributions on Capital Securities, Series A (3,600,000)
---------------- -------------- --------------
Savings (loss) before income tax expense (benefit),
undistributed savings (loss) in Statesman Financial
Corporation and cumulative effect of change in 5,731,773 (1,449,650) 13,570,456
accounting method
Income tax expense (benefit) 2,422,632 (596,570) 2,960,539
---------------- -------------- --------------
Savings (loss) before undistributed savings (loss) in
Statesman Financial Corporation and cumulative effect
of change in accounting method 3,309,141 (853,080) 10,609,917
Undistributed savings (loss) of Statesman Financial Corporation,
net of income taxes 73,562 (1,221,685) 56,721
Cumulative effect of change in accounting method, net of income taxes 1,581,327
---------------- -------------- --------------
Net savings (loss) $ 4,964,030 $ (2,074,765) $ 10,666,638
================ ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PATRONS' EQUITY
for the years ended June 30, 2000, 1999 and 1998
_________________
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- -----
<S> <C> <C> <C>
Patronage refund allocations:
Balance, beginning of year $ 67,844,199 $ 68,151,124 $ 67,566,625
Allocation from net savings for the year 3,702,869
Allocations assumed in merger (Note 17) 2,683,000
Adjustments to prior year's allocation 138,934 74,627 153,836
Redemptions (2,149,305) (381,552) (5,955,206)
-------------- -------------- --------------
Balance, end of year 65,833,828 67,844,199 68,151,124
-------------- -------------- --------------
Operating capital:
Balance, beginning of year 94,275,220 97,441,238 93,948,702
Net savings (loss) 4,964,030 (2,074,765) 10,666,638
Patronage refund payable in:
Cash (2,378,378)
Patronage refund allocations (3,702,869)
Adjustments to prior year's estimated patronage refunds,
net of income taxes (10,101) (71,790) (123,724)
Dividends on capital stock declared:
Preferred (2,525,872) (278,419) (279,407)
Common, $.06 per share (724,684) (729,551) (681,536)
Stock issuance costs (957,733)
Other reductions (223,288) (11,493) (8,188)
-------------- -------------- --------------
Balance, end of period 94,797,572 94,275,220 97,441,238
-------------- -------------- --------------
Total patrons' equity $ 160,631,400 $ 162,119,419 $ 165,592,362
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended June 30, 2000, 1999 and 1998
__________________
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net savings (loss) $ 4,964,030 $ (2,074,765) $ 10,666,638
Adjustments to reconcile net savings (loss) to cash (used)
provided by operating activities:
Depreciation 25,125,862 22,129,980 17,256,620
Amortization 328,653 264,036 355,252
Deferred income taxes 824,894 (3,475,756) 274,611
Gain on sale of property and equipment (3,866,172) (1,822,468) (510,695)
Net undistributed earnings of insurance exchange and joint
ventures, including cumulative change in accounting (3,877,025) (218,814) (227,768)
Undistributed (earnings) loss of Statesman Financial
Corporation, net of tax (73,562) 1,221,685 (56,721)
Noncash patronage refunds received (555,022) (4,746,591) (6,764,372)
Redemption of noncash patronage refunds received 279,511 2,763,912 2,335,408
Cash (used) provided by current assets and liabilities (Note (30,192,943) 129,876,089 10,272,606
16)
------------- ------------- ------------
Cash (used) provided by operating activities (7,041,774) 143,917,308 33,601,579
------------- ------------- ------------
Investing activities:
Additions to property, plant and equipment (31,632,513) (46,602,932) (33,904,668)
Proceeds from disposal of property, plant and equipment 12,159,256 7,017,655 1,743,604
Additional investments in other companies (794,529) (10,224,875) (10,430,352)
Net cash paid for acquisitions (Notes 17 and 18) - (218,279,732) (1,241,347)
Proceeds from purchase price adjustment (Note 18) 19,927,176 - -
------------- ------------- ------------
Cash used in investing activities (340,610) (268,089,884) (43,832,763)
------------- ------------- ------------
Financing activities:
Net (decrease) increase in short-term notes payable (4,600,000) (1,500,000) 4,725,000
Proceeds from bridge loan facility 218,313,467
Repayment of bridge loan facility (100,000,000) (118,313,467)
Proceeds from long-term debt 958,977,335 584,234,093 49,172,487
Repayment of long-term debt (947,989,908) (551,502,998) (31,594,763)
Net redemptions of equities required by lender (Note 9) 126,480 42,160
Net proceeds from sale of Capital Securities, Series A 59,005,470
Net proceeds from sale of preferred stock 39,042,267
Proceeds from sale of capital stock 34,159 90,584 921,929
Dividends on capital stock paid (2,778,336) (969,314) (1,022,041)
Patronage refunds paid in cash (2,378,378) (6,884,321)
Redemption of stockholders' and patrons' equity (2,648,558) (537,929) (6,630,611)
------------- ------------- ------------
Cash (used) provided by financing activities (957,571) 127,562,538 8,729,840
------------- ------------- ------------
(Decrease) increase in cash and cash equivalents (8,339,955) 3,389,962 (1,501,344)
Balance at beginning of year 18,742,408 15,352,446 16,853,790
------------- ------------- ------------
Balance at end of period $ 10,402,453 $ 18,742,408 $ 15,352,446
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________
1. Summary of Significant Accounting Policies:
------------------------------------------
a. Basis of Presentation - The consolidated financial statements include
---------------------
the accounts of Southern States Cooperative, Incorporated ("Southern
States") and its wholly owned subsidiaries (collectively the
"Company"). Upon consolidation, all significant intercompany accounts
and transactions have been eliminated. Southern States' investment in
Statesman Financial Corporation ("SFC" or the "Corporation") is
accounted for by the equity method (see Note 5). Michigan Livestock
Credit Corporation ("MLCC") is a wholly owned subsidiary of SFC.
Effective April 1, 1998, Michigan Livestock Exchange ("MLE") merged
with the Company. Pursuant to the merger, MLE became a division of the
Company, operating under the name MLE Marketing.
On October 13, 1998, the Company purchased the agricultural farm
supply inputs business ("Inputs Business") of Gold Kist Inc. (the
"Gold Kist Inputs Business"), a Georgia marketing cooperative. The
Gold Kist Inputs Business' results of operations have been included in
the Company's consolidated results of operations since the date of
acquisition (See Note 18).
b. Lines of Business - The Company's primary lines of business are the
-----------------
procurement, processing and distribution of agricultural production
supplies and the marketing of grain and livestock, for its members.
The Company distributes its products through a network of retail,
wholesale and processing facilities primarily located in Alabama,
Arkansas, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland,
Mississippi, North Carolina, South Carolina, Virginia and West
Virginia. The Company markets grain through a network of grain
facilities located in Delaware, Kentucky, Maryland, North Carolina,
South Carolina, Pennsylvania and Virginia. The Company markets
livestock through a network of livestock facilities located in
Indiana, Kentucky, Michigan and Ohio.
c. Inventories and Cost of Products Purchased and Marketed - Inventories,
-------------------------------------------------------
except grain, are stated at the lower of cost or market. Cost is
determined on various bases, including average; first-in, first-out;
and specific-identification. Grain inventories are stated at net
market, as adjusted for unrealized gains and losses on open futures
contracts, and open purchase and sales contracts. Grain inventories
are substantially hedged to minimize risks arising from price
volatility due to market fluctuations. Patronage refunds from supplier
cooperatives in the form of qualified written notices of allocation
are recorded as received and are accounted for as reductions of cost
of products purchased and marketed. Nonqualified written notices of
allocation are not recorded until the cash is received.
Rebates from product suppliers are accrued as a reduction to cost of
products purchased when earned, determined as follows: when the amount
of the rebate becomes contractually fixed and determinable; or, when
the rebate is received after a period end but prior to the issuance of
the financial statements and the rebate has a contract period ending
on or before the balance sheet date; or, upon appropriate notification
from the supplier that a determinable rebate has been earned by and
will be paid to the Company.
d. Property, Plant and Equipment - Property, plant and equipment is
-----------------------------
recorded at cost. The costs of property additions, major renewals and
betterments are capitalized while the costs of ordinary maintenance
and repairs are charged to operations as incurred. The costs of
property additions include interest capitalized during major plant
construction.
The Company capitalizes certain costs incurred during the application
development stage of an internal use software development project,
including: (i) external direct costs of materials and services
consumed in developing or obtaining internal-use computer software,
and (ii) payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use
computer software project. Capitalized costs are amortized over three
to ten year periods depending on the expected term of the benefit to
be received. Unamortized balances were $14,448,924 and $11,027,801 at
June 30, 2000 and 1999, respectively.
F-8
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________
1. Summary of Significant Accounting Policies, continued:
------------------------------------------
Depreciation is determined principally by the straight-line method
based on estimated useful lives (buildings and improvements - 20 to 40
years, machinery and equipment - 4 to 20 years, furniture and
fixtures - 5 to 10 years). Gains and losses on disposition or
retirement of assets are reflected in income as incurred.
e. Impairment of Long-Lived Assets - The Company reviews long-lived
-------------------------------
tangible and intangible assets for impairment on an annual basis.
Whenever events indicate that an asset may be impaired, undiscounted
cash flows are analyzed at the lowest level for which there are
identifiable and independent cash flows for assets to be held and used
in operations. If the sum of these undiscounted cash flows is less
than the carrying amount of the asset, an impairment loss is
recognized. Measurement of the loss is based on the estimated fair
value of the asset.
f. Investments - Investments in other cooperatives are stated at cost
-----------
(cash invested) plus qualified written notices of allocation, less
redemptions. The equity method of accounting is used for investments
in other companies in which Southern States has significant influence,
generally having a voting interest of 20 to 50 percent. The Company
will reduce or write-off the carrying value of an investment when
events indicate that the investment is impaired and the Company will
not be able to recover the full carrying value of the investment.
g. Environmental Compliance and Remediation - Environmental compliance
----------------------------------------
costs include the cost of purchasing and/or constructing assets to
prevent, limit and/or control pollution or to monitor the
environmental status at various locations. These costs are capitalized
and depreciated based on estimated useful lives.
Environmental remediation costs of facilities used in current
operations are expensed as incurred. Remediation costs and post
remediation costs at facilities that relate to an existing condition
caused by past operations are accrued as liabilities on an
undiscounted basis when it is probable that such costs will be
incurred and when such costs are reasonably estimable.
h. Income Taxes - For income tax purposes, Southern States is a nonexempt
------------
agricultural cooperative. Accordingly, Southern States does not pay
income taxes on that portion of savings distributed in qualified
written notices of allocation arising from sales to members, patrons
eligible for membership and certain other patrons; such savings are
included in the taxable income of these members and patrons. Deferred
income tax liabilities and assets are determined based on differences
between financial statement carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect for the years in
which the differences are expected to reverse.
i. Employee Retirement Plan - The employees of Southern States and
------------------------
certain subsidiaries are covered under a multiemployer defined benefit
retirement plan. Southern States' policy is to fund and expense an
amount equal to Southern States' share of the actuarially determined
funding requirement of the plan .
j. Common Stock and Patronage Refunds Payable - Southern States is an
------------------------------------------
agricultural cooperative operating for the benefit of its
stockholders/members and other patrons. Pursuant to its bylaws,
Southern States is obligated to return all patronage-sourced savings
for each year, after payment of dividends on capital stock and
reasonable additions to capital reserves, to such members, patrons
eligible for membership and certain other patrons in proportion to the
volume of business transacted with them during the year. See Note 10
with respect to requirements for membership and common stock
ownership.
F-9
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________
1. Summary of Significant Accounting Policies, continued:
------------------------------------------
k. Cash and Cash Equivalents - The Company considers all highly liquid
-------------------------
investments purchased with an original maturity of three months or
less to be cash equivalents.
l. Estimates - The preparation of financial statements in conformity with
---------
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
m. Transfers of Financial Assets - The Company accounts for transfers of
-----------------------------
financial assets pursuant to Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 125 applies a control oriented financial components approach to
financial-asset-transfer transactions. Finance receivables sold to SFC
are recorded as sales of financial assets and all related discounts
are expensed as incurred.
n. New Accounting Standards - In June of 1998, the FASB issued SFAS No.
------------------------
133, "Accounting for Derivative Instruments and Hedging Activities" as
amended by SFAS No. 137 and 138, which is effective for fiscal
quarters beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts,
and for hedging activities. It requires that an entity recognize all
derivatives as assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will
adopt SFAS No. 133 effective July 1, 2000. The Company has concluded
that the adoption of this statement will be immaterial to its
financial position and results of operations.
o. Revenue Recognition - Revenue from the sale of goods is recognized
-------------------
when title and risk of loss have transferred to the buyer, which is
generally when the product is either sold or delivered. Service
revenue is recognized upon completion of the rendered service and no
significant contingencies exist.
p. Derivatives - As part of its asset/liability management program, the
-----------
Company utilizes financial derivatives to reduce the Company's
sensitivity to interest rate fluctuations and commodity hedges to
reduce market price fluctuations relating to grain and petroleum
products. Net receipts or payments under the interest rate swap
agreements are recognized as adjustments to interest expense. Realized
and unrealized gains and losses on futures contracts for grain and
petroleum products are accounted for on a deferral basis.
q. Reclassifications - Certain reclassifications have been made to the
-----------------
1999 and 1998 financial statements to conform to the 2000
presentation.
F-10
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
2. Managed Member Cooperatives:
---------------------------
Under management agreements, Southern States performs various financial,
management and accounting services for other agricultural cooperatives
("managed member cooperatives"). There were 70 such cooperatives at June
30, 2000, 1999 and 1998, respectively. These managed member cooperatives
are owned entirely by their stockholders and patrons and thus are
associated with Southern States solely by management agreements (the
"Agreements"). For services performed, Southern States was reimbursed
$4,170,642 in 2000, $4,162,656 in 1999 and $3,947,069 in 1998.
