Exhibit 2.A
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TRANSACTION AGREEMENT
between
CENEX HARVEST STATES COOPERATIVES,
a Minnesota cooperative association
and
FARMLAND INDUSTRIES, INC.,
a Kansas cooperative corporation
Dated as of September 23, 1999
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TABLE OF CONTENTS
ARTICLE ITHE TRANSACTION........................................1
Section 1.01.........................Overview of Transaction 1
Section 1.02.....................................The Closing 2
Section 1.03..........................Actions at the Closing 2
Section 1.04...........................Effect of Transaction 3
ARTICLE IIREPRESENTATIONS AND WARRANTIES OF CHSC................5
Section 2.01..................Organization and Good Standing 6
Section 2.02............................Financial Statements 6
Section 2.03..........................Absence of Liabilities 6
Section 2.04...............................Title to Property 6
Section 2.05...........................Intellectual Property 7
Section 2.06......................Compliance with Laws, etc. 7
Section 2.07Pending Litigation, Claims, Actions, Proceedings or
Investigations........................................7
Section 2.08.............................Absence of Defaults 7
Section 2.09...................................Authorization 8
Section 2.10.......................................Insurance 8
Section 2.11......................Governmental Authorization 8
Section 2.12....................................Subsidiaries 8
Section 2.13.....................................SEC Filings 9
Section 2.14......................Absence of Certain Changes 9
Section 2.15...........................................Taxes 9
Section 2.16..........................Employee Benefit Plans 10
Section 2.17...........................Environmental Matters 11
Section 2.18..........................Pooling; Tax Treatment 12
Section 2.19...........................No Dissenters' Rights 12
Section 2.20.................................Acquisition Co. 12
Section 2.21.................................Full Disclosure 13
ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF FARMLAND..........13
Section 3.01..................Organization and Good Standing 13
Section 3.02............................Financial Statements 14
Section 3.03..........................Absence of Liabilities 14
Section 3.04...............................Title to Property 14
Section 3.05...........................Intellectual Property 14
Section 3.06......................Compliance with Laws, etc. 15
Section 3.07Pending Litigation, Claims, Actions, Proceedings or
Investigations.......................................15
Section 3.08.............................Absence of Defaults 15
Section 3.09...................................Authorization 15
Section 3.10.......................................Insurance 16
Section 3.11......................Governmental Authorization 16
Section 3.12....................................Subsidiaries 16
Section 3.13.....................................SEC Filings 16
Section 3.14......................Absence of Certain Changes 17
Section 3.15...........................................Taxes 17
Section 3.16..........................Employee Benefit Plans 18
Section 3.17...........................Environmental Matters 19
Section 3.18..........................Pooling; Tax Treatment 19
Section 3.19...........................No Dissenters' Rights 19
Section 3.20.................................Full Disclosure 20
ARTICLE IVPRE-CLOSING COVENANTS................................20
Section 4.01..........................Selection of Structure 20
Section 4.02..............................Good Faith Efforts 20
Section 4.03........................Preservation of Business 21
Section 4.04............................Conduct of Business. 21
Section 4.05.............................Meetings of Members 22
Section 4.06.....................................Full Access 22
Section 4.07..........................Notice of Developments 23
Section 4.08.......................................Exclusive 23
Section 4.09.......................Hart-Scott-Rodino Filings 23
Section 4.10....................Tax and Accounting Treatment 23
ARTICLE VCLOSING CONDITIONS....................................23
Section 5.01.........Conditions to Obligations of Each Party 24
Section 5.02.....Additional Conditions to Obligation of CHSC 24
Section 5.03.Additional Conditions to Obligation of Farmland 25
ARTICLE VIPOST-CLOSING AGREEMENTS..............................26
Section 6.01..................Consolidation of Benefit Plans 26
Section 6.02.........................Patronage Distributions 26
Section 6.03...Indemnification of Former Officers; Insurance 26
ARTICLE VIITERMINATION.........................................27
Section 7.01........................Termination of Agreement 27
Section 7.02...........................Effect of Termination 27
ARTICLE VIIIMISCELLANEOUS......................................28
Section 8.01............................Waiver of Conditions 28
Section 8.02.......................................Amendment 28
Section 8.03..................................Binding Nature 28
Section 8.04....................................Counterparts 28
Section 8.05................................Entire Agreement 28
Section 8.06.........................................Notices 28
Section 8.07..Non-Survival of Representations and Warranties 29
Section 8.08........................................Captions 29
Exhibits
Exhibit A-1 - Structure A Plan of Merger
Exhibit A-2 - Structure A Surviving Entity Bylaws
Exhibit B-1 - Structure B Plans of Merger
Exhibit B-2 - Structure B Surviving Entity Bylaws
Exhibit C - Senior Management Reporting Relationships
Exhibit D - Capital Plan
CHSC Disclosure Schedule
Farmland Disclosure Schedule
TRANSACTION AGREEMENT
THIS TRANSACTION AGREEMENT (this "Agreement") is made and entered into as
of September 23, 1999, by and between CENEX HARVEST STATES COOPERATIVES, a
Minnesota cooperative association ("CHSC"), and FARMLAND INDUSTRIES, INC., a
Kansas cooperative corporation ("Farmland").
WHEREAS, each of CHSC and Farmland is an agricultural cooperative organized
for the purposes of benefitting and serving its members and patrons; and
WHEREAS, the parties believe that the unification of their respective
business operations and assets will be in the best interest of their respective
members; and
WHEREAS, on May 6, 1999, the parties entered into a Memorandum of Intent
pursuant to which both parties agreed to negotiate in good faith to reach
agreement on the principal terms of a transaction pursuant to which they would
combine their respective assets and business operations into a single entity,
through a form of business combination to be determined by the parties, and
WHEREAS, the parties have now reached agreement as to the final terms and
conditions of such business combination, and wish to reduce such agreement to
writing as more particularly described herein.
NOW THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants herein contained, the parties hereto
agree as follows:
ARTICLE I
THE TRANSACTIONARTICLE ITHE TRANSACTION{tc \l 1 "ARTICLE ITHE TRANSACTION"}
Section 1.01 Overview of TransactionSection 1.01
Overview of Transaction{tc \l 2 "Section 1.01 Overview of
Transaction"}.
At the Effective Time (as such term is defined in section 1.04 hereof),
CHSC and Farmland will combine into a single entity named "United Country
Brands, Inc." (the "Surviving Entity"). The combination will be in the form of
either (a) Structure A, which will be a merger of Farmland with and into CHSC,
with CHSC as the Surviving Entity, such merger to become effective at the
Effective Time ("Structure A"), or (b) a merger, prior to the Effective Time, of
CHSC into UCB Acquisition Co., an Ohio cooperative corporation and wholly-owned
subsidiary of CHSC ("Acquisition Co."), with Acquisition Co. as the survivor in
such merger (the "CHSC/Acquisition Co. Merger"), and immediately thereafter, the
merger of Farmland into Acquisition Co., with Acquisition Co. as the Surviving
Entity ("Structure B"). The parties anticipate and agree that Structure A
constitutes the structure that is preferred by the parties and the default
structure to accomplish the combination, and agree that Structure A shall be
used (and that the parties will use their best efforts to resolve any issues
relating to the use of Structure A) unless, prior to the Closing (as defined
herein), either party obtains an opinion of counsel to the effect that use of
such Structure A would have a Material Adverse Effect (as defined herein) on the
Surviving Entity. If Structure A is used to accomplish the combination, then
(i) the parties shall execute, deliver and file the Agreement and Plan of Merger
attached hereto as Exhibit A-1 to effectuate the merger therein contemplated;
and (ii) effective as of the Effective Time, the Surviving Entity will be
governed by Articles of Incorporation in the form attached hereto as Schedule I
to such Plan of Merger and Bylaws in the form attached hereto as Exhibit A-2
and will otherwise continue to operate and exist as a cooperative association
organized under the laws of the State of Minnesota. If Structure B is used to
accomplish the combination, then (i) CHSC shall take appropriate action to
effectuate the CHSC/Acquisition Co. Merger, and in connection therewith, shall
execute, deliver and file the appropriate Agreement and Plan of Merger attached
hereto as Exhibit B-1 and shall redeem all of its outstanding Equity
Participation Units in the Defined Business Units; (ii) thereafter the parties
shall execute, deliver and file the appropriate Agreement and Plan of Merger
attached hereto as Exhibit B-1 as required by law to effectuate the merger of
Farmland into Acquisition Co.; and (iii) effective as of the Effective Time, the
Surviving Entity will be governed by Articles of Incorporation in the form
attached hereto as Schedule I to such Plan of Merger and Bylaws in the form
attached hereto as Exhibit B-2 and will (subject to Section 4.01 hereof)
continue to operate and exist as a cooperative association organized under the
laws of the State of Ohio. The Agreement and Plan of Merger so used and
executed, delivered and filed as hereinabove provided is referred to herein as
the "Plan of Merger", the Articles of Incorporation which serve as the Articles
of Incorporation of the Surviving Entity are referred to herein as the
"Surviving Entity Articles", the Bylaws which serve as the Bylaws of the
Surviving Entity are referred to herein as the "Surviving Entity Bylaws", and
the merger transaction therein contemplated, together with all actions,
consents, agreements and transactions described herein or otherwise necessary or
desirable in connection therewith, are referred to collectively herein as the
"Transaction."
Section 1.02 The Closing
Unless this Agreement is terminated and the Transaction is abandoned as
provided in Article VII hereof, the closing for the Transaction (the "Closing")
shall take place on or before February 29, 2000, or such other date as the
parties may mutually determine (the "Closing Date"), subject to the satisfaction
or waiver of all conditions to the obligations of each of the parties to
consummate the Transaction (other than conditions with respect to actions which
the respective parties will take at the Closing itself).
