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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___________ TO ____________.
COMMISSION FILE NUMBER: 333-17865
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CENEX HARVEST STATES COOPERATIVES
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0251095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5500 CENEX DRIVE (651) 451-5151
INVER GROVE HEIGHTS, MINNESOTA 55077 (Registrant's Telephone number,
(Address of principal executive office) including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not applicable
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: The registrant has no voting stock
outstanding.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: The registrant has
no common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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INDEX
PART I. PAGE NO.
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Item 1. Business
Cautionary Statement ................................................................... 1
The Company ............................................................................ 1
Agronomy ............................................................................... 2
Energy ................................................................................. 4
Country Operations ..................................................................... 6
Grain Marketing ........................................................................ 7
Processed Grains and Foods ............................................................. 9
Price Risk and Hedging ................................................................. 12
Employees .............................................................................. 13
Membership in the Company and Authorized Capital ....................................... 13
Item 2. Properties ............................................................................. 16
Item 3. Legal Proceedings ...................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders .................................... 17
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................. 18
Item 6. Selected Financial Data ................................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................ 20
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk ............................. 30
Item 8. Financial Statements and Supplementary Data ............................................ 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 31
PART III.
Item 10. Directors and Executive Officers of the Registrant
Board of Directors ..................................................................... 32
Executive Officers ..................................................................... 36
Item 11. Executive Compensation ................................................................. 38
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................... 44
Item 13. Certain Relationships and Related Transactions ......................................... 44
PART IV.
Item 14. Controls and Procedures ................................................................ 45
Item 15. Exhibits, Financial Statements and Reports Filed on Form 8-K ........................... 45
SUPPLEMENTAL INFORMATION .......................................................................... 48
SIGNATURES ........................................................................................ 49
SECTION 302 CERTIFICATIONS ........................................................................ 50
PART I.
ITEM 1. BUSINESS
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THE INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
AUGUST 31, 2002, INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
COMPANY. IN ADDITION, THE COMPANY AND ITS REPRESENTATIVES AND AGENTS MAY FROM
TIME TO TIME MAKE OTHER WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS, INCLUDING
STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION AND ITS REPORTS TO ITS MEMBERS AND SECURITYHOLDERS. WORDS AND
PHRASES SUCH AS "WILL LIKELY RESULT," "ARE EXPECTED TO," "WILL CONTINUE," "IS
ANTICIPATED," "ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE
UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE MADE.
THE COMPANY'S FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, RISKS RELATED TO THE LEVEL OF COMMODITY
PRICES, LOSS OF MEMBER BUSINESS, COMPETITION, CHANGES IN THE TAXATION OF
COOPERATIVES, COMPLIANCE WITH LAWS AND REGULATIONS, PERCEPTIONS OF FOOD QUALITY
AND SAFETY, BUSINESS INTERRUPTIONS AND CASUALTY LOSSES, ACCESS TO EQUITY
CAPITAL, CONSOLIDATION OF PRODUCERS AND CUSTOMERS, FLUCTUATIONS IN PRICES FOR
CRUDE OIL AND REFINED PETROLEUM PRODUCTS, ALTERNATIVE ENERGY SOURCES, THE
PERFORMANCE OF OUR AGRONOMY BUSINESS AND JOINT VENTURES. THESE RISKS AND
UNCERTAINTIES ARE FURTHER DESCRIBED IN EXHIBIT 99.1 TO THIS ANNUAL REPORT ON
FORM 10-K, AND OTHER RISKS OR UNCERTAINTIES MAY BE DESCRIBED FROM TIME TO TIME
IN THE COMPANY'S FUTURE FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING
STATEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
THE COMPANY
Cenex Harvest States Cooperatives (CHS Cooperatives, CHS or the Company)
is one of the nation's leading integrated agricultural companies. As a
cooperative, the Company is owned by farmers and ranchers and their local
cooperatives from the Great Lakes to the Pacific Northwest and from the
Canadian border to Texas. CHS Cooperatives buys commodities from and provides
products and services to its members and other customers. The Company provides
a wide variety of products and services, from initial agricultural inputs such
as fuels, farm supplies and crop nutrients, to agricultural outputs that
include grains and oilseeds, grain and oilseed processing and food products. A
portion of the Company's operations are conducted through equity investments
and joint ventures whose operating results are not consolidated with the
Company's results; rather, a proportionate share of the income from those
entities is included as a component in the Company's net income under the
equity method of accounting. For the fiscal year ended August 31, 2002, the
Company's total revenues were $7.8 billion.
The Company's operations are organized into five business segments:
Agronomy, Energy, Country Operations, Grain Marketing and Processed Grains and
Foods. Together these business segments create vertical integration to link
producers with consumers. The first two segments, Agronomy and Energy, produce
and provide for the wholesale distribution of inputs that are essential for
crop production. The third segment, Country Operations, serves as the
Company-owned retailer of a portion of these crop inputs and also serves as the
first handler of a significant portion of the crops marketed and processed by
the Company. The fourth segment, Grain Marketing, purchases and resells grains
and oilseeds originated by the Country Operations segment, by member
cooperatives and by third parties. The fifth business segment, Processed Grains
and Foods, converts grains and oilseeds into value-added products.
Only producers of agricultural products and associations of producers of
agricultural products may be members of CHS Cooperatives. The Company's
earnings are allocated to members based on the
1
volume of business they do with the Company. Members receive earnings in the
form of patronage refunds in cash and patron's equities, which may be redeemed
over time.
The origins of CHS Cooperatives date back to the early 1930s with the
founding of the predecessor companies of Cenex, Inc. and Harvest States
Cooperatives. Cenex Harvest States Cooperatives, now headquartered in Inver
Grove Heights, Minnesota, emerged as the result of the merger of the two
entities in 1998.
The international sales information and segment information in Notes 2 and
11 to the financial statements are incorporated by reference into the following
business segment descriptions.
The business segment financial information presented below does not
represent the results that would have been obtained had the relevant business
segment been operated as an independent business.
AGRONOMY
OVERVIEW
Through the Agronomy business segment, the Company is engaged in the
manufacture of crop nutrients and the wholesale distribution of crop nutrients
and crop protection products. The Company conducts its agronomy operations
primarily through two investments -- a 20% cooperative ownership interest in CF
Industries, Inc. (CF Industries) and, effective January 2000, a 25% ownership
interest in Agriliance, LLC (Agriliance). CF Industries manufactures crop
nutrient products, particularly nitrogen and phosphate fertilizers, and is one
of the largest suppliers to Agriliance. Agriliance is one of North America's
largest wholesale distributors of crop nutrients, crop protection products and
other agronomy products.
There is significant seasonality in the sale of crop nutrients and crop
protection products and services, with peak activity coinciding with the
planting and input seasons.
The Company's minority ownership interests in CF Industries and Agriliance
are treated as investments, and therefore, those entities' revenues and
expenses are not reflected in the Company's operating results. Each of CF
Industries and Agriliance has its own line of financing, without recourse to
the Company.
OPERATIONS
CF INDUSTRIES. CF Industries is an interregional agricultural cooperative
involved in the manufacturing of crop nutrient products. It is one of North
America's largest producers of nitrogen and phosphate fertilizers. Through its
members, CF Industries' nitrogen and phosphate fertilizer products reach
farmers and ranchers in 48 states and two Canadian provinces. CF Industries
conducts its operations primarily from the following facilities:
o a nitrogen manufacturing and processing facility at Donaldsonville,
Louisiana;
o a phosphate mine and phosphate fertilizer plant in central Florida;
and
o a 66% ownership interest in a nitrogen fertilizer manufacturing and
processing facility in Alberta, Canada.
AGRILIANCE. Agriliance is the one of the nation's largest wholesale
distributors of crop nutrients (fertilizers) and crop protection products
(insecticides, fungicides and pesticides), accounting for an estimated 30% of
the U.S. market for crop nutrients and approximately 25% of the U.S. market for
crop protection products. As a wholesale distributor, Agriliance has warehouse,
distribution and service facilities located throughout the country. Agriliance
also owns and operates retail agricultural units in the southeastern United
States. Agriliance purchases most of its fertilizer from CF Industries and
Farmland Industries, Inc. (Farmland) and its crop protection products from
Monsanto and Sygenta.
Agriliance was formed in 2000 when CHS Cooperatives, Farmland and Land
O'Lakes, Inc. (Land O'Lakes) contributed their respective agronomy businesses
to the new company in consideration for ownership interests (25% each for CHS
and Farmland and 50% for Land O'Lakes) in the venture. CHS Cooperatives and
Farmland hold their interests in Agriliance through United Country Brands, LLC,
a jointly-owned holding company.
2
PRODUCTS AND SERVICES
CF Industries manufactures crop nutrient products, primarily nitrogen and
phosphate fertilizers and potash. Agriliance wholesales crop nutrient products
and crop protection products that include insecticides, fungicides, and
pesticides. Agriliance also provides field and technical services, including
soil testing, adjuvant and herbicide formulation, application and related
services.
SALES AND MARKETING; CUSTOMERS
CF Industries sells its crop nutrient products to large agricultural
cooperatives and distributors. Its largest customers are Land O'Lakes, CHS and
seven other regional cooperatives that wholesale the products to their members.
Agriliance distributes agronomy products through approximately 1,000 local
cooperatives from Ohio to the West Coast and from the Canadian border south to
Kansas. Agriliance also provides sales and services through 48 Agriliance
Service Centers and other retail outlets. Agriliance's largest customer is the
Company's Country Operations business segment. In 2002, Agriliance sold
approximately $1.4 billion of crop nutrient products and approximately $2.2
billion of crop protection and other products.
INDUSTRY; COMPETITION
CF INDUSTRIES. North American fertilizer producers operate in a highly
competitive, global industry. Commercial fertilizers are world-traded
commodities and producers compete principally on the basis of price and
service. Many of the raw materials that are used in fertilizer production, such
as natural gas, are often more expensive in the U.S. than other parts of the
world. Crop nutrient margins have historically been cyclical; large profits
generated throughout the mid-1990's attracted additional capital and expansion
and the industry now suffers from excess capacity. These factors have produced
depressed margins for North American fertilizer manufacturers over the past
several years, although recently fertilizer margins have stabilized as natural
gas prices have declined.
CF Industries competes with numerous domestic and international crop
nutrient manufacturers, including Farmland.
AGRILIANCE. The wholesale distribution of agronomy products is highly
competitive and dependent upon relationships with agricultural producers and
local cooperatives, proximity to producers and local cooperatives and
competitive pricing. Moreover, the crop protection products industry is mature
with slow growth predicted for the future, which has led distributors and
suppliers to turn to consolidation and strategic partnerships to benefit from
economies of scale and increased market share. Agriliance competes with other
large agronomy distributors, as well as other regional or local distributors
and retailers. Agriliance competes on the strength of its relationships with
the members of the Company, Farmland and Land O'Lakes, its purchasing power and
competitive pricing, and its attention to service in the field.
Major competitors of Agriliance in crop nutrient distribution include
Agrium, Growmark, United Suppliers and West Central. Major competitors of
Agriliance in crop protection products distribution include Helena, ConAgra
(UAP), Tenkoz and numerous smaller distribution companies.
SUMMARY OPERATING RESULTS
The Company accounts for its Agronomy business segment as follows:
CF INDUSTRIES. The Company's investment in CF Industries of $153 million
on August 31, 2002, is carried on the balance sheet at cost, including
allocated patronage. Since CF Industries is a cooperative, the Company
recognizes income from the investment only if it receives patronage refunds. In
recent years, CF Industries has realized operating losses and as such, it has
not issued any patronage refunds to its members. Historically, crop nutrients
manufacturing earnings have been cyclical in nature.
AGRILIANCE. At August 31, 2002 the Company's equity investment in
Agriliance was $86 million. The Company recognizes earnings from Agriliance
using the equity method of accounting, which results in the Company including
its ownership percentage of Agriliance's net earnings as equity income from
investments. The Company applies related internal expenses against those
earnings.
3
Summary operating results for the Agronomy business segment for the fiscal
years ended August 31, 2002, 2001 and 2000 are shown below:
2002 2001 2000
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(DOLLARS IN THOUSANDS)
Revenues:
Net sales* .................................... $808,659
Patronage dividends ........................... $ (89) $ 196 224
Other revenues ................................ 5,817
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(89) 196 814,700
Cost of goods sold ............................. 764,744
Marketing, general and administrative .......... 8,957 8,503 20,832
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Operating (losses) earnings .................... (9,046) (8,307) 29,124
Interest ....................................... (1,403) (4,529) (3,512)
Equity (income) loss from investments .......... (13,425) (7,360) 4,336
--------- -------- --------
Income before income taxes ..................... $ 5,782 $ 3,582 $ 28,300
========= ======== ========
Total identifiable assets -- August 31 ......... $ 242,015 $230,051 $228,277
========= ======== ========
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* Net sales in 2000 reflect sales from the Company's agronomy business prior to
the time it was contributed to Agriliance. Earnings from the Company's
interest in Agriliance are shown as equity (income) loss from investments.
ENERGY
OVERVIEW
CHS Cooperatives is the nation's largest cooperative energy company, with
operations that include petroleum refining and pipelines; the supply, marketing
and distribution of refined fuels (gasoline, diesel, and other energy
products); the blending, sale and distribution of lubricants; and the wholesale
and retail supply of propane. The Energy business segment processes crude oil
into refined petroleum products at refineries in Laurel, Montana (wholly-owned)
and McPherson, Kansas (owned by an entity in which CHS has an approximate 74.5%
ownership interest) and sells those products under the Cenex brand to CHS's
member cooperatives and others through a network of approximately 1,400
independent retailers, including approximately 800 that operate Cenex/Ampride
convenience stores.
OPERATIONS
LAUREL REFINERY. The Company's Laurel, Montana refinery processes medium
and high sulfur crude oil into refined petroleum products that primarily
include gasoline, diesel, and asphalt. The Laurel refinery sources
approximately 90% of its crude oil supply from Canada, with the balance
obtained from domestic sources. Laurel has access to Canadian and northwest
Montana crude through the Company's wholly-owned Front Range Pipeline and other
common carrier pipelines. The Laurel refinery also has access to Wyoming crude
via common carrier pipelines from the south.
The Laurel facility processes approximately 55,000 barrels of crude oil
per day to produce refined products that consist of approximately 42% gasoline,
30% diesel and 28% asphalt and other residual products. Refined fuels produced
at Laurel, Montana are available via the Yellowstone Pipeline to western
Montana terminals and to Spokane and Moses Lake, Washington, south via common
carrier pipelines to Wyoming terminals and Denver, Colorado, and east via the
Company's wholly-owned Cenex Pipeline to Glendive, Montana, and Minot and
Fargo, North Dakota.
MCPHERSON REFINERY. The McPherson, Kansas refinery is owned and operated
by the National Cooperative Refinery Association (NCRA), of which the Company
owns approximately 74.5%. The McPherson refinery processes low and medium
sulfur crude oil into gasoline, diesel and other distillates, propane, and
other products. McPherson sources approximately 95% of its crude oil from
Kansas, Oklahoma, and Texas through NCRA-owned and common carrier pipelines.
The McPherson refinery processes approximately 80,000 barrels of crude oil
per day to produce refined products that consist of approximately 57% gasoline,
34% diesel and other distillates, and 9% propane and other products.
Approximately 90% of the refined fuels are shipped via NCRA's
4
proprietary products pipeline to its terminal in Council Bluffs, Iowa and to
other markets via common carrier pipelines. The balance of the fuels are loaded
into trucks at the refinery.
OTHER ENERGY OPERATIONS. The Company owns and operates ten propane plants
and three propane terminals, four asphalt terminals, three lubricants blending
and packaging facilities, and 36 convenience stores. The Company also owns and
leases a fleet of liquid and pressure trailers and tractors which are used to
transport refined fuels, propane and anhydrous ammonia.
PRODUCTS AND SERVICES
The Energy business segment produces and sells (primarily wholesale)
gasoline, diesel, propane, asphalt, and lubricants. It obtains the petroleum
products that it sells both from the Laurel and McPherson refineries and from
third parties.
SALES AND MARKETING; CUSTOMERS
The Company makes approximately 85% of its refined fuel sales to members,
with the balance sold to non-members. Sales are made wholesale to member
cooperatives and through a network of independent retailers that operate
convenience stores under the Cenex/Ampride tradename. The Company sold
approximately 1.3 billion gallons of gasoline and approximately 1.2 billion
gallons of diesel fuel in fiscal year 2002. The Company also wholesales auto
and farm machinery lubricants to both members and non-members. In fiscal year
2002, energy operations sold approximately 26.4 million gallons of lubricants.
The Company is one of the nation's largest propane wholesalers. In fiscal year
2002, energy operations sold approximately 0.7 billion gallons of propane. Most
of the propane sold in rural areas is for heating and agricultural consumption.
Annual sales volumes of propane vary greatly depending on weather patterns and
crop conditions.
INDUSTRY; COMPETITION
Governmental regulations and policies, particularly in the areas of
taxation, energy and the environment, have a significant impact on the
Company's energy operations segment. Like many other refineries, the Energy
business segment's refineries are currently focusing their capital spending on
reducing pollution. In particular, these refineries are currently working to
comply with the federal government's initiatives to lower the sulfur content of
gasoline and diesel. The Company currently expects that the cost of compliance,
which will be spread out over the next four years, will be approximately $340
million in total for the McPherson and Laurel refineries. It is expected that
over 80% of the costs will be incurred at the McPherson refinery.
The energy business is highly cyclical. Demand for crude oil and its
products are driven by the condition of local and worldwide economies, local
and regional weather patterns and taxation relative to other energy sources.
Most of the Company's energy product market is located in rural areas, so sales
activity tends to follow the planting and harvesting cycles. More fuel
efficient equipment, reduced crop tillage, depressed prices for crops, warm
winter weather, and government programs which encourage idle acres may all
reduce demand for the Company's energy products.
The refining and wholesale fuels business is very competitive. Among the
Company's competitors are some of the world's largest integrated petroleum
companies, which have their own crude oil supplies, distribution and marketing
systems. The Company also competes with smaller domestic refiners and marketers
in the midwestern and northwestern United States, with foreign refiners who
import products into the United States and with producers and marketers in
other industries supplying other forms of energy and fuels to consumers. Given
the commodity nature of the end products, profitability in the refining and
marketing industry depends largely on margins, as well as operating efficiency,
product mix, and costs of product distribution and transportation. The retail
gasoline market is highly competitive, with much larger competitors that have
greater brand recognition and distribution outlets throughout the country and
the world. CHS Cooperatives owned and non-owned retail outlets are located
primarily in the southern, midwestern and northwestern United States.
5
SUMMARY OPERATING RESULTS
Summary operating results for the Energy business segment for the fiscal
years ended August 31, 2002, 2001 and 2000 are shown below:
2002 2001 2000
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(DOLLARS IN THOUSANDS)
Revenues:
Net sales ..................................... $2,657,689 $2,781,243 $2,959,622
Patronage dividends ........................... 458 712 311
Other revenues ................................ 6,392 4,036 2,792
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2,664,539 2,785,991 2,962,725
Cost of goods sold ............................. 2,489,352 2,549,099 2,862,715
Marketing, general and administrative .......... 66,731 48,432 43,332
---------- ---------- ----------
Operating earnings ............................. 108,456 188,460 56,678
Interest ....................................... 16,875 25,097 27,926
Equity loss (income) from investments .......... 1,166 4,081 (856)
Minority interests ............................. 14,604 34,713 24,443
---------- ---------- ----------
Income before income taxes ..................... $ 75,811 $ 124,569 $ 5,165
========== ========== ==========
Total identifiable assets -- August 31 ......... $1,305,828 $1,154,036 $1,379,019
========== ========== ==========
COUNTRY OPERATIONS
OVERVIEW
The Country Operations business segment purchases wheat and other grains
from the Company's producer members and provides cooperative members and
producers with access to a full range of products and services including farm
supplies, programs for crop and livestock production, hedging and insurance
services, and agricultural operations financing. Country Operations operates at
approximately 300 locations dispersed throughout Minnesota, North Dakota, South
Dakota, Nebraska, Montana, Idaho, Washington and Oregon. Most of these
locations purchase grain from farmers and sell agronomy products, energy
products and feed to those same producers and others, although not all
locations provide every product and service.
PRODUCTS AND SERVICES
GRAIN PURCHASING. The Company is one of the largest country elevator
operators in North America. Through a majority of its elevator locations, the
Country Operations business segment purchases grain from member and non-member
producers and other elevators and grain dealers. Most of the grain purchased is
either sold through the Company's Grain Marketing business segment or used for
local feed and processing operations. In the year ended August 31, 2002, the
Company purchased approximately 280 million bushels of grain, primarily wheat
(131 million bushels), corn (77 million bushels) and soybeans (45 million
bushels). Of these bushels, 255 million were purchased from members and 239
million were sold through the Grain Marketing business segment.
FARM SUPPLIES. Country Operations manufactures and sells farm supplies,
both directly and through ownership interests in other entities. These include
seed; plant food; energy products; animal feed ingredients, supplements and
products; animal health products; and crop protection products. The Company
sells agronomy products at 160 locations, feed products at 135 locations and
energy products at 94 locations. Farm supplies are purchased through
cooperatives whenever possible.
FINANCIAL SERVICES. The Company has provided open account financing to
more than 150 CHS members that are cooperatives (Cooperative Association
Members) in the past year. These arrangements involve the discretionary
extension of credit in the form of term and seasonal loans and can also be used
as a clearing account for settlement of grain purchases and as a cash
management tool. A substantial part of the term and seasonal loans are sold to
the National Bank for Cooperatives (CoBank), with CoBank purchasing up to 90%
of any loan. The Company's borrowing arrangements with CoBank limit loan
balances outstanding under this program to not more than $150.0 million at any
one time.
6
Through its wholly-owned subsidiary Fin-Ag, Inc. the Company provides
seasonal cattle feeding and swine financing loans, facility financing loans and
crop production loans. It also provides consulting services to member
cooperatives. Most loans are sold to CoBank under a separate program from that
described above, under which the Company has guaranteed a portion of the loans.
The Company's exposure at August 31, 2002 was approximately $40.8 million.
Under the Company's borrowing arrangements, the maximum amount of the loans
outstanding at any one time may not exceed $125.0 million and the Company's
maximum guarantee exposure would be $48.5 million.
The Company's wholly-owned subsidiary Country Hedging, Inc., which is a
registered futures commission merchant and a clearing member of both the
Minneapolis Grain Exchange and the Kansas City Board of Trade, is a full
service commodity futures and options broker.
Ag States Agency, LLC is an independent insurance agency in which the
Company holds a majority ownership interest. It sells insurance, including
group benefits, property and casualty, and bonding programs. Its more than
1,700 customers are primarily agricultural businesses, including local
cooperatives and independent elevators, oil stations, agronomy and feed/seed
plants, implement dealers, fruit and vegetable packers/warehouses, and food
processors.
INDUSTRY; COMPETITION
Competitors for the purchase of grain include other elevators and large
grain marketing companies. Competitors for farm supply include a variety of
cooperatives, privately held and large national companies. The Company competes
primarily on the basis of price, services and patronage.
The financing operations are not significant, however, competitors for the
Company's financing operations are primarily other financial institutions. The
Company competes primarily on the basis of price, services and patronage.
Country Hedging's competitors include international brokerage firms, national
brokerage firms, regional brokerage firms (both cooperatives and
non-cooperatives) as well as local introducing brokers, with competition driven
both by price and level of service. Ag States competes with other insurance
agencies, primarily on the basis of price and services.
SUMMARY OPERATING RESULTS
Summary operating results for the Country Operations business segment for
the fiscal years ended August 31, 2002, 2001 and 2000 are shown below:
2002 2001 2000
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Revenues:
Net sales ..................................... $1,474,553 $1,577,268 $1,409,892
Patronage dividends ........................... 2,572 3,683 3,830
Other revenues ................................ 80,789 80,479 68,436
---------- ---------- ----------
1,557,914 1,661,430 1,482,158
Cost of goods sold ............................. 1,471,422 1,569,884 1,404,120
Marketing, general and administrative .......... 47,995 53,417 44,136
---------- ---------- ----------
Operating earnings ............................. 38,497 38,129 33,902
Interest ....................................... 13,851 15,695 12,782
Equity income from investments ................. (283) (246) (1,007)
Minority interests ............................. 786 385 103
---------- ---------- ----------
Income before income taxes ..................... $ 24,143 $ 22,295 $ 22,024
========== ========== ==========
Total identifiable assets -- August 31 ......... $ 799,711 $ 679,053 $ 660,358
========== ========== ==========
GRAIN MARKETING
OVERVIEW
CHS Cooperatives is the nation's largest cooperative marketer of grain and
oilseed, handling about 1.1 billion bushels annually. During fiscal year 2002,
the Company purchased approximately 76% of total
7
grain volumes from individual and member cooperatives and the Country
Operations business segment, with the balance purchased from third parties. CHS
Cooperatives arranges for the transportation of the grains either directly to
customers or to Company owned or leased grain terminals and elevators pending
delivery to domestic and foreign purchasers. The Company primarily conducts its
Grain Marketing operations directly, but does conduct some of its business
through three 50% owned joint ventures.
OPERATIONS
The Grain Marketing segment purchases grain directly and indirectly from
agricultural producers primarily in the Midwestern and Western United States.
The purchased grain is typically sold for future delivery at a specified
location, with the Company responsible for handling the grain and arranging for
its transportation to that location. The Company's ability to arrange efficient
transportation, including loading capabilities onto unit trains, ocean-going
vessels, and barges, is a significant part of the service it offers to its
customers. Rail, vessel, barge and truck transportation is carried out by third
parties, often under long-term freight agreements with the Company. Grain
intended for export is usually shipped by rail or barge to an export terminal,
where it is loaded onto ocean-going vessels. Grain intended for domestic use is
usually shipped by rail or truck to various locations throughout the country.
CHS owns export terminals, river terminals, and elevators involved in the
handling and transport of grain. River terminals at Kansas City, Missouri, St.
Paul, Savage, and Winona, Minnesota, and Davenport, Iowa are used to load
grains onto barges for shipment to both domestic and export customers via the
Mississippi River System. The Company's export terminal at Superior, Wisconsin
provides access to the Great Lakes and St. Lawrence Seaway, and an export
terminal at Myrtle Grove, Louisiana serves the Gulf market. In the Pacific
Northwest, the Company conducts its grain marketing operations through United
Harvest, LLC (a 50% joint venture with United Grain Corporation) and TEMCO, LLC
(a 50% joint venture with Cargill, Incorporated). United Harvest, LLC operates
grain terminals in Vancouver and Kalama, Washington. TEMCO, LLC operates a
large export terminal in Tacoma, Washington. These facilities serve the Pacific
market, as well as domestic grain customers in the Western United States. Grain
Supplier, LLC (a 50% joint venture with Commodity Specialists Company) will
begin operating an elevator facility in Friona, Texas and one in Collins,
Mississippi beginning in late fiscal year 2003 or early fiscal year 2004.
Grain Marketing purchases most of its grain during the summer and fall
harvest period. Because of the Company's geographic location and the fact that
it is further from its export facilities, grain tends to be sold later than in
other parts of the country. However, as many producers have significant on-farm
storage capacity and in light of the Company's own storage capacity, the Grain
Marketing business segment buys and ships grain throughout the year. Due to the
amount of grain purchased and held in inventory, the Grain Marketing business
segment has significant working capital needs at various times of the year. The
amount of borrowings for this purpose, and the interest rate charged on those
borrowings, directly affect the profitability of the Grain Marketing segment.