Under the Agreements, cash can be advanced by Southern States to the
managed member cooperatives (primarily as revolving advances for sales of
products to the managed member cooperatives) and excess cash of the managed
member cooperatives can be advanced to Southern States. The interest rate
charged or credited on monthly balances of these advances approximates the
CoBank, ACB national variable rate. Net interest expense incurred by
Southern States on net advances totaled $276,909 in 2000 and $199,837 in
1999. Net interest income charged by Southern States to Managed Member
Cooperatives on net advances totaled $296,423 in 1998.
During 1998, certain managed member cooperatives chose to reinvest
approximately $1.2 million, of their revolved patronage refund allocations
in an equivalent amount of $1 par value shares of the Company's membership
common stock. No amounts were reinvested in 2000 and 1999.
Net purchases by patrons include purchases by managed member cooperatives
of $214,181,375 in 2000, $195,312,918 in 1999 and $209,833,488 in 1998.
3. Receivables:
-----------
The Company grants credit to farmers and other retail and wholesale
purchasers of agricultural production supplies primarily in Alabama,
Arkansas, Delaware, Florida, Georgia, Indiana, Kentucky, Louisiana,
Maryland, Michigan, Mississippi, North Carolina, Ohio, South Carolina,
Virginia and West Virginia. Receivables at year-end were as follows:
<TABLE>
<CAPTION>
Current: 2000 1999
---- ----
<S> <C> <C>
Trade:
Accounts $ 262,421,561 $ 251,925,304
Notes 8,731,252 11,433,076
Advances to managed member cooperatives (Note 2) 19,760,953 27,398,280
Less receivables sold to SFC (Note 5) (171,014,184) (169,177,100)
------------- -------------
119,899,582 121,579,560
Less allowance for doubtful accounts (2,191,538) (4,204,203)
------------- -------------
Total current receivables $ 117,708,044 $ 117,375,357
============= =============
Noncurrent:
Trade notes $ 1,422,567 $ 1,544,553
============= =============
</TABLE>
Interest is earned and recognized on accounts receivable based on average
outstanding balances beginning either from account inception or after 30-
day interest free periods dependent upon the type and anticipated duration
of the account receivable.
F-11
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
4. Inventories:
-----------
Inventories at year-end consisted of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Finished goods:
Purchased for resale $183,178,896 $183,115,888
Manufactured 5,642,107 5,902,728
------------ ------------
188,821,003 189,018,616
Materials and supplies 21,908,341 24,122,703
------------ ------------
Totals $210,729,344 $213,141,319
============ ============
</TABLE>
5. Investments in Finance Companies:
--------------------------------
SFC and Southern States are parties to an agreement dated September 16,
1991, and amended effective January 12, 1999, under which SFC purchases
from Southern States certain receivables without recourse. Under the terms
of the agreement, Southern States pays certain fees on receivables sold to
SFC. In addition, certain receivables are discounted to provide SFC with
revenues sufficient to cover interest charges incurred and historical
charge-offs. Total receivables sold to SFC totaled approximately
$1,383,354,000, $1,280,780,000, and $996,700,000, for 2000, 1999 and 1998,
respectively. The related fees and discounts for 2000, 1999 and 1998 were
$15,400,000, $11,230,000 and $9,500,000, respectively. SFC paid total
volume incentive fees, which are recorded as miscellaneous income in the
statement of operations, to Southern States for purchases of receivables of
approximately $2,966,000, $2,160,000 and $1,320,000 for 2000, 1999 and
1998, respectively. In addition, pursuant to the aforementioned contractual
arrangement between Southern States and SFC, Southern States services
certain accounts receivable sold to SFC.
Under the terms of the agreement, Southern States is obligated to maintain
a computed minimum investment in SFC's Class A noncumulative preferred
stock ("Class A Preferred Stock"), based on the average daily balances of
receivables sold to SFC. The amount of Class A Preferred Stock held by
Southern States was $23,418,000 at June 30, 2000 and 1999, respectively.
As of April 1, 1998, SFC purchased MLCC. MLCC and Southern States are
parties to an agreement dated April 1, 1998, under which MLCC provides
agricultural production loans, building loans, equipment loans, renovation
loans, revolving credit loans, and other loans to and financing for
customers of Southern States. Under the agreement, Southern States agrees
to provide MLCC with equity capital in exchange for shares of MLCC
preferred stock. The amount of MLCC preferred stock held by Southern States
was $14,156,000 at June 30, 2000 and 1999, respectively.
F-12
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------
5. Investment in Finance Companies, continued:
-------------------------------
The following unaudited proforma results of operations of SFC assumes that
the purchase of MLCC had occurred on July 1, 1997. The unaudited proforma
results of operations are presented for informational purposes only and do
not purport to be indicative of SFC's future consolidated results of
operations.
<TABLE>
<CAPTION>
Year ended June 30, 1998
------------------------
<S> <C>
Interest and service fee income $24,791,835
===========
Net loss $(2,026,773)
===========
</TABLE>
A consolidated condensed balance sheet and statement of operations for SFC
as of June 30, 2000 and 1999, and for the two years then ended, are as
follows:
Balance Sheet
-------------
<TABLE>
<CAPTION>
Assets 2000 1999
------ ---- ----
<S> <C> <C>
Cash $ 12,029,187 $ 8,221,133
Notes receivable, net of allowance for credit losses of $3,215,783 for 2000
and $3,941,274 for 1999 35,964,409 42,357,610
Notes receivable-livestock feeding program, net of allowance
for credit losses of $1,424,856 for 2000 and $1,674,722 for 1999 9,478,878 10,030,885
Dairy leases and beef improvement program, net of allowance
for credit losses of $191,654 for 2000 and $297,819 for 1999 187,152 369,268
Finance receivables, net of allowance for credit losses of
$4,063,768 for 2000 and $3,611,470 for 1999 185,875,975 185,628,609
Crop time financing receivables, net allowance for credit losses
of $249,996 for 2000 and $0 for 1999 15,687,130 13,925,948
Due from Southern States 720,205 757,673
Deferred income taxes 5,239,906 5,337,791
Other 1,780,785 4,128,061
Investments in other cooperatives 12,268,703 11,341,183
Property, plant and equipment, including equipment leased to others, net 5,723,794 5,460,541
------------ ------------
Total assets $284,956,124 $287,558,702
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Notes payable:
Short-term lines of credit $213,163,000 $219,702,000
Term loans and subordinated debt 28,000,000 30,750,000
Accounts payable, deferred credit, and accrued expenses 1,740,047 1,346,228
Due to Southern States 6,355,816 219,767
Dividends payable 78,077 -
Preferred stock 38,574,000 38,574,000
Stockholders' (deficit) (2,954,816) (3,033,293)
------------ ------------
Total liabilities and stockholders' equity $284,956,124 $287,558,702
============ ============
</TABLE>
F-13
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------
5. Investment in Finance Companies, continued:
-------------------------------
<TABLE>
<CAPTION>
Statement of Operations 2000 1999 1998
----------------------- ---- ---- ----
<S> <C> <C> <C>
Net interest income (expense), fee income and other $5,282,490 $ (397,166) $4,152,215
General and administrative expenses 4,970,067 5,452,660 3,932,000
---------- ----------- ----------
Income (loss) before provision for income taxes 312,423 (5,849,826) 220,215
Provision (benefit) for income taxes 100,869 (2,238,622) 86,318
---------- ----------- ----------
Net income (loss) $ 211,554 $(3,611,204) $ 133,897
========== =========== ==========
Southern States' equity interest, net of income taxes $ 73,562 $(1,221,685) $ 56,721
========== =========== ==========
</TABLE>
On August 1, 1996, SFC entered into a Financing Services and Contributed
Capital Agreement (the "Agreement") with Land O'Lakes, Inc., successor to
Countrymark Cooperative, Inc. ("Land O'Lakes"), whereby SFC extends
revolving credit to customers of Land O'Lakes through the issuance of
credit cards. Under the terms of the Agreement, Land O'Lakes is obligated
to maintain a computed minimum investment in SFC's Class A noncumulative
preferred stock. At June 30, 2000 and 1999 pursuant to the Agreement, Land
O'Lakes had no investment in the Corporation's Class A preferred stock. In
connection with this transaction, SFC and Land O'Lakes reentered into a
Common Stock Subscription and Redemption Agreement (the "Common Stock
Agreement"). Additionally, for as long as Land O'Lakes maintains at least
8.0% ownership in SFC's common stock, Land O'Lakes is entitled to maintain
one representative on the Board of Directors of SFC. The termination of the
Common Stock Agreement is contingent upon the termination of participation
under the Financing Services and Contributed Capital Agreement. If Land
O'Lakes terminates the Common Stock Agreement, the Corporation is then
obligated to repurchase all shares of common stock owned by Land O'Lakes at
the par value.
On December 3, 1998, the Corporation entered into a Financing Services and
Contributed Capital Agreement (the "MFA Agreement") with MFA Oil Company
("MFA Oil") and on December 16, 1998 with MFA Incorporated ("MFA") whereby
the Corporation is allowed to extend revolving credit to customers of MFA
Oil and MFA through the issuance of credit cards. Under the terms the MFA
Agreement, MFA and MFA Oil are obligated to maintain a computed minimum
investment in the Corporation's Class A noncumulative preferred stock. At
June 30, 2000 and 1999, pursuant to the MFA agreement, MFA and MFA Oil had
no investment in SFC's Class A preferred stock. If the actual investment
exceeds the computed minimum, the Corporation will, upon written request
from MFA and MFA Oil, redeem the excess number of shares. Upon written
notice, the MFA Agreement may be terminated by either party.
In connection with this transaction, the Corporation and MFA and MFA Oil
also entered into a Common Stock Subscription and Redemption Agreement (the
"Common Stock Agreement"). As part of the Common Stock Agreement, MFA and
MFA Oil each purchased 73 shares of the Corporation's common stock
(approximately 8.5% of the Corporation's authorized common stock) for
$60,444 each. Additionally, for as long as MFA and MFA Oil maintain at
least an 8% ownership in the Corporation's common stock, MFA and MFA Oil
are entitled to maintain one representative each on the Board of Directors
of the Corporation. The termination of the Common Stock Agreement is
contingent upon the termination of participation under the Financing
Services and Contributed Capital Agreement. If MFA or MFA Oil terminates
the Common Stock Agreement, the Corporation is then obligated to repurchase
all shares of common stock owned by MFA or MFA Oil at the par value.
As a result of the Common Stock Agreement, the 859 shares of outstanding
common stock of SFC are owned 38.42% by Southern States, 36.08% by 62
independently owned agriculture cooperatives, 8.5% by Land O'Lakes, 8.5% by
MFA and 8.5% by MFA Oil.
F-14
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------
6. Investments in Other Companies:
-------------------------------
Investments in other companies consisted of the following at year end:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CF Industries, Inc. $43,473,877 $43,473,877
CoBank, ACB 10,020,724 7,964,176
St. Paul Bank 1,474,092
Southern States Insurance Exchange 16,400,134 12,474,193
Universal Cooperatives, Inc. 3,387,332 3,339,991
Other cooperatives and companies 2,726,062 2,804,363
Joint ventures 7,355,347 6,885,715
----------- -----------
Totals $83,363,476 $78,416,407
=========== ===========
</TABLE>
At June 30, 2000 and 1999, the Company's aggregate equity in the net assets
of these investees exceeded the carrying value of such investments by
approximately $22,900,000 and $31,500,000, respectively. Purchases by
Southern States from CF Industries, Inc. and Universal Cooperatives, Inc.
were $107 million, $121 million and $88 million in 2000, 1999 and 1998,
respectively. The cash portion of patronage refunds totaled $3,452,475,
$403,809 and $2,918,799 for 2000, 1999 and 1998, respectively. Patronage
refunds received from cooperatives and income recognized under the equity
method for the Southern States Insurance Exchange for 2000, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
C F Industries, Inc. $ $ $5,512,596
CoBank, ACB 826,512 872,568 477,526
Southern States Insurance Exchange (Note 21) 7,067,055 3,969,818 3,407,439
Universal Cooperatives, Inc. 94,682 247,670 232,667
Other cooperatives 53,197 60,344 52,943
---------- ---------- ----------
Totals $8,041,446 $5,150,400 $9,683,171
========== ========== ==========
</TABLE>
F-15
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
___________________
7. Property, Plant and Equipment:
-----------------------------
Property, plant and equipment at year end is summarized as follows:
2000 1999
------------- -------------
Land $ 21,217,094 $ 21,687,177
Buildings and improvements 124,070,950 122,791,864
Machinery and equipment 130,965,721 129,660,133
Furniture and fixtures 48,748,343 35,464,195
Automotive equipment 53,217,057 53,867,421
Construction in progress 16,326,431 14,725,867
------------- -------------
Totals $ 394,545,596 $ 378,196,657
============= =============
At June 30, 2000 and 1999, property, plant and equipment, having an aggregate
book value of $8,935,985 and $11,160,153, respectively, was pledged as
collateral under industrial revenue financings (see Note 9).
The cost of furniture and fixtures includes capitalized software in the
amount of $18,750,088, $14,618,592 and $9,610,641 at June 30, 2000, 1999, and
1998, respectively. Depreciation expense associated with capitalized software
was $1,056,967, $408,577 and $234,027 in 2000, 1999 and 1998, respectively.
During 2000, 1999 and 1998, the Company capitalized interest as part of
construction in progress in the amount of $726,385, $901,701, and $451,478,
respectively.
8. Short-Term Notes Payable:
------------------------
At June 30, 2000, short-term notes of $1,000,000 bearing interest at rates of
9.75% were payable to CoBank. At June 30, 1999, short-term notes of
$5,600,000 bearing interest at 7.50% and 8.00% were payable to CoBank. At
June 30, 2000, the Company had short-term lines of credit with other
institutions totaling $10,000,000 which do not require the maintenance of
compensating balances because generally credit extension is subject to
availability of funds. At June 30, 2000 and 1999, there were no borrowings
under these lines of credit.
During 2000, average daily short-term borrowings were $6,636,215 (maximum
outstanding - $14,600,000) at a weighted average interest rate of 5.82%.