Section 1.03 Actions at the Closing
At the Closing, the parties shall (a) execute and deliver the Agreement and
Plan of Merger pursuant to Section 1.01 above, (b) deliver the various
certificates, instruments and documents referred to in the Plan of Merger or in
Article V of this Agreement, and (c) cause to be filed with the Secretary of
State of the appropriate states the Plan of Merger, certificate of merger or
such other documents as may be required by the applicable laws to effectuate the
Transaction pursuant to the terms of the Plan of Merger and this Agreement.
Section 1.04 Effect of Transaction
The Transaction shall become fully effective at 12:02 a.m. Central Time on
March 1, 2000 (the "Effective Time"). The Transaction shall have the effect set
forth in the Plan of Merger, this Agreement and applicable state law. At any
time after the Effective Time, the Surviving Entity may take any action
(including executing and delivering any document) in the name and on behalf of
either party to this Agreement in order to carry out and effectuate the
Transaction contemplated by this Agreement. At the Effective Time, without any
further action on the part of the members or the boards of directors of either
CHSC or Farmland:
(a) Articles and Bylaws. The Surviving Entity Articles and the
Surviving Entity Bylaws shall become the articles of incorporation and
bylaws of the Surviving Entity, as provided in the Plan of Merger.
(b) Board of Directors.
(i) Transition Board Each of the then current directors of
Farmland and the then current directors of CHSC will become directors
of the Surviving Entity, to serve according to the Surviving Entity
Bylaws, so that the board of directors of the Surviving Entity as of
the Effective Time will consist of all of the then current directors
of both Farmland and CHSC. Each party agrees to take all actions
necessary to reduce, as of the Effective Time, the number of directors
on the Board of Directors of such party to seventeen (17).
(ii) Producer Directors After December 2001. Effective for and
after the annual meeting of the members of the Surviving Entity to be
held in December 2001, for purposes of Section 4.4(b) of the Surviving
Entity Bylaws and subject to review and reapportionment by the Board
of Directors of the Surviving Entity pursuant to Section 4.4(c) of the
Surviving Entity Bylaws from time to time, the numbers of producer
directors in each director district shall be as follows: District 1 --
one (1) producer director; District 2 -- two (2) producer directors;
District 3 -- four (4) producer directors; District 4 -- five (5)
producer directors; District 5 -- two (2) producer directors; District
6 -- one (1) producer director; and District 7 -- three (3) producer
directors.
(c) Board Officers. For the period from the Effective Time to the
annual meeting of the members of the Surviving Entity to be held in
December 2000 (the "Transition Period"), Elroy Webster will serve as
Chairman of the Board and Albert Shivley will serve as the Vice Chairman of
the Board. In addition, effective as of the Effective Time, there shall be
established an Executive Committee of the Board, and the following Standing
Committees of the Board: Capital, Finance/Audit, Governance and Corporate
Responsibility (including compensation). For the Transition Period the
Capital Committee will be chaired by Merlin Van Walleghen, the
Finance/Audit Committee of the Board will be chaired by Monte Romohr, the
Governance Committee will be chaired by Gerald Kuster and the Corporate
Responsibility Committee will be chaired by Jody Bezner. For the
Transition Period, the Chairman and Vice Chairman of the Board, together
with the Chairs of the Standing Committees, shall make up the Executive
Committee.
(d) Office of Leadership. The "Office of Leadership" will consist of
the Chief Executive Officer and the President of the Surviving Entity.
Robert Honse ("Honse") will serve as Chief Executive Officer of the
Surviving Entity, reporting to the board of directors of the Surviving
Entity. It is anticipated that Honse shall serve in that capacity through
no later than December 31, 2003; and John D. Johnson ("Johnson") will serve
as the President of the Surviving Entity, reporting to the Chief Executive
Officer of the Surviving Entity. Upon expiration of Honse's service as
Chief Executive Officer, it is anticipated that Johnson shall assume the
role of President and Chief Executive Officer of the Surviving Entity.
Both the Chief Executive Officer and the President will serve at the
pleasure of the Board of Directors of the Surviving Entity at all times,
subject, however, to the monetary provisions of any applicable employment
contract. Such employment contracts will provide that Honse, as Chief
Executive Officer, may not demote, discharge, change the senior management
reporting relationships (described in paragraph (e) below) of, or otherwise
materially adversely change the status of, Johnson, as President, without
the agreement of the Executive Committee of the Board of Directors.
(e) Senior Management. Senior management will be as designated by
the Office of Leadership from time to time in accordance with the Surviving
Entity Bylaws. The reporting relationships between senior management and
the Office of Leadership are identified in Exhibit C attached hereto and
will be incorporated into employment contracts with the Chief Executive
Officer and the President.
(f) Exchange and Conversion of Stock, Non-Stock Equity and Patronage
Equities. At and as of the Effective Time, without any further action by
the parties or any of their respective members, and as further described in
the Plan of Merger, (i) each member of CHSC and each member of Farmland
shall become a member of the Surviving Entity, to the extent they are
eligible for membership under the Surviving Entity Articles and the
Surviving Entity Bylaws, and (ii) except for any stock and equity interests
of Farmland in CHSC or any stock interest of CHSC in Farmland (which shall,
in each case, be extinguished), the stock, non-stock equity and patronage
equity interests of each member, patron and former patron of Farmland shall
be exchanged for non-stock equity and patronage equity interests in the
Surviving Entity at their stated value amount on a dollar-for-dollar basis,
as further described in the Plan of Merger.
(g) Capital Plan. From and after the Effective Time, the Surviving
Entity will operate pursuant to a capital plan that adheres to the
principles set forth on Exhibit D attached hereto and the Surviving Entity
shall use its best efforts to adopt and implement a capital plan that
incorporates such principles (the "Capital Plan"). The Capital Plan may be
adopted and amended from time to time, by the board of directors of the
Surviving Entity, provided that amendment of any provisions of the Capital
Plan relating to disposition of the Terra tax case shall require a vote
of
three-fourths (3/4) of the full board of directors of the Surviving Entity,
and provided further that any such amendment shall, as far as feasible,
adhere to the "Key Terra Principles" described on Exhibit D attached
hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CHSC
CHSC represents and warrants to Farmland and the Surviving Entity that the
statements contained in this Article II are correct and complete in all material
respects as of the date of this Agreement, except as set forth in the CHSC
Disclosure Schedule delivered by CHSC to Farmland attached hereto (the "CHSC
Disclosure Schedule"). Nothing in the CHSC Disclosure Schedule shall be deemed
adequate to disclose an exception to a representation or warranty made herein
unless the CHSC Disclosure Schedule identifies the exception with particularity
and describes the relevant facts in detail. Without limiting the generality of
the foregoing, the mere listing (or inclusion of a copy) of a document or other
item shall not be deemed adequate to disclose an exception to a representation
or warranty made herein (unless the representation or warranty has to do with
the existence of the document or other item itself). For purposes of this
Agreement (a) the word "Subsidiary" when used with respect to any Person (as
herein defined) means any other Person, whether incorporated or unincorporated
(i) of which fifty percent or more of the securities or other ownership
interests is directly owned or controlled by such Person or by any one or more
of its Subsidiaries, or (ii) of which securities or other interests having by
their terms ordinary voting power to elect fifty percent or more of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly owned or controlled by such Person
or by any one or more of its Subsidiaries, or (iii) when such Person is CHSC,
the entities listed on the CHSC Disclosure Schedule, or (iv) when such Person is
Farmland, the entities listed on the Farmland Disclosure Schedule (as herein
defined), (b) "Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or any agency or
instrumentality thereof, and (c) a "Material Adverse Effect" with respect to any
Person means a material adverse effect on the financial condition, business,
liabilities, properties, assets or results of operations, taken as a whole, of
such Person and its Subsidiaries, taken as a whole, except to the extent
resulting from (w) any changes in general United States or global economic
conditions, (x) any changes affecting the agricultural industry in general, (y)
matters whose significance or impact would reasonably be expected to be
primarily short term (i.e., under one year) or (z) matters disclosed on the
Person's Disclosure Schedule.
Section 2.01 Organization and Good Standing
CHSC is a cooperative association duly organized and existing under Chapter
308A of the Minnesota Statutes, is in good standing under the laws of the State
of Minnesota, and has all requisite corporate power and authority to own its
properties and conduct its business as it is presently being conducted. CHSC is
duly qualified to do business and is in good standing in each jurisdiction in
which it conducts business or owns or leases properties of a nature which would
require such qualification, except for those jurisdictions where the failure to
be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on CHSC. CHSC has heretofore delivered to Farmland true and
complete copies of the CHSC articles of incorporation and bylaws as currently in
effect.
Section 2.02 Financial StatementsSection 2.02
CHSC has delivered to Farmland (a) its audited financial statements as of
August 31, 1998, accompanied by the opinion of PricewaterhouseCoopers, (b) the
audited financial statements of CENEX, Inc. for the year ended September 30,
1997 and the eight months ended May 31, 1998, (c) the audited financial
statements of Harvest States Cooperatives for the year ended May 31, 1998, and
(d) the unaudited financial statements of CHSC for the nine months ended May 31,
1999. Such financial statements fairly present the financial position of CHSC
at the dates indicated therein and the results of its operation for the periods
indicated therein, in conformity with generally accepted accounting principles
consistently applied ("GAAP"). There has been no material adverse change in the
financial condition or results of operations of CHSC since May 31, 1999.
Section 2.03 Absence of Liabilities
Neither CHSC nor any Subsidiary of CHSC has any liabilities or obligations,
absolute or contingent, except for liabilities and obligations which are (i)
reflected in the financial statements referred to in Section 2.02, (ii) fully
covered by insurance, except for reasonable deductibles or self-insured
retention levels, (iii) incurred in the ordinary course of business since May
31, 1999 and not materially different in type or amount from those reflected in
the financial statements referred to in Section 2.02, or (iv) would not in the
aggregate reasonably be expected to have a Material Adverse Effect on CHSC.