PRODUCTS AND SERVICES
The primary grains purchased by the Grain Marketing business segment for
the year ended August 31, 2002 were wheat (362 million bushels), corn (393
million bushels) and soybeans (241 million bushels). Of the total grains
purchased by the Grain Marketing segment during the year ended August 31, 2002,
571 million bushels were purchased from the Company's individual and
cooperative association members, 239 million bushel were purchased from the
Country Operations business segment and the remainder were purchased from third
parties.
SALES AND MARKETING; CUSTOMERS
Purchasers include domestic and foreign millers, maltsters, feeders,
crushers, and other processors. To a much lesser extent purchasers include
intermediaries and distributors. Grain marketing operations are not dependent
on any one customer. The Grain Marketing segment has supply relationships
calling for delivery of grain at prevailing market prices.
INDUSTRY; COMPETITION
The Grain Marketing business segment competes for both the purchase and
sale of grain. Competition is intense and margins are low. Some competitors are
integrated food producers, which may also be customers. A few major competitors
have substantially greater financial resources than the Company.
8
In the purchase of grain from producers, location of the delivery facility
is a prime consideration, but producers are increasingly willing to truck grain
longer distances for sale. Price is affected by the capabilities of the
facility; for example, if it is cheaper to deliver to a customer by unit train
than by truck, a facility with unit train capability provides a price
advantage. The Company believes that its relationships with individual members
serviced by local Country Operations locations and with cooperative members
gives it a broad origination capability.
The Grain Marketing business segment competes for grain sales based on
price, services and ability to provide the desired quantity and quality of
grains required. Location of facilities is a major factor in the ability to
compete. Grain marketing operations compete with numerous grain merchandisers,
including major grain merchandising companies such as Archer Daniels Midland
(ADM), Cargill, Incorporated (Cargill), ConAgra, Bunge and Louis Dreyfus, each
of which handle grain volumes of more than one billion bushels annually.
The results of the grain marketing business may be adversely affected by
relative levels of supply and demand, both domestic and international,
commodity price levels (including grain prices reporting on national markets)
and transportation costs and conditions. Supply is affected by weather
conditions, disease, insect damage, acreage planted and government regulations
and policies. Demand may be affected by foreign governments and their programs,
relationships of foreign countries with the United States, the affluence of
foreign countries, acts of war, currency exchange fluctuations and substitution
of commodities. Demand may also be affected by changes in eating habits, by
population growth, and by increased or decreased per capita consumption of some
products.
SUMMARY OPERATING RESULTS
Summary operating results for the Grain Marketing business segment for the
fiscal years ended August 31, 2002, 2001 and 2000 are shown below:
2002 2001 2000
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Revenues:
Net sales ..................................... $3,787,322 $3,514,314 $3,453,807
Patronage dividends ........................... 497 840 861
Other revenues ................................ 21,902 22,964 15,440
---------- ---------- ----------
3,809,721 3,538,118 3,470,108
Cost of goods sold ............................. 3,778,838 3,514,575 3,439,863
Marketing, general and administrative .......... 22,213 22,396 21,412
---------- ---------- ----------
Operating earnings ............................. 8,670 1,147 8,833
Interest ....................................... 4,807 8,144 8,701
Equity income from investments ................. (4,257) (4,519) (6,452)
---------- ---------- ----------
Income (loss) before income taxes .............. $ 8,120 $ (2,478) $ 6,584
========== ========== ==========
Total identifiable assets -- August 31 ......... $ 481,232 $ 345,696 $ 321,813
========== ========== ==========
PROCESSED GRAINS AND FOODS
OVERVIEW
The Processed Grains and Foods business segment converts raw agricultural
commodities into ingredients for finished food products or into finished
consumer food products. The Company has focused on areas that allow it to
utilize the products supplied by member producers. These areas are oilseed
processing and refining, wheat milling and foods.
OILSEED PROCESSING AND REFINING
The Company's oilseed processing operations convert soybeans into soybean
meal, soyflour, crude soyoil, refined soybean oil and associated by-products.
These operations are conducted at a facility in Mankato, Minnesota that can
crush 39 million bushels of soybeans on an annual basis, producing
9
approximately 940,000 short tons of soybean meal and 460 million pounds of
crude soybean oil. The same facility is able to refine approximately 1 billion
pounds of refined soybean oil annually. Another crushing facility is under
construction in Fairmont, Minnesota that will have a crushing capacity and
crude soyoil output similar to the Mankato facility. The facility in Fairmont
is anticipated to be ready for the 2003 harvest and is estimated to cost
approximately $90 million, of which approximately $23 million has been spent
through August 31, 2002.
The Company's oilseed processing and refining operations produce three
primary products: refined oils, soybean meal and soyflour. Refined oils are
used in processed foods, such as margarine, shortening, salad dressings and
baked goods and, to a lesser extent for certain industrial uses for plastics,
inks and paints. Soybean meal has a high protein content and is used for
feeding livestock. Soyflour is used in the baking industry, as a milk
replacement in animal feed and in industrial applications.
The Company's soy processing facilities are located in areas with a strong
production base of soybeans and end-user market for the meal and soyflour. The
Company purchases virtually all of its soybeans from members. The oilseed
crushing operations currently produce approximately 45% of the crude oil that
the Company refines; it purchases the balance from outside suppliers.
The Company's customers for refined oil are principally large food product
companies located throughout the United States. However, over 50% of the
customers are located in the Midwest due to lower freight costs and slightly
higher profitability. The largest customer for refined oil products is Ventura
Foods, LLC (Ventura Foods), in which the Company holds a 50% ownership interest
and with which the Company has a long-term supply agreement to supply minimum
quantities of edible soybean oils as long as the Company maintains a minimum
25.5% ownership interest and the price is comparative with other suppliers of
the product. The Company's sales to Ventura Foods were $49.8 million in fiscal
year 2002. The Company also sells soymeal to over 500 customers, primarily feed
lots and feed mills in southern Minnesota; six of these customers accounted for
approximately 61% of the soymeal sold. Land O'Lakes/Farmland Feeds, LLC
accounts for 29% of soymeal sold and Commodity Specialists Company accounts for
10% of soymeal sold. The Company sells soyflour to customers in the baking
industry both domestically and for export.
The refined soybean products industry is highly competitive. Major
industry competitors include ADM, Cargill, Ag Processing, Inc., and Bunge.
These and other competitors have acquired other processors and have expanded
existing plants, or are proposing to construct new plants, both domestically
and internationally. Price, transportation costs, services and product quality
drive competition. The Company estimates that it has a market share of
approximately 6% to 8% of the domestic refined soybean oil market and less than
3% of the domestic soybean crushing capacity.
Soybeans are a commodity and their price can fluctuate significantly
depending on production levels, demand for the refined products, and other
supply and demand factors.
WHEAT MILLING
In January 2002, the Company and Cargill formed Horizon Milling, LLC
(Horizon Milling), in which the Company owns 24% and Cargill owns the remaining
76%. Horizon Milling is the largest U.S. wheat miller. Sales of wheat and durum
by the Company to Horizon Milling during fiscal year 2002 were $114.4 million.
The Company ceased operations at its Huron, Ohio mill prior to the
formation of Horizon Milling and the Company's facility lease expired on
September 30, 2002. The Company is currently dismantling and negotiating for
the sale of the milling equipment. The Processed Grains and Foods business
segment established an impairment of approximately $6.5 million on the
equipment during the fourth quarter of fiscal year 2002.
FOODS
The Company has two primary areas of focus in the foods area: Ventura
Foods, which produces oilseed based products such as margarine and salad
dressing and which is 50% owned by the Company, and the production of Mexican
foods such as tortillas, tortilla chips and entrees.
10
VENTURA FOODS. Ventura Foods manufactures, packages, distributes and
markets bulk margarine, salad dressings, mayonnaise, salad oils, syrups, soup
bases and sauces, many of which utilize soybean oil as a primary ingredient.
Approximately 20% of Ventura Food's volume, based on sales revenues, comes from
products for which Ventura Foods owns the brand, and the remainder comes from
products that it produces for third parties. A variety of Ventura Food's
product formulations and processes are proprietary to it or its customers.
Ventura Foods is the largest manufacturer of margarine in the U.S. and is a
major producer of many other products.
Ventura Foods has 13 manufacturing and distribution locations across the
United States. It sources its raw materials, which consists primarily of
soybean oil, canola oil, cottonseed oil, peanut oil and various ingredients and
supplies, from various national suppliers, including the Company's oilseed
processing and refining operations. It sells the products it manufactures to
third parties as a contract manufacturer, as well as directly to retailers,
food distribution companies and large institutional food service companies.
Ventura Foods' sales are approximately 65% in foodservice and the remainder
split between retail and industrial customers who use edible oil products as
ingredients in foods they manufacture for resale.
Ventura Foods competes with a variety of large companies in the food
manufacturing industry. Some of its major competitors are ADM, Cargill, Bunge,
Unilever, ConAgra, ACH, Smuckers, Kraft, and CF Sauer.
Ventura Foods was created in 1996 and at the time was owned 40% by the
Company and 60% by Wilsey Foods, Inc., a majority owned subsidiary of Mitsui
USA, Inc. In March 2000, Wilsey Foods, Inc. sold an additional 10% interest
bringing the Company's total equity investment in Ventura Foods to 50%. The
Company accounts for the Ventura Foods investment under the equity method of
accounting.
MEXICAN FOODS. Since June 2000, the Company has acquired three regional
producers of Mexican foods. Through its Mexican foods operations, the Company
manufactures, packages and distributes tortillas, tortilla chips and prepared
frozen Mexican food products such as burritos and tamales. The Company sells
these products under a variety of local and regional brand names and also
produces private label products and co-packs for customers. The current
operational focus is on integrating these disparate operations into a single
business entity with consistent standards, systems and sales practices. The
Company is also working to develop a national brand from its predominantly
local and regional brand platforms.
The tortilla and tortilla chip industry in the United States is comprised
of a large number of small regional manufacturers and a few dominant
manufacturers. The Company estimates that its Mexican foods operation has
approximately a 1.5% share of the national tortilla market and less than a 1%
share of the national tortilla chip market. On a national basis, the primary
competitors are large chip and snack companies such as Frito Lay.
11
SUMMARY OPERATING RESULTS
Summary operating results for the Processed Grains and Foods business
segment for the fiscal years ended August 31, 2002, 2001 and 2000 are shown
below:
2002 2001 2000
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Revenues:
Net sales* .................................... $ 496,084 $ 662,726 $ 584,052
Patronage dividends ........................... 260 339 100
Other revenues ................................ (1,469) (238) (10)
--------- --------- ---------
494,875 662,827 584,142
Cost of goods sold ............................. 457,538 619,184 547,234
Marketing, general and administrative .......... 36,930 44,870 21,462
--------- --------- ---------
Operating earnings (losses) .................... 407 (1,227) 15,446
Interest ....................................... 9,514 13,026 9,851
Equity income from investments ................. (41,331) (35,505) (24,367)
--------- --------- ---------
Income before income taxes ..................... $ 32,224 $ 21,252 $ 29,962
========= ========= =========
Total identifiable assets -- August 31 ......... $ 439,942 $ 430,871 $ 391,286
========= ========= =========
- ------------------
* The sales decline in 2002 is primarily due to the formation of Horizon
Milling. Since January 2002 the Company has accounted for the operating
results of its milling operations under the equity method of accounting.
Earnings from the Company's interest in Horizon Milling are included as part
of equity income from investments.
PRICE RISK AND HEDGING
Depending on the terms and conditions of the particular contract, the
Company incurs risks of carrying inventory, including risks related to price
changes and performance (including delivery, quality, quantity and shipment
period) whenever it enters into a commodity purchase commitment. The Company is
exposed to risk of loss in the market value of positions held, consisting of
inventory and purchase contracts at a fixed or partially fixed price in the
event market prices decrease. The Company is also exposed to risk of loss on
its fixed price or partially fixed price sales contracts in the event market
prices increase.
To reduce the price change risks associated with holding fixed price
positions, the Company generally takes opposite and offsetting positions by
entering into commodity futures contracts (either a straight futures contract
or an options futures contract) on regulated commodity futures exchanges for
grain, and regulated mercantile exchanges for refined products and crude oil.
The crude oil and most of the grain and oilseed volume handled by the Company
can be hedged. Some grains cannot be hedged because there are no futures for
certain commodities. For those commodities, risk is managed through the use of
forward sales and different pricing arrangements and to some extent
cross-commodity futures hedging. While hedging activities reduce the risk of
loss from changing market values of inventory, such activities also limit the
gain potential which otherwise could result from changes in market prices of
inventory. The Company's policy is to generally maintain hedged positions in
grain. The Company's profitability from operations is primarily derived from
margins on products sold and grain merchandised, not from hedging transactions.
Hedging arrangements do not protect against nonperformance of a contract.
When a futures contract is entered into, an initial margin deposit must be
sent to the applicable exchange or broker. The amount of the deposit is set by
the exchange and varies by commodity. If the market price of a short futures
contract increases, then an additional margin deposit (maintenance margin)
would be required. Similarly, if the price of a long futures contract
decreases, a maintenance margin deposit would be required and sent to the
applicable exchange. Subsequent price changes could require additional
maintenance margins or could result in the return of maintenance margins.
12
At any one time inventory and purchase contracts for delivery to the
Company may be substantial. The Company has risk management policies and
procedures that include net position limits. It is defined by commodity and
includes both trader and management limits. This policy, and computerized
procedures in grain marketing operations, triggers a review by operations
management when any trader is outside of position limits and also triggers
review by senior management of the Company if operating areas are outside of
position limits. A similar process is used in energy operations. The position
limits are reviewed at least annually with management of the Company. The
Company monitors current market conditions and may expand or reduce the
purchasing program in response to changes in those conditions. In addition,
certain purchase and sale contracts are subject to credit approvals and
appropriate terms and conditions.
EMPLOYEES
As of August 31, 2002, CHS Cooperatives had approximately 6,750 full and
part-time employees, which included approximately 550 employees of NCRA. Of
that total, approximately 2,180 were employed in the Energy segment, 2,260 in
the Country Operations segment (not including an estimated 720 seasonal and
temporary employees), 390 in the Grain Marketing segment, 970 in the Processed
Grains and Foods business segment and 230 in corporate and administrative
functions.
In addition to those employed directly by the Company, many employees work
directly for the joint ventures in which the Company has an ownership interest.
All of the employees in the Agronomy segment and a portion of the Grain
Marketing and Processed Grains and Foods segments are employed as such.
Employees in certain areas are represented by collective bargaining
agreements. Refinery workers in Laurel, Montana (233 employees), are
represented by agreements with two unions (Paper, Allied-Industrial, Chemical
and Energy Workers International Union (PACE) and Oil Basin Pipeliners Union
(OBP)), for which agreements are in place through 2006 for PACE and under
negotiation for OBP with anticipation of a successful resolution. The contracts
covering the McPherson, Kansas refinery (254 employees in the PACE union) are
also in place through 2006. There are approximately 160 employees in
transportation and lubricant plant operations that are covered by collective
bargaining agreements that expire at various times. Production workers in grain
marketing operations (143 employees) are represented by agreements with four
unions which expire at various times from 2003 through 2005. Finally, certain
production workers in Oilseed Processing and Refining operations are subject to
collective bargaining agreements with the American Federation of Grain Millers
(126 employees) and the Pipefitters' Union (2 employees). Both of these
contracts have expired and are currently being negotiated with the Company
anticipating a successful resolution.
MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL
INTRODUCTION
The Company is an agricultural membership cooperative organized under
Minnesota cooperative law to do business with member and non-member patrons.
Patrons, and not the Company, are subject to income taxes on income from
patronage. The Company is subject to income taxes on non-patronage-sourced
income. See "-- Tax Treatment" below.
DISTRIBUTION OF NET INCOME; PATRONAGE DIVIDENDS
The Company is required by its organizational documents annually to
distribute net earnings derived from patronage business with members, after
payment of dividends on equity capital, to members on the basis of patronage,
except that the Board of Directors may elect to retain and add to the Company's
unallocated capital reserve an amount not to exceed 10% of the distributable
net income from patronage business. Net income from non-patronage business may
be distributed to members or added to the unallocated capital reserve, in
whatever proportions the Board of Directors deems appropriate.
13
These distributions, referred to as "patronage dividends," may be
distributed in cash, patrons' equities, revolving fund certificates, securities
of the Company or others or any combination designated by the Board of
Directors. Since 1998, the Board of Directors has distributed patronage
dividends in the form of 30% cash and 70% patrons' equities (see "-- Patrons'
Equities" below). The Board of Directors may change the mix in the form of the
patronage dividend in the future. In making distributions, the Board of
Directors may use any method of allocation as may, in its judgment, be
reasonable and equitable. Patronage dividends distributed during the years
ended August 31, 2002, 2001 and 2000 were $132.6 million ($40.1 million in
cash), $86.4 million ($26.1 million in cash) and $59.1 million($17.9 million in
cash), respectively.
PATRONS' EQUITIES
Patrons' equities are in the form of a bookkeeping entry and represent a
right to receive cash when redeemed by the Company. Patrons' equities form part
of the capital of the Company, do not bear interest and are not subject to
redemption upon request of a member. Patrons' equities are redeemable only at
the discretion of the Board of Directors and in accordance with the terms of a
redemption policy adopted by the Board of Directors, which may be modified at
any time without member consent. The Company's current policy is to redeem the
equities of those members who were age 61 and older on June 1, 1998 when they
reach the age of 72 and upon death. The current policy is also to redeem
equities older than 10 years held by active members on a pro-rata basis as
determined by the Board of Directors.
Redemptions of patrons' and other equities, including equity participation
units (discussed in Note 9 to the Financial Statements), during the years ended
August 31, 2002, 2001 and 2000 were $31.1 million, $33.0 million and $28.7
million, respectively.
GOVERNANCE
The Company is managed by a Board of Directors of at least 17 persons
elected by the members at the Company's annual meeting. Terms of Directors are
staggered so that no more than seven directors are elected in any year. The
Board of Directors is currently comprised of 17 directors. The articles of
incorporation and bylaws of the Company may be amended only upon approval of a
majority of the votes cast at an annual or special meeting of the members,
except for the higher vote described under "-- Certain Antitakeover Measures"
below.
MEMBERSHIP
Membership in the Company is restricted to certain producers of
agricultural products and to associations of producers of agricultural products
that are organized and operating so as to adhere to the provisions of the
Agricultural Marketing Act and the Capper-Volstead Act, as amended. The Board
of Directors may establish other qualifications for membership as it may from
time to time deem advisable.
As a membership cooperative, the Company does not have common stock. The
Company may issue equity or debt securities, on a patronage basis or otherwise,
to its members. The Company has two classes of outstanding membership.
Individual members are individuals actually engaged in the production of
agricultural products. Cooperative associations are associations of
agricultural producers, either cooperatives or other associations organized and
operated under the provisions of the Agricultural Marketing Act and the
Capper-Volstead Act.
VOTING RIGHTS
Voting rights arise by virtue of membership in the Company, not because of
ownership of any equity or debt security. Members that are cooperative
associations are entitled to vote based upon a formula that takes into account
the number of producer members of such cooperative, the equity held by the
cooperative in the Company and the average amount of business done with the
Company over the previous three years.
Members who are individuals are entitled to one vote. Individual members
may exercise their voting power directly or through a patrons' association
associated with a grain elevator, feed mill, seed plant or any other Company
facility (with certain historical exceptions) recognized by the Board of
Directors. The number of votes of patrons' associations is determined under the
same formula as cooperative association members.
14
The Board of Directors has proposed an amendment to the Company's bylaws
to eliminate the number of producers as a factor in determining the number of
votes of cooperative association members and patrons' associations. The
proposed amendment is expected to be voted upon at the annual members' meeting
in December 2002.
Most matters submitted to a vote of the members require the approval of a
majority of the votes cast at a meeting of the members, although the approval
of not less than two-thirds of the votes cast at a meeting is required to
approve "Change of Control" transactions, which include a merger,
consolidation, liquidation, dissolution, or the sale of all or substantially
all of the Company's assets and, in certain circumstances, a greater vote may
be required. See "Certain Antitakeover Measures" below.
DEBT AND EQUITY INSTRUMENTS
The Company may issue debt and equity instruments to its current members
and patrons, on a patronage basis or otherwise, and to persons who are neither
members nor patrons. Debt or equity issued by the Company is subject to a first
lien in favor of the Company for all indebtedness of the holder thereof to the
Company. As of August 31, 2002 the Company's outstanding capital included
patrons' equities (consisting of capital equity certificates and non-patronage
earnings certificates), 8% Preferred Stock and certain capital reserves. A best
efforts offering of 8% Preferred Stock begun in late 2001 has been suspended
after raising approximately $9.5 million in new capital.
DISTRIBUTION OF ASSETS UPON DISSOLUTION; MERGER AND CONSOLIDATION
In the event of any dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, all debts and liabilities would be paid first
according to their respective priorities. As more particularly provided in the
Company's bylaws, the remaining assets would be paid to the holders of equity
capital to the extent of their interests and any excess would be paid to
patrons on the basis of their past patronage. The bylaws provide for the
allocation among the members and nonmember patrons of the consideration
received in any merger or consolidation to which the Company is a party.
CERTAIN ANTITAKEOVER MEASURES
The governing documents may be amended upon the approval of a majority of
the votes cast at an annual or special meeting. However, if the Board of
Directors, in its sole discretion, declares that a proposed amendment to the
Company's governing documents involves or is related to a "hostile takeover,"
the amendment must be adopted by 80% of the total voting power of the members
of the Company. Further, if the Board of Directors determines that a proposed
change of control transaction involves a hostile takeover, the 80% approval
requirement applies. The term "hostile takeover" is not further defined in the
Minnesota cooperative law or the governing documents of the Company.
TAX TREATMENT
Subchapter T of the Internal Revenue Code sets forth rules for the tax
treatment of cooperatives and applies to both cooperatives exempt from taxation
under Section 521 of the Internal Revenue Code and to nonexempt corporations
operating on a cooperative basis. The Company is a nonexempt cooperative.
As a cooperative, the Company is not taxed on patronage paid to its
members either in the form of equities or cash. Consequently, such amounts are
taxed only at the patron level. However, the amounts of any allocated but
undistributed patronage earnings (called non-qualified unit retains) are
taxable to the Company when allocated. Upon redemption of any such
non-qualified unit retains, the amount is deductible to the Company and taxable
at the member level.
Income derived by the Company from non-patronage sources is not entitled
to the "single tax" benefit of Subchapter T and is taxed to the Company at
corporate income tax rates.
15
ITEM 2. PROPERTIES
The Company owns or leases energy, grain handling and processing, food
manufacturing and agronomy related facilities throughout the United States.
Below is a summary of these locations.
ENERGY
Facilities in the Company's Energy business segment include the following,
all of which are owned except where indicated as leased:
Refinery Laurel, Montana
Propane Plants 10 locations in Iowa, Idaho, and Oregon
Propane Terminals 3 locations in Minnesota, North Dakota and Wisconsin
Transportation Terminals/Repair 10 locations in Iowa, Minnesota, Montana, North Dakota, South
Facilities Dakota, Washington and Wisconsin, 2 of which are leased
Petroleum & Asphalt 9 locations in Montana, North Dakota and Wisconsin
Terminals/Storage Facilities
Pump Stations 10 locations in Montana and North Dakota
Pipelines:
Cenex Pipeline, LLC Laurel, Montana to Fargo, North Dakota
Front Range Pipeline, LLC Canadian Border to Laurel, Montana
Convenience Stores/Gas 36 locations in Iowa, Minnesota, Montana, South Dakota and
Stations Wyoming
Lube Plants/Warehouses 3 locations in Minnesota, Ohio and Texas
The Company has a 74.5% interest in NCRA, which operates the following facilities:
Refinery McPherson, Kansas
Petroleum Terminals/Storage 2 locations in Iowa and Kansas
Pipeline McPherson, Kansas to Council Bluffs, Iowa
Jayhawk Pipeline Throughout Kansas, with branches in Oklahoma and Texas
Jayhawk Stations 40 locations located in Kansas and Oklahoma
GRAIN MARKETING
The Company owns or leases grain terminals used in the Grain Marketing
business segment at the following locations:
Davenport, Iowa (2 owned terminals)
Kalama, Washington (leased)
Kansas City, Missouri (2 leased terminals)
Myrtle Grove, Louisiana (owned)
St. Paul, Minnesota (leased)
Savage, Minnesota (owned)
Spokane, Washington (owned)
Superior, Wisconsin (owned)
Winona, Minnesota (owned)
COUNTRY OPERATIONS
In the Country Operations business segment the Company owns approximately
300 Agri Operations locations (of which some of the facilities are on leased
land), 7 feed manufacturing facilities and 2 sunflower plants (one was
purchased in September 2002) located in Minnesota, Nebraska, North Dakota,
South Dakota, Montana, Washington, Oregon and Idaho.
16
PROCESSED GRAINS AND FOODS
Within the Processed Grains and Foods business segment, the Company owns
and leases the following facilities:
Oilseed Processing and Refining
The Company owns a campus in Mankato, Minnesota, comprised of a crushing
plant, an oilseed refinery, a soyflour plant and a quality control laboratory.
A new crushing plant is currently under construction at Fairmont, Minnesota
which the Company expects to complete in the fall of 2003.
Wheat Milling
The Company owns five flour milling facilities at the following locations
that are leased to Horizon Milling, LLC:
Rush City, Minnesota
Kenosha, Wisconsin
Houston, Texas
Mount Pocono, Pennsylvania
Fairmount, North Dakota
Foods
The Company leases manufacturing facilities in New Brighton, Minnesota and
Phoenix, Arizona, and two facilities in Newton, North Carolina. In addition,
the Company owns three manufacturing facilities in Ft. Worth, Texas. A new
facility is currently under construction near Newton, North Carolina, which the
Company expects to complete during its fiscal year ended August 31, 2003. All
facilities are related to Mexican foods operations.
CORPORATE HEADQUARTERS
The Company is headquartered in Inver Grove Heights, Minnesota. The
33-acre campus consists of one main building with approximately 320,000 square
feet of office space and two smaller buildings with approximately 13,400 and
9,000 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits and administrative proceedings
incidental to its business. It is impossible at this time to estimate what the
ultimate legal and financial liability of the Company will be; nevertheless,
management believes, based on the information available to date and the
resolution of prior proceedings, that the ultimate liability of all litigation
and proceedings will not have a material impact on the financial position of
the Company taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company sold no equity securities during the three years ended August
31, 2002 that were not registered under the Securities Act of 1933, as amended.
On August 31, 2002 the Company had 9,325,374 shares of 8% Preferred Stock
outstanding. There is no active trading market for the Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information below has been derived from the
Company's consolidated financial statements for the periods indicated. The
selected consolidated financial information subsequent to August 31, 1999
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included elsewhere in this filing.