During 1999, such borrowings averaged $21,203,150 (maximum outstanding -
$66,500,000) at a weighted average interest rate of 7.65%. These rates were
computed net of qualified patronage refunds received from CoBank.
F-16
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________________
9. Long-Term Debt:
--------------
Long-term debt at year-end consisted of:
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Term notes - CoBank due 2005, 6.89% and 6.82% per annum at
June 30, 2000 and 1999, respectively (a) $ 34,000,000 $ 37,000,000
Revolving term loan - CoBank due 2002, 7.74%
per annum at June 30, 2000 (a) 5,000,000
Syndicated line of credit (expires January 11, 2002) (a) 140,200,000 127,600,000
Industrial revenue financings (b) 11,820,000 12,570,000
Notes due through 2003 (maximum rate 10%) 112,092 174,163
Liability under lease 254,570 3,055,071
------------- -------------
Total long-term debt 191,386,662 180,399,234
Less current maturities 3,811,298 3,836,938
------------- -------------
Long-term debt due after one year 187,575,364 176,562,296
Bridge loan facility (c) ---- 100,000,000
------------- -------------
$ 187,575,364 $ 276,562,296
============= =============
</TABLE>
(a) The term notes with CoBank are payable $3,000,000 in 2001, $7,000,000
in 2002, $7,000,000 in 2003, $9,000,000 in 2004, and $8,000,000 in
2005. The credit facilities with CoBank include a revolving bank
credit agreement totaling $5,000,000. The credit facilities include a
syndicated bank line of credit agreement totaling, in aggregate,
$200,000,000. The weighted average interest rate on this syndicated
line of credit was 6.68% and 6.20% in 2000 and 1999, respectively.
These agreements, which expire in 2002, enable the Company to
refinance short term debt on a long-term basis. Accordingly, certain
current maturities of long-term debt intended to be refinanced were
reclassified as long-term debt. Under the terms of the short-term and
long-term loan agreements with CoBank, the Company is required to
maintain investments in CoBank's capital stock and allocated equities
based on percentages of the average loans outstanding. At June 30,
2000 and 1999, such investments in the amounts of $10,020,724 and
$7,964,176, respectively, were pledged as collateral for indebtedness
to CoBank.
(b) Three industrial revenue financings require payments sufficient to
enable the industrial development authorities to pay principal,
premium, if any, and interest on the revenue bonds. The obligations
mature serially in the following annual amounts: $750,000 annually in
fiscal 2001 through 2004, $1,620,000 in 2005, $500,000 in 2006, and
$6,700,000 in 2016. The obligations bear interest at rates ranging
from 4.70% to 5.00%.
(c) In October 1998, Southern States borrowed $218.3 million under a 180-
day "bridge" loan facility with NationsBank, N.A., First Union Bank
and CoBank to finance the purchase of the Gold Kist Inputs Business.
In January 1999, this facility was paid down by $118.3 million,
September 1999, $25.88 million was paid, and in October 1999, the
balance of $74.12 million was paid off utilizing proceeds from the
sale of Capital Trust Securities, Series A and Step-Up Rate Series B
Cumulative Redeemable Preferred Stock. The weighted average interest
rate on this loan was 5.68% and 5.99% in 2000 and 1999, respectively.
Long-term debt maturing within each of the four fiscal years after June 30,
2001 is as follows: 2002 - $153,249,535; 2003 - $7,755,391; 2004 -
$9,750,438; 2005 -$9,620,000; thereafter - $7,200,000.
The Company had outstanding letters of credit in the amount of $18,000,000
and $15,000,000 at June 30, 2000 and 1999 to collateralize certain
liabilities.
F-17
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Long-Term Debt, continued:
--------------
Under the most restrictive outstanding debt agreement, the Company is
required to maintain, at fiscal year end and at the end of each fiscal
quarter, on a consolidated basis: (a) the ratio of consolidated outstanding
debt to capitalization not to exceed .50 to 1.00, (b) tangible net worth
not to be less than the sum of $256,000,000 plus twenty-five percent of the
net income (no reduction for net losses) of the Company for each such
fiscal year since 1999 and, (c) the ratio of consolidated cash flow for
four consecutive fiscal quarters to consolidated interest expense plus
distributions on Capital Securities during such period not to be less than
1.5 to 1.00.
See Note 15, Derivative Financial Instruments for information relating to
interest swaps.
10. Capital Stock:
-------------
At June 30, 2000, Southern States' authorized capital stock consisted of
20,000,000 shares of common stock ($1 par value) and 1,000,000 shares of
cumulative preferred stock ("5% - 6% Preferred Stock") ($100 par value),
issuable in series. The 5% to 6% preferred stock is redeemable by the
Company at par plus declared and unpaid dividends, if any, and redemption
is limited to 20,000 shares annually.
Wetsel, Inc. ("Wetsel"), a wholly owned subsidiary, has authorized 35,000
shares of Series 1, Class A cumulative redeemable preferred stock. At June
30, 2000, Wetsel had 21,049 shares ($2,104,900) outstanding. At June 30,
1999 and 1998, Wetsel had 21,141 shares ($2,114,000) of 9% Series 1, Class
A cumulative redeemable preferred stock ("9% Redeemable Preferred Stock")
outstanding.
Southern States' authorized common stock is membership common stock and,
pursuant to the requirements of the Agricultural Cooperative Association
Act of Virginia and the Articles of Incorporation and Bylaws of Southern
States, its issuance or transfer is limited to bona fide producers of
agricultural products and cooperative associations that are owned and
controlled by such producers who use the services or supplies of Southern
States. Dividends on Southern States' common stock are limited annually to
6% of this stock's aggregate par value.
Patronage refund allocations represent allocated undistributed member
margins. Patronage refund allocations do not bear interest and are
subordinated to all common and preferred shares outstanding and
indebtedness of the Company. Patronage refund allocations may be redeemed
at the discretion of the Board of Directors.
Each member, regardless of the number of shares of common stock registered
in the member's name, is entitled to one vote in the affairs of Southern
States. Under various circumstances (e.g., death of stockholder), Southern
States repurchases common stock from its members at par value plus declared
and unpaid dividends, if any. In the event of liquidation or other
disposition of the assets of Southern States, the holders of common stock,
after satisfaction of obligations to creditors and to holders of all
preferred stock, would be entitled to receive a maximum of $1 per share
(par value) plus declared and unpaid dividends, if any. Any remaining
amounts shall be returned to members and other patrons on a pro rata basis
of their respective interest therein.
F-18
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________
10. Capital Stock, continued:
-------------
On October 5, 1999, Southern States Capital Trust I, a trust subsidiary of
Southern States, issued to Gold Kist $60.0 million Step-Up Rate Capital
Securities, Series A ("Series A"). Issuance costs incurred related to the
Series A securities totaled $995,000. Distributions are cumulative relating
to the Series A securities at a rate of 8% per annum, increasing to 8.5% on
July 5, 2000 and 8.75% on July 5, 2001. The Series A securities mature on
October 5, 2029.
On October 5, 1999, Southern States issued to Gold Kist $40 million Step-Up
Rate Series B Cumulative Redeemable Preferred Stock, $100 par value per
share ("Series B"). Issuance costs incurred with respect to the Series B
securities totaled $957,733. Cash dividends are cumulative at an initial
rate of 7.5%, increasing to 8% per annum 9 months after the date of
issuance and increasing to 8.25% per annum twenty-one months after the
issuance of the Series B securities. Distributions on the Series A and
dividends on the Series B securities are both payable quarterly, in arrears
on January 5, April 5, July 5 and October 5 of each year. The proceeds from
the sale of both the Series A securities and the Series B securities were
used to reduce Company debt and pay off the bridge loan facility which had
been utilized to finance the Gold Kist acquisition.
F-19
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
10. Capital Stock, continued:
-------------
Changes in preferred stock ($100 par), step-up rate preferred ($1,000 par)
and common stock ($1 par) during 1998, 1999 and 2000 follow:
<TABLE>
<CAPTION>
5% - 6% Preferred 9% Redeemable Preferred Step-Up Rate Preferred
--------------------------------- ------------------------------ -------------------------------
Outstanding Aggregate Outstanding Aggregate Outstanding Aggregate
Shares Par Value Shares Par Value Shares Par Value
------------- ---------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1997 15,432 $ 1,543,200 21,141 $ 2,114,100
Issued 424 42,400
Redeemed (914) (91,400)
------------- ---------------- -------------- -------------- -------------- -------------
Balances, June 30, 1998 14,942 $ 1,494,200 21,141 $ 2,114,100
Issued 507 50,700
Redeemed (599) (59,900)
------------- ---------------- -------------- -------------- -------------- -------------
Balances, June 30, 1999 14,850 $1,485,000 21,141 $ 2,114,100
Issued 341 34,100 0 40,000 $ 40,000,000
Redeemed (762) (76,200) (92) (9,200)
------------- ---------------- -------------- -------------- -------------- -------------
Balances, June 30, 2000 14,429 $1,442,900 21,049 $ 2,104,900 40,000 $ 40,000,000
============= ================ ============== ============== ============== ===============
<CAPTION>
Common
-----------------------------
Outstanding Aggregate
Shares Par Value
------------- -------------
<S> <C> <C>
Balances, June 30, 1997 11,921,422 $11,921,422
Issued 879,529 879,529
Redeemed (605,933) (605,933)
------------ -----------
Balances, June 30, 1998 12,195,018 $12,195,018
Issued 39,884 39,884
Redeemed (87,820) (87,820)
------------ -----------
Balances, June 30, 1999 12,147,082 $12,147,082
Issued 59 59
Redeemed (319,398) (319,398)
------------ -----------
Balances, June 30, 2000 11,827,743 $11,827,743
============ ===========
</TABLE>
F-20
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
11. Employee Benefit and Compensation Plans:
---------------------------------------
Southern States sponsors a multiemployer defined benefit retirement plan
(the "Plan") which is noncontributory and includes substantially all
employees of Southern States, certain subsidiaries, SFC, and 70 managed
member cooperatives ("the Participating Employers"). Plan assets are not
segregated for each Participating Employer and are used to provide benefits
for participants of all Participating Employers. Benefit formulas and
pension cost allocation and funding methodologies are the same for all
Participating Employers. If a Participating Employer withdraws from the
plan, the Participating Employer does not withdraw any assets from the Plan
and does not assume any of the Plan's obligation. Thus, information
relating specifically to Southern States is not available. For 2000, 1999
and 1998 Southern States' benefit expenses, including administrative
expenses, were $242,551, $1,210,865 and $3,004,146, respectively. Changes
in actuarial assumptions relating to both the asset valuation interest
rates and the current liability interest rates were primarily responsible
for the decrease in benefit expenses in 1999 and 2000.
A comparison of accumulated benefits, as estimated by the Plan's actuary,
and net assets of the Plan is presented below.
<TABLE>
<CAPTION>
July 1
------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Actuarial present value of plan benefits:
Vested $121,383,395 $122,399,788
Nonvested 3,143,569 3,929,335
------------ ------------
Total benefits $124,526,964 $126,329,123
============ ============
Net assets available for benefits $158,381,828 $154,922,073
============ ============
</TABLE>
The discount rates used in computing the present value of plan benefits
were 7.8% and 6.95% for the years ended June 30, 2000, and 1999,
respectively.
The Corporation has a non-qualified supplemental retirement plan covering
certain employees, which provides for incremental retirement payments from
the Company's funds so that total retirement payments equal amounts that
would have been payable from the Company's multiemployer retirement plan if
it were not for limitations imposed by income tax regulations. The amounts
expensed for the supplemental retirement plan were $283,426, $278,334, and
$232,755 in 2000, 1999 and 1998, respectively. The accumulated benefit
obligation recognized in the Company's consolidated balance sheet at June
30, 2000 and 1999 was $1,584,832 and $1,551,912, respectively.
The Company has established the Southern States Non-Qualified Benefits
Plans Trust, a rabbi trust, to hold assets related to its unfunded, non-
qualified deferred compensation plans. As of June 30, 2000 and 1999 the
assets held by the rabbi trust were $7,126,917 and $5,847,508,
respectively. These amounts are included in other assets on the Company's
consolidated balance sheet.
The Company provides employees with a medical insurance plan, which is
funded through contributions made by both the Company and employees to a
Voluntary Employees Beneficiary Association (VEBA). The Company is self-
insured with respect to this liability.
Southern States provides certain life insurance benefits for retired
employees. Substantially all of Southern States' employees may become
eligible for those benefits, generally upon attaining normal retirement age
while employed by Southern States. Those and similar benefits for active
employees are provided through insurance companies whose premiums are based
on benefits paid. The costs of these benefits for retired employees are a
function of the annual pension plan valuation.
F-21
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
11. Employee Benefit and Compensation Plans, continued:
---------------------------------------
Costs for postretirement benefits other than pensions, primarily medical
benefit costs, are accrued during the employee's period of service. The
transition obligation is being amortized over a period of 20 years. The
Company's policy is to fund these benefits on a pay-as-you-go basis. The
Company contributed $623,848 and $469,095 for benefit payments for the
years ended June 30, 2000 and 1999, respectively.