Section 2.04 Title to Property
Except as reflected in the notes accompanying the audited financial
statements of CHSC, CHSC has good and marketable title to all real and personal
property reflected as owned on the books and records of CHSC as of the date of
this Agreement and owns outright all other assets, properties or property
interests acquired since that date, in each case free of all mortgages, liens,
charges and encumbrances, other than (i) easements, rights-of-way and other
encumbrances which do not materially impair the use of such real or personal
property for the same or similar purposes as such real or personal property has
been used by CHSC prior to the Effective Time, (ii) liens for current taxes that
are not yet due and payable, (iii) liens related to the acquisition of inventory
or otherwise arising in the normal course of business, and (iv) other liens,
encumbrances and title defects which would not reasonably be expected to have a
Material Adverse Effect on CHSC.
Section 2.05 Intellectual Property
CHSC owns or possesses, is licensed under or otherwise has lawful access
to, all patents, trade secrets, know-how, other confidential information,
trademarks, service marks, copyrights, trade names, logos and other intellectual
property, whether registered or unregistered, necessary for the lawful conduct
of its business as currently conducted, without any infringement of or conflict
with the industrial or intellectual property rights of any third party, except
as would not reasonably be expected to have a Material Adverse Effect on CHSC.
CHSC does not know or have reason to know of any unauthorized use or disclosure
or misappropriation of any of its intellectual property, which disclosure, use,
or misappropriation would reasonably be expected to have a Material Adverse
Effect on CHSC.
Section 2.06 Compliance with Laws, etc.
CHSC is in compliance with all applicable laws and regulations the
violation of which would reasonably be expected to have a Material Adverse
Effect on CHSC. CHSC has all governmental authorizations, consents, licenses
and permits required by law or otherwise necessary for the proper operation of
its business as currently conducted, all of such licenses and permits are in
full force and effect and no action to terminate, withdraw, not renew or
materially limit or otherwise change any such license or permit is pending or
has been threatened by any governmental agency or other party, except as would
not reasonably be expected to have a Material Adverse Effect on CHSC.
Section 2.07 Pending Litigation, Claims, Actions, Proceedings or
Investigations
There is no action, proceeding or investigation pending against, or to the
best of the knowledge of CHSC after reasonable inquiry, is threatened against
CHSC or any Subsidiary of CHSC or any of the assets which are owned by CHSC or
any Subsidiary of CHSC which would reasonably be expected to have a Material
Adverse Effect on CHSC.
Section 2.08 Absence of Defaults
CHSC is not in default under any provision of its Articles of Incorporation
or Bylaws or any indenture, mortgage, loan agreement or other material agreement
to which it is a party or by which it is bound, and CHSC is not in violation of
any statute, order, rule or regulation of any court or governmental agency
having jurisdiction over it or its properties, which, in each case, could have a
Material Adverse Effect on CHSC, and, except for any consent or approval
identified on the CHSC Disclosure Schedule, neither the execution and delivery
of this Agreement nor the consummation of the Transaction in accordance with
this Agreement will in any respect conflict with or result in a breach of any of
the foregoing, which could have a Material Adverse Effect on CHSC.
Section 2.09 Authorization
CHSC has the corporate power and authority to enter into and to perform its
obligations under this Agreement (subject to the approval of its members as
required by Section 5.01(a)). This Agreement and the Transaction have been duly
and validly authorized by the Board of Directors of CHSC, and (except for the
approvals of its members, as required by Section 5.01(a)) no other corporate
action is required by CHSC in connection with this Agreement or the Transaction.
This Agreement constitutes the valid and binding agreement of CHSC, enforceable
against CHSC in accordance with its terms, except to the extent such enforcement
may be limited by the application of equitable principles where equitable relief
is sought or bankruptcy and other laws relating to the enforcement of creditors'
rights generally.
Section 2.10 Insurance
CHSC has secured appropriate insurance policies which (i) are issued by
sound and reputable insurance companies duly authorized to write said insurance,
(ii) are in full force and effect, (iii) are sufficient for compliance with all
requirements of law and all agreements to which CHSC is a party, and (iv)
provide reasonable insurance coverage for the assets and operations of CHSC and
all liabilities related thereto.
Section 2.11 Governmental Authorization
The execution, delivery and performance by CHSC of this Agreement and the
consummation of the Transaction by CHSC require no action by or in respect of,
or filing with, any governmental body, agency, official or authority other than
(a) the filing of appropriate documents to effect the Plan of Merger under
applicable law, (b) compliance with any applicable requirements of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (c) compliance
with applicable requirements of U.S. state and federal securities laws and (d)
other actions or filings which if not taken or made would not, individually or
in the aggregate, have a Material Adverse Effect on CHSC or the Surviving Entity
following the Effective Time.
Section 2.12 Subsidiaries
Each Subsidiary of CHSC is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, has all powers and
all governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted, except for those the absence of which
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on CHSC. Each Subsidiary of CHSC is duly qualified to
do business and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where failure to be so
qualified would not, individually or in the aggregate, have a Material Adverse
Effect on CHSC.
Section 2.13 SEC Filings
(a) CHSC has delivered to Farmland (i) its annual report on Form 10-K for
its fiscal year ended August 31, 1998, (ii) its quarterly reports on Form 10-Q
for its fiscal quarters ended after August 31, 1998, (iii) all of its other
reports, statements, schedules and registration statements filed with the SEC
since August 31, 1998 (the documents referred to in this Section 2.13(a) being
referred to collectively as the "CHSC SEC Documents").
(b) As of its filing date, each CHSC SEC Document complied as to form in
all material respects with the applicable requirements of the Securities
Exchange Act of 1934 (the "Exchange Act").
(c) As of its filing date, each CHSC SEC Document filed pursuant to the
Exchange Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Section 2.14 Absence of Certain Changes
Except as set forth in the CHSC Disclosure Schedule, since May 31, 1999,
CHSC and its Subsidiaries have conducted their business in the ordinary course
consistent with past practice and there has not been: (a) any event, occurrence
or development of a state of circumstances or facts which has had or reasonably
would be expected to have, individually or in the aggregate, a Material Adverse
Effect on CHSC; (b) any transaction or commitment made, or any contract,
agreement or settlement entered into, by (or judgment, order or decree
affecting) CHSC or any of its Subsidiaries relating to its assets or business
(including the acquisition or disposition of any assets) or any relinquishment
by CHSC or any of its Subsidiaries of any contract or other right, in either
case, material to CHSC and its Subsidiaries taken as a whole, other than
transactions, commitments, contracts, agreements or settlements (including
without limitation settlements of litigation and tax proceedings) in the
ordinary course of business consistent with past practice, those contemplated by
this Agreement, or as agreed to in writing by Farmland; (c) any change in any
method of accounting or accounting practice (other than any change for tax
purposes) by CHSC or any of its Subsidiaries, except for any such change which
is not significant or which is required by reason of a concurrent change in
GAAP; or (d) any increase in (or amendments to the terms of) compensation, bonus
or other benefits payable to directors, officers or employees of CHSC or any of
its Subsidiaries, other than in the ordinary course of business consistent with
past practice, as permitted by this Agreement, or as agreed to in writing by
Farmland.
Section 2.15 Taxes
Except as set forth in the CHSC Balance Sheet dated May 31, 1999 (including
the notes thereto) and except as would not, individually or in the aggregate,
have a Material Adverse Effect on CHSC, (i) all CHSC Tax Returns required to be
filed with any taxing authority by, or with respect to, CHSC and its
Subsidiaries have been filed in accordance with all applicable laws; (ii) CHSC
and its Subsidiaries have timely paid all Taxes shown as due and payable on the
CHSC Tax Returns that have been so filed, and, as of the time of filing, the
CHSC Tax Returns correctly reflected the facts regarding the income, business,
assets, operations, activities and the status of CHSC and its Subsidiaries
(other than Taxes which are being contested in good faith and for which adequate
reserves are reflected on the CHSC Balance Sheet); (iii) CHSC and its
Subsidiaries have made provision for all Taxes payable by CHSC and its
Subsidiaries for which no CHSC Tax Return has yet been filed; (iv) the charges,
accruals and reserves for Taxes with respect to CHSC and its Subsidiaries
reflected on the CHSC Balance Sheet are adequate under GAAP to cover the Tax
liabilities accruing through the date thereof; (v) there is no action, suit,
proceeding, audit or claim now proposed or pending against or with respect to
CHSC or any of its Subsidiaries in respect of any Tax where there is a
reasonable possibility of an adverse determination; and (vi) to the best of
CHSC's knowledge and belief, neither CHSC nor any of its Subsidiaries is liable
for any Tax imposed on any entity other than such Person, except as the result
of the application of Treas. Reg. Section 1.1502-6 (and any comparable provision
of the tax laws of any state, local or foreign jurisdiction) to the affiliated
group of which CHSC is the common parent. For purposes of this Agreement,
"Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, all net income, gross income, gross
receipts, excise, stamp, real or personal property, ad valorem, withholding,
social security (or similar), unemployment, occupation, use, service, service
use, license, net worth, payroll, franchise, severance, transfer, recording,
employment, premium, windfall profits, environmental (including taxes under
Section 59A of the Internal Revenue Code of 1986, as amended (the "Code")),
customs duties, capital stock, profits, disability, sales, registration, value
added, alternative or add-on minimum, estimated or other taxes, assessments or
charges imposed by any federal, state, local or foreign governmental entity and
any interest, penalties, or additions to tax attributable thereto. For purposes
of this Agreement, "Tax Returns" shall mean any return, report, form or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
Section 2.16 Employee Benefit Plans
(a) Prior to the date hereof, CHSC has provided Farmland with a list
identifying each material "employee benefit plan," as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974 ("ERISA"), each material
employment, severance or similar contract, plan, arrangement or policy
applicable to any director, former director, employee or former employee of CHSC
and each material plan or arrangement (written or oral), providing for
compensation, bonuses, profit-sharing, stock option or other stock related
rights or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, workers' compensation, supplemental unemployment
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance benefits)
which is maintained, administered or contributed to by CHSC and covers any
employee or director or former employee or director of CHSC, or under which CHSC
has any liability. Such material plans (excluding any such plan that is a
"multiemployer plan", as defined in Section 3(37) of ERISA) are referred to
collectively herein as the "CHSC Employee Plans".