SUMMARY CONSOLIDATED FINANCIAL DATA
YEARS ENDED AUGUST 31, THREE MONTHS
------------------------------------------------------- ENDED AUGUST 31, YEAR ENDED
2002 2001 2000 1999 1998 MAY 31, 1998
------------- ------------- ------------- ------------- ------------------ -------------
(DOLLARS IN THOUSANDS)
Income Statement Data:
Revenues:
Net sales ................... $7,731,867 $7,753,012 $8,497,850 $6,381,334 $1,531,124 $8,410,030
Patronage dividends ......... 3,885 5,977 5,494 5,876 5,111 70,387
Other revenues .............. 109,459 116,254 97,471 81,180 17,706 85,127
---------- ---------- ---------- ---------- ---------- ----------
7,845,211 7,875,243 8,600,815 6,468,390 1,553,941 8,565,544
Cost of goods sold ............ 7,513,369 7,470,203 8,300,494 6,193,287 1,475,407 8,209,448
Marketing, general and
administrative ............... 187,292 184,046 155,266 152,031 34,998 126,061
---------- ---------- ---------- ---------- ---------- ----------
Operating earnings ............ 144,550 220,994 145,055 123,072 43,536 230,035
Interest ...................... 42,455 61,436 57,566 42,438 12,311 34,620
Equity (income) loss from
investments .................. (58,133) (28,494) (28,325) (22,363) 9,142 (8,381)
Minority interests ............ 15,390 35,098 24,546 10,017 3,252 6,880
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes .... 144,838 152,954 91,268 92,980 18,831 196,916
Income taxes .................. 18,700 (25,600) 3,880 6,980 2,895 19,615
---------- ---------- ---------- ---------- ---------- ----------
Net income .................... $ 126,138 $ 178,554 $ 87,388 $ 86,000 $ 15,936 $ 177,301
========== ========== ========== ========== ========== ==========
Balance Sheet Data (at end of
period):
Working capital ............... $ 249,115 $ 305,280 $ 214,223 $ 219,045 $ 284,452 $ 235,721
Net property, plant and
equipment .................... 1,057,421 1,023,872 1,034,768 968,333 915,770 868,073
Total assets .................. 3,481,727 3,057,319 3,172,680 2,787,664 2,469,103 2,436,515
Long-term debt, including
current maturities ........... 572,124 559,997 510,500 482,666 456,840 378,408
Total equities ................ 1,289,638 1,261,153 1,164,426 1,117,636 1,065,877 1,029,973
18
The selected financial statement information below has been derived from
the Company's five business segments, and Corporate and Other, for the fiscal
years ended August 31, 2002, 2001 and 2000. The intracompany sales between
segments were $683.8 million, $782.5 million and $718.2 million for the fiscal
years ended August 31, 2002, 2001 and 2000, respectively.
SUMMARY FINANCIAL DATA BY BUSINESS SEGMENT
AGRONOMY ENERGY
----------------------------------------- -----------------------------------------
2002 2001 2000 2002 2001 2000
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Revenues:
Net sales ................................. $ 808,659 $2,657,689 $2,781,243 $2,959,622
Patronage dividends ....................... $ (89) $ 196 224 458 712 311
Other revenues ............................ 5,817 6,392 4,036 2,792
---------- ---------- ---------- ---------- ---------- ----------
(89) 196 814,700 2,664,539 2,785,991 2,962,725
Cost of goods sold ......................... 764,744 2,489,352 2,549,099 2,862,715
Marketing, general and
administrative ............................ 8,957 8,503 20,832 66,731 48,432 43,332
---------- ---------- ---------- ---------- ---------- ----------
Operating (losses) earnings ................ (9,046) (8,307) 29,124 108,456 188,460 56,678
Interest ................................... (1,403) (4,529) (3,512) 16,875 25,097 27,926
Equity (income) loss from
investments ............................... (13,425) (7,360) 4,336 1,166 4,081 (856)
Minority interests ......................... 14,604 34,713 24,443
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ................. $ 5,782 $ 3,582 $ 28,300 $ 75,811 $ 124,569 $ 5,165
========== ========== ========== ========== ========== ==========
Total identifiable assets -- August 31 ..... $ 242,015 $ 230,051 $ 228,277 $1,305,828 $1,154,036 $1,379,019
========== ========== ========== ========== ========== ==========
COUNTRY OPERATIONS GRAIN MARKETING
----------------------------------------- -----------------------------------------
2002 2001 2000 2002 2001 2000
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Revenues:
Net sales ................................. $1,474,553 $1,577,268 $1,409,892 $3,787,322 $3,514,314 $3,453,807
Patronage dividends ....................... 2,572 3,683 3,830 497 840 861
Other revenues ............................ 80,789 80,479 68,436 21,902 22,964 15,440
---------- ---------- ---------- ---------- ---------- ----------
1,557,914 1,661,430 1,482,158 3,809,721 3,538,118 3,470,108
Cost of goods sold ......................... 1,471,422 1,569,884 1,404,120 3,778,838 3,514,575 3,439,863
Marketing, general and
administrative ............................ 47,995 53,417 44,136 22,213 22,396 21,412
---------- ---------- ---------- ---------- ---------- ----------
Operating earnings ......................... 38,497 38,129 33,902 8,670 1,147 8,833
Interest ................................... 13,851 15,695 12,782 4,807 8,144 8,701
Equity income from investments ............. (283) (246) (1,007) (4,257) (4,519) (6,452)
Minority interests ......................... 786 385 103
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes .......... $ 24,143 $ 22,295 $ 22,024 $ 8,120 $ (2,478) $ 6,584
========== ========== ========== ========== ========== ==========
Total identifiable assets -- August 31 ..... $ 799,711 $ 679,053 $ 660,358 $ 481,232 $ 345,696 $ 321,813
========== ========== ========== ========== ========== ==========
PROCESSED GRAINS AND FOODS CORPORATE AND OTHER
----------------------------------------- -----------------------------------------
2002 2001 2000 2002 2001 2000
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Revenues:
Net sales ................................. $ 496,084 $ 662,726 $ 584,052
Patronage dividends ....................... 260 339 100 $ 187 $ 207 $ 168
Other revenues ............................ (1,469) (238) (10) 1,845 9,013 4,996
---------- ---------- ---------- ---------- ---------- ----------
494,875 662,827 584,142 2,032 9,220 5,164
Cost of goods sold ......................... 457,538 619,184 547,234
Marketing, general and
administrative ............................ 36,930 44,870 21,462 4,466 6,428 4,092
---------- ---------- ---------- ---------- ---------- ----------
Operating earnings (losses) ................ 407 (1,227) 15,446 (2,434) 2,792 1,072
Interest ................................... 9,514 13,026 9,851 (1,189) 4,003 1,818
Equity (income) loss from
investments ............................... (41,331) (35,505) (24,367) (3) 15,055 21
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes .......... $ 32,224 $ 21,252 $ 29,962 $ (1,242) $ (16,266) $ (767)
========== ========== ========== ========== ========== ==========
Total identifiable assets -- August 31 ..... $ 439,942 $ 430,871 $ 391,286 $ 212,999 $ 217,612 $ 191,927
========== ========== ========== ========== ========== ==========
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cenex Harvest States Cooperatives (CHS Cooperatives, CHS or the Company)
is one of the nation's leading integrated agricultural companies. As a
cooperative, the Company is owned by farmers, ranchers and their local
cooperatives from the Great Lakes to the Pacific Northwest and from the
Canadian border to Texas. CHS Cooperatives buys commodities from, and provides
products and services to members and other customers. The Company provides a
wide variety of products and services, from initial agricultural inputs such as
fuels, farm supplies and crop nutrients, to agricultural outputs that include
grains and oilseeds, grain and oilseed processing, and food products.
The Company has five distinct business segments: Agronomy, Energy, Country
Operations, Grain Marketing and Processed Grains and Foods. Summary data for
each of these segments for the fiscal years ended August 31, 2002, 2001 and
2000 is shown on prior pages.
Many of the Company's businesses are highly seasonal. Due to this,
operating income will vary throughout the year, but overall revenues remain
fairly constant, partly because the Company does not consolidate revenues in
the Agronomy segment as explained below. Overall, the Company's income is
generally lowest during the second fiscal quarter and highest during the third
fiscal quarter. Certain business segments are subject to varying seasonal
fluctuations. For example, Agronomy and Country Operations segments experience
higher volumes and income during the spring planting season and in the fall,
which corresponds to harvest. The Grain Marketing segment, as well, is somewhat
subject to fluctuations in revenue and earnings based on producer harvests. The
Company's Energy segment generally experiences higher revenues and
profitability in certain operating areas, such as refined products, in the
summer when gasoline and diesel usage is highest. Other energy products, such
as propane, experience higher revenues and profitability during the winter
heating season.
While the Company's sales and operating income are derived from businesses
and operations which are wholly-owned and majority-owned, a portion of business
operations are conducted through companies in which the Company holds ownership
interests of 50% or less. The Company accounts for these investments primarily
using the equity method of accounting, wherein CHS Cooperatives records as
equity income from investments its proportionate share of income or loss
reported by the entity, without consolidating the revenues and expenses of the
entity in the Company's consolidated statements of operations. These
investments principally include the Company's 25% ownership in Agriliance, LLC
(Agriliance), the 50% ownership in TEMCO, LLC, the 50% ownership in United
Harvest, LLC, the 24% ownership in Horizon Milling, LLC (Horizon) and the 50%
ownership in Ventura Foods, LLC (Ventura).
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED AUGUST 31, 2002 AND 2001
NET INCOME. Consolidated net income for the year ended August 31, 2002 was
$126.1 million compared to $178.6 million for the year ended August 31, 2001,
which represents a $52.5 million (29%) decrease. This decrease in profitability
is primarily attributable to a tax benefit of $34.2 million in the prior year
and decreased earnings in the Company's Energy segment compared to the year
ended August 31, 2001.
NET SALES. Consolidated net sales of $7.7 billion for the year ended
August 31, 2002 decreased $21.1 million compared to the year ended August 31,
2001.
Energy net sales of $2.6 billion decreased $119.1 million (4%) during the
year ended August 31, 2002 compared to the year ended August 31, 2001. Sales
for the year ended August 31, 2002 and 2001 were $2,657.7 million and $2,781.2
million, respectively. The Company eliminated all intracompany sales from the
Energy segment to the Country Operations segment of $67.4 million and $71.8
million for the years ended August 31, 2002 and 2001, respectively. Prior to
December 31, 2000 the company consolidated the business activity of Cooperative
Refining LLC (CRLLC), a refining joint venture into the Energy segment. The
Company held a 58% interest in CRLLC, which was dissolved effective December
31, 2000. The decrease in Energy sales is primarily due to this dissolution.
The decrease was partially offset by an increase in refined fuel sales that
were not part of CRLLC, which consisted of a 49% increase in volume, which was
partially offset by a sales price decrease of $0.21 per gallon
20
compared to the year ended August 31, 2001. The average sales price of propane
decreased by $0.21 per gallon, which was partially offset by a volume increase
of 28% compared to the year ended August 31, 2001. Refined fuels and propane
volume increases were primarily a result of acquisitions, with the most
substantial acquisition taking place in November 2001, when the Company
purchased for $39.0 million, the wholesale energy business of Farmland
Industries, Inc. (Farmland), as well as all interest in Country Energy, LLC a
joint venture formerly with Farmland.
Country Operations farm supply sales of $612.5 million decreased by $51.3
million (8%) during the year ended August 31, 2002 compared to the year ended
August 31, 2001. The decrease is primarily due to a reduction in the average
retail sales price of energy products compared to the prior year.
Company-wide grain and oilseed net sales of $4.0 billion increased $315.7
million (8%) during the year ended August 31, 2002 compared to the year ended
August 31, 2001. Sales for the year ended August 31, 2002 were $3,787.3 million
and $862.0 million from Grain Marketing and Country Operations segments,
respectively. Sales for the year ended August 31, 2001 were $3,514.3 million
and $913.4 million from Grain Marketing and Country Operations segments,
respectively. The Company eliminated all intracompany sales from the Country
Operations segment to the Grain Marketing segment, of $615.8 million and $709.9
million, for the years ended August 31, 2002 and 2001, respectively. The net
increase in sales was primarily due to an increase of $0.60 (20%) per bushel in
the average sales price of all grain and oilseed marketed by the Company, which
was partially offset by a decrease in grain volume of 9% compared to the prior
year.
Processed Grains and Foods segment net sales of $495.5 million decreased
$166.4 million (25%) during the year ended August 31, 2002 compared to the year
ended August 31, 2001. Intracompany sales between segments were eliminated. The
decrease in sales is primarily due to the formation of Horizon, a wheat flour
milling and processing joint venture that was formed in January 2002. After
that date, the Company accounted for operating results of Horizon under the
equity method of accounting. The Company has a 24% interest in Horizon, and
Cargill, Incorporated (Cargill) has a 76% interest. The Company is leasing five
mills and related equipment to Horizon.
PATRONAGE DIVIDENDS. Patronage dividends received of $3.9 million
decreased $2.1 million (35%) during the year ended August 31, 2002 compared to
the year ended August 31, 2001, primarily due to reduced patronage dividends
from cooperatives.
OTHER REVENUES. Other revenues of $109.5 million decreased $6.8 million
(6%) during the year ended August 31, 2002 compared to the year ended August
31, 2001. The most significant changes were within the Energy segment, and
Corporate and Other compared to the prior year.
COST OF GOODS SOLD. Cost of goods sold of $7.5 billion increased $43.2
million (1%) during the year ended August 31, 2002, compared to the year ended
August 31, 2001. The cost of all grains and oilseed procured by the Company
through its Grain Marketing and Country Operations segments increased 9%
compared to the year ended August 31, 2001 primarily due to a $0.59 (20%)
average cost per bushel increase, which was partially offset by a 9% decrease
in volume. This increase was partially offset by decreases in cost of goods
sold in the Processed Grains and Foods, Country Operations and Energy segments.
Processed Grains and Foods segment cost of goods sold decreased by 26% compared
to the year ended August 31, 2001, primarily due to the formation of Horizon,
as previously described. Country Operations segment farm supply cost of goods
sold decreased by 9% during the year ended August 31, 2002 compared to the
prior year primarily due to the reduced cost of energy products. The Energy
segment cost of goods sold decreased by 2% during the year ended August 31,
2002 compared to the prior year, primarily due to the dissolution of CRLLC, as
previously discussed. However, the volumes of refined fuels that were not
associated with the dissolution of CRLLC increased by 49%, which was partially
offset by an average cost decrease of $0.18 per gallon compared to the year
ended August 31, 2001. The average cost of propane decreased by $0.19 per
gallon, which was partially offset by a 28% volume increase compared to the
prior year. These volume increases were primarily the result of acquisitions.
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses of $187.3 million for the year ended August 31, 2002
increased by $3.2 million (2%) compared to the year
21
ended August 31, 2001. The net increase is primarily due to additional expenses
resulting from Energy segment acquisitions, which was partially offset by
reduced expenses within the Processed Grains and Foods segment due to the
formation of Horizon described earlier.
INTEREST. Interest expense of $42.5 million for the year ended August 31,
2002 decreased by $19.0 million (31%) compared to the year ended August 31,
2001. The average level of short-term borrowings decreased 24% and the average
short-term interest rate decreased 3.6% during the year ended August 31, 2002
compared to the prior year. The net decrease in interest expense from
short-term borrowings was partially offset by an increase due to an additional
$80.0 million of long-term debt from a private placement, of which $25.0
million and $55.0 million were issued in January and March 2001, respectively.
EQUITY INCOME FROM INVESTMENTS. Equity income from investments of $58.1
million for the year ended August 31, 2002 increased by $29.6 million (104%)
compared to the year ended August 31, 2001. The increase was primarily
attributable to decreased losses from Corporate and Other technology
investments of $15.1 million that was dissolved. In addition, earnings from
Agronomy, and Processed Grains and Foods segments investments increased in
fiscal year 2002 by $6.1 million and $5.8 million, respectively compared to the
prior year.
MINORITY INTERESTS. Minority interests of $15.4 million for the year ended
August 31, 2002 decreased by $19.7 million (56%) compared to the year ended
August 31, 2001. The change in minority interests during the year ended August
31, 2002 compared to the prior year was primarily a result of less profitable
operations within the Company's majority-owned subsidiaries and the dissolution
of CRLLC. Substantially all minority interests relate to National Cooperative
Refinery Association (NCRA) an approximately 74.5% owned subsidiary.
INCOME TAXES. Income tax expense of $18.7 million for the year ended
August 31, 2002 compares to a tax benefit of $25.6 million for the year ended
August 31, 2001, resulting in effective tax rates of a 12.9% expense and a
16.7% benefit, respectively. The federal and state statutory rate applied to
nonpatronage business activity was 38.9% for the years ended August 31, 2002
and 2001. An income tax benefit of $34.2 million for the year ended August 31,
2001 resulted from a change in the tax rate applied to the Company's cumulative
temporary differences between income for financial statement purposes and
income used for tax reporting purposes. The Company's calculation of its
patronage distribution using earnings for financial statement purposes rather
than tax basis earnings prompted the rate change. The Company recorded income
tax expense of $18.7 million for the year ended August 31, 2002, which compares
to $8.6 million for the year ended August 31, 2001, exclusive of the $34.2
million benefit related to the change in patronage determination described
above. The income taxes and effective tax rate vary each year based upon
profitability and nonpatronage business activity during each of the comparable
years.
COMPARISON OF THE YEARS ENDED AUGUST 31, 2001 AND 2000
NET INCOME. The Company's consolidated net income of $178.6 million for
the year ended August 31, 2001 represents a $91.2 million (104%) increase
compared to the year ended August 31, 2000. This net increase in profitability
is primarily attributable to an increase in income from the Company's Energy
segment, which was partially offset by decreases from the Agronomy and Grain
Marketing segments, and Corporate and Other.
NET SALES. Consolidated net sales of $7.8 billion for the year ended
August 31, 2001 represent a $744.8 million (9%) decrease compared to the year
ended August 31, 2000.
The Company did not record Agronomy sales during the year ended August 31,
2001 compared to sales of $768.4 million net of intracompany elimination of
$40.3 million from the Agronomy segment to the Country Operations segment for
the year ended August 31, 2000. During 2000, the Company exchanged its agronomy
operations for an ownership interest in Agriliance, LLC, owned indirectly
through United Country Brands, LLC. As of July 31, 2000, the Company recorded
results of its 25% ownership in Agriliance, LLC on the equity method, and as
such, income or losses are reflected in equity income from investments.
22
Energy net sales of $2.7 billion decreased $194.5 million (7%) during the
year ended August 31, 2001 compared to the year ended August 31, 2000. Sales
for the years ended August 31, 2001 and 2000 were $2,781.2 million and $2,959.6
million, respectively. The Company eliminated all intracompany sales from the
Energy segment to the Country Operations segment of $71.8 million and $55.7
million for the years ended August 31, 2001 and 2000, respectively. The
decrease is primarily attributable to a net volume decrease compared to the
year ended August 31, 2000 due to the dissolution of CRLLC effective December
31, 2000. The Company owned 58% of CRLLC through its ownership in NCRA and
therefore consolidated CRLLC business activity up to the time of dissolution.
The decrease related to the dissolution was partially offset by an increase in
refined fuels that were not part of CRLLC of $0.12 per gallon in the average
sales price and 2% in volume compared to the year ended August 31, 2000. In
addition, propane volumes increased by 39% and the average sales price of
propane increased by $0.21 per gallon compared to the year ended August 31,
2000.
Country Operations farm supply sales of $663.9 million increased $73.0
million (12%) for the year ended August 31, 2001 compared to the year ended
August 31, 2000. The net increase is primarily attributable to average sales
price increases in agronomy and energy products and additional volumes from
acquisitions.
Company-wide grain and oilseed net sales of $3.7 billion increased $67.0
million (2%) during the year ended August 31, 2001 compared to the year ended
August 31, 2000. Sales for the year ended August 31, 2001 were $3,514.3 million
and $913.4 million from Grain Marketing and Country Operations segments,
respectively. Sales for the year ended August 31, 2000 were $3,453.8 million
and $819.0 million from Grain Marketing and Country Operations segments,
respectively. The Company eliminated all intracompany sales from the Country
Operations segment to the Grain Marketing segment of $709.9 million and $622.0
million for the years ended August 31, 2001 and 2000, respectively. This
increase in sales was primarily due to an increase of $0.06 (2%) per bushel in
the average sales price while volumes were essentially unchanged on all grain
and oilseed marketed by the Company compared to the prior year.
Processed Grains and Foods segment net sales of $661.9 million increased
$78.1 million (12%) for the year ended August 31, 2001 compared to the year
ended August 31, 2000. Intracompany sales between segments were eliminated.
This increase is primarily due to foods acquisitions, which increased sales by
$47.3 million compared to the prior year. In addition, sales of processed wheat
increased by $22.6 million compared to the prior year, primarily due to
increased volumes from the acquisition of a wheat mill in April 2000 and an
increase in the average sales price of all wheat products. Sales of processed
oilseed increased by $8.8 million primarily due to volume and price increases
compared to the prior year.
OTHER REVENUES. Other revenues of $116.3 million increased $18.8 million
(19%) for the year ended August 31, 2001 compared to the year ended August 31,
2000. The most significant increases were within the Country Operations and
Grain Marketing segments. These increases were partially offset by a prior year
gain of $7.4 million from the sale of 1.455% of the Company's economic interest
in Agriliance, LLC which was recorded in March 2000 in the Agronomy segment.
COST OF GOODS SOLD. Cost of goods sold of $7.5 billion decreased $830.3
million (10%) during the year ended August 31, 2001 compared to the year ended
August 31, 2000. The decrease was primarily attributable to the impact of
recording the Company's share of its agronomy operations on the equity method
in 2001 as previously discussed, which caused a reduction in cost of goods sold
of $764.7 million compared to the year ended August 31, 2000. In addition,
during the year ended August 31, 2001 the cost of goods sold of the Energy
segment decreased by 11% primarily due to a decrease in volume as a result of
the dissolution of CRLLC. The decrease was partially offset by volume and price
increases on refined fuels purchases that were not part of CRLLC, and propane
products. The cost of all grain and oilseed procured by the Company through its
Grain Marketing and Country Operations segments increased 2% compared to the
previous year end primarily due to a $0.06 (2%) cost per bushel increase with
volumes remaining essentially unchanged. Country Operations segment farm supply
cost of goods sold increased by 14% during the year ended August 31, 2001
compared to the year ended August 31, 2000, primarily due to cost increases in
agronomy and energy products and higher volumes due to acquisitions. Cost of
goods sold within the Processed Grains and Foods segment increased by 13% due
to volume increases primarily as a result of acquisitions.
23
MARKETING, GENERAL AND ADMINISTRATIVE. Marketing, general and
administrative expenses of $184.0 million for the year ended August 31, 2001
increased by $28.7 million (19%) compared to the year ended August 31, 2000.
This increase is primarily due to increases in expenses within the Processed
Grains and Foods segment of $23.4 million, which is primarily due to additional
expenses of $12.9 million related to acquisitions and a loss on assets held for
disposal of $7.5 million related to the closing of a wheat mill compared to the
prior year. In addition, expenses within the Country Operations segment
increased by $9.3 million primarily due to acquisitions. These increases were
partially offset by a decrease in expenses of $12.3 million in the Agronomy
segment.
INTEREST. Interest expense of $61.4 million for the year ended August 31,
2001 increased by $3.8 million (7%) compared to the year ended August 31, 2000.
The average level of short-term borrowings increased 11% and the average
short-term interest rate decreased 0.55% during the year ended August 31, 2001
compared to the previous year. Interest expense also increased due to an
additional $80.0 million of long-term debt from a private placement of which
$25.0 million and $55.0 million were issued in January and March 2001,
respectively.
EQUITY INCOME FROM INVESTMENTS. Equity income from investments of $28.5
million for the year ended August 31, 2001 increased by $0.2 million (1%)
compared to the year ended August 31, 2000. The increase was primarily
attributable to increases in earnings from investments within the Agronomy and
Processed Grains and Foods segments of $11.7 million and $11.1 million,
respectively, during the year ended August 31, 2001 compared to the prior year.
The Company records its 25% share of its Agronomy segment investment in
Agriliance, LLC on the equity method as previously discussed. The net increase
was partially offset by losses from technology investments of $15.1 million and
decreased earnings of $4.9 million and $1.9 million from Energy and Grain
Marketing segment investments, respectively.
MINORITY INTERESTS. Minority interests of $35.1 million for the year ended
August 31, 2001 increased by $10.6 million (43%) compared to the year ended
August 31, 2000. Substantially all minority interests were related to NCRA.
This net change in minority interests was reflective of more profitable
operations within the Company's majority-owned subsidiaries during the year
ended August 31, 2001 compared to the previous year.
INCOME TAXES. An income tax benefit of $25.6 million for the year ended
August 31, 2001 compares to expense of $3.9 million for the year ended August
31, 2000 resulting in effective tax rates of 16.7% benefit and 4.3% expense,
respectively. The federal and state statutory rate applied to nonpatronage
business activity was 38.9% for the years ended August 31, 2001 and 2000. An
income tax benefit of $34.2 million for the year ended August 31, 2001 resulted
from a change in the tax rate applied to the Company's cumulative temporary
differences between income for financial statement purposes and income used for
tax reporting purposes. The Company's change in the calculation of its
patronage distribution using earnings for financial statement purposes rather
than tax basis earnings prompted the rate change. The Company recorded an
income tax expense of $8.6 million and $3.9 million for the years ended August
31, 2001 and 2000 excluding the effects of the adjustment. The income taxes and
effective tax rates vary each year based upon profitability and nonpatronage
business activity during each of the comparable years.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $41.7 million during
the year ended August 31, 2002. Net income of $126.1 million and net non-cash
expenses of $62.4 million were offset by increased working capital requirements
of $230.2 million. This increase in working capital requirements is primarily
due to stronger commodity prices.
Operating activities of the Company provided net cash of $252.8 million
during the year ended August 31, 2001. Net income of $178.6 million, net
non-cash expenses of $50.5 million and decreased working capital requirements
of $23.7 million provided this net cash from operating activities.
Operating activities of the Company provided net cash of $128.4 million
during the year ended August 31, 2000. Net income of $87.4 million and net
non-cash expenses of $79.7 million were partially offset by increased working
capital requirements of $38.7 million.
24
CASH FLOWS FROM INVESTING ACTIVITIES
For the years ended August 31, 2002, 2001 and 2000, the net cash flows
used in the Company's investing activities totaled $141.8 million, $69.1
million and $184.9 million, respectively.
The acquisition of property, plant and equipment comprised the primary use
of cash totaling $140.2 million, $97.6 million and $153.8 million for the years
ended August 31, 2002, 2001 and 2000, respectively. For the year ended August
31, 2003 the Company expects to spend approximately $216.8 million for the
acquisition of property, plant and equipment, which includes $57.0 million of
expenditures for the construction of an oilseed processing facility in
Fairmont, Minnesota. Total expenditures related to the construction of the
facility are projected to be approximately $90.0 million, of which $22.9
million was used for construction through the year ended August 31, 2002.
Capital expenditures primarily related to the Environmental Protection Agency
low sulfur fuel regulations required by 2006, are expected to be approximately
$340 million in total for the Company's Laurel, Montana and NCRA's McPherson,
Kansas refineries over the next four years. It is expected that over 80% of the
costs will be incurred at NCRA.
Investments made during the years ended August 31, 2002, 2001 and 2000
totaled $6.2 million, $14.2 million and $35.3 million, respectively.
Investments during the year ended August 31, 2000 included the purchase of an
additional 10% interest in Ventura Foods, LLC, the Company's foods joint
venture, for $25.6 million. The Company has a 50% interest in that joint
venture.
Acquisitions of intangibles were $29.5 million, $7.3 million and $26.5
million for the years ended August 31, 2002, 2001 and 2000, respectively.
During the year ended August 31, 2002, $26.4 million of the acquisitions of
intangibles were related to the purchase of Farmland's interest in its
wholesale energy business, as previously discussed, and represents trademarks,
tradenames and non-compete agreements. During the previous two years, the
intangibles resulted primarily from the purchase of Rodriguez Festive Foods,
Inc. in fiscal 2001 and the purchase of Sparta Foods, Inc. and the wholesale
propane marketing business of Williams Energy Marketing and Trading Company in
fiscal 2000.