Summary postretirement plan information is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net periodic postretirement benefit cost for the fiscal year
ending June 30:
Service cost $ 200,424 $ 86,209 $ 80,194
Interest cost 369,101 277,853 285,888
Amortization of unrecognized transitional liability 252,189 252,189 252,189
Amortization of prior service cost 130,849 61,240 61,240
Recognized net actuarial gain (45,504) (47,960)
----------- ----------- --------
Total $ 952,563 $ 631,987 $631,551
=========== =========== ========
Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation at beginning
of year $ 5,584,786 $ 3,939,257
Service cost 200,424 86,209
Interest cost 369,101 277,853
Actuarial loss 508,136 1,054,473
Benefits paid (623,848) (469,095)
Change in plan provisions 124,003 696,089
----------- -----------
Accumulated postretirement benefit obligation
at end of year 6,162,602 5,584,786
Fair value of plan assets - -
----------- -----------
Funded status (6,162,602) (5,584,786)
Unrecognized prior service cost 1,179,161 1,186,007
Unrecognized net loss or (gain) 493,035 (15,101)
Unrecognized transition obligation 3,278,450 3,530,639
----------- -----------
Accrued postretirement benefit cost $(1,211,956) $ (883,241)
=========== ===========
</TABLE>
F-22
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________________
11. Employee Benefit and Compensation Plans, continued:
---------------------------------------
Because the Company has established a maximum amount it will pay per
retiree under the plan, health care cost trends do not affect the
calculation of the accumulated benefit obligation or the net postretirement
benefit cost. The discount rate used to determine the APBO was 7.8% at June
30, 2000 and 7.0% at June 30, 1999. The unrecognized prior service cost
resulted from a 1997 plan amendment which extended an employer cost freeze
previously effective January 1, 1997, to January 1, 2000, and from a 1999
amendment that changed the benefit eligibility for employees retiring under
65 from age 55 with 20 years of service to the earlier of 1) age 55 with 20
years of service, 2) age 60 with 15 years of service, or 3) age 62 with 10
years of service.
Under the Company's 401(k) plan, the Company matches employee contributions
and may make discretionary contributions based on the Company's
performance. Employee contributions are matched to the extent of 40% of the
participant's first 3% contributed and 15% of the next 2% contributed. The
Company's matching contributions for 2000, 1999 and 1998 were $1,451,369,
$1,292,942 and $1,001,382 respectively. The Company did not make a
discretionary contribution in fiscal 2000, 1999 or 1998.
The Company has in effect other compensation plans for management and
retail store personnel under which current and deferred awards, based
principally on operating results, are made. The aggregate charge to
operations with respect to these plans approximated $3,751,882, $3,273,819
and $1,793,045 in 2000, 1999 and 1998, respectively.
12. Income Taxes:
------------
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current: $1,287,753 $ 2,035,460 $2,123,899
Federal 311,995 466,283 567,276
State ---------- ----------- ----------
1,599,748 2,501,743 2,691,175
Total current
822,884 (3,098,313) 274,611
Deferred federal and state ---------- ----------- ----------
$2,422,632 $ (596,570) $2,965,786
Total ========== =========== ==========
</TABLE>
F-23
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
12. Income Taxes, continued:
------------
The significant differences between the U.S. federal statutory income tax
rate and the effective income tax rate are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Patronage refund deduction 0.0 0.0 (15.6)
State income taxes, net of federal benefit 5.4 5.8 3.0
Non-qualified patronage refunds forfeited 1.9 0.0 0.0
Other, net 0.0 0.4 (0.6)
---- ---- -----
Effective income tax rate 42.3% 41.2% 21.8%
==== ==== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
as of June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts $ 843,076 $ 962,542
Inventory costs 1,718,609 1,314,607
Uninsured losses 1,400,925 1,410,054
Accrued vacation pay 2,559,950 3,002,293
Other, net (90,750) ---
----------- -----------
Net current deferred income tax asset 6,431,810 6,689,496
----------- -----------
Noncurrent deferred tax assets (liabilities):
Deferred compensation 2,866,610 2,607,410
Non-qualified patronage refund allocations:
Issued 1,285,037 1,417,560
Received (980,160) (980,160)
Property, plant and equipment (8,527,633) (9,399,969)
Net operating loss carryforward 774,958 2,529,530
Other, net 1,044,615 856,264
----------- -----------
Net noncurrent deferred income tax liability (3,536,573) (2,969,365)
----------- -----------
Net deferred income tax asset $ 2,895,237 $ 3,720,131
=========== ===========
</TABLE>
As of June 30, 2000, the Company recorded deferred income tax assets of
$774,958 for net operating loss carry forwards which expire in years 2009
through 2017. Management believes that the realization of the deferred
income tax assets is more likely than not based on the expectation that the
Company will have taxable income in future periods.
F-24
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________
13. Commitments and Other Matters:
-----------------------------
a. Leases - Southern States is party to an agreement whereby an investment
------
company (the "Owner") constructed, on land owned by Southern States and
leased to the Owner for a 70-year term expiring in 2048, a headquarters
building for lease to Southern States. Under the terms of the building
lease, Southern States is obligated to pay rent (net of income from the
land rental) based upon the cost of the building and executory costs
such as insurance, maintenance and property taxes. This operating lease
has an initial term of 30 years, expiring in October 2008, and contains
options allowing Southern States to renew the lease for two additional
five-year periods and to purchase the building, at certain times
throughout the lease, at the greater of the building's original cost or
its then fair market, value as defined in the lease. Should Southern
States not exercise its purchase option by the expiration of the
building lease, the Owner has options, exercisable throughout the
remaining term of the land lease, to purchase the land at its then fair
market value.
In addition, the Company leases transportation, data processing and
other equipment under operating leases expiring generally during the
next five years. Rent expense approximated $20,895,694 in 2000,
$18,058,165 in 1999 and $8,700,650 in 1998.
The Company's approximate minimum lease commitments under
noncancellable leases, less noncancellable subleases, are as follows:
<TABLE>
<CAPTION>
Office Building
-----------------------------
Year Equipment Lease Sublease Totals
---- --------- ----- ----------- ------
<S> <C> <C> <C> <C>
2001 $14,174,148 $ 742,538 $(608,225) $14,308,461
2002 10,623,970 742,538 (608,225) 10,758,283
2003 7,898,957 742,538 (208,713) 8,432,782
2004 5,420,510 742,538 6,163,048
2005 3,562,876 742,538 4,305,414
Thereafter 3,878,847 2,413,248 6,292,095
</TABLE>
b. Other Matters - The Company's 2000, 1999 and 1998 consolidated
-------------
statement of operations includes a provision in cost of products
purchased and marketed and other operating costs of $1,839,188,
$4,204,456 and $872,306, respectively, to cover estimated environmental
remediation costs. These costs are offset by recoveries, primarily from
state agencies, of certain environmental costs expended in prior
periods, of $100,000, $0 and $100,000 in 2000, 1999 and 1998,
respectively. The unpaid portion of such costs totaled $3,560,163, and
$3,191,141 at June 30, 2000 and 1999, respectively, and is included as
a liability in the Company's consolidated balance sheet for the
respective years. Amounts accrued do not take into consideration claims
for recovery from insurance or state underground storage tank
remediation trust funds. When specific amounts within a range cannot be
determined, the Company has accrued the minimum amount within that
range. The remaining actual environmental remediation liability may be
different from management's estimates due to the uncertainty of the
extent of pollution, the complexity of laws and government regulations
and their interpretation, the varying costs and effectiveness of
alternative cleanup technologies and methods, the uncertain level of
insurance or other types of recovery, and the uncertain level of the
Company's involvement. As the scope of the Company's environmental
contingencies becomes more clearly defined, it is possible that
expenditures in excess of those amounts already accrued may be
necessary. However, management believes that these overall costs are
expected to be incurred over an extended period of time and, as a
result, such contingencies are not anticipated to have a material
impact on the consolidated financial position or liquidity, but could
have a material adverse effect on future annual operating results.
F-25
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________________
13. Commitments and Other Matters, continued:
-----------------------------
In early January of 1999, the Company received additional information and
revised estimates of the cost of containment, remediation and monitoring
activities related to environmental contamination at one of the Company's past
operating sites. Based upon this additional information the Company accrued
$3.0 million for the additional estimated cost of remediating this site. These
costs are expected to be expended over a twenty-year period with approximately
$1.1 million to be expended by December 31, 2000 and the remaining portion
spread over the remaining 19 years. Expenditures for the first ten years are
for capital equipment and site remediation and expenditures after year ten are
expected to be for site monitoring and reporting. The liability accrual and
remediation methodology has been developed by a third party environmental
consultant and is based on known remediation methodologies and techniques.
The Company is a defendant in several lawsuits arising in the ordinary course
of business. While the outcome of any litigation cannot be predicted with
certainty, the Company believes that the ultimate disposition of these matters
will not have a material adverse effect on its consolidated financial
position, liquidity or results of operations.
At June 30, 2000 and 1999, commitments for the construction and acquisition of
plant and equipment totaled approximately $3.6 million and $2.2 million,
respectively.
14. Fair Value of Financial Instruments:
-----------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and Accounts Receivable - The carrying amounts approximate fair value
----------------------------
because of the short maturity of these assets.
Long-term Investments - Long-term investments, principally in supplier
---------------------
cooperatives, are carried at cost and unpaid qualified written notices of
allocation are carried at stated or par value. The Company believes it is
not practicable to estimate the fair value of the securities of supplier
cooperatives without incurring excessive costs because there is no
established market for these securities and it is inappropriate to estimate
future cash flows which are largely dependent on future patronage earnings
of the supplier cooperatives.
Accounts Payable and Notes Payable - The carrying amounts approximate fair
----------------------------------
value because of the short maturity of these liabilities.
Long-term Debt - The fair value of the Company's long-term debt is
--------------
estimated based on the discounted cash flow of that debt, using estimated
current rates for debt of the same remaining maturities. At June 30, 2000,
the estimated fair value of the long-term debt totaling $191,386,662 was
$177,133,630. At June 30, 1999, the estimated fair value of the long-term
debt totaling $280,399,234 was $262,474,093.
Capital Securities, Series A - The fair value of the Capital Securities,
----------------------------
Series A is estimated based on the discounted cash flow of those
securities, using estimated current rates for securities of the same
remaining maturities. At June 30, 2000, the estimated fair value was
$55,545,654.
F-26
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_________________
15. Derivative Financial Instruments:
--------------------------------
As part of its' asset/liability management program, the Company utilizes
financial derivatives to reduce the Company's sensitivity to interest rate
fluctuations. At June 30, 2000, the Company had outstanding nine variable
to fixed interest rate swaps with a notional amount of $180,000,000 and
fair market value of $6,017,458 with terms ranging from three to seven
years. Under terms of these agreements, the Company is paying fixed
interest rates ranging from 4.930% to 6.690% and receiving a variable rate
based on 3-month London Interbank Offering Rates ("LIBOR") of 6.794% at
June 30, 2000. At June 30, 1999, the Company had outstanding seven variable
to fixed interest rate swaps with a notional amount of $140,000,000 and
fair value of $1,777,395 with terms ranging from three to seven years.
Under the terms of these agreements, the Company was paying fixed interest
rates ranging from 4.930% to 6.420% and receiving a variable rate based on
3-month LIBOR of 5.37% at June 30, 1999. These interest rate swaps are
being used to convert certain floating rate debt to fixed rates. Net
receipts or payments under the agreements are being recognized as
adjustments to interest expense. The Company is exposed to credit losses in
the event of counterparty nonperformance, but does not anticipate any such
losses.
The Company uses futures contracts to protect purchase and sales contract
prices from directly related fluctuations in the market price of grains and
petroleum products. Those futures contracts are commitments to either
purchase or sell designated amounts and varieties of grain and petroleum
products at a future date, generally not exceeding a period of six months,
for a specified price, and may be settled in cash or through delivery. The
Company hedges purchases and sales with the sole purpose of eliminating the
risk of market price fluctuations. No futures contracts are purchased or
sold for purely speculative purposes. The Company is exposed to credit
losses in the event of counterparty nonperformance, but does not anticipate
any such losses.
Realized and unrealized gains and losses on futures contracts are accounted
for on a deferral basis. Net realized gains and losses on open and closed
futures contracts, primarily in grain futures, reported in the statement of
operations under cost of products purchased and marketed were net gains of
$909,071, $1,210,383 and $1,016,672 for 2000, 1999 and 1998, respectively.
Since these net realized gains were the result of hedging transactions,
they were substantially offset by net losses realized on cash transactions.
Deferred gains on open and closed new crop grain futures reported in the
balance sheet under accrued expenses were $1,855,218 and $543,343 for 2000
and 1999, respectively. Deferred losses on open crop grain futures reported
in the balance sheet under other assets were $2,426,046 and $830,390 for
2000 and 1999, respectively.
At June 30, 2000 the Company's open and closed new crop grain futures were
as follows:
Weighted
Average
Bushels Contract Amount Price/Bushel Terms
------- --------------- ------------ -----
Open Futures
------------
Corn 2,170,000 $5,555,412 $2.5601 Dec. 00
280,000 748,288 2.6725 Mar. 01
Soybeans 560,000 3,145,350 5.6167 Nov. 00
10,000 56,075 5.6075 Jan. 01
Corn (for wheat) 30,000 98,075 3.2692 Jul. 01
--------- --------- -------
Total 3,050,000 $9,603,200 $3.1486
The carrying value for these contracts at June 30, 2000 was an unrealized
gain which was substantially hedged or offset by an unrealized loss of
approximately the same amount on the matching open forward purchase
commitments to acquire grains. The deferred gain on closed futures was
$181,192 and the deferred loss was $21,435.
At June 30, 2000 the Company's futures contracts relating to the sale of
petroleum products had a carrying value of $3.8 million and a fair value of
$3.7 million on 4.2 million gallons of petroleum products.
F-27
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_________________
16. Supplemental Disclosures of Cash Flow Information:
-------------------------------------------------
The components of cash provided by current assets and liabilities, net of
the effect of balances acquired from the acquisition of the Gold Kist
Inputs Business on October 13, 1998 and MLE on April 1, 1998, follow:
2000 1999 1998
---- ---- ----
Receivables $(20,137,877) $ 61,950,915 $ 27,870,279
Inventories 2,455,665 (4,776,701) (6,476,370)
Prepaid expenses (1,195,251) 1,492,252 (1,173,102)
Accounts payable (20,704,301) 65,855,438 (29,534,741)
Accrued expenses 11,858,781 8,138,855 20,838,166
Other, net (2,469,960) (2,784,670) (1,251,626)
------------ ------------ ------------
$(30,192,943) $129,876,089 $ 10,272,606
============ ============ ============
Cash payments for interest were $17,907,834, $20,758,285 and $8,957,931 for
2000, 1999 and 1998, respectively. Cash payments for income taxes were
$2,534,009, $2,719,806, and $2,533,809 for 2000, 1999 and 1998,
respectively.