(b) Each CHSC Employee Plan has been maintained in compliance with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations (including but not limited to ERISA and the Code) which
are applicable to such Plan, except where failure to so comply would not,
individually or in the aggregate, have a Material Adverse Effect on CHSC.
(c) Neither CHSC nor any affiliate of CHSC has incurred a liability under
Title IV of ERISA that has not been satisfied in full, and no condition exists
that presents a material risk to CHSC or any affiliate of CHSC of incurring any
such liability other than liability for premiums due the Pension Benefit
Guaranty Corporation (which premiums have been paid when due).
(d) Each CHSC Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from federal income tax pursuant to Section 501(a) of the Code.
(e) No director or officer or other employee of CHSC or any of its
Subsidiaries will become entitled to any retirement, severance or similar
benefit or enhanced or accelerated benefit solely as a result of the
transactions contemplated hereby.
(f) Each CHSC Employee Plan that provides for post-retirement health and
medical, life or other insurance benefits for retired employees of CHSC or any
of its Subsidiaries has been adequately reserved for in CHSC's financial
statements.
(g) There has been no amendment to, written interpretation or announcement
(whether or not written) by CHSC or any of its affiliates relating to, or change
in employee participation or coverage under, any CHSC Employee Plan which would
increase materially the expense of maintaining such CHSC Employee Plan above the
level of the expense incurred in respect thereof for the 12 months ended May 31,
1999.
Section 2.17 Environmental Matters
(a) Except as set forth in the CHSC SEC Documents filed prior to the date
hereof and with such exceptions as, individually or in the aggregate, have not
had, and would not reasonably be expected to have, a Material Adverse Effect on
CHSC (i) no notice, notification, demand, request for information, citation,
summons, complaint or order has been received by, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of CHSC or any
of its Subsidiaries, threatened by any Person against, CHSC or any of its
Subsidiaries, and no penalty has been assessed against CHSC or any of its
Subsidiaries, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) CHSC and its Subsidiaries are and have been
in compliance with all Environmental Laws; (iii) there are no liabilities of
CHSC or any of its Subsidiaries relating to or arising out of any Environmental
Law of any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, and there is no existing condition, situation or set
of circumstances which could reasonably be expected to result in such a
liability; and (iv) there has been no environmental investigation, study, audit,
test, review or other analysis conducted of which CHSC has knowledge in relation
to the current or prior business of CHSC or any of its Subsidiaries or any
property or facility now or previously owned, leased or operated by CHSC or any
of its Subsidiaries which has not been delivered to Farmland at least five days
prior to the date hereof. All liabilities of CHSC or any of its Subsidiaries
relating to or arising out of any Environmental Law of any kind whatsoever have
been adequately reserved for on the financial statements of CHSC, or for
unconsolidated Subsidiaries, on the financial statements of such Subsidiaries.
(b) For purposes of this Agreement, the term "Environmental Laws" means
any federal, state, local and foreign statutes, laws (including, without
limitation, common law), judicial decisions, regulations, ordinances, rules,
judgments, orders, codes, injunctions, permits, governmental agreements or
governmental restrictions relating to human health and safety, the environment
or to pollutants, contaminants, wastes, or chemicals.
Section 2.18 Pooling; Tax Treatment
The parties intend that the Transaction be accounted for under the "pooling
of interests" method under the requirements of Opinion No. 16 (Business
Combinations) of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board, and the
rules and regulations of the Securities and Exchange Commission. Neither CHSC
nor any of its affiliates has taken or agreed to take any action or is aware of
any fact or circumstance that would prevent the Transaction from qualifying (i)
for "pooling of interests" accounting treatment as described above or (ii) as a
reorganization within the meaning of Section 368 of the Code (a "368
Reorganization").
Section 2.19 No Dissenters Rights
No member of CHSC or any other holder of equity of CHSC, other than the
holders of Equity Participation Units as defined in CHSC's Bylaws and as further
defined in resolutions of the CHSC board of directors establishing the defined
business units to which such Equity Participation Units relate, have the right
to dissent from the Transaction and receive payment for their interest in cash
or otherwise receive any property or other interest in the Transaction, other
than as provided in the Plan of Merger.
Section 2.20 Acquisition Co.
Acquisition Co. has been formed by CHSC solely for the purpose of carrying
out the Transaction if Structure B is selected. Acquisition Co. is a
"Subsidiary" of CHSC for purposes hereof. Acquisition Co. has no assets or
liabilities, other than nominal assets to comply with any organizational
requirements of Ohio law.
Section 2.21 Full Disclosure
CHSC has disclosed to Farmland all facts material to the transactions
contemplated in this Agreement, including disclosure of all material contracts
(as such term is described in Item 601 of Regulation S-K under the Securities
Act of 1933, as amended ("Regulation S-K")). No representation, warranty, or
covenant by CHSC contained in this Agreement or the Plan of Merger, and no
statement contained in any certificate, schedule, or other documents or
instrument furnished to Farmland pursuant hereto or in connection with the
transactions contemplated hereby, including responses to Farmland inquiries put
to CHSC in the course of its investigation to confirm the warranties and
representations of CHSC in this Agreement, when taken as a whole, contains or
will contain any untrue statement of a material fact or omits or will omit a
material fact which would make it misleading as to CHSC.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FARMLAND
Farmland represents and warrants to CHSC and the Surviving Entity that the
statements contained in this Article III are correct and complete in all
material respects as of the date of this Agreement, except as set forth in the
Farmland Disclosure Schedule attached hereto (the "Farmland Disclosure
Schedule"). Nothing in the Farmland Disclosure Schedule shall be deemed
adequate to disclose an exception to a representation or warranty made herein
unless the Farmland Disclosure Schedule identifies the exception with
particularity and describes the relevant facts in detail. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein (unless the representation or warranty
has to do with the existence of the document or other item itself).
Section 3.01 Organization and Good Standing
Farmland is a cooperative corporation duly organized and existing under
Chapter 17, Article 16 of the Kansas Statutes, is in good standing under the
laws of the State of Kansas, and has all requisite corporate power and authority
to own its properties and conduct its business as it is presently being
conducted. Farmland is duly qualified to do business and is in good standing in
each jurisdiction in which it conducts business or owns or leases properties of
a nature which would require such qualification, except for those jurisdictions
where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on Farmland. Farmland has heretofore
delivered to Farmland true and complete copies of the Farmland articles of
incorporation and bylaws as currently in effect.
.
Section 3.02 Financial Statements
Farmland has delivered to CHSC (a) its audited financial statements as of
August 31, 1998, accompanied by the opinion of KPMG-Peat Marwick, and (b) its
unaudited financial statements for the nine months ended May 31, 1999. Such
financial statements fairly present the financial position
of Farmland at the dates indicated therein and the results of its operation for
the periods indicated therein, in conformity with GAAP. There has been no
material adverse change in the financial condition or results of operations of
Farmland since May 31, 1999.
Section 3.03 Absence of Liabilities
Neither Farmland nor any Subsidiary of Farmland has any liabilities or
obligations, absolute or contingent, except for liabilities and obligations
which are (i) reflected in the financial statements referred to in Section 3.02,
(ii) fully covered by insurance, except for reasonable deductibles or self-
insured retention levels, (iii) incurred in the ordinary course of business
since May 31, 1999 and not materially different in type or amount from those
reflected in the financial statements referred to in Section 3.02, or (iv) would
not in the aggregate reasonably be expected to have a Material Adverse Effect on
Farmland.
Section 3.04 Title to PropertyS
Except as reflected in the notes accompanying the audited financial
statements of Farmland, Farmland has good and marketable title to all real and
personal property reflected as owned on the books and records of Farmland as of
the date of this Agreement and owns outright all other assets, properties or
property interests acquired since that date, in each case free of all mortgages,
liens, charges and encumbrances, other than (i) easements, rights-of-way and
similar encumbrances which do not materially impair the use of such real or
personal property for the same or similar purposes as such real or personal
property has been used by Farmland prior to the Effective Time, (ii) liens for
current taxes that are not yet due and payable, (iii) liens related to the
acquisition of inventory or otherwise arising in the normal course of business,
and (iv) other liens, encumbrances and title defects which would not reasonably
be expected to have a Material Adverse Effect on Farmland.
Section 3.05 Intellectual Property
Farmland owns or possesses, is licensed under or otherwise has lawful
access to, all patents, trade secrets, know-how, other confidential information,
trademarks, service marks, copyrights, trade names, logos and other intellectual
property, whether registered or unregistered, necessary for the lawful conduct
of its business as currently conducted, without any infringement of or conflict
with the industrial or intellectual property rights of any third party, except
as would not reasonably be expected to have a Material Adverse Effect on
Farmland. Farmland does not know or have reason to know of any unauthorized use
or disclosure or misappropriation of any of its intellectual property. which
disclosure, use, or misappropriation would reasonably be expected to have a
Material Adverse Effect on Farmland.
Section 3.06 Compliance with Laws, etc.