During the year ended August 31, 2002 the changes in notes receivable
resulted in a decrease of $22.0 million primarily from related party notes
receivables at NCRA from its minority owners, Growmark, Inc. and MFA Oil
Company. During the years ended August 31, 2001 and 2000 the changes in notes
receivable resulted in increases of $0.5 million and $0.6 million,
respectively.
Distributions to minority owners for the years ended August 31, 2002, 2001
and 2000 were $7.4 million, $19.3 million and $21.1 million, respectively, and
were primarily related to NCRA. For the years ended August 31, 2001 and 2000,
NCRA's distributions also included the distributions made by CRLLC.
Partially offsetting cash outlays in investing activities were proceeds
from the disposition of property, plant and equipment of $20.2 million, $35.3
million and $7.7 million for the years ended August 31, 2002, 2001 and 2000,
respectively. During the year ended August 31, 2002, the proceeds were
primarily from disposals of propane plants in the Energy segment and of
non-strategic agri-operations locations in the Country Operations segment.
During the year ended August 31, 2001, the proceeds were primarily from the
disposal of feed plants and other assets in the Country Operations segment.
Also partially offsetting cash usages were distributions received from joint
ventures and investments totaling $44.0 million, $31.8 million and $43.9
million for the years ended August 31, 2002, 2001 and 2000, respectively.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company finances its working capital needs through short-term lines of
credit with a syndication of banks. In May 2002, the Company renewed its
364-day credit facility of $550.0 million committed. In addition to these lines
of credit, the Company has a 364-day credit facility dedicated to NCRA, with a
syndication of banks in the amount of $30.0 million committed. On August 31,
2002 and 2001, the Company had total short-term indebtedness outstanding on
these various facilities and other short-term notes payable totaling $332.5
million and $97.2 million, respectively. The increase from 2001 to 2002 is
primarily due to increases in inventories in the Grain Marketing and Energy
segments related to higher grain prices and the purchase of Farmland's
wholesale energy business, discussed previously.
25
In June 1998, the Company established a five-year revolving credit
facility with a syndication of banks, with $200.0 million committed. On August
31, 2002 and 2001 the Company had outstanding balances on this facility of
$75.0 million and $45.0 million, respectively. The outstanding balance on
August 31, 2002 includes $30.0 million, which was drawn during the first
quarter of the fiscal year.
The Company has financed its long-term capital needs in the past,
primarily for the acquisition of property, plant and equipment, with long-term
agreements through the banks for cooperatives. In June 1998, the Company
established a long-term credit agreement through the banks for cooperatives.
This facility committed $200.0 million of long-term borrowing capacity to the
Company, with repayments through fiscal year 2009. The amount outstanding on
this credit facility was $144.3 million and $150.9 million on August 31, 2002
and 2001, respectively. Repayments of $6.6 million were made on this facility
during each of the years ended August 31, 2002 and 2001.
Also in June 1998, the Company issued a private placement with several
insurance companies for long-term debt in the amount of $225.0 million.
Repayments will be made in equal annual installments of $37.5 million each in
the years 2008 through 2013.
In January 2001, the Company entered into a note purchase and private
shelf agreement with Prudential Insurance Company. The long-term note in the
amount of $25.0 million will be repaid in equal annual installments of
approximately $3.6 million, in the years 2005 through 2011. A subsequent note
for $55.0 million was issued in March 2001, related to the private shelf
facility. The $55.0 million note will be repaid in equal annual installments of
approximately $7.9 million, in the years 2005 through 2011.
The Company, through NCRA, had revolving term loans outstanding of $18.0
million and $21.0 million for the years ended August 31, 2002 and 2001,
respectively. Repayments of $3.0 million were made during each of the years
ended August 31, 2002 and 2001.
On August 31, 2002, the Company had total long-term debt outstanding of
$572.1 million, of which $255.0 million was bank financing, $305.0 million was
private placement proceeds and $12.1 million was industrial development revenue
bonds, capitalized leases and other notes and contracts payable. On August 31,
2001, the Company had long-term debt outstanding of $560.0 million. The
aggregate amount of long-term debt payable as of August 31, 2002 was as follows
(dollars in thousands):
2002 ............... $ 89,032
2003 ............... 15,079
2004 ............... 34,511
2005 ............... 34,938
2006 ............... 41,709
Thereafter ......... 356,855
--------
$572,124
========
During the years ended August 31, 2002, 2001 and 2000, the Company
borrowed on a long-term basis $30.0 million, $116.9 million and $49.9 million,
respectively, and during the same periods repaid long-term debt of $18.0
million, $67.4 million and $22.5 million, respectively.
On October 18, 2002 (fiscal year 2003) the Company entered into a private
placement with several insurance companies for long-term debt in the amount of
$175.0 million which was layered into two series. The first series of $115.0
million has an interest rate of 4.96% and will be repaid in equal semi-annual
installments of approximately $8.8 million during the years 2007 through 2013.
The second series of $60.0 million has an interest rate of 5.60% and will be
repaid in equal semi-annual installments of approximately $4.6 million during
fiscal years 2012 through 2018.
In accordance with the bylaws and by action of the Board of Directors,
annual net earnings from patronage sources are distributed to consenting
patrons following the close of each fiscal year. Effective September 1, 2000,
patronage refunds are calculated based on earnings for financial statement
purposes rather than based on amounts reportable for federal income tax
purposes as had been the Company's practice prior to this date. This change was
authorized through a bylaw amendment at the Company's annual meeting on
December 1, 2000. The patronage earnings from the fiscal year ended August 31,
26
2001 were distributed in January 2002. The cash portion of this distribution,
deemed by the Board of Directors to be 30% was $40.1 million. During the years
ended August 31, 2001 and 2000, the Company distributed cash patronage of $26.1
million and $17.9 million, respectively.
Cash patronage for the year ended August 31, 2002, deemed by the Board of
Directors to be 30% and to be distributed in fiscal year 2003, is expected to
be approximately $27.9 million and is classified as a current liability on the
August 31, 2002 consolidated balance sheet.
The current equity redemption policy, as authorized by the Board of
Directors, allows for the redemption of capital equity certificates held by
inactive direct members and patrons and active direct members and patrons at
age 72 or death that were of age 61 or older on June 1, 1998. For active direct
members and patrons who were of age 60 or younger on June 1, 1998, and member
cooperatives, equities older than 10 years will be redeemed annually based on a
prorata formula where the numerator is dollars available for such purpose as
determined by the Board of Directors, and the denominator is the sum of the
patronage certificates older than 10 years held by such eligible members and
patrons. For the years ended August 31, 2002, 2001 and 2000, the Company
redeemed patronage related equities in accordance with authorization from the
Board of Directors in the amounts of $31.1 million, $18.7 million and $28.7
million, respectively. Total redemptions related to the year ended August 31,
2002, to be distributed in fiscal year 2003, are expected to be approximately
$28.6 million and are classified as a current liability on the August 31, 2002
consolidated balance sheet.
During the year ended May 31, 1997, the Company offered securities in the
form of Equity Participation Units (EPUs) in its Wheat Milling and Oilseed
Processing and Refining Defined Business Units. These EPUs gave the holder the
right and obligation to deliver to the Company a stated number of bushels in
return for a prorata share of the undiluted grain based patronage earnings of
these respective Defined Business Units. The offering resulted in the issuance
of such equity with a stated value of $13,870,000 and generated additional
capital and cash of $10,837,000, after issuance cost and conversion privileges.
Conversion privileges allowed a member to elect to use outstanding patrons'
equities for the payment of up to one-sixth the purchase price of the EPUs.
During 2001, the Company's Board of Directors adopted a resolution to issue, at
no charge, to each Defined Member of the Oilseed Processing and Refining
Defined Business Unit an additional 1/4 Equity Participation Unit (EPU) for
each EPU held, due to increased crush volume.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Defined Investment Program. The Company redeemed
all of the EPUs and allocated the assets of the Oilseed Processing and Refining
and Wheat Milling Defined Business Units to the Company as provided in the
plan. Due to loss carry-forwards incurred by the Wheat Milling Defined Business
Unit the plan also provided for the cancellation of all outstanding Preferred
Capital Certificates issued to the EPU holders, totaling $0.2 million. The plan
further provided to the Oilseed Processing Defined Member EPU holders for the
redemption of all outstanding Preferred Capital Certificates issued and a 100%
cash distribution during 2002 for the patronage refunds earned for the fiscal
year ended August 31, 2001.
The Board of Directors authorized the sale and issuance of up to
50,000,000 shares of 8% Preferred Stock at a price of $1.00 per share. The
Company filed a registration statement on Form S-2 with the Securities and
Exchange Commission registering the Preferred Stock. The registration statement
was declared effective on October 31, 2001 and sales of the Preferred Stock
were $9.3 million through August 31, 2002. Expenses related to the issuance of
the Preferred Stock were $3.4 million through the same period. Sales of the
preferred shares have been suspended.
OFF BALANCE SHEET FINANCING ARRANGEMENTS
LEASE COMMITMENTS:
The Company has commitments under operating leases for various refinery,
manufacturing and transportation equipment, rail cars, vehicles and office
space. Some leases include purchase options at not less than fair market value
at the end of the leases.
Total rental expense for all operating leases, net of rail car mileage
credits received from the railroad and sublease income for the years ended
August 31, 2002, 2001 an 2000 was $30.2 million, $35.5 million and $38.0
million, respectively.
27
Minimum future lease payments, required under noncancellable operating
leases as of August 31, 2002, were as follows:
TOTAL
----------------------
(DOLLARS IN MILLIONS)
2003 ..................... $ 33.0
2004 ..................... 24.2
2005 ..................... 16.0
2006 ..................... 8.9
2007 ..................... 5.1
Thereafter ............... 4.8
-------
Total minimum future lease
payments ................. $ 92.0
=======
GUARANTEES:
The Company is a guarantor for lines of credit for related companies
totaling up to $86.2 million, of which $45.1 million was outstanding as of
August 31, 2002. The Company's bank covenants allow maximum guarantees of
$100.0 million. All outstanding loans with respective creditors are current as
of August 31, 2002.
DEBT:
There is no material off balance sheet debt.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements requires
the use of estimates as well as management's judgments and assumptions
regarding matters that are subjective, uncertain or involve a high degree of
complexity, all of which affect the results of operations and financial
condition for the periods presented. The Company believes that of its
significant accounting policies, the following may involve a higher degree of
estimates, judgments, and complexity.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The allowances for doubtful accounts are maintained at a level considered
appropriate by management based on analyses of credit quality for specific
accounts, historical trends of charge-offs and recoveries, and current and
projected economic and market conditions. Different assumptions, changes in
economic circumstances or the deterioration of the financial condition of the
Company's customers could result in additional provisions to the allowances for
doubtful accounts and increased bad debt expense.
INVENTORY VALUATION AND RESERVES
Grain, processed grain, oilseed and processed oilseed are stated at net
realizable values, which approximates market values. All other inventories are
stated at the lower of cost or market. The cost of certain energy inventories
(wholesale refined products, crude oil and asphalt) are determined on the
last-in, first-out (LIFO) method; all other energy inventories are valued on
the first-in, first-out (FIFO) and average cost methods. Estimates are used in
determining the net realizable value of grain and oilseed and processed grain
and oilseed inventories. These estimates include the measurement of grain in
bins and other storage facilities, which use formulas in addition to actual
measurements taken to arrive at appropriate quantity. Other determinations made
by management include quality of the inventory and estimates for freight. Grain
shrink reserves and other reserves that account for spoilage also affect
inventory valuation. If estimates regarding the valuation of inventory or the
adequacy of reserves are less favorable than management's assumptions, then
additional reserves or write-downs of inventory may be required.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on energy, grain and
oilseed transactions to the extent considered
28
practicable for minimizing risk. The Company does not use derivatives for
speculative purposes. Futures and options contracts used for hedging are
purchased and sold through regulated commodity exchanges. Fluctuations in
inventory valuations, however, may not be completely hedged, due in part to the
absence of satisfactory hedging facilities for certain commodities and
geographical areas and in part to the Company's assessment of its exposure from
expected price fluctuations. The Company also manages its risks by entering
into fixed price purchase contracts with pre-approved producers and
establishing appropriate limits for individual suppliers. Fixed price sales
contracts are entered into with customers of acceptable creditworthiness, as
internally evaluated. The Company is exposed to loss in the event of
nonperformance by the counterparties to the contracts. However, the Company
does not anticipate nonperformance by counterparties. The fair value of futures
and options contracts are determined primarily from quotes listed on regulated
commodity exchanges. Fixed price purchase and sales contracts are with various
counterparties, and the fair values of such contracts are determined from the
market price of the underlying product.
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, a standard
related to the accounting for derivative transactions and hedging activities,
effective September 1, 2000. Such accounting is complex, evidenced by
significant interpretations of the primary accounting standard, which continues
to evolve.
PENSION AND POSTRETIREMENT BENEFITS
Pension and other postretirement benefits costs and obligations are
dependent on assumptions used in calculating such amounts. These assumptions
include discount rates, health care cost trend rates, benefits earned, interest
cost, expected return on plan assets, mortality rates, and other factors. In
accordance with accounting principles generally accepted in the United States
of America, actual results that differ from the assumptions are accumulated and
amortized over future periods and, therefore, generally affect recognized
expense and the recorded obligation in future periods. While management
believes that the assumptions used are appropriate, differences in actual
experience or changes in assumptions may affect the Company's pension and other
postretirement obligations and future expense.
DEFERRED TAX ASSETS
The Company assesses whether a valuation allowance is necessary to reduce
its deferred tax assets to the amount that it believes is more likely than not
to be realized. While the Company has considered future taxable income as well
as other factors in assessing the need for the valuation allowance, in the
event that the Company were to determine that it would not be able to realize
all or part of its net deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to income in the period such determination
was made.
LONG-LIVED ASSETS
Depreciation and amortization of the Company's property, plant and
equipment is provided on the straight-line method by charges to operations at
rates based upon the expected useful lives of individual or groups of assets.
Economic circumstances or other factors may cause management's estimates of
expected useful lives to differ from actual.
All long-lived assets, including property plant and equipment, goodwill,
investments in unconsolidated affiliates and other identifiable intangibles,
are evaluated for impairment on the basis of undiscounted cash flows at least
annually for goodwill, and whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impaired asset
is written down to its estimated fair market value based on the best
information available. Estimated fair market value is generally measured by
discounting estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows and may differ from actual.
ENVIRONMENTAL LIABILITIES
Liabilities related to remediation of contaminated properties are
recognized when the related costs are considered probable and can be reasonably
estimated. Estimates of these costs are based on current available facts,
existing technology, undiscounted site-specific costs and currently enacted
laws and regulations. Recoveries, if any, are recorded in the period in which
recovery is considered probable. It is
29
often difficult to estimate the cost of environmental compliance, remediation
and potential claims given the uncertainties regarding the interpretation and
enforcement of applicable environmental laws and regulations, the extent of
environmental contamination and the existence of alternate cleanup methods. All
liabilities are monitored and adjusted as new facts or changes in law or
technology occur and management believes adequate provisions have been made for
environmental liabilities. Changes in facts or circumstances may have an
adverse impact on the Company's financial results.
EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS
The Company believes that inflation and foreign currency fluctuations have
not had a significant effect on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective September 1, 2001 the Company adopted the provisions of
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". The adoption
of this pronouncement did not have a material impact on the Company's
consolidated financial statements.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The adoption of this
statement does not have a material affect on the Company.
The FASB also issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
retains and expands upon the fundamental provisions of existing guidance
related to the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. Generally, the provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The adoption of this
statement does not have a material affect on the Company.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities". This statement addresses financial accounting and
reporting for costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a disposal activity
covered by SFAS No. 144. The costs addressed in SFAS No. 146 include, but are
not limited to, termination benefits, costs to terminate a contract that is not
a capital lease and costs to consolidate facilities or relocate employees. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
The Company utilizes futures and options contracts offered through
regulated commodity exchanges to reduce risk. The Company is exposed to risk of
loss in the market value of inventories and fixed or partially fixed purchase
and sales contracts. So as to reduce that risk, the Company generally takes
opposite and offsetting positions using futures contracts or options.
Certain commodities cannot be hedged with futures or options contracts
because such contracts are not offered for these commodities by regulated
commodity exchanges. Inventories and purchase contracts for those commodities
are hedged with forward sales contracts to the extent practical so as to arrive
at a net commodity position within the formal position limits set by the
Company and deemed prudent for each of those commodities. Commodities for which
futures contracts and options are available are also typically hedged first in
this manner, with futures and options used to hedge within position limits that
portion not covered by forward contracts. These futures and options contracts
and forward purchase and sales cash contracts used to hedge against price level
change risks are effective economic hedges of specified risks, but they are not
designated as and accounted for as hedging instruments for accounting purposes.
30
Unrealized gains and losses on futures contracts and options used as
economic hedges of grain and oilseed inventories and fixed price contracts are
recognized in cost of goods sold for financial reporting. Inventories and fixed
price contracts are marked to market so that gains or losses on the derivative
contracts are offset by gains or losses on inventories and fixed priced
contracts during the same accounting period.
Through August 31, 2000, unrealized gains and losses on futures contracts
and options used to hedge energy inventories and fixed price contracts were
deferred until such futures contracts and options were closed. Effective
September 1, 2000 those gains and losses are recognized as a component of net
income for financial reporting. The inventories hedged with these derivatives
are valued at lower of cost or market, and effective September 1, 2000, the
fixed price contracts are marked to market. Some derivatives related to propane
in the Energy segment meet the normal purchase and sales exemption, and thus
are not required to be marked to fair value.
A 10% adverse change in market prices would not materially affect the
Company's results of operations, financial position or liquidity, since the
Company's operations have effective economic hedging requirements as a general
business practice.
INTEREST RATE RISK
The Company manages interest expense using a mix of fixed and floating
rate debt. These debt instruments are carried at amounts approximating
estimated fair value. Short-term debt used to finance inventories and
receivables is represented by notes payable within thirty days or less so that
the blended interest rate to the Company for all such notes approximates
current market rates. Long-term debt used to finance non-current assets carries
various fixed interest rates and is payable at various dates as to minimize the
effect of market interest rate changes. The effective interest rate to the
Company on fixed rate debt outstanding on August 31, 2002 was approximately
6.4%; a 10% adverse change in market rates would not materially affect the
Company's results of operations, financial position or liquidity.
In August 2002, the Company entered into interest rate swap instruments
related to private placement debt issued on October 18, 2002 in order to
protect against a potential increase in interest rates. In fact, interest rates
declined between the dates of the interest swaps and the closing of the
borrowing transaction. These derivative instruments are designated and
effective as cash flow hedges for accounting purposes and the changes in fair
values of these instruments are recorded as a component of other comprehensive
income. The Company expects to record additional interest expense of $0.8
million during the year ended August 31, 2003 related to these derivative
instruments as an offset to the lower interest rates actually obtained on the
debt instruments.
FOREIGN CURRENCY RISK
The Company conducts essentially all of its business in U.S. dollars and
had essentially no risk regarding foreign currency fluctuations on August 31,
2002. Foreign currency fluctuations do, however, impact the ability of foreign
buyers to purchase U.S. agricultural products and the competitiveness of U.S.
agricultural products compared to the same products offered by alternative
sources of world supply.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in 15(a)(1) are set forth beginning on
page F-1. The Company is not required to provide the supplementary financial
information required by Item 302 of Regulation S-K in this Annual Report on
Form 10-K. Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The table below lists the directors of the Company as of August 31, 2002.
DIRECTOR
NAME AND ADDRESS AGE DISTRICT SINCE
- ------------------------------------- ----- ---------- ------
Bruce Anderson 50 3 1995
13500 42nd St NE
Glenburn, ND 58740-9564
Robert Bass 48 5 1994
E 639 -- 1 Bass Road
Reedsburg, WI 53959
Steven Burnet 62 6 1983
94699 Monkland Lane
Moro, OR 97039-9705
Dennis Carlson 41 3 2001
3255 50th Street
Mandan, ND 58554
Curt Eischens 50 1 1990
2153 -- 330th St North
Minneota, MN 56264-1880
Robert Elliott 52 8 1996
324 Hillcrest
Alliance, NE 69301
Robert Grabarski 53 5 1999
1770 Highway 21
Arkdale, WI 54613
Jerry Hasnedl 56 1 1995
RR 1, Box 39
St. Hilaire, MN 56754
Glen Keppy 55 7 1999
21316 -- 155th Avenue
Davenport, IA 52804
James Kile 54 6 1992
508 W. Bell Lane
St. John, WA 99171
Randy Knecht 52 4 2001
40193 -- 112th Street
Houghton, SD 57449
Leonard Larsen 66 3 1993
5128 -- 11th Ave. N.
Granville, ND 58741-9595
Richard Owen 48 2 1999
PO Box 129
Geraldine, MT 59446
32
NAME AND ADDRESS AGE DISTRICT SINCE
- ------------------------------------ ----- ---------- ------
Duane Stenzel 56 1 1993
RR 2, Box 173
Wells, MN 56097
Michael Toelle 40 1 1992
RR 1, Box 190
Browns Valley, MN 56219
Merlin Van Walleghen 66 4 1993
24106 -- 408th Avenue
Letcher, SD 57359-6021
Elroy Webster 69 1 1982
Route 2, Box 123
Nicollet, MN 56074
BRUCE ANDERSON was elected to the board in 1995. He has held positions
with North Dakota Farmers Union, Farmers Union Mutual Insurance Co. and has
served a four-year term in the North Dakota House of Representatives. He is a
member of the North Dakota Agricultural Products Utilization Commission. Mr.
Anderson and his wife raise small grains on their farm near Glenburn, North
Dakota.
ROBERT BASS, elected to the board in 1994, operates a 500-acre dairy and
feed grain farm with his wife and brother near Reedsburg, Wisconsin. Mr. Bass
currently serves as a member of the board of Co-op Country Partners in Baraboo,
Wisconsin. He holds a B.S. degree from the University of Wisconsin in
agricultural education and is a former vo-ag teacher.
STEVEN BURNET has been a board member since 1983, has served as Chairman
of the board since 1999, and has served as past Chairman of Harvest States
Cooperatives from 1992 through 1997. He is a member of the Oregon Wheat Growers
League and the Oregon Cattlemen's Association. Mr. Burnet is a past president
of Mid-Columbia Grain Growers and past vice president of North Pacific Grain
Growers. He serves as a director on the Agricultural Co-op Council of Oregon
and is a former board member of the Oregon State University Alumni Association.
Mr. Burnet and his wife grow dryland wheat and barley, and support a cow/calf
and yearling operation with irrigated hay and pasture.
DENNIS CARLSON was elected to the board in 2001. He is chairman of Farmers
Union Oil Co. of Bismarck/Mandan, N.D. and has served on that board since 1989.
Mr. Carlson, a third-generation cooperative member, has a diversified farm in
partnership with his parents that include wheat, sunflowers and a cow/calf
operation.
CURT EISCHENS was elected to the board in 1990. He has been a director for
Farmers Co-op Association in Canby for ten years, nine as chairman. He is
director of the Minnesota Association of Cooperatives, and a member of the
Minnesota Soybean Association and Minnesota Farmers Union. Mr. Eischens and his
wife operate a corn and soybean farm near Canby, Minnesota.
ROBERT ELLIOTT, elected to the board in 1996, is the first director for
the region consisting of Nebraska, Kansas, Oklahoma, Colorado, Texas and New
Mexico. He and his wife operate a 6,000-acre farm near Alliance, Nebraska. Mr.
Elliott is president of the Hemingford Scholarship Foundation and serves on the
Nationwide Insurance Board Counsel. He is past president of the Nebraska Wheat
Growers Association and served on the boards of Western Cooperative Alliance
(Westco) and New Alliance Bean & Grain Company.
ROBERT GRABARSKI was elected to the Board in 1999, and has a long history
of cooperative leadership. He currently serves as Board Chairman of Wisconsin
River Cooperative, Adams, Wisconsin, and as First Vice Chairman of Alto Dairy
Cooperative, Waupun, Wisconsin. He is active in a wide range of civic
organizations, including serving on the fire department in the Adams Volunteer
Fire District, as well as volunteer auctioneering for local charitable
organizations. Mr. Grabarski and his wife and son operate a 1,900 acre-farm and
milk 90 registered Holsteins.
33
JERRY HASNEDL was elected to the board in 1995. He is a member and past
director of Northwest Grain, a Cenex Harvest States Cooperatives
regionalization; a member of Farmers Union Oil Co. in Thief River Falls; Garden
Valley Telephone Co-op in Erskine; Red Lake Electric Co-op in Red Lake Falls;
Minnesota Wheat Growers; and Minnesota Barley Growers. He is currently serving
on the interim board for Minnesota Marketplace. He and his wife raise wheat,
barley, corn, soybeans, sunflowers and alfalfa on their northern Minnesota
farm.
GLEN KEPPY was elected to the board in 1999. Active in a wide range of
agricultural and civic organizations, Mr. Keppy has served on the boards of the
Iowa and National Pork Producer Associations. He is a three-time Master Soybean
Grower contest winner and the recipient of the Iowa Farm Bureau's distinguished
service award. A graduate of the University of Wisconsin-Platteville with a
degree in technical agriculture, Mr. Keppy was drafted by the Pittsburgh
Steelers and also played for the Detroit Lions and Green Bay Packers. He and
his wife operate a third-generation family farm consisting of a
farrow-to-finish hog operation and 1,000 acres of corn, soybeans, oats and
alfalfa hay.
JAMES KILE, the first graduate of Young Producer Institute to join the
board, was elected in 1992. He served 18 years, 10 as chairman, on the board of
his local St. John Grange Supply, and represents CHS Cooperatives on the
Washington State Council of Farmer Cooperatives and is a member of Grange and
Washington Association of Wheat Growers. He and his wife operate a 1,300-acre
dryland wheat, barley and pea operation near St. John, Washington.
RANDY KNECHT was elected to the board in 2001. Mr. Knecht has served on
the board of Four Seasons Cooperative, Britton, S.D., for seven years, is
chairman of the Northern Electric Cooperative board and is a member of the
board of Dakota Value Capture Cooperative, Pierre, S.D. He holds a B.S. degree
in agriculture from South Dakota University. With his father and a son, Mr.
Knecht raises 4,000 acres of corn, beans, wheat and alfalfa. He also maintains
a 450-head cow/calf operation.
LEONARD LARSEN has been a board member since 1993. He is a member of the
Farmers Union Oil Companies in Minot and Velva, Cenex Harvest States Sunprairie
Grain, and Dakota Growers Pasta Company. Starting as a board member of the
Simcoe Elevator in 1970, Leonard served through the unification with the Minot
Farmers Union Elevator, where he was a board member for 11 years and chairman
for six. He has served on the Hendrickson Township board, the First Lutheran
Church council, and the Granville Economic Development Corporation. He is a
member of the North Dakota Farmers Union and a 34-year member of the American
Legion. He and his wife and a son, farm a grain, sunflower, canola and flax
operation.
RICHARD OWEN was elected to the board in 1999. His involvement in
agriculture and civic organizations includes serving as secretary of the
Central Montana Co-op, Geraldine, Mont., since 1994. Mr. Owen has served as
president of the Equity Co-op Association, Geraldine, Mont., and vice chair of
the Montana International Agricultural Exchange Association. He is a graduate
of Montana State University, Bozeman, and has served on the university's board
of directors. Mr. Owen and his wife operate a 2,200-acre dryland wheat, barley
and safflower operation.
DUANE STENZEL was elected to the board in 1993. He is a member of Watonwan
Farm Service; Wells Farmers Elevator, where he served as board president and
secretary. He raises 665 acres of soybeans, sweet corn and corn on his farm in
south central Minnesota.