During fiscal 2000, noncash transactions included a $2,655,204 transfer of
other assets to property, plant and equipment. During fiscal 1999, noncash
transactions included the assumption of liabilities in connection with the
Gold Kist transaction totaling $9,793,404. During fiscal 1998, noncash
transactions included the assumption of patronage refund allocations from
MLE totaling $2,683,000.
17. Merger:
------
On April 1, 1998, Southern States completed a merger with MLE Marketing, a
livestock marketing cooperative headquartered in East Lansing, Michigan.
MLE Marketing operates livestock dealer and auction markets in Indiana,
Kentucky, Michigan and Ohio. The merger constituted a tax-free
reorganization and has been accounted for using the purchase method under
Accounting Principles Board Opinion No. 16 ("APB 16"). The acquisition of
MLE was completed for approximately $3.5 million. In that connection, the
Company issued 60,664 shares (par value $60,664) of its common stock to the
former members of MLE and assumed patronage refund allocations issued in
prior years to MLE members in the amount of $2,683,000. Pro forma results
of operations for the year ended June 30, 1998 as if the acquisition of MLE
occurred as of the beginning of the respective period is not presented, as
the effect is not material.
The fair value of the assets acquired and liabilities assumed is summarized
follows (in thousands):
Current assets $ 23,290
Investments 10,352
Property, plant and equipment 7,680
Other noncurrent assets 4,389
Current liabilities (33,251)
Long-term liabilities (8,963)
--------
$ 3,497
========
F-28
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_________________
18. Acquisition of Gold Kist Inc.:
-----------------------------
On October 13, 1998, the Company purchased the Gold Kist Inputs Business of
Gold Kist Inc. ("Gold Kist"), a Georgia cooperative marketing association.
The net assets purchased included certain inventory, real property,
personal property, and certain accounts receivable, other assets, and
certain liabilities. The initial estimated net purchase price of $218
million, (net of liabilities assumed of approximately $21.5 million and
subject to a final purchase price adjustment) was financed utilizing a
bridge loan facility. This acquisition has been accounted for under the
purchase method of accounting. The purchase price was allocated to
inventory, accounts receivable and property plant and equipment based on
estimated fair values at the date of acquisition, pending final
determination of certain acquired balances. The Gold Kist Inputs Business'
results of operations have been included in the Company's consolidated
statement of operations since the date of acquisition.
In connection with the purchase transaction, the Company delivered to Gold
Kist a post-closing statement of net asset value (the "Post-Closing
Valuation") prepared pursuant to the terms of the purchase agreement (the
"Agreement"). The final purchase price as determined by the Company
pursuant to the adjusted Post-Closing Valuation was approximately $198
million compared to an initial estimated purchase price (after deducting
the $10 million hold back provided for in the Agreement) of $218 million.
Taking into account certain agreed upon adjustments, the Company's Post-
Closing Valuation resulted in a repayment by Gold Kist to the Company of
approximately $21 million on September 3, 1999, with interest from the
closing date. The difference between the initial estimated purchase price
as determined by the pre-closing valuation and the Company's determination
of the final purchase price as shown by the adjusted Post-Closing Valuation
was principally due to the Company not purchasing certain accounts
receivable that were included in the initial purchase price.
The following unaudited pro forma consolidated results of operations
assumes that the purchase of Gold Kist had occurred at the beginning of
each respective year. The unaudited pro forma consolidated results are
presented for informational purposes only and do not purport to be
indicative of the Company's future consolidated results of operations.
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------- -------------
Revenues $1,457,867,492 $1,603,828,518
============== ==============
Loss on operations $ (5,190,846) $ (3,161,249)
============== ===============
Net loss $ (8,108,864) $ (544,363)
============== ===============
F-29
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_______________
19. Quarterly Results of Operations:
The Company's unaudited quarterly results of operations were as follows:
<TABLE>
<CAPTION>
Fiscal 2000 Quarters
--------------------
September 30 December 31 March 31 June 30
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Sales and other operating revenue $287,004,953 $300,409,858 $443,066,594 $516,598,852
Gross margin 54,914,535 62,487,785 80,793,001 92,576,258
Net (loss) savings (4,604,498) (5,559,835) 3,642,444 11,485,919
Fiscal 1999 Quarters
--------------------
September 30 December 31 March 31 June 30
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Sales and other operating revenue $210,892,909 $227,216,075 $413,901,376 $514,349,132
Gross margin 34,970,645 55,436,515 72,705,734 88,464,073
Net (loss) savings (8,081,367) (7,510,864) 2,663,564 10,853,902
</TABLE>
F-30
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________________
20. Segment Information:
-------------------
The Company has six reporting segments or divisions: Crops, Feed, Petroleum,
Retail Farm Supply, Farm and Home, and Marketing. The crops segment
procures, manufactures, processes and distributes fertilizer, seed and crop
protection products. The feed segment procures and manufactures dairy,
livestock, equine, poultry, pet and aquacultural feeds. The petroleum
segment distributes all grades of gasoline, kerosene, fuel oil, propane and
other related petroleum products. The retail farm supply segment distributes
agricultural supplies through approximately 300 Company owned and managed
member cooperatives. The farm and home segment distributes farm and home
products through wholesale and retail centers. The marketing segment
purchases corn, soybean, wheat, barley and livestock from its members and
markets these products.
The Company evaluates performance based upon operating profit or loss.
Interest expense is allocated to each of the segment assets employed but
excluding the allocation of general overhead. The Company accounts for
intersegment sales at current market prices.
The following table presents information about the Company's reported
segment profit and segment assets as well as the reconciliation of
reportable segment revenues, operating profit and assets to the Company's
consolidated totals.
<TABLE>
<CAPTION>
2000
Retail Farm
Crops Feed Petroleum Farm Supply and Home Marketing
----- ---- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 212,643,134 $ 178,214,994 $ 276,714,307 $ 592,157,165 $ 208,308,553 $ 76,158,831
Intersegment revenues 306,737,423 75,438,068 22,430,296 - 59,828,697 7,165,656
Interest expense 5,498,735 2,561,900 941,023 15,541,747 3,002,249 1,693,522
Depreciation and amortization 1,972,537 3,550,477 2,016,550 9,983,348 2,176,661 1,506,822
Profit 15,435,780 9,997,562 9,334,129 2,817,132 7,674,046 (943,688)
Assets 126,912,607 47,267,829 37,166,734 193,089,115 72,446,075 50,511,192
Capital expenditures 2,311,895 2,819,688 3,040,772 7,230,047 6,420,484 4,666,935
1999
Retail Farm
Crops Feed Petroleum Farm Supply and Home Marketing
----- ---- --------- ----------- -------- ---------
Revenues from external customers $ 193,745,243 $ 181,287,240 $ 165,645,121 $ 532,287,286 $ 209,563,533 $ 79,637,454
Intersegment revenues 285,085,607 70,473,727 13,663,909 - 51,301,878 6,871,948
Interest expense 4,175,956 2,676,378 1,218,823 11,747,410 3,046,888 1,220,555
Depreciation and amortization 1,821,066 2,984,380 1,985,752 9,080,996 2,011,605 1,371,066
Profit 12,422,440 11,825,694 5,867 (518,604) 8,326,288 (380,799)
Assets 117,705,461 47,542,388 36,378,354 197,754,505 69,022,499 46,421,387
Capital expenditures 3,774,689 3,695,269 35,209 21,574,003 345,728 2,354,457
<CAPTION>
2000
Other Total
----- -----
<S> <C> <C>
Revenues from external customers $ 2,883,273 $ 1,547,080,257
Intersegment revenues - 471,600,140
Interest expense (1,376,659) 27,862,517
Depreciation and amortization 4,248,120 25,454,515
Profit (707,008) 43,607,953
Assets 150,090,002 677,483,554
Capital expenditures 5,142,692 31,632,513
1999
Other Total
----- -----
Revenues from external customers $ 4,193,615 $ 1,366,359,492
Intersegment revenues 794,754 428,191,823
Interest expense 4,327,119 28,413,129
Depreciation and amortization 3,139,151 22,394,016
Profit (1,169,078) 30,511,808
Assets 166,923,095 681,747,689
Capital expenditures 14,824,577 46,603,932
</TABLE>
F-31
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
1998
Retail Farm
Crops Feed Petroleum Farm Supply and Home Marketing
----- ---- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $154,825,265 $145,581,994 $193,097,559 $336,259,693 $196,116,317 $94,516,837
Intersegment revenues 156,898,258 62,314,122 17,555,622 - 40,404,007 8,876,637
Interest expense 2,461,380 1,805,800 1,488,294 6,570,858 2,965,678 (191,898)
Depreciation and amortization 1,315,274 2,107,916 2,057,166 6,594,762 1,844,868 910,256
Profit 16,865,664 6,120,676 1,650,180 4,855,530 5,966,802 1,781,884
Assets 55,508,563 34,270,787 35,634,480 104,946,956 69,168,805 51,698,503
Capital expenditures 1,102,859 3,046,937 2,499,106 14,372,371 2,380,587 820,786
<CAPTION>
1998
Other Total
----- -----
<S> <C> <C>
Revenues from external customers $ 2,888,853 $1,123,286,518
Intersegment revenues 711,122 286,759,768
Interest expense 1,759,261 16,859,373
Depreciation and amortization 2,781,630 17,611,872
Profit (526,980) 36,713,756
Assets 111,068,346 462,296,440
Capital expenditures 9,682,022 33,904,668
</TABLE>
The following is a reconciliation of reportable segment profit to the
Company's consolidated totals.
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Total profit for reportable segments $ 43,607,953 $ 30,511,808 $ 36,713,756
General corporate overhead (37,876,180) (31,961,458) (23,143,300)
------------ ------------ ------------
Savings (loss) before income tax expense (benefit),
undistributed savings (loss) in Statesman Financial
Corporation and cumulative effect of change in
accounting method $ 5,731,773 $ (1,449,650) $ 13,570,456
============ ============ ============
</TABLE>
F-32
<PAGE>
SOUTHERN STATES COOPERATIVE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_________________
21. Change in Accounting Method:
---------------------------
Effective July 1, 1999, Southern States changed its method of accounting
for its investment in the Southern States Insurance Exchange (the
"Insurance Exchange") and began recognizing operating results on this
investment on a quarterly basis. The cumulative effect of this change in
accounting method was to increase net savings $1.6 million, net of income
taxes of approximately $1.0 million, for the year ended June 30, 2000.
Prior to the accounting change, Southern States' portion of the annual
earnings relating to the Insurance Exchange, which year ends on December
31, were recognized in Southern States' third quarter, which ends March 31.
Although this method was acceptable under accounting rules for agricultural
cooperatives, Southern States believes the new method is preferable because
operating results relating to the Insurance Exchange are more appropriately
matched with the period in which the revenue is earned.
Pro forma amounts assuming the change in application of accounting method
applied retroactively.
Year Ended
June 30, 2000 June 30, 1999
------------- -------------
Net savings (loss) $3,382,703 ($2,107,055)
========== ===========
22. Subsequent Event:
----------------
On July 31, 2000, Southern States consummated an agreement with Agway Inc.
("Agway") of De Witt, NY under which Southern States acquired the right to
provide product distribution and marketing services to Agway's network of
approximately 500 independent consumer dealers in the northeastern United
States. The total purchase price paid to Agway by Southern States was
approximately $22.4 million which was allocated as discussed in the
following two sentences. Under the agreement Southern States assumed
Agway's existing lease obligations on two regional distribution centers and
office space totaling $6.2 million and purchased Agway's existing inventory
at the distribution centers for a purchase price of approximately $8.2
million. Southern States also purchased Agway's existing current accounts
receivable due from the Agway dealer network for a purchase price of
approximately $13.4 million. In addition, Southern States purchased various
pieces of distribution center equipment and other related personal property
totaling $.8 million in the transaction. Under the terms of the agreement,
the Company also will assume all related dealer marketing, development,
operations, distribution and logistics associated with that business.
Through this transaction, Southern States has extended the geographic scope
of its farm and home business into the northeastern United States.
F-33
<PAGE>
Independent Auditors' Report
The Board of Directors
Gold Kist Inc.:
Southern States Cooperative, Incorporated:
We have audited the accompanying statements of operations and cash flows of
the Inputs Business (as defined in Note 1) of Gold Kist Inc. and subsidiaries
(the "Company") for the year ended June 27, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements of the Company's Inputs Business to be
sold to Southern States Cooperative, Inc. were prepared pursuant to the Asset
Purchase Agreement described in Note 1, and are not intended to be a complete
presentation of the Inputs Business's results of operations and cash flows as if
the Inputs Business had operated as a stand-alone company.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and the cash flows of the
Inputs Business of Gold Kist Inc. and subsidiaries for the year ended June 27,
1998, pursuant to the Asset Purchase Agreement described in Note 1, in
conformity with generally accepted accounting principles.
KPMG LLP
Atlanta, Georgia
August 26, 1998
F-34
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
STATEMENT OF OPERATIONS
(Amounts in Thousands)
Year Ended
June 27, 1998
-------------
Net sales............................................. $ 480,542
Cost of sales......................................... 393,711
---------
Gross margin...................................... 86,831
Distribution, administrative and general expenses..... 105,291
---------
Net operating loss................................ (18,460)
---------
Other income (deductions):............................
Interest income................................... 10,041
Interest expense.................................. (12,675)
Miscellaneous, net................................ 1,169
---------
Total other deductions........................ (1,465)
---------
Loss before income taxes.......................... (19,925)
Income tax benefit (note 6)........................... 7,576
---------
Net loss.......................................... $(12,349)
=========
See accompanying notes to financial statements.