Farmland is in compliance with all applicable laws and regulations the
violation of which would reasonably be expected to have a Material Adverse
Effect on Farmland. Farmland has all governmental authorizations, consents,
licenses and permits required by law or otherwise necessary for the proper
operation of its business as currently conducted, all of such licenses and
permits are in full force and effect, and no action to terminate, withdraw, not
renew or materially limit or otherwise change any such license or permit is
pending or has been threatened by any governmental agency or other party, except
as would not reasonably be expected to have a Material Adverse Effect on
Farmland.
Section 3.07 Pending Litigation, Claims, Actions, Proceedings
or
Investigations
There is no action, proceeding or investigation pending against, or to the
best of the knowledge of Farmland after reasonable inquiry, is threatened
against Farmland or any Subsidiary of Farmland or any of the assets which are
owned by Farmland or any Subsidiary of Farmland which would reasonably be
expected to have a Material Adverse Effect on Farmland.
Section 3.08 Absence of Defaults
Farmland is not in default under any provision of its Articles of
Incorporation or Bylaws or any indenture, mortgage, loan agreement or other
material agreement to which it is a party or by which it is bound, and Farmland
is not in violation of any statute, order, rule or regulation of any court or
governmental agency having jurisdiction over it or its properties, which, in
each case, could have a Material Adverse Effect on Farmland, and, except for any
consent or approval identified on the Farmland Disclosure Schedule, neither the
execution and delivery of this Agreement nor the consummation of the Transaction
in accordance with this Agreement will in any respect conflict with or result in
a breach of any of the foregoing, which could have a Material Adverse Effect on
Farmland.
Section 3.09 Authorization
Farmland has the corporate power and authority to enter into and to perform
its obligations under this Agreement (subject to the approvals of its members as
required by Section 5.01(b)). This Agreement and the Transaction have been duly
and validly authorized by the Board of Directors of Farmland, and (except for
the approvals of its members as required by Section 5.01(b)) no other corporate
action is required by Farmland in connection with this Agreement or the
Transaction. This Agreement constitutes the valid and binding agreement of
Farmland, enforceable against Farmland in accordance with its terms, except to
the extent such enforcement may be limited by the application of equitable
principles where equitable relief is sought or bankruptcy and other laws
relating to the enforcement of creditors' rights generally.
Section 3.10 Insurance
Farmland has secured appropriate insurance policies which (i) are issued by
sound and reputable insurance companies duly authorized to write said insurance,
(ii) are in full force and effect, (iii) are sufficient for compliance with all
requirements of law and all agreements to which Farmland is a party, and (iv)
provide reasonable insurance coverage for the assets and operations of Farmland
and all liabilities related thereto.
Section 3.11 Governmental Authorization
The execution, delivery and performance by Farmland of this Agreement and
the consummation of the Transaction by Farmland require no action by or in
respect of, or filing with, any governmental body, agency, official or authority
other than (a) the filing of appropriate documents to effect the Plan of Merger
under applicable law, (b) compliance with any applicable requirements of the HSR
Act, and (c) other actions or filings which if not taken or made would not,
individually or in the aggregate, have a Material Adverse Effect on Farmland or
the Surviving Entity following the Effective Time.
Section 3.12 Subsidiaries
Each Subsidiary of Farmland is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, has all powers and
all governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted, except for those the absence of which
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on Farmland. Each Subsidiary of Farmland is duly
qualified to do business and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where failure
to be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on Farmland.
Section 3.13 SEC Filings
(a) Farmland has delivered to CHSC (i) its annual report on Form 10-K for
its fiscal year ended August 31, 1998, (ii) its quarterly reports on Form 10-Q
for its fiscal quarters ended after August 31, 1998, (iii) all of its other
reports, statements, schedules and registration statements filed with the SEC
since August 31, 1998 (the documents referred to in this Section 3.13(a) being
referred to collectively as the "Farmland SEC Documents").
(b) As of its filing date, each Farmland SEC Document complied as to form
in all material respects with the applicable requirements of the Exchange Act.
(c) As of its filing date, each Farmland SEC Document filed pursuant to
the Exchange Act did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
Section 3.14 Absence of Certain Changes
Except as set forth in the Farmland Disclosure Schedule, since May 31,
1999, Farmland and its Subsidiaries have conducted their business in the
ordinary course consistent with past practice and there has not been: (a) any
event, occurrence or development of a state of circumstances or facts which has
had or reasonably would be expected to have, individually or in the aggregate, a
Material Adverse Effect on Farmland; (b) any transaction or commitment made, or
any contract, agreement or settlement entered into, by (or judgment, order or
decree affecting) Farmland or any of its Subsidiaries relating to its assets or
business (including the acquisition or disposition of any assets) or any
relinquishment by Farmland or any of its Subsidiaries of any contract or other
right, in either case, material to Farmland and its Subsidiaries taken as a
whole, other than transactions, commitments, contracts, agreements or
settlements (including without limitation settlements of litigation and tax
proceedings) in the ordinary course of business consistent with past practice,
those contemplated by this Agreement, or as agreed to in writing by CHSC; (c)
any change in any method of accounting or accounting practice (other than any
change for tax purposes) by Farmland or any of its Subsidiaries, except for any
such change which is not significant or which is required by reason of a
concurrent change in GAAP; or (d) any increase in (or amendments to the terms
of) compensation, bonus or other benefits payable to directors, officers or
employees of Farmland or any of its Subsidiaries, other than in the ordinary
course of business consistent with past practice, as permitted by this
Agreement, or as agreed to in writing by CHSC.
Section 3.15 Taxes
Except as set forth in the Farmland Balance Sheet dated May 31, 1999
(including the notes thereto) and except as would not, individually or in the
aggregate, have a Material Adverse Effect on Farmland, (i) all Farmland Tax
Returns required to be filed with any taxing authority by, or with respect to,
Farmland and its Subsidiaries have been filed in accordance with all applicable
laws; (ii) Farmland and its Subsidiaries have timely paid all Taxes shown as due
and payable on the Farmland Tax Returns that have been so filed, and, as of the
time of filing, the Farmland Tax Returns correctly reflected the facts regarding
the income, business, assets, operations, activities and the status of Farmland
and its Subsidiaries (other than Taxes which are being contested in good faith
and for which adequate reserves are reflected on the Farmland Balance Sheet);
(iii) Farmland and its Subsidiaries have made provision for all Taxes payable by
Farmland and its Subsidiaries for which no Farmland Tax Return has yet been
filed; (iv) the charges, accruals and reserves for Taxes with respect to
Farmland and its Subsidiaries reflected on the Farmland Balance Sheet are
adequate under GAAP to cover the Tax liabilities accruing through the date
thereof; (v) there is no action, suit, proceeding, audit or claim now proposed
or pending against or with respect to Farmland or any of its Subsidiaries in
respect of any Tax where there is a reasonable possibility of an adverse
determination; and (vi) to the best of Farmland's knowledge and belief, neither
Farmland nor any of its Subsidiaries is liable for any Tax imposed on any entity
other than such Person, except as the result of the application of Treas. Reg.
Section 1.1502-6 (and any comparable provision of the tax laws of any state,
local or foreign jurisdiction) to the affiliated group of which Farmland is the
common parent.
Section 3.16 Employee Benefit Plans
(a) Prior to the date hereof, Farmland has provided CHSC with a list
identifying each material "employee benefit plan," as defined in Section 3(3) of
ERISA, each material employment, severance or similar contract, plan,
arrangement or policy applicable to any director, former director, employee or
former employee of Farmland and each material plan or arrangement (written or
oral), providing for compensation, bonuses, profit-sharing, stock option or
other stock related rights or other forms of incentive or deferred compensation,
vacation benefits, insurance coverage (including any self-insured arrangements),
health or medical benefits, disability benefits, workers' compensation,
supplemental unemployment benefits, severance benefits and post-employment or
retirement benefits (including compensation, pension, health, medical or life
insurance benefits) which is maintained, administered or contributed to by
Farmland and covers any employee or director or former employee or director of
Farmland, or under which Farmland has any liability. Such material plans
(excluding any such plan that is a "multiemployer plan", as defined in Section
3(37) of ERISA) are referred to collectively herein as the "Farmland Employee
Plans".
(b) Each Farmland Employee Plan has been maintained in compliance with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations (including but not limited to ERISA and the Code) which
are applicable to such Plan, except where failure to so comply would not,
individually or in the aggregate, have a Material Adverse Effect on Farmland.
(c) Neither Farmland nor any affiliate of Farmland has incurred a
liability under Title IV of ERISA that has not been satisfied in full, and no
condition exists that presents a material risk to Farmland or any affiliate of
Farmland of incurring any such liability other than liability for premiums due
the Pension Benefit Guaranty Corporation (which premiums have been paid when
due).
(d) Each Farmland Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from federal income tax pursuant to Section 501(a) of the Code.
(e) No director or officer or other employee of Farmland or any of its
Subsidiaries will become entitled to any retirement, severance or similar
benefit or enhanced or accelerated benefit solely as a result of the
transactions contemplated hereby.
(f) Each Farmland Employee Plan that provides for post-retirement health
and medical, life or other insurance benefits for retired employees of Farmland
or any of its Subsidiaries has been adequately reserved for in Farmland's
financial statements.
(g) There has been no amendment to, written interpretation or announcement
(whether or not written) by Farmland or any of its affiliates relating to, or
change in employee participation or coverage under, any Farmland Employee Plan
which would increase materially the expense of maintaining such Farmland
Employee Plan above the level of the expense incurred in respect thereof for the
12 months ended May 31, 1999.