MICHAEL TOELLE was elected to the board in 1992. He has been serving on
the board of Country Partners Cooperative of Browns Valley for 12 years and as
chairman for the past eight years. He also is actively involved in National FFA
Organization, Ag Council of America, Minnesota Wheat Growers, Minnesota Corn
Growers and Minnesota Soybean Growers associations. He currently serves as
chairman of the Finance & Investment Committee for the Cenex Harvest States
Foundation. He and his wife operate a grain, hog and beef farm with his brother
and parents near Browns Valley.
MERLIN VAN WALLEGHEN has been a board member since 1993. He is a former
director of Farmers Co-op Elevator Association of Mitchell, Letcher and
Alexandria, serving as board president for 11 years. Mr. Van Walleghen also
served 10 years on the South Dakota Association of Cooperatives board of
directors, eight as president. A former FmHA committee member, he is currently
chairman of the
34
Sanborn County Development board and also a member of Heartland Consumer Power
District board. He and his wife and a son, operate a grain farm producing corn
and soybeans.
ELROY WEBSTER was elected to the board in 1982 and served as the chairman
from 1987 to 1999. His leadership record includes service as a director for the
Minnesota Association of Cooperatives, Western Co-op Transport Association and
Agland Cooperative. Mr. Webster is past chairman of the Agricultural Council of
America and is chairman of the Board of Trustees for the Cenex Harvest States
Foundation. He also works with Southwest State University as an advisor for its
Cooperative Studies program. He is an active farmer with a corn and soybean
operation near Nicollet, Minnesota.
Elections are for three-year terms and are open to any eligible candidate.
To be eligible, a candidate must meet the following qualifications:
o At the time of the election, the individual must be less than the age
of 68.
o The individual must be a member of this cooperative or a member of a
Cooperative Association Member.
o The individual must reside in the region from which he or she is to be
elected.
o The individual must be an active farmer or rancher. "Active farmer or
rancher" means an individual whose primary occupation is that of a
farmer or rancher, excluding any full-time employee of the Company or
of a Cooperative Association Member.
o The individual must currently be serving or shall have served at least
one full term as a director of a Cooperative Association Member of
this cooperative.
The following positions on the Board of Directors will be elected at the
2002 Annual Meeting of Members:
REGION CURRENT INCUMBENT
- ------------------------------------------- --------------------------
Region 1 (Minnesota) Curt Eischens
Jerry Hasnedl
Region 2 (Montana, Wyoming) Richard Owen
Region 3 (North Dakota) Bruce Anderson
Region 5 (Connecticut, Indiana, Illinois, Robert Grabarski
Kentucky, Michigan, Ohio,
Wisconsin)
Region 6 (Alaska, Arizona, California, Steve Burnet (not seeking
Idaho, Oregon, Washington, re-election)
Utah)
Region 7 (Alabama, Arkansas, Florida, Glen Keppy
Iowa, Louisiana, Missouri,
Mississippi)
35
EXECUTIVE OFFICERS
The table below lists the executive officers and other senior officers of
the Company as of August 31, 2002. Officers are appointed annually by the Board
of Directors.
NAME AGE POSITION
- ------------------- ----- ---------------------------------------------------------------
John D. Johnson 54 President and Chief Executive Officer
Patrick Kluempke 54 Executive Vice President -- Corporate Planning
Tom Larson 54 Executive Vice President -- Public Affairs
Mark Palmquist 45 Executive Vice President/Chief Operating Officer -- Grains and
Foods
John Schmitz 52 Executive Vice President and Chief Financial Officer
Leon E. Westbrock 55 Executive Vice President/Chief Operating Officer -- Energy and
Crop Inputs
JOHN D. JOHNSON was born in Rhame, North Dakota, and grew up in Spearfish,
South Dakota. He earned a degree in business administration and a minor in
economics from Black Hills State University. In 1976, he joined Harvest States
Cooperatives as a feed consultant in the GTA Feeds Division, later becoming
regional sales manager, Director of Sales and Marketing and then General
Manager of GTA Feeds. In 1992, he was elected Group Vice President of Farm
Marketing and Supply for Harvest States Cooperatives and was selected President
and CEO in January 1995. Mr. Johnson became President and General Manager of
Cenex Harvest State Cooperatives upon its creation June 1, 1998 and was named
President and Chief Executive Officer on June 1, 2000. Mr. Johnson serves on CF
Industries, Inc. and National Cooperative Refinery Association boards of
directors.
PATRICK KLUEMPKE, Executive Vice President of Corporate Planning, was
raised on a family dairy farm in central Minnesota, and received a Bachelor of
Science degree in Finance and Accounting from St. Cloud University and the
University of Minnesota. Mr. Kluempke served in the United States Army in South
Vietnam and South Korea, as Aide to General J. Guthrie. He began his
agribusiness career in grain procurement and merchandising at General Mills and
later with Louis Dreyfus Corporation in export marketing. Mr. Kluempke joined
the predecessor to CHS Cooperatives when G.T.A. was being merged with North
Pacific Grain Growers, in 1983, to form Harvest States Cooperatives and has
held various positions in the commodity marketing division and at the corporate
level. He was named to the position of Senior Vice President of Corporate
Planning and Business Development in 1993 and held that position until 2000
when he was named to his current position. Mr. Kluempke serves on the board of
Ventura Foods, a joint venture company between CHS Cooperatives and Mitsui &
Company, Japan.
TOM LARSON is Executive Vice President, Public Affairs at CHS
Cooperatives. After growing up on a 480-acre crop and hog farm near Slayton,
Minnesota, he earned a Bachelor's degree in Agriculture Education from South
Dakota State University. After working as a vo-ag teacher, he took an agronomy
sales position with Cenex, Inc. and later managed the local cooperative at
Hoffman, Minnesota, for two years. Mr. Larson returned to the regional
cooperative in 1978 and held positions in marketing and planning. He moved to
Agronomy in 1987 and became director of Agronomy Services for Cenex/Land
O'Lakes Agronomy Company in 1988. He was later named Vice President of Agronomy
Services until 1996 when he became Vice President of Cenex Supply and Marketing
which included overseeing the operation of more than two dozen Cenex-owned
agricultural supply outlets. Mr. Larson was named to his current position in
January 1999. He oversees the public affairs area of the Company, which
includes communications, corporate giving, meetings and travel and governmental
affairs, including the Washington, D.C. office. He is active in the FFA
organization and is a recipient of its Honorary American Degree.
MARK PALMQUIST is the Executive Vice President and Chief Operating Officer
of Grains and Foods. He is responsible for all related areas of grains
including country operations, terminal operations, exports, logistics,
transportation and grain marketing joint ventures. He is also responsible for
the operations of wheat milling, oilseed processing and refining, and food
manufacturing and packaging. Mr. Palmquist has worked for CHS Cooperatives for
21 years. Starting as a grain buyer and moving into merchandising, he has
traded many different commodities including corn, soybeans and spring wheat. In
36
1990, he assumed the role of Vice President and director of Grain Marketing and
then in 1993, was promoted to Senior Vice President, which he held until 2000
when he was named to his current position. Mr. Palmquist attended Gustavus
Adolphus College in St. Peter, Minnesota, graduating in 1979. He also attended
the Master of Business Administration program at the University of Minnesota.
Mr. Palmquist serves on Ventura Foods board of directors.
JOHN SCHMITZ is the Executive Vice President and Chief Financial Officer
of the Company. Mr. Schmitz joined Harvest States Cooperatives in 1974 as
Corporate Accountant and has held a number of accounting and finance positions
within the Company, including divisional controller positions in Country
Services, Farm Marketing & Supply and Grain Marketing. In 1986, he was named
Vice President and Controller of Harvest States Cooperatives, and had served in
that position up to the time of the merger with Cenex when he became Vice
President, Finance, of CHS Cooperatives. In May 1999, Mr. Schmitz became Senior
Vice President and Chief Financial Officer. Mr. Schmitz earned a Bachelor of
Science Degree in Accounting from St. Cloud State University, and is a member
of the American Institute of Certified Public Accountants, the Minnesota
Society of CPA's and the National Society of Accountants for Cooperatives. Mr.
Schmitz serves on National Cooperative Refinery Association and Ventura Foods
boards of directors.
LEON E. WESTBROCK is the Executive Vice President and Chief Operating
Officer of Energy and Crop Inputs for the Company. He joined the cooperative
system in 1976 and managed three local cooperatives before joining the regional
system. At the regional level, Mr. Westbrock served in the Merchandising
Department at Cenex, Inc. and then later as Manager of the Lubricants
Department and as Director of Retailing. Since January 1, 1987, he served as
Vice President and Executive Vice President in the Energy Division of the
Company. On March 1, 2000 Mr. Westbrock was appointed to his current position.
He serves as chairman for both National Cooperative Refinery Association and
Universal Cooperatives, Inc. boards of directors and also serves as a member of
the Agriliance, LLC board of directors. Mr. Westbrock received a Bachelor's
Degree from St. Cloud State University and served a tour in the U.S. Army.
37
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth the cash and noncash
compensation earned by the Chief Executive Officer and each of the executive
officers of the Company whose total salary and bonus or similar incentive
payment earned during the year ended August 31, 2002, exceeded $100,000 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------------------------------- -------------
NAME AND OTHER ANNUAL ALL OTHER LTIP
PRINCIPAL POSITION YEAR ENDED SALARY(1) BONUS(1) COMPENSATION(2) COMPENSATION(3) PAYOUTS(1)
- -------------------------------- ------------ ----------- ---------- ----------------- ----------------- -------------
John. D. Johnson 8/31/02 $820,000 $811,750 $30,376 $10,216
President and Chief Executive 8/31/01 787,500 747,338 8,600 9,606
Officer 8/31/00 600,000 540,000 14,672 12,720 $719,280
Patrick Kluempke 8/31/02 223,000 166,875 15,120 10,873
Executive Vice President -- 8/31/01 200,000 162,675 3,780 6,010
Corporate Planning 8/31/00 176,500 68,664 8,194 7,068 92,995
Tom Larson 8/31/02 229,100 172,200 18,878 10,214
Executive Vice President -- 8/31/01 200,000 167,850 16,130 8,189
Public Affairs 8/31/00 182,768 71,665 6,240 7,160 97,060
Mark Palmquist 8/31/02 453,400 342,000 15,120 11,081
Executive Vice President and 8/31/01 375,000 232,680 14,111 5,863
Chief Operating Officer -- 8/31/00 262,932 235,168 2,620 7,068 184,273
Grains and Foods
John Schmitz 8/31/02 317,300 244,500 21,856 12,255
Executive Vice President and 8/31/01 275,000 232,500 2,520 7,080
Chief Financial Officer 8/31/00 210,583 100,377 82 8,566 135,947
Leon E. Westbrock 8/31/02 453,400 342,000 15,120 12,057
Executive Vice President and 8/31/01 375,000 332,400 7,320 5,116
Chief Operating Officer -- 8/31/00 323,750 86,745 4,808 184,273
Energy and Crop Inputs
- ------------------
(1) Amounts shown include amounts deferred at the employee's election under the
Company's Deferred Compensation Program and amounts waived in exchange for
options under the Company's Share Option Plan.
(2) Amounts shown include personal use of a Company vehicle.
(3) Other compensation includes the Company's matching contributions under the
Company's 401(k) Plan and the portion of group term life insurance
premiums paid by the Company.
On September 1, 2000, the Company entered into an employment agreement
with John D. Johnson, the President and CEO. The employment agreement provides
for a rolling three-year period of employment commencing on September 1, 2000
at an initial base salary of at least $787,500, subject to annual review.
Either party, subject to the rights and obligations set forth in the employment
agreement, may terminate Mr. Johnson's employment at any time. The Company is
obligated to pay Mr. Johnson a severance allowance of 2.99 times his base
salary and target bonus in the event Mr. Johnson's employment is terminated for
any reason other than for cause (as such term is defined in the employment
agreement), death, disability or voluntary termination. The employment
agreement includes a provision to pay Mr. Johnson a severance allowance of 2.99
times his base salary and target bonus in the event of the consolidation of the
Company's business with the business of any other entity, if Johnson is not
offered the position of Chief Executive Officer of the combined entity. The
contract provides for a gross-up for any possible excise tax. Mr. Johnson has
also agreed to a non-compete clause of two years, in the event of his
termination.
REPORT ON EXECUTIVE COMPENSATION
The Corporate Responsibility Committee of the Board of Directors, subject
to the approval of the Board of Directors, determines the compensation of Cenex
Harvest States Cooperatives chief executive officer and oversees the
administration of the executive compensation programs.
38
EXECUTIVE COMPENSATION POLICIES AND PROGRAMS
Cenex Harvest States Cooperatives executive compensation programs are
designed to attract and retain highly qualified executives and to motivate them
to optimize member owner returns by achieving aggressive goals. The
compensation program links executive compensation directly to the Company's
performance. A significant portion of each executive's compensation is
dependent upon value-added operations and meeting financial goals and other
individual performance objectives.
Each year, the Committee reviews the executive compensation policies with
respect to the correlation between executive compensation and the creation of
member owner value, as well as the competitiveness of the programs. The
Committee determines what, if any, changes are appropriate to executive
compensation programs of Cenex Harvest States Cooperatives. The Committee
recommends to the total Board of Directors, salary actions relative to the
chief executive officer and determines the amount of annual variable pay and
the amount of long-term awards.
The Company intends to the extent possible, to preserve the deductibility
under the Internal Revenue Code of compensation paid to its executive officers
while maintaining compensation programs to attract and retain highly qualified
executives in a competitive environment. Accordingly, compensation paid under
Cenex Harvest States Cooperatives share option plan and incentive compensation
plan is generally deductible.
COMPONENTS OF COMPENSATION
There are three basic components to the Cenex Harvest States Cooperatives
executive compensation plan: base pay; annual variable pay; and long-term
variable pay (grants in the share option plan). Each component is designed to
be competitive within the executive compensation market. In determining
competitive compensation levels, the Company analyzes information from several
independent compensation surveys, which include information regarding a
comparable all-industrial market and other companies that compete for executive
talent.
BASE PAY: Base pay is designed to be competitive at the 50th percentile of
other large companies for equivalent positions. The executive's actual salary
relative to this competitive benchmark varies based on individual performance
and the individual's skills, experience and background.
ANNUAL VARIABLE PAY: Award levels, like the base pay levels, are set with
reference to competitive conditions and are intended to motivate the executives
by providing substantial incentive payments for the achievement of aggressive
goals. The actual amounts paid for 2002 were determined based on two factors:
first, profitability and financial performance of the Company and the
executive's business unit; and second, the individual executive's performance
against other specific management objectives such as revenue growth, value
added performance, talent development. Financial objectives are given greater
weight than individual performance objectives in determining individual awards.
The types and relative importance of specific financial and other business
objectives varied among executives depending upon their positions and the
particular business unit for which they were responsible.
LONG-TERM VARIABLE PAY: The main purpose of the long-term variable pay
program is to encourage the Cenex Harvest States Cooperatives' executives to
increase the value of doing business with the Company by increasing and
improving value added business opportunities and therefore the value of member
owners doing business with Cenex Harvest States Cooperatives. The long-term
variable pay component of the compensation program (through extended vesting)
is also designed to create an incentive for the individual to remain with the
Company.
The long-term variable pay program consists of grants of shares in the
restricted investment corporations sponsored by Cenex Harvest States
Cooperatives. These options vest over a multi-year period. The Company
periodically grants new awards to provide continuing incentives for future
performance. Like the annual variable pay, award levels are set with regard to
competitive considerations and each individual's actual award is based on
financial performance of the Company, collectively. No grant was awarded in
2002 due to the fact that no award period had matured during the fiscal year.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In determining the compensation of the chief executive officer, the
Committee considers three factors: the absolute and relative performance of the
business particularly as it relates to variable pay;
39
the market for such positions; and Cenex Harvest States Cooperatives
compensation strategy in determining the mix of base, annual, and long-term
variable pay.
In general, the Company's strategy is to distribute pay for the chief
executive officer among the three basic components so that it effectively
reflects the competitive market with major consideration for achievement of
individual performance objectives.
Mr. Johnson's actual base salary for fiscal year 2002 was $820,000. Based
on Cenex Harvest States Cooperatives financial performance in terms of
profitability and other individual goals related to achieving communications
objectives, business partner accountability and other strategic objectives, Mr.
Johnson received an annual variable pay award of $811,750 for fiscal year 2002.
This incentive payment was consistent with his achievement of performance
standards set by the Board of Directors.
Mr. Johnson received no long-term variable pay award for fiscal year 2002
as no award period had matured during that time.
THE FOLLOWING SUMMARIZES CERTAIN BENEFITS IN EFFECT AS OF AUGUST 31, 2002
TO THE NAMED EXECUTIVE OFFICERS.
MANAGEMENT COMPENSATION INCENTIVE PROGRAM
Each Named Executive Officer is eligible to participate in the Management
Compensation Incentive Program (the "Incentive Program") for the year ending
August 31, 2002. The Incentive Program is based on Company, group or division
performance and individual performance. These amounts will be paid after August
31, 2002. The target incentive is 50% of base compensation except for the
President and Chief Executive Officer, where target incentive is 67% of base
compensation.
LONG-TERM INCENTIVE PLAN
Each Named Executive Officer is eligible to participate in the Long-Term
Incentive Plan. The plan consists of a three-year performance period. Award
opportunities are expressed as a percentage of a participating employee's
position mid-point. Company performance must meet a minimum level of pre-tax
earnings per unit of sales and net income levels before any grants are made
from this plan. Awards from the plan are grants to the Company's Share Option
Plan at the end of each plan period.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
MATURATION
NAME AND PRINCIPAL POSITION AWARD OF AWARD THRESHOLD TARGET MAXIMUM
- -------------------------------------------- ------- ----------- ----------- ----------- ------------
John. D. Johnson -0- 2001-2003 $82,000 $549,400 $ 820,000
President and Chief Executive Officer
Patrick Kluempke -0- 2001-2003 16,875 111,806 166,875
Executive Vice President -- Corporate
Planning
Tom Larson -0- 2001-2003 17,220 115,374 172,200
Executive Vice President -- Public Affairs
Mark Palmquist -0- 2001-2003 34,200 229,140 342,000
Executive Vice President and Chief
Operating Officer -- Grain and Foods
John Schmitz -0- 2001-2003 24,450 163,815 244,500
Executive Vice President and Chief
Financial Officer
Leon E. Westbrock -0- 2001-2003 34,200 229,140 342,000
Executive Vice President and Chief
Operating Officer -- Energy and Crop
Inputs
RETIREMENT PLAN
Each of the Named Executive Officers is entitled to receive benefits under
the Company's Cash Balance Retirement Plan (the "Retirement Plan"). An
employee's benefit under the Retirement Plan
40
depends on credits to the employee's account, which are based on the employee's
total salary each year the employee works for the Company, the length of
service with the Company and the rate of interest credited to the employee's
account balance each year. Credits are made to the employee's account from Pay
Credits, Special Career Credits and Investment Credits.
The amount of Pay Credits added to an employee's account each year is a
percentage of the employee's gross salary, including overtime pay, commissions,
severance pay, bonuses, any compensation reduction pursuant to the 401(k) Plan
and any pretax contribution to any of the Company's welfare benefit plans, paid
vacations, paid leaves of absence and pay received if away from work due to a
sickness or injury. The Pay Credits percentage received is determined on a
yearly basis, based on the years of Benefit Service completed as of January 1
of each year. An employee receives one year of Benefit Service for every
calendar year of employment in which the employee completed at least 1,000
hours of service.
Effective January 1, 2002, Pay Credits are earned according to the
following schedule:
PAY BELOW SOCIAL SECURITY PAY ABOVE SOCIAL SECURITY
YEARS OF BENEFIT SERVICE TAXABLE WAGE BASE TAXABLE WAGE BASE
- ------------------------------ --------------------------- --------------------------
1 to 3 years .............. 3% 6%
4 to 7 years .............. 4% 8%
8 to 11 years ............. 5% 10%
12 to 15 years ............ 6% 12%
16 years and more ......... 7% 14%
The Company credits an employee's account at the end of the year with an
Investment Credit based on the balance at the beginning of the year. The
Investment Credit is based on the average return for one-year U.S. Treasury
Bills for the preceding 12-month period. The maximum Investment Credit will not
exceed 12% for any year.
As of December 31, 2001, the dollar value of the account and years of
service for each of the Named Executive Officers was:
DOLLAR VALUE YEARS OF SERVICE
-------------- -----------------
John D. Johnson ............ $884,775 26
Patrick Kluempke ........... 433,378 19
Tom Larson ................. 361,813 25
Mark Palmquist ............. 474,183 22
John Schmitz ............... 414,876 27
Leon E. Westbrock .......... 942,075 21
SHARE OPTION PLAN
In October 1997, the Company adopted a Share Option Plan. Participants in
the plan, which include all Named Executive Officers, are select management of
the Company who have been designated as eligible by the President of the
Company to participate in such plan. The Share Option Plan allows participants
to waive bonuses and up to 30 percent of salary in exchange for options to
purchase at a discount, shares of selected mutual funds. The Company has filed
a Form S-8, dated December 12, 1997 on this program. This plan allows officers
to buy investments at a specific price. Some options have vesting schedules.
41
The following is a share option grants table showing each Named Executive
Officer option activity for the fiscal year ended August 31, 2002. The dollars
in the "Realizable Value" columns of the table are computed as of the
expiration date. All grants are salary exchanges, and not additional income to
the employee.
% OF $
NUMBER OF TOTAL EXERCISE EXPIRATION REALIZABLE REALIZABLE REALIZABLE
NAME SECURITIES OPTIONS PRICE DATE VALUE 5% VALUE 10% VALUE 0%
- ------------------- --------------- ----------- ---------- ------------ ------------ ------------ -----------
John. D. Johnson 5,555.5556 12.20% $ 9.00 9/30/2021 $ 139,298 $ 370,013 $ 37,500
John. D. Johnson 107,328.2050 28.77% 9.75 12/31/2021 2,776,543 7,039,992 784,837
John. D. Johnson 7,723.9960 14.31% 9.70 3/31/2022 198,997 504,562 56,192
John. D. Johnson 8,522.720 19.59% 8.80 6/30/2022 198,997 504,562 56,250
Patrick Kluempke 22,430.1960 6.01% 9.67 12/31/2021 575,501 1,459,195 162,675
Mark Palmquist 860.2151 1.89% 9.30 9/30/2021 21,227 51,373 6,000
Mark Palmquist 32,308.6290 8.66% 9.85 12/31/2021 844,386 2,140,960 238,680
Mark Palmquist 816.3270 1.51% 9.79 3/31/2022 21,227 51,373 5,994
Mark Palmquist 876.2320 2.01% 9.13 6/30/2022 21,227 51,373 6,000
Leon E. Westbrock 45,832.4720 12.28% 9.67 12/31/2021 1,175,941 2,981,628 332,400
The following is a share option grants table showing each Named Executive
Officer, along with the number and value of shares exercised for the fiscal
year ended August 31, 2002, and the number of underlying unexercised options
and the value of unexercised in-the-money options, as of the most recent
statement period ended June 30, 2002.
NUMBER OF NUMBER OF VALUE OF VALUE OF
SECURITIES SECURITIES UNEXERCISED UNEXERCISED
VALUE OF UNDERLYING UNDERLYING IN-THE-MONEY IN-THE-MONEY
NUMBER OF SHARES OPTIONS OPTIONS OPTIONS OPTIONS
NAME SHARES EXERCISED EXERCISED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ------------------ ----------- ---------------- --------------- -------------- --------------
John. D. Johnson 312,229.323 8,522.727 $1,969,996 $56,250
Patrick Kluempke 103,183.870 640,424
Thomas Larson 56,364.534 357,119
Mark Palmquist 31,036.000 $221,287 33,110.324 876.232 220,737 6,000
John Schmitz 34,297.224 234,644
Leon E. Westbrock 479,558.960 3,091,117
401(k) PLAN
Each Named Executive Officer is eligible to participate in the Cenex
Harvest States Savings Plan (the 401(k) Plan). All benefit-eligible employees
of the Company are eligible to participate in the 401(k) Plan. Effective
January 1, 2002, participants may contribute between 1% and 50% (not to exceed
6% in the case of "highly compensated" employees) of their pay on a pre-tax
basis. Each of the Named Executive Officers is a "highly compensated" employee.
The Company matches 50% of the first 6% of pay contributed each year. The
Company's Board of Directors may elect to reduce or eliminate matching
contributions for any year or any portion thereof. Participants are 100% vested
in their own contributions and are fully vested after three years of service in
any Company matching contribution made on the participant's behalf.
DEFERRED COMPENSATION SUPPLEMENTAL RETIREMENT PLAN
Each of the Named Executive Officers may participate in the Company's
Deferred Compensation Supplemental Retirement Plan (the Supplemental Plan).
Participants in the Supplemental Plan are select management or highly
compensated employees of the Company who have been designated as eligible by
the President of the Company to participate in such plan. Compensation waived
under the Share Option Plan is not eligible for Pay Credits under the Cash
Balance Retirement Plan or matching contributions under the 401(k) Plan. The
Supplemental Plan is intended to replace the benefits lost under those plans
due to Section 415 of the Internal Revenue Code of 1986, as amended (the Code)
which cannot be considered for purposes of benefits due to Section 401(a)(17)
of the Code under the qualified plans that the Company offers. The Supplemental
Plan is not funded or qualified for special tax treatment under the Code.
42
As of December 31, 2001, the dollar value of the account of each of the
Named Executive Officers was approximately:
John D. Johnson ................. $1,601,593
Patrick Kluempke ................ 65,334
Tom Larson ...................... 246,945
Mark Palmquist .................. 158,241
John Schmitz .................... 128,210
Leon E. Westbrock ............... 790,757
DIRECTORS' COMPENSATION
The Board of Directors met monthly during the year ended August 31, 2002.
Through August 31, 2002, the Company provided each director with compensation
of $42,000, paid in twelve monthly payments, with the Chairman of the Board
receiving an additional annual compensation of $12,000, paid in twelve monthly
payments. Each director receives a per diem of $300 plus actual expenses and
travel allowance for each day spent on Company meetings (other than regular
Board meetings and the Annual Meeting), life insurance and health and dental
insurance. Each director has a retirement benefit of $125 per month per year of
service, with a maximum benefit of $1,875 per month, for life with a guarantee
of 120 months (paid to beneficiary in the event of death). This benefit
commences at age 60 or retirement, whichever is later. This retirement benefit
may be converted to a lump sum. The retired directors may also continue health
benefits until eligible for Medicare and thereafter pay at their own expense
for a Medicare supplemental policy. The retirement benefit was raised to $175
per month effective for retirements after December 31, 2002.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors appoints ad hoc committees from time to time to
review certain matters and make reports and recommendations to the full Board
of Directors for action. The entire Board of Directors determines the salaries
and incentive compensation for the President and Chief Executive Officer using
industry and compensation studies. The Board of Directors has a standing
committee to review the results and scope of the annual audit and other
services provided by the Company's independent auditors, and another standing
committee to review equity redemption policy and its application to situations
believed by the equity holder or patron's equity department to be unusual.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the Company's Board of Directors did not have a
Compensation Committee. The entire Board of Directors determined the
compensation of the President and Chief Executive Officer and the terms of the
employment agreement with the President and Chief Executive Officer. The
President and Chief Executive Officer determined the compensation for all other
executive officers.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial ownership of equity securities as of August 31, 2002, is shown
below:
AMOUNT AND
NATURE OF
BENEFICIAL
TITLE OF CLASS NAME OF BENEFICIAL OWNER(1) OWNERSHIP % OF CLASS
- -------------- ------------------------------------------------------- -------------- ----------
8% Preferred Stock Directors:
Steven Burnet ....................................... --
Bruce Anderson ...................................... --
Robert Bass ......................................... 3,000 shares *
Dennis Carlson ...................................... 1,500 shares *
Curt Eischens ....................................... 3,000 shares *
Robert Elliott ...................................... 6,000 shares *
Robert Grabarski .................................... 12,000 shares *
Jerry Hasnedl ....................................... 1,000 shares *
Glen Keppy .......................................... 5,000 shares *
Jim Kile ............................................ 3,000 shares *
Randy Knecht ........................................ 1,000 shares *
Leonard Larsen ...................................... 2,000 shares *
Richard Owen ........................................ 6,000 shares *
Duane Stenzel ....................................... 10,000 shares *
Michael Toelle ...................................... 5,500 shares *
Merlin Van Walleghen ................................ 30,000 shares *
Elroy Webster ....................................... 10,000 shares *
Executive Officers:
John D. Johnson ..................................... 60,000 shares *
Patrick Kluempke .................................... 6,000 shares *
Tom Larson .......................................... 1,000 shares *
Mark Palmquist ...................................... 10,000 shares *
John Schmitz ........................................ 25,000 shares *
Leon E. Westbrock ................................... 10,000 shares *
-------------- ---
Directors and executive officers as a group ......... 211,000 shares 2.3%
- ------------------
(1) Includes shares held by spouse and children.
* Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Because directors must be active patrons of the Company or an Affiliated
Association, transactions between the Company and directors are customary and
expected. Transactions include the sale of commodities to the Company and the
purchase of products and services from the Company, as well as patronage
refunds and equity redemptions received from the Company. During the period
indicated, the value of those transactions between a particular director (and
members of such directors' immediate family, which includes such director's
spouse; parents; children; siblings; mothers and fathers-in-law; sons and
daughters-in-law; and brothers and sisters-in-law) and the Company that
exceeded $60,000 are shown below.
YEAR ENDED
NAME AUGUST 31, 2002
---- ---------------
Bruce Anderson ......................................... $ 66,777
Jerry Hasnedl .......................................... 442,288
Leonard Larsen ......................................... 140,893
Merlin Van Walleghen ................................... 106,643
44
PART IV.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that the Company's disclosure controls and procedures are adequately
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities and Exchange Act of
1934, as amended, is recorded, processed, summarized and reported, within the
time periods specified in applicable rules and forms. There have not been any
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls, subsequent to the date of such
evaluation, including any corrective actions taken with regard to significant
deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS FILED ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and the Reports of Independent
Accountants are filed as part of this Form 10-K.
PAGE NO.
---------
CENEX HARVEST STATES COOPERATIVES
Consolidated Balance Sheets as of August 31, 2002 and 2001 .................................... F-1
Consolidated Statements of Operations for the years ended August 31, 2002, 2001 and 2000 ...... F-2
Consolidated Statements of Equities and Comprehensive Income for the years ended
August 31, 2002, 2001 and 2000 .............................................................. F-4
Consolidated Statements of Cash Flows for the years ended August 31, 2002, 2001 and 2000 ...... F-6
Notes to Consolidated Financial Statements .................................................... F-7
Report of Independent Accountants ............................................................. F-26
VENTURA FOODS, LLC, A NON-CONSOLIDATED 50% OWNED EQUITY INVESTMENT
Independent Auditors' Report .................................................................. F-27
Consolidated Balance Sheets as of March 31, 2002 and 2001 ..................................... F-28
Consolidated Statements of Income for the years ended March 31, 2002, December 31, 2000
and 1999 and the three months ended March 31, 2001 .......................................... F-29
Consolidated Statements of Members' Capital for the years ended March 31, 2002,
December 31, 2000 and 1999 and the three months ended March 31, 2001 ........................ F-30
Consolidated Statements of Cash Flows for the years ended March 31, 2002, December 31,
2000 and 1999 and the three months ended March 31, 2001 ..................................... F-31
Notes to Consolidated Financial Statements for the years ended March 31, 2002, December 31,
2000 and 1999 and the three months ended March 31, 2001 ..................................... F-32
- ------------------
*Audited financial statements for Ventura Foods, LLC, as of and for the year
ended March 31, 2003 will be filed by an amendment to this Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because they are not applicable
or the required information is shown in the financial statements or notes
thereto.
(a)(3) EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.2 Amended and Restated By-Laws of the Company. (15)
4.1 Cenex Harvest States Cooperatives Certificate of Designations for the 8% Preferred
Stock. (12)
10.1 Lease between the Port of Kalama and North Pacific Grain Growers, Inc., dated
November 22, 1960. (2)
10.2 Limited Liability Company Agreement for the Wilsey-Holsum Foods, LLC dated July 24,
1996. (2)
45
10.3 Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and Harvest States
Cooperatives dated August 30, 1996. (*) (2)
10.4 TEMCO, LLC Limited Liability Company Agreement between Cargill, Incorporated and
Cenex Harvest States Cooperatives dated as of August 26, 2002. (15)
10.5 Cenex Harvest States Cooperatives Supplemental Savings Plan. (9)
10.6 Cenex Harvest States Cooperatives Supplemental Executive Retirement Plan. (9)
10.7 Cenex Harvest States Cooperatives Senior Management Compensation Plan. (9)
10.8 Cenex Harvest States Cooperatives Executive Long-Term Variable Compensation Plan. (9)
10.9 Cenex Harvest States Cooperatives Share Option Plan. (9)
10.9A Amendment to Cenex Harvest States Share Option Plan, dated June 28, 2001. (12)
10.10 $225,000,000 Note Agreement (Private Placement Agreement) dated as of June 19, 1998
among Cenex Harvest States Cooperatives and each of the Purchases of the Notes. (3)
10.11 $400 Million 364-day and $200 Million 5-Year Revolving Loan Credit Agreement dated as
of June 1, 1998 among Cenex Harvest States Cooperatives, CoBank, ACB, St. Paul Bank
for Cooperatives, et al., including Exhibit 2.4 (form of 364-Day Facility Note) and Exhibit
3.4 (form of 5-Year Note). (3)
10.11A First Amendment to Credit Agreement (Revolving Loan), effective as of May 31, 1999
among Cenex Harvest States Cooperatives, CoBank, ACB, NationsBank, N.A. and St. Paul
Bank for Cooperatives. (5)
10.11B Second Amendment to Credit Agreement (Revolving Loan) dated May 23, 2000 by and
among Cenex Harvest States Cooperatives, CoBank, ACB, Bank of America, SunTrust
Bank and the Syndication Parties. (8)
10.11C Third Amendment to Credit Agreement (Revolving Loan) dated May 23, 2001 among
Cenex Harvest States Cooperatives, CoBank, ACB, Cooperatieve Centrale Raiffeisen-
Boerenleenbank, B.A., SunTrust Bank, BNP Paribas and the Syndication Parties. (11)
10.11D Fourth Amendment to Credit Agreement (Revolving Loan) dated May 22, 2002 among
Cenex Harvest States Cooperatives, CoBank, ACB, Cooperatieve Centrale Raiffeisen-
Boerenleenbank, B.A., SunTrust Bank, Deere Credit, Inc., Credit Lyonnais Chicago Branch
and the Syndication Parties. (14)
10.12 $200 Million Term Loan Credit Agreement dated as of June 1, 1998 among Cenex Harvest
States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives, including Exhibit
2.4 (form of $200 Million Promissory Note). (3)
10.12A First Amendment to Credit Agreement (Term Loan), effective as of May 31, 1999 among
Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives. (5)
10.12B Second Amendment to Credit Agreement (Term Loan) dated May 23, 2000 by and among
Cenex Harvest States Cooperatives, CoBank, ACB, St. Paul Bank for Cooperatives and the
Syndication Parties. (8)
10.12C Third Amendment to Credit Agreement (Term Loan) dated May 23, 2001 among Cenex
Harvest States Cooperatives, CoBank, ACB, and the Syndication Parties. (11)
10.12D Fourth Amendment to Credit Agreement (Term Loan) dated May 22, 2002 among Cenex
Harvest States Cooperatives, CoBank, ACB and the Syndication Parties. (14)
10.13 Limited Liability Agreement of United Harvest, LLC dated November 9, 1998 between
United Grain Corporation and Cenex Harvest States Cooperatives. (4)
46
10.14 $50 Million 364-Day Revolving Loan Credit Agreement dated as of December 21, 1999
among National Cooperative Refinery Association, CoBank, ACB, Mercantile Bank and
Bank of America, N.A. (6)
10.14A First Amendment to Credit Agreement (364-Day Revolving Loan) dated December 19,
2000 by and among National Cooperative Refinery Association, CoBank, ACB and Firstar
Bank, N.A. (13)
10.15 Joint Venture Agreement for Agriliance LLC, dated as of January 1, 2000 among Farmland
Industries, Inc., Cenex Harvest States Cooperatives, United Country Brands, LLC and
Land O' Lakes, Inc. (7)
10.16 Employment Agreement dated September 1, 2000 by and between John D. Johnson and
Cenex Harvest States Cooperatives. (9)
10.17 Note purchase and Private Shelf Agreement dated as of January 10, 2001 between Cenex
Harvest States Cooperatives and The Prudential Insurance Company of America. (10)
10.17A Amendment No. 1 to Note Purchase and Private Shelf Agreement, dated as of March 2,
2001. (10)
10.18 Note Purchase Agreement and Series D & E Senior Notes dated October 18, 2002. (15)
21.1 Subsidiaries of the Registrant. (15)
23.1 Consent of Independent Accountants. (15)
23.2 Independent Auditors' Consent. (15)
24.1 Power of Attorney. (15)
99.1 Cautionary Statement. (15)
99.2 Statement under oath of John D. Johnson, principal executive officer regarding the facts
and circumstances relating to Exchange Act filings required by Order 4-460. (15)
99.3 Statement under oath of John Schmitz, principal financial officer regarding the facts and
circumstances relating to Exchange Act filings required by Order 4-460. (15)
99.4 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (15)
99.5 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (15)
- ------------------
(*) Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibit 10.3 have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
(1) Incorporated by reference to the Company's Form 8-K filed June 10, 1998.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-17865), effective February 14, 1997.
(3) Incorporated by reference to the Company's Form 10-Q Transition Report for
the period June 1, 1998 to August 31, 1998, filed October 14, 1998.
(4) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended November 30, 1998, filed January 13, 1999.
(5) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended May 31, 1999, filed July 13, 1999.
(6) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended November 30, 1999, filed January 12, 2000.
(7) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended February 29, 2000 filed April 11, 2000.
47
(8) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended May 31, 2000, filed July 10, 2000.
(9) Incorporated by reference to the Company's Form 10-K for the year ended
August 31, 2000, filed November 22, 2000.
(10) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended February 28, 2001, filed April 10, 2001.
(11) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended May 31, 2001, filed July 3, 2001.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-2 (File No. 333-65364), effective October 31, 2001.
(13) Incorporated by reference to the Company's Form 10-K for the year ended
August 31, 2001, filed November 19, 2001.
(14) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended May 31, 2002, filed July 3, 2002.
(15) Filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the fourth
quarter of the year ended August 31, 2002.
(c) EXHIBITS
The exhibits shown in Item 15(a)(3) above are being filed herewith.
(d) SCHEDULES
None.
SUPPLEMENTAL INFORMATION
As a cooperative, the Company does not utilize proxy statements.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
November 25, 2002.
CENEX HARVEST STATES COOPERATIVES
By: /s/ JOHN D. JOHNSON
-----------------------------
John D. Johnson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on November 25, 2002:
SIGNATURE TITLE
- --------------------------------------------------------------- -----------------------------------------------------
/s/ JOHN D. JOHNSON President and Chief Executive Officer
------------------------------------- (principal executive officer)
John D. Johnson
/s/ JOHN SCHMITZ Executive Vice President and Chief Financial Officer
------------------------------------- (principal financial officer)
John Schmitz
/s/ JODELL HELLER Vice President and Controller
------------------------------------- (principal accounting officer)
Jodell Heller
Steven Burnet* Chairman of the Board of Directors
Bruce Anderson* Director
Robert Bass* Director
Dennis Carlson* Director
Curt Eischens* Director
Robert Elliott* Director
Robert Grabarski* Director
Jerry Hasnedl* Director
Glen Keppy* Director
James Kile* Director
Randy Knecht* Director
Leonard Larsen* Director
Richard Owen* Director
Duane Stenzel* Director
Michael Toelle* Director
Merlin Van Walleghen* Director
Elroy Webster* Director
* By: /s/ JOHN D. JOHNSON
-------------------
John D. Johnson
ATTORNEY-IN-FACT
49
SECTION 302 CERTIFICATION
I, John D. Johnson, certify that:
1. I have reviewed this annual report on Form 10-K of Cenex Harvest States
Cooperatives;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 25, 2002
/s/ John D. Johnson
-------------------
John D. Johnson
President and Chief Executive Officer
50
SECTION 302 CERTIFICATION
I, John Schmitz, certify that:
1. I have reviewed this annual report on Form 10-K of Cenex Harvest States
Cooperatives;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 25, 2002
/s/ John Schmitz
----------------
John Schmitz
Executive Vice President and
Chief Financial Officer
51
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2002 AND 2001
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 108,192 $ 113,458
Receivables ................................................ 741,578 686,140
Inventories ................................................ 759,663 510,443
Other current assets ....................................... 140,944 60,995
---------- ----------
Total current assets ..................................... 1,750,377 1,371,036
Investments ................................................. 496,607 467,953
Property, plant and equipment ............................... 1,057,421 1,023,872
Other assets ................................................ 177,322 194,458
---------- ----------
TOTAL ASSETS ............................................. $3,481,727 $3,057,319
========== ==========
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .............................................. $ 332,514 $ 97,195
Current portion of long-term debt .......................... 89,032 17,754
Customer credit balances ................................... 26,461 38,486
Customer advance payments .................................. 169,123 109,135
Checks and drafts outstanding .............................. 84,251 87,808
Accounts payable ........................................... 517,667 495,198
Accrued expenses ........................................... 225,704 148,026
Patronage dividends and equity retirements payable ......... 56,510 72,154
---------- ----------
Total current liabilities ................................ 1,501,262 1,065,756
Long-term debt .............................................. 483,092 542,243
Other liabilities ........................................... 118,280 99,906
Minority interests in subsidiaries .......................... 89,455 88,261
Commitments and contingencies
Equities .................................................... 1,289,638 1,261,153
---------- ----------
TOTAL LIABILITIES AND EQUITIES ........................... $3,481,727 $3,057,319
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
2002 2001 2000
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
REVENUES:
Net sales .................................... $7,731,867 $7,753,012 $8,497,850
Patronage dividends .......................... 3,885 5,977 5,494
Other revenues ............................... 109,459 116,254 97,471
---------- ---------- ----------
7,845,211 7,875,243 8,600,815
Cost of goods sold ............................ 7,513,369 7,470,203 8,300,494
Marketing, general and administrative ......... 187,292 184,046 155,266
---------- ---------- ----------
Operating earnings ............................ 144,550 220,994 145,055
Interest ...................................... 42,455 61,436 57,566
Equity income from investments ................ (58,133) (28,494) (28,325)
Minority interests ............................ 15,390 35,098 24,546
---------- ---------- ----------
INCOME BEFORE INCOME TAXES .................... 144,838 152,954 91,268
INCOME TAXES .................................. 18,700 (25,600) 3,880
---------- ---------- ----------
NET INCOME .................................... $ 126,138 $ 178,554 $ 87,388
========== ========== ==========
DISTRIBUTION OF NET INCOME:
Patronage refunds ............................ $ 92,900 $ 128,900 $ 87,400
Unallocated capital reserve .................. 33,238 49,654 (12)
---------- ---------- ----------
Net income ................................. $ 126,138 $ 178,554 $ 87,388
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
(This page has been left blank intentionally.)
F-3
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
CAPITAL NONPATRONAGE WHEAT
EQUITY EQUITY PREFERRED MILLING
CERTIFICATES CERTIFICATES STOCK EPUS
-------------- -------------- ----------- ----------
(DOLLARS IN THOUSANDS)
BALANCES, SEPTEMBER 1, 1999 ................................. $ 912,294 $28,785 $ 9,258
Patronage and equity retirement determination .............. 25,750
Patronage distribution ..................................... 41,182
Equities retired ........................................... (28,615) (82)
Equities issued ............................................ 7,921
Other, net ................................................. (178) (194) (12)
Comprehensive income:
Net income ................................................
Other comprehensive loss ..................................
Total comprehensive income .................................
Patronage dividends and equity retirements payable ......... (17,474)
--- ---- ---------- ------- --------
BALANCES, AUGUST 31, 2000 ................................... 940,880 28,509 9,246
Patronage and equity retirement determination .............. 17,474
Patronage distribution ..................................... 60,304
Equities retired ........................................... (18,662) (74)
Equities issued ............................................ 5,481
Equity Participation Units issued ..........................
Equity Participation Units redeemed ........................ (9,066)
Other, net ................................................. (120) (277) (180)
Comprehensive income:
Net income ................................................
Other comprehensive income ................................
Total comprehensive income .................................
Patronage dividends and equity retirements payable ......... (33,484)
--- ---- ---------- ------- --------
BALANCES, AUGUST 31, 2001 ................................... 971,873 28,158 --
Patronage and equity retirement determination .............. 33,484
Patronage distribution ..................................... 92,484
Equities retired ........................................... (31,099) (46)
Equities issued ............................................ 2,600
Preferred stock issued, net ................................ $9,325
Preferred stock dividends ..................................
Other, net ................................................. (106) (339)
Comprehensive income:
Net income ................................................
Other comprehensive loss ..................................
Total comprehensive income .................................
Patronage dividends and equity retirements payable ......... (28,640)
--- ---- ---------- ------- ------ --------
BALANCES, AUGUST 31, 2002 ................................... $1,040,596 $27,773 $9,325 $ --
========== ======= ====== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED AUGUST 31, 2002, 2001 AND 2000
OILSEED PROCESSING UNALLOCATED ACCUMULATED OTHER ALLOCATED
& REFINING PATRONAGE CAPITAL COMPREHENSIVE CAPITAL TOTAL
EPUS REFUNDS RESERVE INCOME (LOSS) RESERVE EQUITIES
- -------------------- ------------- ------------- ------------------- ---------- -------------
(DOLLARS IN THOUSANDS)
$ 4,188 $ 40,250 $115,883 $ (1,170) $8,148 $1,117,636
17,250 43,000
(57,500) (1,588) (17,906)
(28,697)
7,921
(6) 453 (28) 35
87,400 (12) 87,388
(1,257) (1,257)
----------
86,131
----------
(26,220) (43,694)
--------- ---------- -------- --------- ------ ----------
4,182 61,180 114,736 (2,427) 8,120 1,164,426
26,220 43,694
(87,400) 967 (26,129)
(18,736)
5,481
1,045 (1,045) --
(5,227) (14,293)
445 (70) (202)
128,900 49,654 178,554
512 512
----------
179,066
----------
(38,670) (72,154)
--------- ---------- -------- --------- ------ ----------
-- 90,230 164,757 (1,915) 8,050 1,261,153
38,670 72,154
(128,900) (3,666) (40,082)
(31,145)
2,600
(3,428) 5,897
(240) (240)
100 (345)
92,900 33,238 126,138
(49,982) (49,982)
----------
76,156
----------
(27,870) (56,510)
--------- ---------- -------- --------- ------ ----------
$ -- $ 65,030 $190,761 $ (51,897) $8,050 $1,289,638
========= ========== ======== ========= ====== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
2002 2001 2000
------------- ------------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 126,138 $ 178,554 $ 87,388
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization ..................................... 103,986 109,180 92,699
Noncash net income from equity investments ........................ (58,133) (28,494) (28,325)
Minority interests ................................................ 15,390 35,098 24,546
Noncash portion of patronage dividends received ................... (2,327) (3,896) (6,825)
(Gain) loss on sale of property, plant and equipment .............. (6,418) (13,941) 1,167
Deferred tax expense (benefit) .................................... 4,400 (46,625) (467)
Other, net ........................................................ 5,467 (801) (3,130)
Changes in operating assets and liabilities:
Receivables ...................................................... (32,881) 147,641 (229,067)
Inventories ...................................................... (259,209) 37,543 1,717
Other current assets and other assets ............................ (88,941) (24,129) (7,041)
Customer credit balances ......................................... (12,025) 1,707 (8,191)
Customer advance payments ........................................ 59,988 (22,800) 4,180
Accounts payable and accrued expenses ............................ 93,802 (129,258) 202,980
Other liabilities ................................................ 9,079 13,050 (3,244)
---------- ---------- ----------
Net cash (used in) provided by operating activities ............. (41,684) 252,829 128,387
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ....................... (140,169) (97,610) (153,796)
Proceeds from disposition of property, plant and equipment ......... 20,205 35,263 7,655
Investments ........................................................ (6,211) (14,247) (35,297)
Equity investments redeemed ........................................ 37,689 30,104 41,250
Investments redeemed ............................................... 6,310 1,672 2,638
Changes in notes receivable ........................................ (22,031) 533 600
Acquisitions of intangibles ........................................ (29,501) (7,328) (26,513)
Distribution to minority owners .................................... (7,413) (19,256) (21,089)
Other investing activities, net .................................... (685) 1,775 (339)
---------- ---------- ----------
Net cash used in investing activities ........................... (141,806) (69,094) (184,891)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable ........................................... 235,319 (120,731) 20,940
Long-term debt borrowings .......................................... 30,000 116,861 49,914
Principal payments on long-term debt ............................... (17,968) (67,364) (22,502)
Changes in checks and drafts outstanding ........................... (3,557) 3,722 35,481
Proceeds from sale of preferred stock, net of expenses ............. 5,897
Preferred stock dividends paid ..................................... (240)
Retirements of equity .............................................. (31,145) (18,736) (28,697)
Equity Participation Units redeemed ................................ (14,293)
Cash patronage dividends paid ...................................... (40,082) (26,129) (17,906)
---------- ---------- ----------
Net cash provided by (used in) financing activities ............. 178,224 (126,670) 37,230
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ................................................... (5,266) 57,065 (19,274)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD .......................................................... 113,458 56,393 75,667
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 108,192 $ 113,458 $ 56,393
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Cenex Harvest States Cooperatives (CHS Cooperatives or the
Company) is an agricultural cooperative organized for the mutual benefit of its
members. Members of the cooperative are located throughout the United States.
In addition to grain marketing, wheat milling, oilseed processing and refining
and foods, the Company provides its patrons with energy and agronomy products
as well as other farm supplies. Sales are both domestic and international.
Effective September 1, 2000, the Company's Board of Directors approved a
resolution providing for the computation of patronage distributions based on
earnings for financial statement purposes rather than federal income tax basis
earnings. On December 1, 2000, this resolution was ratified by the Company's
members, the by-laws were amended and beginning with fiscal year 2001 patronage
distributions have been calculated based on financial statement earnings. The
by-laws further provide that an amount of up to 10% of the distributable annual
net savings from patronage sources be added to the unallocated capital reserve
as determined by the Board of Directors.
CONSOLIDATION -- The consolidated financial statements include the
accounts of CHS Cooperatives and all of its wholly-owned and majority-owned
subsidiaries and limited liability companies, including National Cooperative
Refinery Association (NCRA). The effects of all significant intercompany
transactions have been eliminated.
On September 1, 1999, NCRA and Farmland Industries, Inc. (Farmland) formed
Cooperative Refining, LLC (CRLLC), which was established to operate and manage
the refineries and related pipelines and terminals of NCRA and Farmland. On
December 31, 2000, NCRA and Farmland signed an Agreement of Dissolution and
dissolved CRLLC.
During 2000, the Company entered into a series of transactions, the result
of which was the exchange of its agronomy operations, consisting primarily of
its interests in and ownership of the Cenex/Land O'Lakes Agronomy Company and
Agro Distribution, LLC and related entities for a 25% equity ownership interest
in Agriliance, LLC (Agriliance). Agriliance is a distributor of crop nutrients,
crop protection products and other agronomy inputs and services formerly owned
by the Company, Land O'Lakes, Inc. (Land O'Lakes) and Farmland. The company
accounts for the Agriliance investment under the equity method.
During 2002 and 2001, the Company had various other acquisitions, which
have been accounted for using the purchase method of accounting. Operating
results of the acquisitions are included in the consolidated financial
statements since the respective acquisition dates. The respective purchase
prices were allocated to the assets and liabilities acquired based upon the
estimated fair values. The excess purchase price over the estimated fair values
of the net assets acquired has been reported as identifiable intangible assets
and goodwill.
CASH EQUIVALENTS -- Cash equivalents include short-term highly liquid
investments with original maturities of three months or less at date of
acquisition.
INVENTORIES -- Grain, processed grain, oilseed and processed oilseed are
stated at net realizable values which approximates market values. All other
inventories are stated at the lower of cost or market. The cost of certain
energy inventories (wholesale refined products, crude oil and asphalt) is
determined on the last-in, first-out (LIFO) method; all other energy
inventories are valued on the first-in, first-out (FIFO) and average cost
methods.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company enters into
exchange-traded commodity futures and options contracts to hedge its exposure
to price fluctuations on energy, grain and oilseed transactions to the extent
considered practicable for minimizing risk. Futures and options contracts used
for hedging are purchased and sold through regulated commodity exchanges.
Fluctuations in inventory valuations, however, may not be completely hedged,
due in part to the absence of satisfactory hedging facilities for certain
commodities and geographical areas and in part to the Company's assessment of
its
F-7
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
exposure from expected price fluctuations. The Company also manages its risks
by entering into fixed price purchase contracts with preapproved producers and
establishing appropriate limits for individual suppliers. Fixed price sales
contracts are entered into with customers of acceptable creditworthiness, as
internally evaluated. The Company is exposed to loss in the event of
nonperformance by the counterparties to the contracts. However, the Company
does not anticipate nonperformance by counterparties.
Commodity trading in futures and options contracts is a natural extension
of cash market trading. The commodity futures and options markets have
underlying principles of increased liquidity and longer trading periods than
the cash market, and hedging is one method of reducing exposure to price
fluctuations. The Company's use of the derivative instruments described above
reduces the effects of price volatility, thereby protecting against adverse
short-term price movements while somewhat limiting the benefits of short-term
price movements. Changes in market value of the derivative instruments
described above are recognized in the consolidated statements of operations in
the period such changes occur. The fair value of futures and options contracts
are determined primarily from quotes listed on regulated commodity exchanges.
Fixed price purchase and sales contracts are with various counterparties, and
the fair values of such contracts are determined from the market price of the
underlying product. At August 31, 2002, the Company's derivative assets and
liabilities were $53.8 million and $67.9 million, respectively.
COMMODITY PRICE RISK. The Company utilizes futures and options contracts
offered through regulated commodity exchanges to reduce risk. The Company is
exposed to risk of loss in the market value of inventories and fixed or
partially fixed purchase and sale contracts. So as to reduce that risk, the
Company generally takes opposite and offsetting positions using future
contracts or options. Certain commodities cannot be hedged with futures or
options contracts because such contracts are not offered for these commodities
by regulated commodity exchanges. Inventories and purchase contracts for those
commodities are hedged with forward sales contracts, to the extent practical,
so as to arrive at a net commodity position within the formal position limits
set by the Company and deemed prudent for each of those commodities.
Commodities for which future contracts and options are available are also
typically hedged first in this manner, with futures and options used to hedge
within position limits that portion not covered by forward contracts. These
futures and options contracts and forward purchase and sales contracts used to
hedge against price level change risks are effective economic hedges of
specified risks, but they are not designated as and accounted for as hedging
instruments for accounting purposes.