F-35
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
STATEMENT OF CASH FLOWS
(Amounts in Thousands)
Year Ended
June 27, 1998
-------------
Cash flows from operating activities:
Net loss.................................................... $(12,349)
Non-cash items included in net loss:
Depreciation and amortization............................ 6,188
Allowance for doubtful accounts.......................... 5,773
Gains on sales of assets................................. (475)
Equity in loss of limited liability corporation.......... 481
Other.................................................... (34)
Changes in operating assets and liabilities:
Receivables.............................................. (8,334)
Crop notes receivable.................................... (10,746)
Inventories.............................................. (7,623)
Other current assets..................................... 564
Accounts payable and accrued expenses.................... 9,166
--------
Net cash used in operating activities................. (17,389)
--------
Cash flows from investing activities:
Acquisitions of investments.............................. (1,673)
Acquisitions of property, plant and equipment............ (4,729)
Proceeds from disposals of property, plant and equipment. 871
Other.................................................... (367)
--------
Net cash used in investing activities................. (5,898)
--------
Cash flows from financing activities:
Principal payments of long-term debt..................... (232)
Net transfers form Gold Kist Inc......................... 23,519
--------
Net cash provided by financing activities............. 23,287
--------
Net change in cash and cash equivalents............... --
Cash and cash equivalents at beginning of year.............. --
--------
Cash and cash equivalents at end of year.................... $ --
========
Supplemental disclosure of cash flow data:
Cash paid during the year for:
Interest paid to third parties........................... $ 468
========
Income taxes (note 6).................................... $ --
========
See accompanying notes to financial statements.
F-36
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
NOTES TO FINANCIAL STATEMENTS
June 27, 1998
(Dollar Amounts in Thousands)
(1) Basis of Presentation
Gold Kist Inc. ("Gold Kist" or "Company") and Southern States Cooperative,
Incorporated ("Southern States") have entered into an Asset Purchase Agreement
(the "Agreement"), dated as of July 23, 1998, pursuant to which the Company has
agreed to sell and assign, and Southern States has agreed to purchase and
assume, the assets and certain of the liabilities of the Company's agricultural
inputs business. The affected assets include substantially all of the assets of
the Company's Agri-Services segment, as well as certain crop notes receivable of
AgraTrade Financing, Inc., the Company's wholly-owned finance subsidiary (such
businesses and certain other assets to be acquired are referred to as the
"Inputs Business"). The Agri-Services segment purchases, manufactures and
processes fertilizers, agricultural chemicals, seeds, pet foods, feed and animal
health products and other farm supply items for distribution and sale at
wholesale and retail. Additionally, the segment serves as a contract
procurement agent for and storer of farm commodities such as soybeans, grain and
peanuts and is engaged in cotton processing and storage.
The financial statements are not intended to be a complete presentation of
the results of operations and cash flows as if the Inputs Business had operated
as a stand-alone company. Intercompany transactions within the Inputs Business
have been eliminated. The accompanying financial statements present the results
of operations and cash flows of the Inputs Business, based upon the structure of
the transaction as described in the Agreement. The transaction as set forth in
the Agreement is hereinafter referred to as the Acquisition.
Gold Kist provides various services to the Inputs Business including, but
not limited to, facilities management, information systems processing, corporate
protection and risk management, payroll and employee benefits administration,
auditing and financial reporting, credit, engineering, and government and public
relations services. Gold Kist allocates these expenses and all other central
operating costs, first on the basis of direct usage when identifiable, with the
remainder allocated among Gold Kist's businesses on the basis of their
respective assets, revenues, headcount, or other measures. In the opinion of
management of Gold Kist, these methods of allocated costs are reasonable. These
expenses totaled $5.4 million in 1998.
The Inputs Business has been financed by operating cash flow and advances
from Gold Kist. Gold Kist has allocated interest expense to the Inputs Business
based upon net operating assets employed at interest rates that approximate
market. Interest expense charged to the Inputs Business for 1998 was $12.2
million.
Sales of animal feeds from the Inputs Business to Gold Kist approximated
$6.0 million in 1998. The Inputs Business recorded cotton procurement commission
revenue from Gold Kist of $95 for 1998. These amounts have been included in the
statement of operations.
The Inputs Business participates in a centralized cash management system
wherein cash receipts are transferred to and cash disbursements are funded by
Gold Kist.
Significant accounting policies are designated below as an integral part of
the notes to financial statements to which the policies relate.
F-37
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 27, 1998
(Dollar Amounts in Thousands)
(a) Fiscal Year
Gold Kist employs a 52/53 week fiscal year. The financial statements
for 1998 reflect 52 weeks.
(b) Use of Estimates
Management of Gold Kist has made a number of estimates and assumptions
to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
(c) Depreciation
Depreciation of plant and equipment is calculated by the straight-line
method over the estimated useful lives of the respective assets
(buildings and improvement--10 to 25 years, machinery and equipment--4
to 10 years).
(d) Goodwill
In 1997, Gold Kist acquired a cotton gin at Morven, Georgia that is
included in the Inputs Business. The cash purchase price totaled $1.7
million. Of this amount, $423 of goodwill was recorded to reflect the
excess of cash prices for these businesses over the fair values of
their net assets. The goodwill for this acquisition is being amortized
on a straight-line basis over a 15 year period.
(2) Crop Notes Receivable
The Inputs Business issues crop notes receivables to farmers and third
party agricultural inputs dealers which are generally secured by crop liens and
bear interest at variable rates based on the prime lending rate. The increase in
the bad debts provision on crop notes receivable for the year ended June 27,
1998 reflects the increase in the age of outstanding crop notes and a
deterioration in the credit quality of specific crop notes. These factors were
primarily the result of poor crop yields and low farm commodity prices during
1998. An allowance for doubtful notes has been recorded, the activity of which
is summarized as follows:
<TABLE>
<CAPTION>
Year Ended
June 27, 1998
--------------
<S> <C>
Allowance for doubtful notes -
beginning of the fiscal year... $ 2,706
Bad debts provisions on crop
notes receivable.............. 6,798
Write-off of crop notes receivable.. (2,688)
-------
Allowance for doubtful notes -
end of the fiscal year......... $ 6,816
=======
</TABLE>
F-38
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 27, 1998
(Dollar Amounts in Thousands)
(3) Futures and Options Transactions
Gold Kist on behalf of the Inputs Business engages in commodity futures and
options transactions to manage the risk of adverse price fluctuations with
regard to its animal feed ingredient purchases. Gains and losses on futures
contracts are recognized when closed. Option contracts are valued at fair
market value. Gains or losses on futures and options transactions are included
as a part of product cost. Cost of sales for the fiscal year ended June 27,
1998 include losses on futures and options transactions of $4.1 million.
(4) Investments
At June 27, 1998, Gold Kist had a $28.8 million investment in CF
Industries, Inc., a major fertilizer cooperative, that is not included in the
acquisition. The Inputs Business Statement of Operations includes patronage
refunds from CF Industries, Inc. of $3.7 million for 1998. These patronage
refunds are reflected as a reduction in cost of sales.
(5) Rent Expense
Total rental expense on operating leases was $12.0 million in 1998.
(6) Income Taxes
The operations of the Inputs Business are included in the consolidated
income tax returns of Gold Kist. All income tax payments are made by Gold Kist
and are not allocated to the Inputs Business. Pursuant to the Agreement, Gold
Kist will retain all income tax liabilities and rights to all tax refunds
relating to operations prior to the closing date of the acquisition. The
statement of operations reflects management's estimates of income tax benefit
using effective federal and state statutory rates as if the Inputs Business was
operated as a stand-alone company. As Gold Kist manages its tax position on a
consolidated basis, which takes into account the results of all of its
operations, the Inputs Business's effective tax rate could vary in the future
from that reported in the accompanying statement of operations. The Inputs
Business's future effective tax rate will largely depend on Southern States'
structure and tax strategies.
The components of the income tax benefit were as follows:
<TABLE>
<CAPTION>
June 27, 1998
-------------
Current:
--------
<S> <C>
Federal $(5,007)
State (698)
-------
(5,705)
-------
Deferred:
---------
Federal (1,701)
State (170)
-------
(1,871)
-------
$(7,576)
=======
</TABLE>
The effective tax rates were different from the United States statutory
rates for the reasons set forth below:
<TABLE>
<CAPTION>
June 27, 1998
-------------
<S> <C>
Computed expected income tax benefit $(6,974)
Effect of state income taxes (433)
Other (169)
-------
$(7,576)
=======
</TABLE>
F-39
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 27, 1998
(Dollar Amounts in Thousands)
(7) Profit Sharing and Retirement Plans
The Inputs Business participates in various incentive plans provided by
Gold Kist for its employees, including a voluntary profit sharing and investment
plan, as well as an annual incentive plan for key employees. The Inputs Business
also participates in Gold Kist's two noncontributory defined benefit pension
plans, as well as a retiree health care benefit plan. All obligations and
liabilities of these plans associated with Inputs Business will be retained by
Gold Kist.
The costs of these plans have been allocated by Gold Kist to the Inputs
business based upon either plan participation, unit profitability or relative
payroll costs. Total benefit plan costs charged to the Inputs Business
operations were $1.1 million for 1998.
F-40
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
STATEMENTS OF OPERATIONS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
September 26, 1998 September 27, 1997
------------------- -------------------
<S> <C> <C>
Net sales.......................................... $ 91,508 $ 104,735
Cost of sales...................................... 78,506 91,495
---------- -----------
Gross margin...................................... 13,002 13,240
Distribution, administrative and general expenses.. 22,054 22,444
---------- -----------
Net operating loss................................ (9,052) (9,204)
Other income (deductions):
Interest income................................... 3,209 2,972
Interest expense.................................. (3,994) (3,168)
Miscellaneous, net................................ 171 753
---------- -----------
Total other income (deductions)............... (614) 557
---------- -----------
Loss before income taxes.......................... (9,666) (8,647)
Income tax benefit (note 2)........................ 3,625 3,288
---------- -----------
Net loss.......................................... $ (6,041) $ (5,359)
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------
September 26, 1998 September 27, 1997
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (6,041) $ (5,359)
Non-cash items included in net loss:
Depreciation and amortization............................ 1,592 1,520
Allowance for doubtful accounts.......................... (828) 292
(Gains) losses on sales of assets........................ 11 (396)
Other.................................................... 1,062 30
Changes in operating assets and liabilities:
Receivables.............................................. 25,692 17,428
Crop notes receivable.................................... (6,996) (7,017)
Inventories.............................................. 13,840 8,233
Other current assets..................................... 408 (3,068)
Accounts payable and other current liabilities........... (38,535) (24,348)
-------- --------
Net cash used in operating activities................... (9,795) (12,685)
-------- --------
Cash flows from investing activities:
Acquisitions of property, plant and equipment............. (21) (2,270)
Proceeds from disposals of property, plant and equipment.. 56 594
-------- --------
Net cash provided by (used in) investing activities.... 35 (1,676)
-------- --------
Cash flows from financing activities:
Principal payments of long-term debt...................... (52) (47)
Net transfers from Gold Kist Inc.......................... 9,812 14,409
-------- --------
Net cash provided by financing activities.............. 9,760 14,362
-------- --------
Net change in cash and cash equivalents................ - -
Cash and cash equivalents at beginning of period........... - -
-------- --------
Cash and cash equivalents at end of period................. $ - $ -
======== ========
Supplemental disclosure of cash flow data:
Cash paid during the period for:
Interest paid to third parties........................... $ 87 $ 117
======== ========
Income taxes (note 2).................................... $ - $ -
======== ========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
INPUTS BUSINESS OF GOLD KIST INC.
NOTES TO FINANCIAL STATEMENTS
(Amounts in Thousands)
(Unaudited)
1. Gold Kist Inc. ("Gold Kist" or "Company") and Southern States Cooperative,
Incorporated ("Southern States") have entered into an Asset Purchase
Agreement (the "Agreement"), dated as of July 23, 1998, pursuant to which
the Company has agreed to sell and assign, and Southern States has agreed to
purchase and assume, the assets and certain of the liabilities of the
Company's agricultural inputs business. The affected assets include
substantially all of the assets of the Company's Agri-Services segment, as
well as certain crop notes receivable of AgraTrade Financing, Inc., the
Company's wholly-owned finance subsidiary (such businesses and certain other
assets to be acquired are referred to as the "Inputs Business"). The Agri-
Services segment purchases, manufactures and processes fertilizers,
agricultural chemicals, seeds, pet foods, feed and animal health products
and other farm supply items for distribution and sale at wholesale and
retail. Additionally, the segment serves as a contract procurement agent for
and storer of farm commodities such as soybeans, grain and peanuts and is
engaged in cotton processing and storage.
The financial statements are not intended to be a complete presentation of
the results of operations and cash flows as if the Inputs Business had
operated as a stand-alone company. Intercompany transactions within the
Inputs Business have been eliminated. The accompanying financial statements
present the results of operations and cash flows of the Inputs Business,
based upon the structure of the transaction as described in the Agreement.
The transaction as set forth in the Agreement is hereinafter referred to as
the Acquisition.
The accompanying unaudited financial statements reflect the accounts of the
Inputs Business of Gold Kist Inc. ("Inputs Business"). All significant
intercompany transactions have been eliminated. Due to the seasonality of
the Inputs Business, results of operations for interim periods are not
necessarily indicative of results for the entire year.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the results of operations and cash flows.
2. The operations of the Inputs Business are included in the consolidated
income tax returns of Gold Kist. All income tax payments are made by Gold
Kist and are not allocated to the Inputs Business. The statements of
operations reflect management's estimates of income tax benefit using
effective federal and state statutory rates as if the Inputs Business was
operated as a stand-alone company. As Gold Kist manages its tax position on
a consolidated basis, which takes into account the results of all of its
operations, the Inputs Business's effective tax rate could vary in the
future from that reported in the accompanying statements of operations. The
Inputs Business's future effective tax rate will largely depend on Southern
States's structure and tax strategies.