Section 3.17 Environmental Matters Except as set
forth in the Farmland SEC Documents filed prior to the date hereof and with such
exceptions as, individually or in the aggregate, have not had, and would not
reasonably be expected to have, a Material Adverse Effect on Farmland (i) no
notice, notification, demand, request for information, citation, summons,
complaint or order has been received by, and no investigation, action, claim,
suit, proceeding or review is pending or, to the knowledge of Farmland or any of
its Subsidiaries, threatened by any Person against, Farmland or any of its
Subsidiaries, and no penalty has been assessed against Farmland or any of its
Subsidiaries, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) Farmland and its Subsidiaries are and have
been in compliance with all Environmental Laws; (iii) there are no liabilities
of Farmland or any of its Subsidiaries relating to or arising out of any
Environmental Law of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability; and (iv) there has been no environmental investigation,
study, audit, test, review or other analysis conducted of which Farmland has
knowledge in relation to the current or prior business of Farmland or any of its
Subsidiaries or any property or facility now or previously owned, leased or
operated by Farmland or any of its Subsidiaries which has not been delivered to
CHSC at least five days prior to the date hereof. All liabilities of Farmland
or any of its Subsidiaries relating to or arising out of any Environmental Law
of any kind whatsoever have been adequately reserved for on the financial
statements of Farmland, or for unconsolidated Subsidiaries, on the financial
statements of such Subsidiaries.
Section 3.18 Pooling; Tax Treatment
The parties intend that the Transaction be accounted for under the "pooling
of interests" method under the requirements of Opinion No. 16 (Business
Combinations) of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board, and the
rules and regulations of the Securities and Exchange Commission. Neither
Farmland nor any of its affiliates has taken or agreed to take any action or is
aware of any fact or circumstance that would prevent the Transaction from
qualifying (i) for "pooling of interests" accounting treatment as described
above or (ii) as a 368 Reorganization.
Section 3.19 No Dissenters' Rights
No member of Farmland or any other holder of equity of Farmland have the
right to dissent from the Transaction and receive payment for their interest in
cash or otherwise receive any property or other interest in the Transaction,
other than as provided in the Plan of Merger.
Section 3.20 Full Disclosure
Farmland has disclosed to CHSC all facts material to the transactions
contemplated in this Agreement, including disclosure of all material contracts
(as such term is described in Item 601 of Regulation S-K). No representation,
warranty, or covenant by Farmland contained in this Agreement or the Plan of
Merger, and no statement contained in any certificate, schedule, or other
documents or instrument furnished to CHSC pursuant hereto or in connection with
the transactions contemplated hereby, including responses to CHSC inquiries put
to Farmland in the course of its investigation to confirm the warranties and
representations of Farmland in this Agreement, when taken as a whole, contains
or will contain any untrue statement of a material fact or omits or will omit a
material fact which would make it misleading as to Farmland.
ARTICLE IV
PRE-CLOSING COVENANTS
The parties agree as follows with respect to the period between the
execution of this Agreement and the Closing Date:
Section 4.01 Selection of Structure
The board of directors of each of CHSC and Farmland shall work together to
determine whether Structure A or Structure B shall be selected as the most
appropriate structure for the Transaction. If Structure B is selected, CHSC
agrees to take such action as the sole member of Acquisition Co., or otherwise,
to permit Acquisition Co. to take such actions as may be necessary to effect the
CHSC/Acquisition Co. Merger pursuant to applicable law, it being understood that
following such Merger the Surviving Entity shall be reincorporated as a
cooperative association under Chapter 308A of the Minnesota Statutes as soon as
practicable after the issue or issues that precluded use of Structure A have
been resolved, unless the board of directors of the Surviving Entity, by a
three-fourths (3/4) vote, determines otherwise.
Section 4.02 Good Faith Efforts
Each party will use its good faith efforts (i) to take all action necessary
to render accurate, as of the Closing Date, its representations and warranties
contained herein, and to refrain from taking any action which would render any
such representation or warranty inaccurate as of the Closing Date, (ii) to
perform or cause to be satisfied each covenant or condition to be performed or
satisfied by it pursuant to this Agreement or the Plan of Merger, and to cause
the Transaction to be consummated, and (iii) to obtain all licenses or other
approvals required to be obtained by it from any appropriate governmental or
regulatory body or other person in connection with the carrying out of the
Transaction and the continued operation of business by the Surviving Entity
after the Closing Date, including without limitation the consents and approvals
identified in each party's Disclosure Schedule.
Section 4.03 Preservation of Business
Each party shall, and shall cause each of its Subsidiaries to, conduct its
business in the ordinary course and in a manner consistent with its past
practices (except as expressly contemplated hereby), and shall use good faith
efforts to preserve intact its business organization, properties (except as they
may be sold, used or otherwise disposed of in the ordinary course) and the good
will of its members, suppliers, customers and others having business
relationships with it.
Section 4.04 Conduct of Business
Each Party agrees to not engage in , and agrees to cause each of its
Subsidiaries not to engage in, any practice, take any action, or enter into any
transaction outside of the ordinary course of business without the prior consent
of the other party to this Agreement. Without limiting the generality of the
foregoing, each party shall not and each party agrees to cause each of its
Subsidiaries to not:
(a) grant to any person any option to purchase, or other right to
acquire, capital stock or other equity interests, except for allocation of
patronage equities in a manner consistent with past practice;
(b) issue any capital stock or other equity interests, except in the
ordinary course of business;
(c) make any material amendment to enter into or terminate any
material contract, lease or understanding;
(d) amend its Articles of Incorporation, Bylaws, or any board
policies;
(e) incur any indebtedness for borrowed money or make any commitment
to borrow money, except indebtedness incurred in the ordinary course of
business pursuant to credit arrangements existing as of the date of this
Agreement (including any renewals thereof);
(f) make any material capital expenditures other than in the ordinary
course of business;
(g) mortgage any of its assets, or except in the ordinary course of
business, sell any of its assets having an aggregate value which would be
material to its business;
(h) pay any dividends or make any distributions with respect to its
capital stock or equity interests, except in the ordinary course of
business;
(i) reclassify, combine, subdivide, split-up, or amend its capital
stock or equity interests;
(j) purchase, acquire or redeem any shares of capital stock or other
equity interests (other than in satisfaction of allocated losses), except
pursuant to the existing equity redemption/base capital plans of the party;
or
(k) agree or commit to do any of the foregoing.
Section 4.05 Meetings of Members
The parties will take all steps necessary to call special meetings of,
and/or mail votes by, the members of Farmland and CHSC, to be held on or around
November 23, 1999 for purposes of considering and voting on the Transaction and
other matters covered by this Agreement in accordance with their respective
Articles of Incorporation, Bylaws and applicable law. The parties will
cooperate with each other in connection with the special member meetings and/or
mail votes and will develop a mutually agreed upon plan for disseminating
information concerning the Transaction to their members (including holding
member information meetings and preparation of a joint statement of terms and
conditions to be mailed to members).
Section 4.06 Full Access
Each party will permit the authorized representatives of the other party to
have full access at all reasonable times, and in a manner so as not to interfere
with the normal business operations of such party, to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to such party. The obligations of each party with respect to any
"Confidential Information" (as such term is defined in that certain
Confidentiality Agreement between the parties dated April 8, 1999 (the
"Confidentiality Agreement")) furnished by the other party shall be governed in
all respects by the Confidentiality Agreement, the terms of which are
incorporated herein by this reference. If for any reason the Transaction is not
consummated, each party will promptly return all documents, papers, books,
records and other materials (and all copies thereof) embodying any Confidential
Information obtained in the course of its investigation and evaluation.
Section 4.07 Notice of Developments
Each party will give prompt written notice to the other of any development
which could reasonably be expected to result in a Material Adverse Effect on
such party or which would cause a breach of any of its representations and
warranties contained herein. Except as specified in such written notice, no
disclosure by a party pursuant to this Section 4.07 shall be deemed to amend or
supplement such party's Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
Section 4.08 Exclusive
Neither party will (i) solicit, initiate, or encourage the submission of
any proposal or offer from any person relating to the acquisition of any capital
stock or other voting securities, or any substantial portion of the assets of,
such party (including any acquisition structured as a merger, consolidation, or
share exchange) or (ii) participate in any discussions or negotiations
regarding, furnish any information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any person to do or seek
any of the foregoing. Each party will notify the other party immediately if any
person makes any proposal, offer, inquiry, or contact with respect to any of the
foregoing.
Section 4.09 Hart-Scott-Rodino Filings
CHSC and Farmland shall prepare and file with the Antitrust Division of the
U.S. Justice Department (the "Antitrust Division") and the Federal Trade
Commission (the "FTC"), all reports required to be filed in connection with the
Transaction pursuant to the HSR Act. Each of CHSC and Farmland shall cooperate
fully with each other in preparation of such reports. If either the Antitrust
Division or the FTC requests that additional information be filed pursuant to
the HSR Act, CHSC and HSR shall prepare and file such additional information as
soon as practicable after the request, and shall cooperate fully with each other
in preparation of such additional information. With respect to preparation or
filing of any of the reports or additional information described in this Section
4.09, each party shall bear its own costs.
Section 4.10 Tax and Accounting Treatment
Each of the parties shall not take any action and shall not fail to take
any action, which action or failure to act would prevent, or would be reasonably
likely to prevent, the Transaction from qualifying (a) for "pooling of
interests" accounting treatment as described in Sections 2.19 and 3.19, or (b)
as a 368 Reorganization.