Unrealized gains and losses on futures contracts and options used as
economic hedges of grain and oilseed inventories and fixed price contracts are
recognized in cost of goods sold for financial reporting. Inventories and fixed
price contracts are marked to market so that gains or losses on the derivative
contracts are offset by gains or losses on inventories and fixed price
contracts during the same accounting period.
Through August 31, 2000, unrealized gains and losses on futures contracts
and options used to hedge energy inventories and fixed price contracts were
deferred until such future contracts and options were closed. Effective
September 1, 2000, those gains and losses are recognized as a component of net
income for financial reporting. The inventories hedged with these derivatives
are valued at lower of cost or market, and effective September 1, 2000, the
fixed price contracts are marked to market. Some derivatives related to propane
in the Energy segment meet the normal purchase and sales exemption, and thus
are not required to be marked to fair value.
A 10% adverse change in market prices would not materially affect the
Company's results of operations, financial position or liquidity, since the
Company's operations have effective economic hedging requirements as a general
business practice.
F-8
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE RISK. The Company manages interest expense using a mix of
fixed and floating rate debt. These debt instruments are carried at amounts
approximating estimated fair value. Short-term debt used to finance inventories
and receivables is represented by notes payable within thirty days or less so
that the blended interest rate to the Company for all such notes approximates
current market rates. Long-term debt used to finance non-current assets carries
various fixed interest rates and is payable at various dates as to minimize the
effect of market interest rate changes. The effective interest rate to the
Company on fixed rate debt outstanding on August 31, 2002 was approximately
6.4%; a 10% adverse change in market rates would not materially affect the
Company's results of operations, financial position or liquidity.
In August 2002, the Company entered into interest rate swap instruments
related to private placement debt issued on October 18, 2002. These derivative
instruments are designated and effective as cash flow hedges for accounting
purposes, and the changes in the fair values of these instruments are recorded
as a component of other comprehensive income. The Company expects to record
operating losses through interest expense of $0.8 million during the year ended
August 31, 2003 related to these derivative instruments.
FOREIGN CURRENCY RISK. The Company conducts essentially all of its
business in U.S. dollars and had minimal risk regarding foreign currency
fluctuations on August 31, 2002. Foreign currency fluctuations do, however,
impact the ability of foreign buyers to purchase U.S. agricultural products and
the competitiveness of U.S. agricultural products compared to the same products
offered by alternative sources of world supply.
The Company adopted Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 133, as amended, related to the
accounting for derivative transactions and hedging activities, effective
September 1, 2000. The effect of the adoption did not have a material effect on
the Company's earnings or financial position.
INVESTMENTS -- Investments in other cooperatives are stated at cost, plus
patronage dividends received in the form of capital stock and other equities.
Patronage dividends are recorded at the time qualified written notices of
allocation are received. Joint ventures and other investments, in which the
Company has significant ownership and influence, but not control, are accounted
for in the consolidated financial statements under the equity method of
accounting. Investments in other debt and equity securities are considered
available for sale financial instruments and are stated at market value, with
unrealized amounts included as a component of accumulated other comprehensive
income (loss).
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated
at cost less accumulated depreciation and amortization. Depreciation and
amortization are provided on the straight-line method by charges to operations
at rates based upon the expected useful lives of individual or groups of assets
(primarily 15 to 40 years for land improvements and buildings and 3 to 20 years
for machinery, equipment, office and other). The cost and related accumulated
depreciation and amortization of assets sold or otherwise disposed of are
removed from the related accounts and resulting gains or losses are reflected
in operations. Expenditures for maintenance and repairs and minor renewals are
expensed, while costs of major renewals and betterments are capitalized.
The Company periodically reviews property, plant and equipment and other
long-lived assets in order to assess recoverability based on projected income
and related cash flows on an undiscounted basis. Should the sum of the expected
future net cash flows be less than the carrying value, an impairment loss would
be recognized. An impairment loss would be measured by the amount by which the
carrying value of the asset exceeds the fair value of the asset.
GOODWILL AND OTHER INTANGIBLE ASSETS -- Effective September 1, 2001 the
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other
F-9
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets." This statement discontinued the amortization of goodwill
and indefinite-lived intangible assets, subject to periodic impairment testing.
At August 31, 2001, goodwill (net of accumulated amortization) prior to the
adoption of SFAS No. 142, was $29.2 million and was included as a component of
other assets. The effect of adopting the new standard will reduce goodwill
amortization expense by approximately $2.0 million annually. The Company has
completed its transitional impairment testing and no changes to the carrying
value of goodwill and other intangible assets were required as a result of the
adoption of SFAS No. 142. Subsequent impairment testing will take place
annually as well as when a triggering event indicating impairment may have
occurred. In addition, the classification of the intangible assets was
reviewed, along with the remaining useful lives of intangibles being amortized,
and no changes were required.
The Company's net income, net of taxes, of retroactive application of the
discontinuance of the amortization of goodwill as if SFAS No. 142 had been in
effect during the years ended August 31, 2001 and 2000 would have been $181.1
million and $88.5 million, respectively. For the years ended August 31, 2001
and 2000, discontinued amortization expense of goodwill included in other
assets would have been $1.9 million and $0.8 million, respectively, and
included in equity investments would have been $0.7 million and $0.3 million,
respectively.
REVENUE RECOGNITION -- Grain and oilseed sales are recorded at time of
settlement. All other sales are recognized upon shipment and transfer of title
to customers. Amounts billed to a customer in a sale transaction related to
shipping and handling are included in sales. Country Operations segment
services revenue and rebates are included in other revenues.
ENVIRONMENTAL EXPENDITURES -- Liabilities related to remediation of
contaminated properties are recognized when the related costs are considered
probable and can be reasonably estimated. Estimates of these costs are based on
current available facts, existing technology, undiscounted site-specific costs
and currently enacted laws and regulations. Recoveries, if any, are recorded in
the period in which recovery is considered probable. Liabilities are monitored
and adjusted as new facts or changes in law or technology occur. Environmental
expenditures are capitalized when such costs provide future economic benefits.
INCOME TAXES -- The Company is a nonexempt agricultural cooperative and
files a consolidated federal income tax return with its 80% or more owned
subsidiaries. The Company is subject to tax on income from nonpatronage sources
and undistributed patronage-sourced income. Deferred income taxes reflect the
impact of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for
federal and state income tax purposes, at each year end, based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
In October 2001, members of NCRA ratified a resolution to compute
patronage distributions based on earnings for financial statement purposes
rather than amounts reportable for federal income tax purposes, and beginning
with the year ended August 31, 2002, NCRA's patronage distributions have been
calculated based on financial statement earnings.
COMPREHENSIVE INCOME -- The Company accounts for comprehensive income
(defined as the change in equity of a business enterprise during a period from
sources other than those resulting from investments by owners and distribution
to owners) in accordance with Financial Accounting Standards Board (FASB) SFAS
No. 130, "Reporting Comprehensive Income." At August 31, 2002, comprehensive
income for the Company primarily includes net income and the effects of minimum
pension liability adjustments. Total comprehensive income is reflected in the
consolidated statements of equities and comprehensive income.
F-10
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS -- The FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The adoption of this statement does not have a material
affect on the Company.
The FASB also issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
retains and expands upon the fundamental provisions of existing guidance
related to the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. Generally, the provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. The adoption of this
statement does not have a material affect on the Company.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a disposal activity
covered by SFAS No. 144. The costs addressed in SFAS No. 146 include, but are
not limited to, termination benefits, costs to terminate a contract that is not
a capital lease and costs to consolidate facilities or relocate employees. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002.
RECLASSIFICATIONS -- Certain amounts in the 2001 financial statements have
been reclassified to conform with the current year's presentation. These
reclassifications had no effect on previously reported net income, equities and
comprehensive income, or cash flows.
2. RECEIVABLES
Receivables as of August 31, 2002 and 2001 are as follows:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Trade ......................................... $717,888 $682,593
Other ......................................... 49,846 28,864
-------- --------
767,734 711,457
Less allowances for doubtful accounts ......... 26,156 25,317
-------- --------
$741,578 $686,140
======== ========
F-11
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECEIVABLES (CONTINUED)
All international sales are denominated in U.S. dollars. International
sales for the years ended August 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
--------- --------- ---------
(DOLLARS IN MILLIONS)
Africa ................ $ 135 $ 138 $ 191
Asia .................. 407 403 552
Europe ................ 282 255 304
North America ......... 298 317 324
South America ......... 100 101 119
------ ------ ------
$1,222 $1,214 $1,490
====== ====== ======
3. INVENTORIES
Inventories as of August 31, 2002 and 2001 are as follows:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Grain and oilseed ................... $393,095 $237,498
Energy .............................. 229,981 163,710
Feed and farm supplies .............. 91,138 76,570
Processed grain and oilseed ......... 36,264 28,648
Other ............................... 9,185 4,017
-------- --------
$759,663 $510,443
======== ========
As of August 31, 2002, the Company valued approximately 26% of
inventories, primarily related to energy, using the lower of cost, determined
on the LIFO method, or market (28% as of August 31, 2001). If the FIFO method
of accounting for these inventories had been used, inventories would have been
higher than the reported amount by $40.5 million and $34.0 million at August
31, 2002 and 2001, respectively.
4. INVESTMENTS
Investments as of August 31, 2002 and 2001 are as follows:
2002 2001
-------- --------
(DOLLARS IN THOUSANDS)
Cooperatives:
CF Industries, Inc. ............................. $152,996 $152,996
National Bank for Cooperatives (CoBank) ......... 30,069 33,080
Ag Processing, Inc. ............................. 25,797 24,967
Land O'Lakes, Inc. .............................. 26,232 24,604
Joint ventures:
Ventura Foods, LLC .............................. 108,981 101,089
United Country Brands, LLC ...................... 86,175 74,457
Tacoma Export Marketing Company ................. 8,414 11,638
Other ............................................ 57,943 45,122
-------- --------
$496,607 $467,953
======== ========
F-12
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
In March 2000, the Company purchased an additional 10% interest in Ventura
Foods, LLC, its consumer products and packaging joint venture, for $25.6
million, of which $13.8 million was goodwill. The Company has a 50% interest in
this joint venture. The following provides summarized information for Ventura
Foods, LLC, balance sheets as of August 31, 2002 and 2001 and statements of
operations for the twelve months ended August 31, 2002, 2001 and 2000:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Current assets .................. $171,084 $159,062
Non-current assets .............. 231,045 221,000
Current liabilities ............. 133,230 114,883
Non-current liabilities ......... 90,819 104,144
2002 2001 2000
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Net sales ............ $1,013,475 $925,962 $896,941
Gross profit ......... 181,217 161,405 143,394
Net income ........... 75,368 71,148 55,115
Effective January 1, 2000, CHS Cooperatives, Farmland and Land O'Lakes
created Agriliance, a distributor of crop nutrients, crop protection products
and other agronomy inputs and services. At formation, Agriliance managed the
agronomy marketing operations of CHS Cooperatives, Farmland and Land O'Lakes,
with the Company exchanging the right to use its agronomy operations for
26.455% of the results of the jointly managed operations.
In March 2000, the Company sold 1.455% of its economic interest in
Agriliance to Land O'Lakes, resulting in a gain of $7.4 million. On July 31,
2000, the Company exchanged its ownership interest in the Cenex/Land O'Lakes
Agronomy Company and in Agro Distribution, LLC, with a total investment of
$64.7 million, for a 25% equity interest in Agriliance. Agriliance ownership
also includes Farmland (25%) and Land O'Lakes (50%). The interests of the
Company and Farmland are held through equal ownership in United Country Brands,
LLC, a joint venture holding company whose sole operations consist of the
ownership of a 50% interest in Agriliance. Equity in the joint venture was
recorded at historical carrying value of its ownership in Cenex/Land O'Lakes
Agronomy Company and Agro Distribution, LLC and no gain or loss was recorded on
the exchange. In July 2000, Agriliance secured its own financing, which is
without recourse to the Company. Also in July 2000, Agriliance purchased the
net working capital related to agronomy operations from each of its member
owners, consisting primarily of trade accounts receivable and inventories, net
of accounts payable.
The following provide summarized information for Agriliance balance sheets
as of August 31, 2002 and 2001 and statements of operations for the years ended
August 31, 2002 and 2001:
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Current assets .................. $922,958 $956,496
Non-current assets .............. 134,247 158,107
Current liabilities ............. 700,903 802,341
Non-current liabilities ......... 107,960 110,964
F-13
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
2002 2001
------------- -------------
(DOLLARS IN THOUSANDS)
Net sales ........................ $3,625,849 $4,072,248
Earnings from operations ......... 57,604 50,423
Net income ....................... 47,044 25,053
The Company's contribution of its equity interest in Agriliance occurred
on July 31, 2000, and as such, net sales, gross profits and net income for the
one month ended August 31, 2000 have been excluded from the above summarized
information of statements of operations, as they were not material.
Disclosure of the fair value of financial instruments to which the Company
is a party includes estimates and assumptions which may be subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Financial instruments are carried at
amounts that approximate estimated fair value. Investments in cooperatives and
joint ventures have no quoted market prices and, as such, it is not practicable
to estimate their fair value.
Various agreements with other owners of investee companies and a
majority-owned subsidiary set out parameters whereby CHS Cooperatives may buy
and sell additional interests in those companies, upon the occurrence of
certain events, at fair values determinable as set forth in the specific
agreements.
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment as of August 31, 2002 and 2001
is as follows:
2002 2001
------------ ------------
(DOLLARS IN THOUSANDS)
Land and land improvements ............................. $ 63,045 $ 55,092
Buildings .............................................. 371,107 348,081
Machinery and equipment ................................ 1,470,475 1,434,598
Office and other ....................................... 62,144 56,740
Construction in progress ............................... 71,540 38,723
---------- ----------
2,038,311 1,933,234
Less accumulated depreciation and amortization ......... 980,890 909,362
---------- ----------
$1,057,421 $1,023,872
========== ==========
In January 2002, the Company formed a limited liability company (LLC) with
Cargill, Incorporated to engage in wheat flour milling and processing. The
Company holds a 24% interest in the entity, which is known as Horizon Milling,
LLC (Horizon). The Company is leasing its wheat milling facilities and related
equipment to Horizon under operating lease agreements. The book value of the
leased milling assets at August 31, 2002 was $104.9 million, net of accumulated
depreciation of $25.3 million.
For the years ended August 31, 2002, 2001 and 2000, the Company
capitalized interest of $2.1 million, $1.2 million and $2.7 million,
respectively, related to long-term construction projects.
F-14
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS
Other assets as of August 31, 2002 and 2001 are as follows:
2002 2001
---------- ----------
(DOLLARS IN THOUSANDS)
Goodwill ............................................................. $ 27,926 $ 29,153
Non-compete covenants, less accumulated amortization of $2,896 and
$1,329, respectively ................................................ 11,204 1,765
Customer lists, less accumulated amortization of $3,511 and $1,946,
respectively ........................................................ 8,447 8,095
Other intangible assets, less accumulated amortization of $2,462 and
$1,513, respectively ................................................ 15,795 239
Prepaid pension and other benefit assets ............................. 54,230 100,727
Deferred tax asset ................................................... 50,544 44,316
Notes receivable ..................................................... 4,822 5,629
Other ................................................................ 4,354 4,534
-------- --------
$177,322 $194,458
======== ========
Intangible assets subject to amortization are amortized on a straight-line
basis over the number of years that approximate their respective useful lives
(ranging from 2 to 15 years). The straight-line method of amortization reflects
an appropriate allocation of the cost of the intangible assets to earnings in
proportion to the amount of economic benefit obtained by the Company in each
reporting period. Amortization expense for the year ended August 31, 2002 was
$4.2 million. The estimated amortization expense related to intangible assets
subject to amortization for the next five years will approximate $4.0 million
annually.
Through Country Energy, LLC, formerly a joint venture with Farmland, the
Company marketed refined petroleum products including gasoline, diesel fuel,
propane and lubricants under the Cenex brand. On November 30, 2001, the Company
purchased the wholesale energy business of Farmland, as well as all interest in
Country Energy, LLC. Based on estimated fair values, $26.4 million of the
purchase price was allocated to intangible assets, primarily trademarks,
tradenames and non-compete agreements. The intangible assets have a
weighted-average life of approximately 12 years. The Company also entered into
an exclusive two-year supply agreement to purchase, at prevailing market
prices, all of the refined fuels production from Farmland's Coffeyville, Kansas
facility.
F-15
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt as of August 31, 2002 and 2001 consisted
of the following:
INTEREST RATES
AT AUGUST 31,
2002 2002 2001
------------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Notes payable (a)(g) .............................. 2.32% to 2.78% $332,514 $ 97,195
======== ========
Long-term debt:
Revolving term loans from cooperative and
other banks, payable in installments through
2009, when the balance is due (b)(c)(g) ......... 2.16% to 13.00% $254,962 $236,611
Private placement, payable in equal
installments beginning in 2008 through
2013 (d)(g) ..................................... 6.81% 225,000 225,000
Private placement, payable in equal
installments beginning in 2005 through
2011 (e)(g) ..................................... 7.43% to 7.90% 80,000 80,000
Industrial Revenue Bonds, payable in
installments through 2011 (f) ................... 5.23% to 12.97% 7,444 12,806
Other notes and contracts ........................ 4.00% to 14.00% 4,718 5,580
-------- --------
Total long-term debt ............................. 572,124 559,997
Less current portion ............................. 89,032 17,754
-------- --------
Long-term portion ................................ $483,092 $542,243
======== ========
Weighted average interest rates at August 31:
2002 2001
---------- ----------
Short-term debt .......... 2.58% 4.18%
Long-term debt ........... 6.38% 6.91%
- ------------------
(a) The Company finances its working capital needs through short-term lines of
credit with a syndication of banks. The Company has a 364-day credit
facility of $550.0 million, all of which is committed, and of which $332.0
million was outstanding on August 31, 2002. In addition to this short-term
line of credit, the Company has a 364-day credit facility dedicated to
NCRA with a syndication of banks in the amount of $30.0 million, all of
which is committed, with no amounts outstanding on August 31, 2002. Other
miscellaneous notes payable totaled $0.5 million at August 31, 2002.
(b) The Company established a $200.0 million five-year revolving credit
facility with a syndication of banks. On August 31, 2002, the Company had
an outstanding balance of $75.0 million.
(c) The Company established a long-term credit agreement which committed $200.0
million of long-term borrowing capacity to the Company through May 31,
1999, of which $164.0 million was drawn before the expiration date of that
commitment. On August 31, 2002, $144.3 million was outstanding. NCRA term
loans of $18.0 million are collateralized by NCRA's investment in CoBank.
(d) The Company entered into a private placement with several insurance
companies for long-term debt in the amount of $225.0 million.
(e) In January 2001, the Company entered into a note purchase and private shelf
agreement with Prudential Insurance Company. A long-term note was issued
for $25.0 million. A subsequent note for $55.0 million was issued in March
2001, related to the private shelf facility.
F-16
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
(f) Industrial Revenue Bonds in the amount of $2.7 million are collateralized
by property, plant and equipment, primarily energy refinery equipment,
with a cost of approximately $152.0 million, less accumulated depreciation
of approximately $115.2 million on August 31, 2002.
(g) Restrictive covenants under various agreements have requirements for
maintenance of minimum working capital levels and other financial ratios.
The fair value of long-term debt approximates book value as of August 31,
2002 and 2001.
The aggregate amount of long-term debt payable as of August 31, 2002 is as
follows (dollars in thousands):
2003 ............... $ 89,032
2004 ............... 15,079
2005 ............... 34,511
2006 ............... 34,938
2007 ............... 41,709
Thereafter ......... 356,855
--------
$572,124
========
On October 18, 2002, the Company entered into a private placement with
several insurance companies for long-term debt in the amount of $175.0 million,
which was layered into two series. The first series of $115.0 million has an
interest rate of 4.96% and will be repaid in equal semi-annual installments of
approximately $8.8 million during the years 2007 through 2013. The second
series of $60.0 million has an interest rate of 5.60% and will be repaid in
equal semi-annual installments of approximately $4.6 million during fiscal
years 2012 through 2018. The proceeds were used to pay down the Company's
short-term debt.
8. INCOME TAXES
As a result of the Company's by-law changes during 2001, and the by-law
changes of its majority-owned subsidiary (NCRA) in 2002, to distribute
patronage based on financial statement earnings (see Note 1), the statutory
rate applied to the cumulative differences between financial statement earnings
and tax basis earnings, has been changed. In connection with this change the
Company recorded a deferred tax benefit of $10.9 million as of August 31, 2002
and $34.2 million as of August 31, 2001. The $10.9 million deferred tax benefit
recorded as a result of the change in patronage distribution by NCRA as of
August 31, 2002 has been offset by a $10.9 million NCRA valuation allowance. An
additional $6.2 million of deferred tax benefit generated by NCRA was also
offset by a valuation allowance.
The provision for income taxes for the years ended August 31, 2002, 2001
and 2000 is as follows:
2002 2001 2000
------------ ------------ ---------
(DOLLARS IN THOUSANDS)
Current ..................... $ 14,300 $ 21,025 $4,347
Deferred .................... (12,700) (49,025) (467)
Valuation allowance ......... 17,100 2,400
--------- --------- ------
Income taxes ................ $ 18,700 $ (25,600) $3,880
========= ========= ======
F-17
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of August 31, 2002 and 2001
is as follows:
2002 2001
------------ ----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Accrued expenses and valuation reserves ...................... $ 49,236 $ 42,704
Postretirement health care and deferred compensation ......... 32,671 24,842
Property, plant and equipment ................................ 11,532 9,570
Alternative minimum tax credit and patronage loss
carryforward ................................................ 6,993 4,540
Other ........................................................ 12,439 12,885
--------- --------
Total deferred tax assets ................................... 112,871 94,541
--------- --------
Deferred tax liabilities:
Pension, including minimum liability ......................... 2,635 9,536
Equity method investments .................................... 20,482 27,893
Other ........................................................ 730 1,314
--------- --------
Total deferred tax liabilities ................................ 23,847 38,743
--------- --------
Deferred tax assets valuation reserve ......................... (19,466) (2,400)
--------- --------
Net deferred tax asset ........................................ $ 69,558 $ 53,398
========= ========
As of August 31, 2002, net deferred tax assets of $19.0 million and $50.5
million are included in current assets and other assets, respectively ($9.1
million and $44.3 million, respectively, as of August 31, 2001). At August 31,
2002, NCRA recognized a valuation allowance for the entire tax benefit
associated with its net deferred tax assets, as it is considered more likely
than not, based on the weight of available information, that the future tax
benefits related to these items will not be realized. At August 31, 2002,
NCRA's net deferred tax assets of approximately $19.5 million were comprised of
deferred tax assets of $23.4 million and deferred tax liabilities of $3.9
million. Deferred tax assets are comprised of basis differences related to
inventories, investments, lease obligations, accrued liabilities and certain
federal and state tax credits. NCRA files a separate tax return and, as such,
these items must be assessed independently of the Company's deferred tax assets
when determining recoverability. At August 31, 2001, NCRA also recorded a
valuation allowance of $2.4 million to account for uncertainties regarding the
recoverability of certain state tax credits.
The reconciliation of the statutory federal income tax rate to the
effective tax rate for the years ended August 31, 2002, 2001 and 2000 is as
follows:
2002 2001 2000
---------- ------------ ----------
Statutory federal income tax rate ............................ 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ................................................. 3.9 3.9 3.9
Patronage earnings ........................................... (25.0) (32.8) (37.3)
Tax effect of changes in deferred patronage .................. 4.4
Change in patronage determination ............................ (7.5) (22.4)
Export activities at rates other than the
U.S. statutory rate ......................................... (1.9)
Deferred tax asset valuation allowance ....................... 11.8 1.6
Rate changes on deferred tax assets and liabilities .......... (2.5)
Other ........................................................ (3.4) (2.0) 0.8
----- ----- -----
Effective tax rate ........................................... 12.9% (16.7)% 4.3%
===== ===== =====
F-18
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The principal differences between financial statement income and taxable
income for the years ended August 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
----------- ------------- ------------
(DOLLARS IN THOUSANDS)
Income before income taxes ................... $ 144,838 $ 152,954 $ 91,268
Financial reporting/tax differences: .........
Environmental reserves ...................... 1,939 4,453 (728)
Oil and gas activities, net ................. 1,540 (22,230) 2,600
Energy inventory market reserves ............ (933) (2,441) (19)
Pension and compensation .................... (21,491) 8,981
Investments in other entities ............... 1,898 26,495
Export activities ........................... (7,141)
Other, net .................................. (2,291) 10,038 3,255
Patronage refund provisions ................. (92,900) (128,900) (87,400)
--------- ---------- ---------
Taxable income ............................... $ 25,459 $ 49,350 $ 8,976
========= ========== =========
9. EQUITIES
In accordance with the by-laws and by action of the Board of Directors,
annual net savings from patronage sources are distributed to consenting patrons
following the close of each year, and are based on amounts using financial
statement earnings. The cash portion of the patronage distribution is
determined annually by the Board of Directors, with the balance issued in the
form of capital equity certificates.
Annual net savings from sources other than patronage may be added to the
unallocated capital reserve or, upon action by the Board of Directors,
allocated to members in the form of nonpatronage equity certificates.
Inactive direct members and patrons and active direct members and patrons
age 61 and older on June 1, 1998 are eligible for redemption of their capital
equity certificates at age 72 or death. For other active direct members and
patrons and member cooperatives, equities will be redeemed annually as
determined by the Board of Directors.
On May 31, 1997, the Company completed an offering for the sale of Equity
Participation Units (EPUs) in its Wheat Milling Defined Business Unit and its
Oilseed Processing and Refining Defined Business Unit to qualified subscribers.
Qualified subscribers were identified as Defined Members or representatives of
Defined Members who were persons or associations of producers actually engaged
in the production of agricultural products. Subscribers were allowed to
purchase a portion of their EPUs by exchanging existing patronage certificates.
The purchasers of EPUs had the right and obligation to deliver annually the
number of bushels of wheat or soybeans equal to the number of units held. Unit
holders participated in the net patronage-sourced income from operations of the
applicable Defined Business Unit as patronage refunds. Retirements of patrons'
equities attributable to EPUs, were at the discretion of the Board of
Directors, and it was the Board's goal to retire such equity on a revolving
basis seven years after declaration.
During 2001, the Company's Board of Directors adopted a resolution to
issue, at no charge, to each Defined Member of the Oilseed Processing and
Refining Defined Business Unit an additional 1/4 EPU, for each EPU held, due to
increased crush volume.
In August 2001, the CHS Cooperatives Board of Directors approved and
consummated a plan to end the Defined Investment Program. The Company redeemed
all of the EPUs and allocated the assets
F-19
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EQUITIES (CONTINUED)
of the Oilseed Processing and Refining and Wheat Milling Defined Business Units
to the Company as provided in the plan. The amounts redeemed to the Oilseed
Processing and Refining and Wheat Milling Defined Member EPU holders were $5.2
million and $9.1 million, respectively. Due to loss carry-forwards incurred by
the Wheat Milling Defined Business Unit, the plan also provided for the
cancellation of all outstanding Preferred Capital Certificates issued to the
Wheat Milling EPU holders, totaling $0.2 million. The plan further provided to
the Oilseed Processing and Refining Defined Member EPU holders for the
redemption of all outstanding Preferred Capital Certificates issued of $0.2
million and a 100% cash distribution during 2002 for the patronage refunds
earned for the fiscal year ended August 31, 2001.