F-43
<PAGE>
================================================================================
You should rely only on the information contained in this prospectus or other
information to which this prospectus refers. Southern States has not authorized
anyone to provide you with information that is different. Southern States is not
making an offer of the Senior Notes in any state where the offer is not
permitted. This prospectus is not an offer to sell, and it is not soliciting an
offer to buy, the Senior Notes offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such offer or solicitation. You should not assume
that the information in this prospectus is accurate as of any date other than
the date of this prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................... 1
Risk Factors............................................................ 6
Use of Proceeds......................................................... 10
Selected Historical Consolidated Financial Information.................. 11
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 15
Southern States......................................................... 34
Business of Southern States............................................. 39
Management.............................................................. 56
Description of the Senior Notes......................................... 70
Plan of Distribution.................................................... 82
Absence of Public Market, Redemption and Market Risk.................... 83
Legal Matters........................................................... 84
Experts................................................................. 84
Available Information................................................... 84
Disclosure Regarding Forward Looking Statements......................... 85
Index to Financial Statements........................................... F-1
</TABLE>
================================================================================
================================================================================
$50,000,000
[Southern States Logo]
SENIOR NOTES
Due From
Six Months to Seven Years
From Date of Issuance
______________________
Prospectus
______________________
____________ __, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses to be incurred by
Southern States in connection with the issuance and distribution of the Senior
Notes to be offered. All amounts are estimates except for the SEC registration
fee:
Registration under the Securities Act of 1933, as amended.. $ 13,200
Accounting Fees and Expenses............................... 250,000
Blue Sky Fees and Expenses................................. 16,000
Legal Fees and Expenses.................................... 300,000
Trustee Fees............................................... 10,000
Printing and Engraving Expenses............................ 100,000
Miscellaneous.............................................. 60,800
--------
Total................................................. $750,000
========
Item 14. Indemnification of Directors and Officers
Sections 13.1-698 and 13.1-702 of the Code of Virginia (1950) (the "Code")
provide that, unless limited by its articles of incorporation, a corporation
shall indemnify a director or officer who entirely prevails in the defense of
any proceeding to which he was a party because he is or was a director or
officer of the corporation against reasonable expenses incurred by him in
connection with the proceeding. Further, under Sections 13.1-697 and 13.1-702 of
the Code, a corporation may indemnify an individual made a party to a proceeding
because he is or was a director or officer against reasonable expenses incurred
in the proceeding if (i) he conducted himself in good faith, and (2) he
believed, in the case of conduct in his official capacity with the corporation
that his conduct was in its best interests and, in all other cases, that his
conduct was at least not opposed to its best interests, and (3) in the case of
any criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. Such indemnification is not permissible however, (a) in connection
with a proceeding by or in the right of the corporation in which the director
was adjudged liable to the corporation or (b) in connection with any other
proceeding charging improper personal benefit to him, whether or not involving
action in his official capacity, in which he was adjudged liable on the basis
that personal benefit was improperly received by him.
Article D of the Restated Articles of Incorporation of Southern States
reads as follows:
The Association shall indemnify any person who was or
is a party to any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal,
administrative, arbitrative or investigative by reason of
the fact that he is or was a director,
II-1
<PAGE>
officer, employee or agent of the Association, or is or was
serving at the request of the Association as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or
proceeding to the full extent permitted under Title 13.1 of
the Code of Virginia, as the same may be amended from time
to time, and under any other controlling statutes or
regulation whether Federal or State. Such indemnification
shall be in addition to, and not in limitation of, any other
indemnity required by law or agreement.
The Company maintains a Directors and Officers Liability Insurance Policy
(the "Policy") in place with Federal Insurance Company which provides coverage
for the Company and for directors and officers of the Company against certain
damages and expenses relating to claims against them caused by negligent acts,
errors or omissions. The Policy is a "claims made" policy with a $ 15,000,000
policy aggregate.
Item 15. Recent Sales of Unregistered Securities
During the three fiscal years ended June 30, 2000, the Company issued the
following:
A. Southern States Membership Common Stock. Southern States' common stock
---------------------------------------
is membership common stock, issued at a price equal to its $1.00 par value per
share. Southern States' membership common stock, notwithstanding a 6% dividend
feature, does not have characteristics typical of an investment security. As an
agricultural cooperative, voting rights in the Company are per capita,
regardless of the number of shares of membership common stock held; there is no
opportunity for capital appreciation, as shares are issued at par ($1.00 per
share) and are redeemable at par; there is no trading market in such shares as
they are subject to significant transfer restrictions. Pursuant to the
requirements of the Agricultural Cooperative Association Act of Virginia and the
Articles of Incorporation and Bylaws of Southern States, its issuance and
transfer is limited to bona fide producers of agricultural products and
cooperative associations that are owned and controlled by such producers who use
the services or supplies of Southern States. An agricultural producer who
qualifies for membership but is not already a member will automatically receive
the first $1.00 of any patronage refund in the form of one share of membership
common stock. Southern States is of the opinion that its membership common stock
should not be considered a security within the meaning of the federal securities
laws, but is nevertheless providing the information below to comply with the
requirements of this Item 15 under a contrary view.
II-2
<PAGE>
1. Issuance of Shares of Membership Common Stock to Managed Local
--------------------------------------------------------------
Cooperatives in Lieu of Cash Refunds of Patronage Refund Allocations.
-----------------------------------------------------------------------
(a) Securities Issued. During the fiscal year ended June 30, 1998,
-----------------
the Company issued an aggregate of 803,329 shares of its membership common stock
to 66 managed local cooperatives, all of which are managed by the Company under
uniform management contracts and all of which operate as an integral part of the
Southern States cooperative distribution system. See "Southern States--The
Southern States Distribution System--Managed Local Cooperatives" in the
Prospectus included as Part I of this registration statement. The shares of
membership stock issued in 1998 were issued in lieu of cash payments made on the
Company's patronage refund allocations previously distributed to patrons for the
fiscal year ended June 30, 1976. See "Southern States--Cooperative Structure--
Patronage Refunds" in the Prospectus included as Part I of this registration
statement.
(b) Underwriters and Other Purchasers. No underwriters were involved.
---------------------------------
See (a) above.
(c) Consideration. The shares were issued at par value ($1.00 per
-------------
share) in lieu of an equivalent dollar amount otherwise payable in cash upon
revolvement of the Company's patronage refund allocations for the years in
question.
(d) Exemption from Registration Claimed. The Company is of the
-----------------------------------
opinion that even if its shares of membership common stock are considered to be
securities for purposes of the Securities Act of 1933, the issuance of such
shares was exempt from registration pursuant to Section 4(2) of the Securities
Act in the circumstances described. The offer and sale of shares exchanged with
the managed local cooperatives was made exclusively to a limited and clearly
defined class of offerees, namely the 70 managed local cooperatives who operate
under a management agreement with Southern States and who, by virtue of their
relationship with Southern States, are familiar with and have access to complete
information concerning the business and financial position of Southern States.
The offer and sale was not made through any general advertisement or
solicitation.
2. Issuance of Shares of Membership Common Stock to Agricultural
-------------------------------------------------------------
Producers Who Wish to Qualify to Do Business with the Company on a Cooperative
------------------------------------------------------------------------------
Basis.
-----
(a) Securities Issued. During each of the fiscal years ended June 30,
-----------------
1998, 1999 and 2000, the Company issued one (1) share of its membership common
stock, $1.00 par value per share, to each of approximately 50 agricultural
producers who purchased one share each in order to qualify for membership in the
Company. Such transactions usually involved agricultural producers who did not
wish to wait to receive a share of membership common stock in connection with a
future patronage refund based upon business done with the Company.
(b) Underwriters and Other Purchasers. No underwriters were involved.
---------------------------------
See (a) above.
II-3
<PAGE>
(c) Consideration. $1.00 per share. See (a) above.
-------------
(d) Exemption from Registration Claimed. The Company is of the opinion
-----------------------------------
that the issuance of one (1) share of its membership common stock, at a purchase
price of $1.00, to persons wishing to qualify to do business with the Company on
a cooperative basis, does not involve the issuance of a security for purposes of
the Securities Act of 1933, and that even if such transactions are viewed as
involving the issuance of a security, such transactions were exempt under Rule
504 of Regulation D. In no year during the three year period ending June 30,
2000, did the issuance of shares of membership common stock by the Company
pursuant to Section 3(b) or in violation of Section 5(a) of the Securities Act
exceed the aggregate $1 million limitation of Rule 504. The Company believes it
complied with the requirements of Rule 504 in all material respects with respect
to the issuance of these shares.
3. Issuance of Shares in Connection with Mergers of Managed Local
--------------------------------------------------------------
Cooperatives into the Company.
-----------------------------
(a) Securities Issued. In the fiscal year ended June 30, 1998, the
-----------------
Company issued approximately 4,120 shares of its membership common stock to
members of two managed local cooperatives that were merged into the Company
during that period.
(b) Underwriters and Other Purchasers. No underwriters were involved.
---------------------------------
See (a) above.
(c) Consideration. $1.00 per share. See (a) above.
-------------
(d) Exemption from Registration Claimed. The Company is of the opinion
-----------------------------------
that even if its shares of membership common stock are considered to be
securities for purposes of the Securities Act of 1933, the issuance of such
shares was exempt from registration under Rule 504 of Regulation D. The
aggregate dollar amount of this offering, based upon the par value of the shares
of membership common stock issued, was under $5,000. The Company believes all
applicable requirements of Rule 504 were met. The Company filed a Form D with
respect to these two transactions under cover of letter dated February 17, 1998.
4. Issuance of Shares in Connection with Merger of Michigan Livestock
------------------------------------------------------------------
Exchange with and into the Company.
----------------------------------
(a) Securities Issued. The Company has issued or will issue a maximum
-----------------
of approximately 78,000 shares of its membership common stock to members of
Michigan Livestock Exchange ("MLE"), a Michigan cooperative, in connection with
the merger of MLE into the Company effective April 1, 1998. The merger
agreement specified that each active member of MLE who held allocated equities
of MLE at the time of the merger would receive one share of the Company's
membership common stock in exchange for, and in lieu of, the first $1.00 of
allocated equity held in MLE, which allocated equity was assumed by the Company
in the merger.
II-4
<PAGE>
(b) Underwriters and Other Purchasers. No underwriters were involved.
---------------------------------
See (a) above.
(c) Consideration.
-------------
(i) One share of membership common stock, $1.00 par value, was
issued or will be issued to each of approximately 38,000 members of MLE as
described in (a) above as part of the consideration for the merger; there were
no discounts or commissions. Members of MLE are required by law to own one share
of the Company's membership common stock in order to be a member of the Company.
Each share issued represents, and will be issued in lieu of, the first $1.00 of
any allocated equity due to such member of MLE, which allocated equities were
assumed by the Company in the merger.
(ii) A maximum of approximately 40,000 of the shares referenced
in (a) above will be on the basis of one share per member, to MLE members who
were not due any allocated equity from MLE at the time of merger, in order to
qualify such members of MLE for membership in the Company. The consideration is
$1.00 per share which was deemed by the parties to the merger to have been paid
as part of the merger consideration.
(d) Exemption from Registration Claimed. The Company is of the opinion
-----------------------------------
that even if its shares of membership common stock are considered to be
securities for purposes of the Securities Act of 1933, the issuance of such
shares was exempt from registration under Rule 504 of Regulation D, as the
consideration for such shares was limited to $1.00 per share, or a maximum of
approximately $78,000. The Company believes all requirements of Rule 504 were
met. The Company filed a Form D with respect to this transaction under cover of
letter dated February 17, 1998.
B. Southern States 6% Cumulative Preferred Stock. Southern States' 6%
---------------------------------------------
cumulative preferred stock is issued at a price equal to its $100.00 par value.
(a) Securities Issued. During its fiscal years ended June 30, 1998,
-----------------
1999 and 2000, the Company issued 424, 507 and 341 shares, respectively, of its
6% cumulative preferred stock to existing holders of such securities, in lieu of
cash dividends thereon, pursuant to prior elections made by such holders to
receive additional shares in lieu of cash dividends.
(b) Underwriters and Other Purchasers. No underwriters were involved.
---------------------------------
See (a) above.
(c) Consideration. Each of the shares referenced in (a) above was
-------------
issued at par value, for $100.00 per share, in lieu of cash dividends in like
amount.
II-5
<PAGE>
(d) Exemption from Registration Claimed. The Company's 6% cumulative
-----------------------------------
preferred stock was initially sold in 1970 pursuant to the exemption in Section
3(a)(5)(B) of the Securities Act. At that time, purchasers were given the
option of electing to receive future dividends, if declared, in the form of cash
or in additional shares of the same issue. The Company is of the opinion that
the issuance of additional shares of its 6% cumulative preferred stock pursuant
to such elections is not a sale of such securities within the meaning of Section
2(3) of the Securities Act. The Company relies on the interpretive ruling of
the General Counsel of the SEC listed at 17 C.F.R. Section 231.929 (par. 1121 of
the CCH Federal Securities Law Reports) in support of this position.
C. "Payment Plus" Debt Obligations.
------------------------------
(a) Securities Issued. On April 1, 1998, Michigan Livestock Exchange
-----------------
("MLE"), a Michigan cooperative, merged into the Company. MLE has, for a number
of years, operated a "Payment Plus" program under which farmers and other
members of MLE who sell livestock to or through MLE, can elect to receive sales
proceeds on a deferred basis. Such proceeds are payable upon demand of the MLE
member, and are paid with interest at a specified rate. If not earlier paid,
such obligations are paid 12 months after the date of the livestock sale
transaction that gave rise to such proceeds. The Payment Plus obligations of
MLE, at the time of its merger into the Company, were secured by an irrevocable
stand-by letter of credit issued by the St. Paul Bank for Cooperatives. MLE had
outstanding Payment Plus indebtedness of approximately $14,000,000 at April 1,
1998, held by approximately 550 members of MLE. Payment Plus obligations became
obligations of the Company upon the effective date of the merger. At June 30,
1998, 1999 and 2000, respectively, the Company had outstanding Payment Plus
indebtedness of approximately $14 million, $14 million and $16 million held by
approximately 500 patrons.
(b) Underwriters and Other Purchasers. No underwriters were involved.
---------------------------------
See (a) above.
(c) Consideration. Payment Plus obligations are interest-bearing debt
-------------
obligations for livestock sales proceeds owed by MLE (now the Company) to
members as a result of commercial transactions handled by MLE (now the Company).