ARTICLE V
CLOSING CONDITIONS
Section 5.01 Conditions to Obligations of Each Party
The respective obligations of CHSC and Farmland to consummate the
Transaction and other matters described in this Agreement are, at their
respective options, subject to the satisfaction or waiver of each of the
following conditions on or before the Closing Date:
(a) The members of CHSC shall have approved this Agreement, the Plan
of Merger, and the Transaction, all in accordance with the requirements of
applicable law and the Articles of Incorporation and Bylaws of CHSC;
(b) The members of Farmland shall have approved this Agreement, the
Plan of Merger, and the Transaction, all in accordance with the
requirements of applicable law and the Articles of Incorporation and Bylaws
of Farmland;
(c) If Structure B is to be used to effect the combination, all steps
then legally feasible to reincorporate the Surviving Entity as a Minnesota
cooperative association (as described in Section 4.01 hereof) shall have
been taken;
(d) The parties shall have made the filings required by Section 4.09
above under the HSR Act, and all applicable time periods under the HSR Act
shall have expired;
(e) No injunction, restraining order or order of any nature issued by
any court of competent jurisdiction, government or governmental agency
enjoining the Transaction shall have been issued and remain in effect;
(f) All consents, approvals and waivers which are necessary in
connection with the Transaction, or any part thereof, shall have been
obtained, including the consents and approvals referred to in Section 4.02
above, other than any such consents, approvals or waiver as do not,
individually or in the aggregate, have a Material Adverse Effect on the
Surviving Entity; and
(g) No action shall have been threatened or instituted by any
governmental agency or any other person challenging the legality of the
Transaction, seeking to prevent or delay consummation of the Transaction or
seeking to obtain divestiture or other relief in the event of consummation
of the Transaction. It is understood in the event that such an action is
threatened or instituted, the parties will first attempt for a period of 90
days to obtain dismissal or other favorable resolution of such threatened
or actual action prior to exercise of their right to terminate hereunder.
Section 5.02 Additional Conditions to Obligation of CHSC
The obligation of CHSC to consummate the Transaction is, at its option,
subject to the satisfaction or waiver of each of the following additional
conditions at the Closing Date.
(a) All the representations and warranties of Farmland contained in
this Agreement shall be true and correct in all material respects on the
Closing Date as though such representations and warranties were made on and
as of the Closing Date, and Farmland shall have performed all of its
obligations and complied with all of its covenants contained in this
Agreement and in the Plan of Merger to be performed or complied with prior
to the Closing Date;
(b) There shall have occurred no change since the date hereof in the
assets, liabilities, financial condition or operations of Farmland which,
in the reasonable judgment of CHSC, has or is likely to have a Material
Adverse Effect on the Surviving Entity; provided, however, that an adverse
ruling in the Terra tax case referred to on Exhibit D hereto shall not
be considered as such a change;
(c) CHSC shall have received a certificate, dated as of the Closing
Date, and executed by the President of Farmland, certifying in such detail
as CHSC may reasonably request as to the accuracy of such representations
and warranties, the fulfillment of such obligations, compliance with such
covenants and satisfaction of the conditions to CHSC's obligation as of the
Closing Date; and
(d) All actions, proceedings and documents necessary to carry out the
Transaction shall be reasonably satisfactory to CHSC
Section 5.03 Additional Conditions to Obligation of Farmland
The obligation of Farmland to consummate the Transaction is, at its option,
subject to the satisfaction or waiver of each of the following additional
conditions on or before the Closing Date:
(a) All the representations and warranties of CHSC contained in this
Agreement shall be true and correct in all material respects on the Closing
Date as though such representations and warranties were made on and as of
the Closing Date, and CHSC shall have performed all of its obligations and
complied with all of its covenants contained in this Agreement and in the
Plan of Merger to be performed or complied with prior to the Closing Date;
(b) There shall have occurred no change since the date hereof in the
assets, liabilities, financial condition or operations of CHSC which, in
the reasonable judgment of Farmland, has or is likely to have a Material
Adverse Effect on the Surviving Entity;
(c) Farmland shall have received a certificate, dated as of the
Closing Date, executed by the President of CHSC, certifying in such detail
as Farmland may reasonably request as to the accuracy of such
representations and warranties, the fulfillment of such obligations,
compliance with such covenants and satisfaction of the conditions to
Farmland's obligations as of the Closing Date; and
(d) All actions, proceedings and documents necessary to carry out the
Transaction shall be reasonably satisfactory to Farmland, including the
effectiveness of the CHSC/Acquisition Co. Merger, if Structure B is
selected.
ARTICLE VI
POST-CLOSING AGREEMENTS
With respect to issues relating to the Surviving Entity subsequent to the
Effective Time, CHSC and Farmland agree as follows:
Section 6.01 Consolidation of Benefit Plans
Within a reasonable period of time after the Effective Time, the Surviving
Entity shall take steps to consolidate the various benefit plans provided to the
employees of the respective parties in accordance with the applicable provisions
of the Code and ERISA. This consolidation of plans shall be accomplished in a
manner to be determined by the Surviving Entity.
Section 6.02 Patronage Distributions
Following the Effective Time and within the time period required by
Subchapter T of the Code, the Surviving Entity will make patronage allocations
to the former members of each party (a) based on patronage transactions with the
respective parties during each party's respective fiscal year or portion thereof
immediately preceding the Effective Time and (b) in accordance with the terms of
the bylaws of the party that are in effect during the period such patronage
transaction occurred. The distributions of such allocation shall be in the form
of cash and equity credits in a manner consistent with the previous patronage
distributions of each party.
Section 6.03 Indemnification of Former Officers; Insurance
The surviving Entity shall indemnify each director, officer, manager,
employee or agent of CHSC or Farmland, and each person serving at the request of
CHSC or Farmland as a director, officer, manager, employee or agent of any other
entity, partnership, joint venture, trust or enterprise, against any losses,
claims or expenses incurred by such person prior to the Effective Time that
would be indemnifiable under Bylaws of the Surviving Entity as in force on the
Effective Time and otherwise to the fullest extent provided or permitted by any
statute which applies to any type of corporation of the state of incorporation
of the Surviving Entity as in effect at such time. The Surviving Entity shall
maintain insurance coverage against any such loss, claim or expense in an amount
of at least $20,000,000, subject to standard exclusions and exceptions to
coverage, for a period of not less than six (6) years after the Effective Time,
subject to the right of the Board of Directors to discontinue such coverage on
grounds of unreasonable cost.
ARTICLE VII
TERMINATION
Section 7.01 Termination of Agreement
This Agreement shall be terminated and the Transaction abandoned if at any
time prior to the Closing:
(a) The members of CHSC at the CHSC member meeting called for the
purpose of voting on the Transaction, fail to approve the Transaction as
required by Section 5.01(a), or the members of Farmland at the Farmland
member meeting called for the purpose of voting on the Transaction, fail to
approve the Transaction as required by Section 5.01(b); or
(b) The parties mutually agree in writing to terminate this
Agreement; or
(c) Either party delivers a written notice to the other to the effect
that (i) one or more of the conditions to its obligations as set forth
herein cannot be met, (ii) the other party has defaulted in a material
respect under one or more of its covenants or agreements contained herein,
or (iii) any of the representations or warranties of the other party are or
have become materially untrue or incorrect as of the date of such notice,
and in any case such condition or conditions have not been satisfied, such
default or defaults have not been remedied or such representation or
warranty has not been rendered true and correct within thirty (30) days
after such notice is mailed; or
(d) The Closing has not occurred on or before December 31, 2000, or
such later date as the parties may mutually agree upon.
Section 7.02 Effect of Termination
If this Agreement is terminated pursuant to Section 7.01 above, all rights
and obligations of the parties hereunder shall terminate without any liability
of either party to the other (except for any liability of a party for breach of
this Agreement); provided, however, that the confidentiality and return of
documents provisions contained in or referred to Section 4.06 above shall
survive any such termination.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Waiver of Conditions
Any party may, at its option, waive in writing any and all of the
conditions herein contained to which its obligations hereunder are subject. A
party, by consummating the transactions contemplated herein, shall be deemed to
have waived any breach of a warranty, representation, covenant or condition of
which such party received written notice prior to the Closing Date if the notice
specifically referred to this Section 8.01 and described the breach in
reasonable detail.
Section 8.02 Amendment
The parties by mutual consent may, before or after approval of this
Agreement by the members, amend, modify or supplement this Agreement in such
manner as may be agreed upon in writing.
Section 8.03 Binding Nature
This Agreement shall be binding upon and inure only to the benefit of the
parties hereto and their respective successors and assigns, provided that
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned or delegated by any of the parties hereto without the prior
written consent of the other parties hereto.
Section 8.04 Counterparts
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
Section 8.05 Entire Agreement
Except for the Confidentiality Agreement (the terms of which are
incorporated herein by reference pursuant to Section 4.06 hereof), this
Agreement, the Plan of Merger and the other documents referred to herein and
therein set forth the entire understanding of the parties hereto with respect to
the matters provided for herein and therein and supersede all prior agreements,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of either party.
Section 8.06 Notices
All notices, requests, demands and other communications hereunder shall be
deemed to have been duly given if delivered or mailed, certified or registered
mail, with postage prepaid:
If to CHSC:
Cenex Harvest States Cooperatives
5500 CENEX Drive
Inver Grove Heights, MN 55077-1733
Attn: Vice President and General Counsel
If to Farmland:
Farmland Industries, Inc.
Department 62
3315 North Oak Trafficway
Kansas City, Missouri 64116
Attn: General Counsel
Section 8.07 Non-Survival of Representations and Warranties
The representations and warranties of the parties contained in Articles II
and III of this Agreement shall form the basis for closing conditions only,
shall not survive the Closing Date and, except to the extent of the principles
for the Capital Plan in Exhibit D hereto, shall not form the basis for any
action by or on behalf of either party or any third party for breach,
misrepresentation or indemnity at any time after the Closing Date.
Section 8.08 Captions
The article and section headings of this Agreement are for convenience only
and shall not affect the meaning or construction of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
CENEX HARVEST STATES FARMLAND INDUSTRIES, INC.
COOPERATIVES
By________________________________ By________________________________
Its________________________________ Its________________________________
The undersigned, UCB Acquisition Co., an Ohio cooperative corporation, the
only member of which is Cenex Harvest States Cooperatives, hereby joins in the
foregoing Transaction Agreement and agrees to take all actions required to
effect Structure B, as therein defined, if said structure is selected pursuant
to Section 1.01 of said Transaction Agreement.
UCB ACQUISITION CO.