(d) Exemption from Registration Claimed. Prior to its merger into the
-----------------------------------
Company, MLE was a farmers' cooperative organization exempt from tax under
section 521 of the Internal Revenue Code of 1954. Accordingly, if the Payment
Plus obligations of MLE are viewed as securities, the Company is of the view
they were exempt from registration pursuant to section 3(a)(5)(B) of the
Securities Act of 1933. Upon the merger of MLE into the Company effective April
1, 1998, the Payment Plus obligations became obligations of the Company.
Although the Payment Plus obligations (as obligations of the Company) no longer
qualify for the exemption in section 3(a)(5)(B) of the 1933 Act, the Company has
continued to maintain the bank letter of credit securing such obligations and,
accordingly, is of the opinion that if such obligations constitute securities,
they are exempt from registration by virtue of the exemption from registration
provided by section 3(a)(2) of the 1933 Act.
II-6
<PAGE>
D. Step-Up Rate Series B Cumulative Redeemable Preferred Stock and Step-Up
-----------------------------------------------------------------------
Rate Capital Securities.
-----------------------
(a) Securities Issued. On October 5, 1999, the Company issued and sold
-----------------
to Gold Kist Inc. ("Gold Kist") $40,000,000 aggregate liquidation amount of its
Step-Up Rate Series B Cumulative Redeemable Preferred Securities. As part of the
same transaction, Gold Kist purchased $60,000,000 aggregate liquidation amount
of Step-Up Rate Capital Securities issued by Southern States Capital Trust I, a
trust subsidiary of the Company.
(b) Underwriters and Other Purchasers. No underwriters were involved.
---------------------------------
Gold Kist was the sole purchaser of the preferred securities and the capital
securities.
(c) Consideration. Gold Kist paid the Company and Southern States
-------------
Capital Trust I a total of $100 million for the preferred securities and capital
securities (or $98.6 million, net of a commitment fee Southern States paid to
Gold Kist in connection with the sale).
(d) Exemption from Registration Claimed. The sale of securities to
-----------------------------------
Gold Kist in October, 1999, was made pursuant to a fixed price commitment
letter, dated October 13, 1998, between the Company and Gold Kist. The parties
entered into the commitment letter in connection with the Company's acquisition
from Gold Kist of its agriservices (or "inputs") business. See "Business of
Southern States--Acquisition of the Gold Kist Inputs Business--Financing
Commitment" in the prospectus constituting Part I of this registration
statement. In entering into this commitment letter and making this sale of
securities to Gold Kist, the Company relied on the exemption from federal
registration contained in (S) 4(2) of the Securities Act of 1933.
Item 16. Exhibits, Financial Statement Schedules
(A) EXHIBITS
An index of exhibits appears at page II-11 and is incorporated herein by
reference.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts and Report of Independent
Public Accountants on Schedule II
All other schedules are omitted as the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
related notes included herein.
II-7
<PAGE>
Item 17. Undertakings
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to its registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
II-8
<PAGE>
B. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
C. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Southern States
Cooperative, Incorporated has duly caused this Amendment No. 2 to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Henrico, State of
Virginia on October 5, 2000.
SOUTHERN STATES COOPERATIVE,
INCORPORATED
By: /s/ Wayne A. Boutwell
------------------------------
Wayne A. Boutwell
President and Chief Executive Officer
II-9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-1 has been signed for the
following persons in the capacities indicated on October 5, 2000.
/s/ Wayne A. Boutwell President and Chief
---------------------------
Wayne A. Boutwell Executive Officer
/s/ Jonathan A. Hawkins Senior Vice President and
---------------------------
Jonathan A. Hawkins Chief Financial Officer
/s/ Philip W. Miller Vice President and Controller
---------------------------
Philip W. Miller
Michael W. Beahm, Cecil D. Bell, Jr., Floyd K. Blessing,
James E. Brady, Jr., Earl L. Campbell, Jere L. Cannon,
William F. Covington, Herbert A. Daniel, Jr., H. Michael Davis,
John B. East, George E. Fisher, R. Bruce Johnson,
James A. Kinsey, J. Wayne McAtee, Richard F. Price,
William Pridgeon, Curry A. Roberts, John Henry Smith,
James A. Stonesifer, William W. Vanderwende,
Raleigh O. Ward, Jr., Wilbur C. Ward, Charles A. Wilfong Directors
By: /s/ N. Hopper Ancarrow, Jr.
------------------------------------
N. Hopper Ancarrow, Jr.
Attorney-In-Fact
II-10
<PAGE>
EXHIBIT INDEX
to Amendment No. 2 to the
Registration Statement
on Form S-1
SOUTHERN STATES COOPERATIVE, INCORPORATED
Exhibit No. Description of Exhibit
----------- ----------------------
ARTICLES OF INCORPORATION AND BYLAWS:
3.1* (a) Restated Articles of Incorporation of Southern States
Cooperative, Incorporated, effective July 30, 1998
(b) Articles of Amendment, effective October 1, 1999, to
Restated Articles of Incorporation of Southern States
Cooperative, Incorporated
3.2* Bylaws of Southern States Cooperative, Incorporated, amended as
of March 29, 1999
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
4.1* Form of Indenture between Southern States Cooperative, Incorporated
and First Union National Bank, dated ________, 2000
4.2* Form of Senior Notes for Southern States Cooperative, Incorporated
(included as Exhibits A-K to Exhibit 4.1 above)
Certain instruments relating to long-term debt not being registered have
been omitted in accordance with Item 601(b) (4) (iii) of Regulation S-K.
Registrant will furnish a copy of any such instrument to the Commission
upon its request.
5** Opinion of Mays & Valentine, L.L.P. regarding the legality of the
Senior Notes
MATERIAL CONTRACTS:
10.1* (a) Asset Purchase Agreement between Gold Kist Inc. and Southern
States Cooperative, Inc., dated July 23, 1998
II-11
<PAGE>
(b) Letter Agreement between Gold Kist Inc. and Southern States
Cooperative, Inc., dated as of October 13, 1998, amending the
Asset Purchase Agreement
(c) Amendment to Asset Purchase Agreement, dated September 7, 1999,
between Gold Kist Inc. and Southern States Cooperative, Inc.
(d) Commitment Letter between Gold Kist Inc. and Southern States
Cooperative, Inc., dated October 13, 1998
(e) Letter Agreement between Gold Kist Inc. and Southern States
Cooperative, Inc., dated as of March 25, 1999, amending the
Commitment Letter
(f) Purchase Agreement among Southern States Capital Trust I,
Southern States Cooperative, Inc. and Gold Kist Inc., dated
October 5, 1999
10.2* (a) Revolving Credit Agreement between Southern States Cooperative,
Incorporated and CoBank, ACB, First Union National Bank,
NationsBank, N.A. and various other lenders, dated January 12,
1999, as amended February 3, 1999
(b) Consent Agreement between Southern States Cooperative,
Incorporated and CoBank, ACB, First Union National Bank,
NationsBank, N.A. and various other lenders, dated as of March
25, 1999, relating to the Revolving Credit Agreement, as amended
February 3, 1999
(c) Second Amendment to Revolving Credit Agreement and Consent
Agreement between Southern States Cooperative, Incorporated and
CoBank, ACB, First Union National Bank, Bank of America, N.A. and
various other lenders, dated December 22, 1999
(d) Third Amendment to Revolving Credit Agreement Southern States
Cooperative, Incorporated and CoBank, ACB, First Union National
Bank, Bank of America, N.A. and various other lenders, dated
January 31, 2000
(e) Consent Agreement between Southern States Cooperative,
Incorporated and CoBank, ACB, First Union National Bank, Bank of
America, N.A. and various other lenders, dated as of April 19,
2000, relating to the Revolving Credit Agreement, as amended
January 31, 2000
10.3* Fourth Amended and Restated Financing Services and Contributed Capital
Agreement between Southern States Cooperative, Incorporated and
Statesman Financial Corporation, dated January 12, 2000
II-12
<PAGE>
10.4* (a) Financing Services and Contributed Capital Agreement between
Southern States Cooperative, Incorporated and Michigan Livestock
Credit Corporation, dated April 1, 1998
(b) Amendment to Financing Services and Contributed Capital Agreement
between Southern States Cooperative, Incorporated and Michigan
Livestock Credit Corporation, dated November 6, 1998 (included as
Exhibit I to Exhibit 10.2(a) above)
(c) Second Amendment to Financing Services and Contributed Capital
Agreement between Southern States Cooperative, Incorporated and
Michigan Livestock Credit Corporation, dated March 25, 1999
10.5* (a) Southern States Insurance Exchange Subscriber's Agreement and
Power of Attorney, dated April 27, 1988
(b) Agreement between Southern States Insurance States Underwriters,
Incorporated, dated April 27, Exchange and Southern 1988
10.6* (a) Form of Management Agreement between Southern States Cooperative,
Incorporated and various local managed cooperatives (listed in
Attachment A to Exhibit 10.6(a))
(b) Management/Operating Agreement between Orange-Madison Cooperative
Farm Service, Inc. and Southern States Cooperative, Inc., dated
March 1, 1991, as amended by Reclassification Agreement, dated
September 1, 1991, as amended November 20, 1992, as amended April
1, 1993, as amended February 1, 1994, as amended May 1, 1994, as
amended March 2, 1995
10.7* (a) Member Product Purchase Agreement between CF Industries, Inc. and
Southern States Cooperative, Incorporated, dated October 18,
1974, as supplemented by letter from J. Sultenfuss to G. Adlich,
dated January 7, 1998
(b) CF Industries, Inc. Product Purchase Agreement Assignment and
Assumption Agreement by and among Gold Kist Cooperative, Inc. and
CF Industries, Inc., dated Inc., Southern States October 13, 1998
10.8* Agreement and Plan of Merger between and among Southern States
Cooperative, Incorporated, and Michigan Livestock Exchange, Statesman
Financial Corporation and Michigan Livestock Credit Corporation, dated
as of December 31, 1997
II-13
<PAGE>
10.9* (a) Ground Lease between Southern States Cooperative, Incorporated,
as Lessor, and Gold Bond Stamp Company of Georgia, as Lessee,
dated as of July 15, 1977
(b) Lease and Agreement between Gold Bond Stamp Company of Georgia,
as Lessor, and Southern States Cooperative, as of July 15, 1977
Incorporated, as Lessee, dated as of July 15, 1977
10.10* Lease Agreement with Purchase Option by and between Scott Petroleum
Corporation and Gold Kist Inc., dated January 5, 1995
10.10.1* (a) Asset Purchase Agreement by and between Agway, Inc. and Southern
States Cooperative, Inc., dated as of June 20, 2000
(b) Letter Agreement between Agway, Inc. and Southern States
Cooperative, Inc., dated July 31, 2000, amending Asset Purchase
Agreement
(c) Promissory Note, dated July 31, 2000, payable to Agway, Inc. in
the principal amount of $13,300,000
MANAGEMENT REMUNERATION PLANS:
10.11* Southern States Supplemental Retirement Plan, effective November 11,
1987, as amended and restated through Fourth Amendment, effective July
1, 1995
10.12* Southern States Executive Incentive Plan, as restated effective July
1, 2000 (formerly, Southern States Deferred Compensation Plan,
effective July 1, 1995, as amended and restated through Sixth
Amendment, effective October 1, 1999)
10.13* Southern States Directors Deferred Compensation Plan, effective July
1, 1989, as amended and restated through First Amendment, effective
July 1, 1995
10.14* Form of Executive Split Dollar Agreement between Southern States
Cooperative, Incorporated and certain executive officers (listed in
Attachment A to Exhibit 10.14)
12 Computation of Ratios
21* List of Subsidiaries
CONSENTS OF EXPERTS AND COUNSEL:
23.1 Consent of PricewaterhouseCoopers LLP
II-14
<PAGE>
23.2 Consent of KPMG LLP
23.3** Consent of Mays & Valentine, L.L.P. (included in Exhibit 5)
24* Powers of Attorney
25* Statement of Eligibility on Form T-1 under the Trust Indenture Act of
1939, as amended, of First Union National Bank as Trustee under the
Indenture
27 Financial Data Schedule
_______________________
* Filed previously.
** To be filed by amendment.
II-15
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SOUTHERN STATES COOPERATIVE, INCORPORATED
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additons
--------
Balance Charged Balance
at Beginning to Costs and Charged to at End of
of the Period Expenses Other Accounts Deductions Period
------------- -------- -------------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended 6-30-00
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts $4,204 $500 $(1,800) (1) $712 (2) $2,192
Allowance for discounts and
other deductions 0 0 0 0
------------ ----------- ----------- ----------- ------------
$4,204 $500 $(1,800) $712 $2,192
============ =========== =========== =========== ============
Year ended 6-30-99
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts $2,643 $246 $ 1,832 (3) $517 (2) $4,204
Allowance for discounts and
other deductions 0 0 0 0
------------ ----------- ----------- ----------- ------------
$2,643 $246 $ 1,832 $517 $4,204
============ =========== =========== =========== ============
Year ended 6-30-98
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful accounts $2,237 $100 $ 1,233 (4) $927 (2) $2,643
Allowance for discounts and
other deductions 0 0 0 0
------------ ----------- ----------- ----------- ------------
$2,237 $100 $ 1,233 $927 $2,643
============ =========== =========== =========== ============
</TABLE>
(1) Allowance balance reversed in connection with receivables returned to Gold
Kist
(2) Accounts charged off, net of recoveries
(3) Allowance balance of Inputs Business at acquisition
(4) Allowance balance of Michigan Livestock Exchange at acquisition
S-2
<PAGE>
Report of Independent Public Accountants on Schedule II
Southern States Cooperative, Incorporated
To the Board of Directors of
Southern States Cooperative, Incorporated
In connection with our audits of the consolidated financial statements of
Southern States Cooperative, Incorporated and Subsidiaries as of June 30, 2000
and 1999, and for each of the three years in the period ended June 30, 2000,
which financial statements are included in the Prospectus, we have also audited
the financial statement schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
September 15, 2000