By Date: ___________________________
President
EXHIBIT D
CAPITAL PLAN
I. Key Principles Underlying the Capital Plan.
1) The total capital required by the Company will be dependent upon the
assets required to be owned to accomplish its mission as well as the
cost and availability of debt.
2) Each base capital pool will have a target level of base capital.
3) Members of the Company will be required to provide capital based upon
relative use of the capitalization unit and the respective target
levels of base capital.
4) Retention of earnings will be a source of capital. The percentage of
earnings to be paid in cash patronage from a patronage pool will
increase as a member's capital increases relative to the base capital
requirement.
5) If a member has capital levels in excess of base capital requirements,
the excess amount will be subject to retirement on a basis to be
determined by the Board of Directors.
6) Patronage-sourced earnings will be allocated on a patronage basis
provided that the Board will have the authority to designate a portion
of patronage-sourced earnings as unallocated surplus to build a
reserve to absorb losses.
7) Earnings from non-patronage sourced business will generally be used to
build unallocated surplus.
8) The concept of Equity Participation Units developed by Harvest States
will be retained.
9) Minimum capital requirements will be $1,000 for individual members and
$10,000 for member cooperatives, with all existing members to be
grandfathered under existing minimum capital requirements. New
members meet minimum capital requirements through patronage earnings.
II. Terra Tax Case.
A. Key Terra Principles
1) No owner equities will be adversely impacted in a consolidated
setting as compared to stand alone. In the event, however, that
there is an adverse impact, it is understood that it should be
borne by the former Farmland stockholders (equity holders).
2) The Company must maintain a base of permanent equity to support
its operations (i.e. equity which is not subject to retirement
and is not credited to base capital plan requirements).
3) The outcome of the Terra case will not impact voting power.
B. Key Terra Agreements
1) Each party will be responsible for $100,000,000 of permanent
equity.
a. As set forth in the Plan of Merger, at the Effective Time, the
Surviving Entity will allocate and distribute to CHSC
members non-patronage equity interests in the Surviving
Entity in an amount equal to CHSC's surplus minus CHSC's
deferred patronage as of the Effective Time and minus
$100,000,000. Such non-patronage equity interests shall not
be included for purposes of voting determinations but shall
be "retirement/base capital eligible equity" (i.e., included
in determining satisfaction of requirements for base capital
and shall be eligible for redemption under the Capital
Plan).
b. At the Effective Time, the Surviving Entity will allocate to
Farmland members non-patronage equity interests in the
Surviving Entity in an amount equal to the excess of the
Farmland surplus over $100,000,000 as of the Effective Time.
The non-patronage equity interests allocated to Farmland's
members shall be distributed to such members by transfer of
such non-patronage equity interests to the Surviving Entity
to be held in escrow on behalf of the Farmland members until
the Terra tax case is resolved and is then to be distributed
to Farmland members in accordance with the provisions set
forth below or canceled. So long as such non-patronage
equity is held in escrow, it shall not be included for
purposes of voting determinations, shall not be included in
determining satisfaction of requirements for base capital
and shall not be eligible for redemption under the Capital
Plan; however, once distributed from escrow to Farmland
members, such non-patronage equity shall be included in
determining satisfaction of requirements for base capital
and shall be eligible for redemption under the Capital Plan.
2) If Terra is lost:
a. The amount of the Terra loss (which amount shall be net of the
deferred tax asset created) shall be determined.
b. The amount in 2)a. shall be reduced by an amount equal to
64.5% of the net non-patronage income of the Surviving
Entity from the Effective Time.
c. The net amount determined in 2)b. above shall first be
allocated to Farmland members by cancellation of the non-
patronage equity issued under 1)b. above up to such net
amount and if, thereafter, there remains any non-patronage
equity held in escrow under 1)b. above, it shall be
distributed from escrow to the appropriate members and shall
be converted to retirement/base capital eligible equity.
d. If there is any net loss remaining after application of 2)c.
above (the "Remaining Adjustment"), then equity in an amount
equal to the Remaining Adjustment received by Farmland
members in the Merger for their Farmland Equity Interests
shall be converted to permanent equity so that such
converted equity will not be included in determining
satisfaction of requirements for base capital and will not
be eligible for redemption under the Capital Plan. However,
such equity will continue to be counted for voting purposes.
e. Permanent equity in 2)d. will be converted to retirement/base
capital eligible equity at a rate of 64.5% of the total non-
patronage earnings (after application of all expenses other
than interest on borrowings used to pay the Terra
obligation), less an appropriate interest charge to reflect
the borrowings used to pay the Terra obligation, less the
reduction of the deferred tax asset associated with the
Terra loss.
f. Debt and other funding actions required to pay a Terra
judgment will be serviced from non-patronage income deemed
attributable to Farmland assets.
g. Equity balances held by estates will be retired in full
regardless of classification.
h. An example of the foregoing is appended hereto as Appendix I.
3) If Terra is won, Farmland members' non-patronage equity allocated
under 1)b. above will be converted into retirement/base capital
eligible equity and distributed from the escrow.
III. Other Contingent Liabilities.
A. Key Principles The parties recognize that there will be liabilities
that arise in the future out of facts that existed at the Effective
Time, which liabilities would be required to be paid by the Surviving
Entity. Some of such liabilities and/or the facts related thereto may
not be disclosed pursuant to the Transaction Agreement, or if
disclosed, nevertheless may not be adequately reserved for in the
party's financial statements.
B. Reclassification. Accordingly, in addition to the Terra Tax case
matter, the Surviving Entity shall make reclassifications of equity as
follows: (a) with respect to Farmland Contingent Losses, the
Surviving Entity shall reclassify the equity that was received in the
Transaction in exchange for Farmland common stock or other Farmland
equity, and (b) with respect to CHSC Contingent Losses, the Surviving
Entity shall reclassify the equity that was retained with respect to
CHSC equity or was received in exchange for CHSC equity in the
Transaction.
C. Procedures and Definitions.
1) As used herein, "Farmland Contingent Loss" is a loss that exceeds
$1,000,000.00 incurred by the Surviving Entity arising out of a
matter or group of related matters relating to liabilities
(fixed, contingent or otherwise, but not including losses
relating to the Terra Tax case) of Farmland, the material facts
of which existed at the Effective Time but were not included in
Farmland's Disclosure Schedule and were not adequately reserved
for in the financial statements of Farmland as of the Effective
Time, or even if included in such disclosure schedule, were not
adequately reserved for in the financial statements of Farmland
as of the Effective Time, and a "CHSC Contingent Loss" is a loss
that exceeds $1,000,000.00 incurred by the Surviving Entity
arising out of a matter or group of related matters relating to
liabilities (fixed, contingent or otherwise) of CHSC, the
material facts of which existed at the Effective Time but were
not included in CHSC's Disclosure Schedule and were not
adequately reserved for in the financial statements of CHSC as of
the Effective Time, or even if included in such disclosure
schedule, were not adequately reserved for in the financial
statements of CHSC as of the Effective Time; and which in either
case come to light before October 1, 2000 or such earlier time as
the parties agree. For purposes of these definitions: (i) a loss
shall be deemed to have been incurred at the earlier of the time
that (a) it was actually incurred, or (b) at the time that the
party incurring the loss is required by GAAP to account for the
loss on its books; (ii) whether a liability was "adequately"
reserved for shall be assessed with reference to the finally-
determined amount of the liability in question; and (iii) the
amount of a Contingent Loss shall be determined net of any actual
reserves.
2) In determining the amount of any loss, there shall be taken into
account the reserves for such loss that were provided for in the
financial statements of (i) Farmland or of any unconsolidated
Subsidiary of Farmland, in the instance of determining the amount
of any Farmland Contingent Loss, and (ii) CHSC or of any
unconsolidated Subsidiary of CHSC, in the instance of determining
the amount of any CHSC Contingent Loss. Determinations of the
amount of any loss shall be made by the board of directors of the
Surviving Entity.
3) Such reclassification of equity shall be done by the Surviving
Entity as follows:
a. Each party's Contingent Losses shall be calculated.
b. $20 million shall be deducted from each such Contingent Loss
figure, to arrive at a "Net Contingent Loss" figure for each
party.
c. Reclassification of equity shall be made with respect to a
party only if, and to the extent that, the aggregate of such
party's Net Contingent Losses exceeds the aggregate of the
other party's Net Contingent Losses.
4) Any such reclassification shall be made in a manner substantially
similar to the procedures for the reclassification to be made if
there is a loss relating to the Terra Tax case (as set forth in
II above).
5) The provisions of this Part III may be modified upon the
affirmative vote of three-fourths of the full board of directors
of the Surviving Entity.
Appendix I
1. Assume a Terra loss with a required payment of $400 million. The
approximate after-tax charge to equity would be $280 million. A deferred
tax asset of $120 million would be created.
2. If Farmland allocated equity is $550 million and unallocated surplus is
$250 million, the $280 million charge would offset the entire unallocated
account; $30 million would be carried in a deficit account.
3. Of the $550 million in allocated equities, $130 million would be converted
to permanent equity. The remaining $420 million would remain as
retirement/base capital eligible equity.
4. Assume, after the Effective Time, the Surviving Entity has total non-
patronage income (after application of all expenses other than interest on
borrowings used to pay the Terra obligation) of $93 million.
5. Of the $93 million in total non-patronage earnings, approximately $60
million would go into the Farmland pool.
6. Assume the interest expense on the Terra note is $25 million. The net non-
patronage sourced income in the Farmland pool would be $35 million.
7. The $35 million net non-patronage sourced income in the pool will be
sheltered with the NOL. As the NOL is used, the deferred tax asset will be
reduced.
8. The net build-up in the unallocated surplus attributable to the Farmland
pool will be $35 million less the reduction in the deferred tax asset.
This net number will be the amount of permanent equity converted to
retirement/base capital eligible equity.