The Board of Directors has authorized the sale and issuance of up to
50,000,000 shares of 8% Preferred Stock at a price of $1.00 per share. The
Company filed a registration statement on Form S-2 with the Securities and
Exchange Commission registering the Preferred Stock. The registration statement
was declared effective on October 31, 2001 and sales of the Preferred Stock
were $9.3 million (9,325,374 shares) through August 31, 2002. Cash dividends
are paid at a rate of 8% per annum per share and are fully cumulative. There is
no sinking fund requirement and the Company may redeem all or any portion of
the preferred stock upon 30 days written notice at $1.00 per share. Expenses
related to the issuance of the Preferred Stock were $3.4 million through the
year ended August 31, 2002 and have been included as a component of unallocated
capital reserve.
10. EMPLOYEE BENEFIT PLANS
The Company has various pension and other defined benefit and defined
contribution plans, in which substantially all employees may participate.
Financial information on changes in benefit obligation and plan assets
funded and balance sheet status as of August 31, 2002 and 2001 is as follows:
PENSION BENEFITS OTHER BENEFITS
------------------------- -----------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at beginning of period ......... $ 253,564 $ 258,059 $ 22,667 $ 21,439
Service cost ...................................... 10,443 8,506 557 566
Interest cost ..................................... 18,559 18,487 1,586 1,569
Plan participants contributions ................... 189
Plan amendments ................................... 2,383 6 (1,005)
Transfers ......................................... 3,677 (2,387)
Actuarial loss (gain) ............................. 2,764 (2,842) 1,716 1,902
Assumption change ................................. 2,534 638
Settlements ....................................... 643
Benefits paid ..................................... (22,979) (29,442) (2,438) (1,804)
--------- --------- -------- --------
Benefit obligation at end of period ............... $ 268,411 $ 253,564 $ 24,915 $ 22,667
========= ========= ======== ========
F-20
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
PENSION BENEFITS OTHER BENEFITS
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Change in plan assets:
Fair value of plan assets at beginning of period ..... $ 230,121 $ 266,896
Actual loss on plan assets ........................... (14,810) (16,206)
Company contributions ................................ 5,554 11,669 $ 2,249 $ 1,804
Participants contributions ........................... 189
Net transfers ........................................ 3,677 (2,796)
Benefits paid ........................................ (22,979) (29,442) (2,438) (1,804)
--------- --------- --------- ---------
Fair value of plan assets at end of period ........... $ 201,563 $ 230,121 $ -- $ --
========= ========= ========= =========
Funded status ........................................ $ (66,848) $ (23,443) $ (24,915) $ (22,667)
Employer contributions after measurement date 31,394 1,262 269 264
Unrecognized actuarial loss (gain) ................... 85,082 47,368 (3,505) (6,363)
Unrecognized transition (asset) obligation ........... (708) 10,197 11,133
Unrecognized prior service cost ...................... 10,569 9,639 (1,336) (1,534)
--------- --------- --------- ---------
Prepaid benefit cost (accrued) ....................... $ 60,197 $ 34,118 $ (19,290) $ (19,167)
========= ========= ========= =========
Amounts recognized on balance sheets
consist of:
Prepaid benefit cost ................................. $ 43,918
Accrued benefit liability ............................ $ (23,837) (12,214) $ (19,290) $ (19,167)
Intangible asset ..................................... 7,995 1,055
Minority interests ................................... 6,195
Accumulated other comprehensive loss ................. 69,844 1,359
--------- --------- --------- ---------
Net amounts recognized ............................... $ 60,197 $ 34,118 $ (19,290) $ (19,167)
========= ========= ========= =========
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the year ended August 31,
2002. The rate was assumed to decrease gradually to 6.0% for 2004 and remain at
that level thereafter. Components of net periodic benefit costs for the years
ended August 31, 2002, 2001 and 2000 are as follows:
PENSION BENEFITS OTHER BENEFITS
------------------------------------------ -----------------------------------
2002 2001 2000 2002 2001 2000
------------ ------------ ------------ ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Components of net periodic
benefit cost:
Service cost ............................... $ 10,443 $ 8,506 $ 8,777 $ 557 $ 566 $ 657
Interest cost .............................. 18,559 18,487 18,058 1,586 1,569 1,470
Expected return on assets .................. (21,386) (22,855) (20,485)
Prior service cost amortization ............ 1,314 1,193 1,182 (197) (131) (77)
Actuarial loss (gain) amortization ......... 1,387 375 (530) (505) (538) (604)
Transition amount amortization ............. (708) (861) (1,120) 936 936 936
Other ...................................... (22)
--------- --------- --------- ------ ------ ------
Net periodic benefit cost .................. $ 9,609 $ 4,845 $ 5,882 $2,377 $2,380 $2,382
========= ========= ========= ====== ====== ======
Weighted-average assumptions:
Discount rate .............................. 7.10% 7.30% 7.50% 7.10% 7.30% 7.50%
Expected return on plan assets ............. 9.00% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase .............. 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
F-21
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The aggregate projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were as follows as of August 31, 2002 and
2001:
2002 2001
----------- ----------
(DOLLARS IN THOUSANDS)
Projected benefit obligation ........... $268,411 $23,247
Accumulated benefit obligation ......... 256,795 18,599
Fair value of plan assets .............. 201,563 6,385
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in
the assumed health care cost trend rates would have the following effects:
1% POINT 1% POINT
INCREASE DECREASE
---------- -----------
(DOLLARS IN THOUSANDS)
Effect on total of service and interest cost components ......... $ 177 $ (202)
Effect on postretirement benefit obligation ..................... 1,435 (1,210)
The Company provides defined life insurance and health care benefits for
certain retired employees. The plan is contributory based on years of service
and family status, with retiree contributions adjusted annually.
The Company has other contributory defined contribution plans covering
substantially all employees. Total contributions by the Company to these plans
were $11.0 million, $6.1 million and $4.6 million, for the years ended August
31, 2002, 2001 and 2000, respectively.
11. SEGMENT REPORTING
The Company manages five business segments, which are based on products
and services, and are Agronomy, Energy, Country Operations, Grain Marketing,
and Processed Grains and Foods. Reconciling Amounts represent the elimination
of sales between segments. Due to cost allocations and intersegment activity,
management does not represent that these segments, if operated independently,
would report the income before income taxes and other financial information as
presented.
Segment information for the years ended August 31, 2002, 2001 and 2000 is
as follows:
PROCESSED CORPORATE
COUNTRY GRAIN GRAINS AND AND RECONCILING
AGRONOMY ENERGY OPERATIONS MARKETING FOODS OTHER AMOUNTS TOTAL
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
For the year ended
August 31, 2002:
Net sales ................ $2,657,689 $1,474,553 $3,787,322 $ 496,084 $ (683,781) $7,731,867
Patronage dividends ...... $ (89) 458 2,572 497 260 $ 187 3,885
Other revenues ........... 6,392 80,789 21,902 (1,469) 1,845 109,459
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(89) 2,664,539 1,557,914 3,809,721 494,875 2,032 (683,781) 7,845,211
Cost of goods sold ....... 2,489,352 1,471,422 3,778,838 457,538 (683,781) 7,513,369
Marketing, general and
administrative .......... 8,957 66,731 47,995 22,213 36,930 4,466 187,292
Interest ................. (1,403) 16,875 13,851 4,807 9,514 (1,189) 42,455
Equity (income) loss from
investments ............. (13,425) 1,166 (283) (4,257) (41,331) (3) (58,133)
Minority interests ....... 14,604 786 15,390
---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes ............ $ 5,782 $ 75,811 $ 24,143 $ 8,120 $ 32,224 $ (1,242) $ -- $ 144,838
========== =========== ========== ========== ========== ========== ========== ==========
F-22
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT REPORTING (CONTINUED)
PROCESSED CORPORATE
COUNTRY GRAIN GRAINS AND AND RECONCILING
AGRONOMY ENERGY OPERATIONS MARKETING FOODS OTHER AMOUNTS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
For the year ended
August 31, 2002:
Goodwill ................ $ 4,059 $ 262 $ 23,605 $ 27,926
========== ========== ========== ==========
Capital expenditures .... $ 54,576 $ 34,305 $ 14,851 $ 35,144 $ 1,293 $ 140,169
========== ========== ========== ========== ========== ==========
Depreciation and
amortization ........... $ 1,247 $ 58,701 $ 21,214 $ 6,235 $ 13,436 $ 3,153 $ 103,986
========== ========== ========== ========== ========== ========== ==========
Total identifiable assets
at August 31, 2002 ..... $ 242,015 $1,305,828 $ 799,711 $ 481,232 $ 439,942 $ 212,999 $3,481,727
========== ========== ========== ========== ========== ========== ==========
For the year ended
August 31, 2001:
Net sales ............... $2,781,243 $1,577,268 $3,514,314 $ 662,726 $ (782,539) $7,753,012
Patronage dividends ..... $ 196 712 3,683 840 339 $ 207 5,977
Other revenues .......... 4,036 80,479 22,964 (238) 9,013 116,254
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
196 2,785,991 1,661,430 3,538,118 662,827 9,220 (782,539) 7,875,243
Cost of goods sold ...... 2,549,099 1,569,884 3,514,575 619,184 (782,539) 7,470,203
Marketing, general and
administrative ......... 8,503 48,432 53,417 22,396 44,870 6,428 184,046
Interest ................ (4,529) 25,097 15,695 8,144 13,026 4,003 61,436
Equity (income) loss from
investments ............ (7,360) 4,081 (246) (4,519) (35,505) 15,055 (28,494)
Minority interests ...... 34,713 385 35,098
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Income (loss) before
income taxes ........... $ 3,582 $ 124,569 $ 22,295 $ (2,478) $ 21,252 $ (16,266) $ -- $ 152,954
========== ========== ========== ========== ========== ========== =========== ==========
Goodwill ................ $ 5,175 $ 373 $ 23,605 $ 29,153
========== ========== ========== ==========
Capital expenditures .... $ 38,984 $ 32,448 $ 3,715 $ 20,485 $ 1,978 $ 97,610
========== ========== ========== ========== ========== ==========
Depreciation and
amortization ........... $ 1,250 $ 55,343 $ 21,738 $ 4,917 $ 22,304 $ 3,628 $ 109,180
========== ========== ========== ========== ========== ========== ==========
Total identifiable assets
at August 31, 2001 ..... $ 230,051 $1,154,036 $ 679,053 $ 345,696 $ 430,871 $ 217,612 $3,057,319
========== ========== ========== ========== ========== ========== ==========
For the year ended
August 31, 2000:
Net sales ............... $ 808,659 $2,959,622 $1,409,892 $3,453,807 $ 584,052 $ (718,182) $8,497,850
Patronage dividends ..... 224 311 3,830 861 100 $ 168 5,494
Other revenues .......... 5,817 2,792 68,436 15,440 (10) 4,996 97,471
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
814,700 2,962,725 1,482,158 3,470,108 584,142 5,164 (718,182) 8,600,815
Cost of goods sold ...... 764,744 2,862,715 1,404,120 3,439,863 547,234 (718,182) 8,300,494
Marketing, general and
administrative ......... 20,832 43,332 44,136 21,412 21,462 4,092 155,266
Interest ................ (3,512) 27,926 12,782 8,701 9,851 1,818 57,566
Equity loss (income) from
investments ............ 4,336 (856) (1,007) (6,452) (24,367) 21 (28,325)
Minority interests ...... 24,443 103 24,546
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Income (loss) before
income taxes ........... $ 28,300 $ 5,165 $ 22,024 $ 6,584 $ 29,962 $ (767) $ -- $ 91,268
========== ========== ========== ========== ========== ========== =========== ==========
Capital expenditures .... $ 65,017 $ 38,514 $ 12,096 $ 36,494 $ 1,675 $ 153,796
========== ========== ========== ========== ========== ==========
Depreciation and
amortization ........... $ 106 $ 52,017 $ 21,717 $ 3,803 $ 11,440 $ 3,616 $ 92,699
========== ========== ========== ========== ========== ========== ==========
12. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL -- The Company is required to comply with various
environmental laws and regulations incidental to its normal business
operations. In order to meet its compliance requirements, the Company
establishes reserves for the future costs of remediation of identified issues,
which are
F-23
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
included in cost of goods sold in the consolidated statements of operations.
Additional costs for matters, which may be identified in the future, cannot be
presently determined. The resolution of any such matters may have an impact on
the Company's consolidated financial results for a particular reporting period;
however, management believes any such matters will not have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
In connection with certain refinery upgrades and enhancements that are
necessary in order to comply with existing environmental regulations, the
Company expects to incur additional capital expenditures of approximately $340
million in relation to these projects over the next four years, primarily at
the NCRA refinery. The Company anticipates funding these projects with a
combination of cash flows from operations and additional indebtedness.
OTHER LITIGATION AND CLAIMS -- The Company is involved as a defendant in
various lawsuits, claims and disputes which are in the normal course of the
Company's business. The resolution of any such matters may have an impact on
the Company's consolidated financial results for a particular reporting period;
however, management believes any resulting liability will not have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
GRAIN STORAGE -- As of August 31, 2002 and 2001, the Company stored grain
and processed grain products for third parties totaling $148.0 million and
$177.0 million, respectively. Such stored commodities and products are not the
property of the Company and therefore are not included in the Company's
inventories.
GUARANTEES -- The Company is a guarantor for lines of credit for related
companies totaling up to $86.2 million, of which $45.1 million was outstanding
as of August 31, 2002. All outstanding loans with respective creditors are
current as of August 31, 2002.
LEASE COMMITMENTS -- The Company leases approximately 1,700 rail cars with
remaining lease terms of one to 10 years. In addition, the Company has
commitments under other operating leases for various refinery, manufacturing
and transportation equipment, vehicles and office space. Some leases include
purchase options at not less than fair market value at the end of the leases.
Total rental expense for all operating leases, net of rail car mileage
credits received from the railroad and sublease income was $30.2 million, $35.5
million and $38.0 million for the years ended August 31, 2002, 2001 and 2000,
respectively. Mileage credits and sublease income were $9.5 million, $11.0
million and $10.6 million for the years ended August 31, 2002, 2001 and 2000,
respectively.
Minimum future lease payments, required under noncancellable operating
leases as of August 31, 2002, are as follows:
EQUIPMENT
RAIL CARS VEHICLES AND OTHER TOTAL
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
2003 ........................................ $ 9,100 $ 9,436 $14,417 $32,953
2004 ........................................ 7,091 6,992 10,116 24,199
2005 ........................................ 5,525 5,183 5,286 15,994
2006 ........................................ 2,018 3,321 3,561 8,900
2007 ........................................ 1,042 1,657 2,433 5,132
Thereafter .................................. 4,025 255 515 4,795
------- ------- ------- -------
Total minimum future lease payments ......... $28,801 $26,844 $36,328 $91,973
======= ======= ======= =======
F-24
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended August 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Net cash paid during the period for:
Interest ......................................... $ 44,231 $ 63,034 $ 57,062
Income taxes ..................................... 27,965 11,709 3,785
Other significant noncash transactions:
(Distributions)/contributions of inventories of
minority interests .............................. (54,399) 54,399
Capital equity certificates issued in exchange for
elevator properties ............................. 1,842 5,481 7,921
Equity Participation Units issued ................ 1,045
Accrual of patronage dividends and equity
retirements payable ............................. (56,510) (72,154) (43,694)
Other comprehensive (loss) income ................ (49,982) 512 (1,257)
14. RELATED PARTIES TRANSACTIONS
As of August 31, 2002, the Company had related party transactions, which
consisted of sales of $550.0 million, purchases of $502.4 million, receivables
of $21.2 million and payables of $18.3 million with its equity investees. These
related party transactions were primarily with Agriliance, CF Industries, Inc.,
Horizon Milling, Tacoma Export Marketing Company and Ventura Foods, LLC.
15. COMPREHENSIVE INCOME
The components of comprehensive income for the years ended August 31,
2002, 2001 and 2000 are as follows:
2002 2001 2000
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Net income .............................................. $ 126,138 $178,554 $ 87,388
Additional minimum pension liability, net of taxes ..... (48,797) (15) 153
Financial instruments, net of taxes .................... (548) 527 (1,410)
Cash flow hedges, net of taxes ......................... (637)
--------- -------- --------
Comprehensive income .................................... $ 76,156 $179,066 $ 86,131
========= ======== ========
The components of accumulated other comprehensive loss as of August 31,
2002 and 2001 are as follows:
2002 2001
---------- ---------
(DOLLARS IN THOUSANDS)
Additional minimum pension liability, net of taxes ......... $50,051 $1,254
Financial instruments, net of taxes ........................ 1,209 661
Cash flow hedges, net of taxes ............................. 637
------- ------
Accumulated other comprehensive loss ....................... $51,897 $1,915
======= ======
F-25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members and Patrons of
Cenex Harvest States Cooperatives:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of equities and comprehensive
income and of cash flows present fairly, in all material respects, the
financial position of Cenex Harvest States Cooperatives and subsidiaries as of
August 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended August 31, 2002, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS, LLP
October 18, 2002
Minneapolis, Minnesota
F-26
INDEPENDENT AUDITORS' REPORT
Members Committee of Ventura Foods, LLC:
We have audited the accompanying consolidated balance sheets of Ventura
Foods, LLC and subsidiary (the "Company") as of March 31, 2002 and 2001, and
the related consolidated statements of income, members' capital, and cash flows
for the year ended March 31, 2002, the three months ended March 31, 2001, and
the years ended December 31, 2000 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Ventura Foods, LLC and
subsidiary as of March 31, 2002 and 2001, and the results of their operations
and their cash flows for the year ended March 31, 2002, the three months ended
March 31, 2001, and the years ended December 31, 2000 and 1999 in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for start-up activities in 1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
June 19, 2002
F-27
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2001
2002 2001
-------------- ---------------
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash and cash equivalents (Note 2) .......................................... $ 9,300,000 $ 14,150,000
Trade receivables, net of allowance for doubtful accounts of $1,543,000 and
$2,000,000 at 2002 and 2001, respectively (Notes 2, 4 and 5) ............... 57,139,000 56,368,000
Inventories (Notes 2, 4 and 5) .............................................. 62,799,000 66,680,000
Prepaid expenses and other current assets ................................... 2,283,000 1,490,000
Due from Wilsey Foods, Inc. (Note 5) ........................................ 47,000
Derivative contract asset (Note 2) .......................................... 13,298,000 12,193,000
------------ ------------
TOTAL CURRENT ASSETS ...................................................... 144,819,000 150,928,000
------------ ------------
PROPERTY (Notes 2 and 4):
Land, buildings, and improvements ........................................... 98,840,000 96,082,000
Machinery and equipment ..................................................... 129,133,000 120,932,000
Construction-in-progress .................................................... 6,489,000 7,581,000
Other property .............................................................. 10,494,000 8,798,000
------------ ------------
Total ..................................................................... 244,956,000 233,393,000
Less accumulated depreciation and amortization .............................. 95,052,000 84,178,000
------------ ------------
Property, net ............................................................. 149,904,000 149,215,000
GOODWILL, Net of amortization of $18,087,000 and $15,180,000 at 2002 and
2001, respectively (Notes 2 and 3) .......................................... 43,156,000 46,063,000
TRADEMARKS, Net of amortization of $8,814,000 and $5,862,000 at 2002 and
2001, respectively (Notes 2 and 4) .......................................... 19,991,000 22,838,000
DEFERRED COMPENSATION PLAN TRUST (Note 6) .................................... 14,240,000
OTHER ASSETS, Net of amortization of $4,181,000 and $3,813,000 (Note 2) ...... 4,879,000 5,304,000
------------ ------------
TOTAL ....................................................................... $376,989,000 $374,348,000
============ ============
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable (Note 5) ................................................... $ 52,045,000 $ 56,536,000
Accrued liabilities (Note 5) ................................................ 25,784,000 22,891,000
Deferred compensation obligations (Note 6) .................................. 9,660,000
Dividends payable ........................................................... 9,550,000 18,625,000
Bank lines of credit (Note 4) ............................................... 8,000,000 5,000,000
Current portion of long-term debt (Note 4) .................................. 12,758,000 12,603,000
Current portion of long-term liability -- Wilsey Foods, Inc. (Note 1) ....... 491,000 978,000
Derivative contract liability (Note 2) ...................................... 4,120,000 4,818,000
------------ ------------
Total current liabilities ................................................. 112,748,000 131,111,000
------------ ------------
LONG-TERM DEBT (Note 4) ...................................................... 97,178,000 109,936,000
------------ ------------
DEFERRED COMPENSATION OBLIGATIONS (Note 6) ................................... 16,347,000 1,557,000
------------ ------------
Total liabilities ......................................................... 226,273,000 242,604,000
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7) ................................
MEMBERS' CAPITAL ............................................................. 150,716,000 131,744,000
------------ ------------
TOTAL ....................................................................... $376,989,000 $374,348,000
============ ============
See notes to consolidated financial statements.
F-28
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
THREE MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
MARCH 31, MARCH 31, -----------------------------------
2002 2001 2000 1999
---------------- ---------------- ---------------- ----------------
NET SALES (Notes 2 and 5) ..................... $ 965,728,000 $ 215,187,000 $ 890,042,000 $ 918,043,000
COST OF GOODS SOLD
(Notes 2 and 5) .............................. 792,689,000 177,748,000 744,282,000 798,891,000
------------- ------------- ------------- -------------
GROSS PROFIT ................................. 173,039,000 37,439,000 145,760,000 119,152,000
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, general, and administrative
(Notes 2 and 5) ............................. 92,034,000 20,121,000 78,145,000 69,127,000
Amortization of intangibles (Note 2) ......... 6,227,000 1,581,000 6,431,000 6,379,000
------------- ------------- ------------- -------------
Total operating expenses ................... 98,261,000 21,702,000 84,576,000 75,506,000
------------- ------------- ------------- -------------
OPERATING INCOME .............................. 74,778,000 15,737,000 61,184,000 43,646,000
INTEREST EXPENSE, Net ......................... 7,474,000 2,071,000 9,585,000 10,146,000
OTHER INCOME (Note 7) ......................... (3,182,000) (702,000) (5,907,000) (2,413,000)
------------- ------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE ......................... 70,486,000 14,368,000 57,506,000 35,913,000
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 2) .............................. 563,000
------------- ------------- ------------- -------------
NET INCOME .................................... $ 70,486,000 $ 14,368,000 $ 57,506,000 $ 35,350,000
============= ============= ============= =============
See notes to consolidated financial statements.
F-29
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
CENEX
HARVEST
WILSEY STATES
FOODS, INC. COOPERATIVES TOTAL
--------------- ---------------- -----------------
BALANCE, JANUARY 1, 1999 ............... $ 48,371,000 $ 32,248,000 $ 80,619,000
Net income ............................ 21,210,000 14,140,000 35,350,000
Contributions ......................... 12,000,000 8,000,000 20,000,000
Dividends ............................. (14,266,000) (9,511,000) (23,777,000)
------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 ............. 67,315,000 44,877,000 112,192,000
Net income ............................ 30,593,000 26,913,000 57,506,000
Transfer of interest (Note 1) ......... (11,775,000) 11,775,000
Dividends ............................. (23,288,000) (20,720,000) (44,008,000)
------------- ------------- -------------
BALANCE, DECEMBER 31, 2000 ............. 62,845,000 62,845,000 125,690,000
Net income ............................ 7,184,000 7,184,000 14,368,000
Dividends ............................. (4,157,000) (4,157,000) (8,314,000)
------------- ------------- -------------
BALANCE, MARCH 31, 2001 ................ 65,872,000 65,872,000 131,744,000
Net income ............................ 35,243,000 35,243,000 70,486,000
Dividends ............................. (25,757,000) (25,757,000) (51,514,000)
------------- ------------- -------------
BALANCE, MARCH 31, 2002 ................ $ 75,358,000 $ 75,358,000 $ 150,716,000
============= ============= =============
See notes to consolidated financial statements.
F-30
VENTURA FOODS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
THREE MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
MARCH 31, MARCH 31, ---------------------------------
2002 2001 2000 1999
---------------- --------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 70,486,000 $ 14,368,000 $ 57,506,000 $ 35,350,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ........................ 12,186,000 2,833,000 10,829,000 9,740,000
Amortization of intangibles .......................... 6,227,000 1,581,000 6,431,000 6,379,000
Loss (gain) on disposal/impairment of assets ......... 324,000 128,000 (139,000) 2,576,000
Derivative contract asset ............................ (1,803,000) (7,375,000)
Gain on deferred compensation plan
trust assets ........................................ (264,000)
Changes in operating assets and liabilities:
Trade receivables ................................... (771,000) 980,000 (359,000) 6,198,000
Inventories ......................................... 3,881,000 5,089,000 (3,246,000) 4,600,000
Prepaid expenses and other current assets ........... (793,000) 330,000 234,000 2,442,000
Accounts payable .................................... (4,491,000) (2,943,000) (4,654,000) (1,023,000)
Accrued liabilities ................................. 2,893,000 (2,540,000) 2,499,000 5,932,000
Deferred compensation obligations ................... 5,130,000 (1,767,000) 6,747,000 3,835,000
Due from/to affiliates .............................. 47,000 1,000 293,000 (266,000)
------------- ------------ ------------- -------------
Net cash provided by operating activities ......... 93,052,000 10,685,000 76,141,000 75,763,000
------------- ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property ................................ (13,268,000) (4,869,000) (13,037,000) (17,841,000)
Proceeds from sale of property ......................... 69,000 23,000 1,021,000 51,000
Acquisitions, net of cash acquired (Note 3) ............ (5,312,000) (50,028,000)
Acquisition of trademarks .............................. (47,000)
Investment in rabbi trust .............................. (13,976,000)
Other assets ........................................... (48,000) 67,000 (201,000) (1,355,000)
------------- ------------ ------------- -------------
Net cash used in investing activities ............. (27,223,000) (4,779,000) (17,576,000) (69,173,000)
------------- ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt ........................... 35,000,000
Repayment of long-term debt ............................ (12,603,000) (554,000) (12,417,000) (9,490,000)
Net borrowings (payments) on line of credit ............ 3,000,000 5,000,000 (15,000,000) (26,000,000)
Payment to Wilsey Foods, Inc. (Note 1) ................. (487,000) (487,000) (487,000)
Payment of bank loan fees .............................. (105,000)
Dividends paid ......................................... (60,589,000) (38,539,000) (23,274,000)
Contributions received ................................. 20,000,000
------------- ------------ ------------- -------------
Net cash (used in) provided by
financing activities ............................. (70,679,000) 3,959,000 (65,956,000) (4,356,000)
------------- ------------ ------------- -------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................... (4,850,000) 9,865,000 (7,391,000) 2,234,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD .................................... 14,150,000 4,285,000 11,676,000 9,442,000
------------- ------------ ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD .......................................... $ 9,300,000 $ 14,150,000 $ 4,285,000 $ 11,676,000
============= ============ ============= =============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION -- Cash paid
during the period for interest ......................... $ 8,129,000 $ 653,054 $ 10,181,000 $ 10,296,000
============= ============ ============= =============
See notes to consolidated financial statements.
F-31
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
1. GENERAL MATTERS
Ventura Foods, LLC and its subsidiary (the "Company") is a processor and
distributor of edible oils used in food preparation and a packager of food
products. The Company sells its products to national and regional restaurant
chains, food wholesalers, and retail chains.
The Company was formed pursuant to a Joint Venture Agreement (the
"Agreement") dated August 30, 1996 between Wilsey Foods, Inc. ("Wilsey") and
Cenex Harvest States Cooperatives ("Cenex") whereby substantially all the
assets and liabilities of Wilsey and Holsum Foods (a division of Cenex) were
transferred and assigned, with certain exclusions, to the Company. Wilsey is a
majority-owned subsidiary of Mitsui & Co., Ltd. From the period of inception
through March 31, 2000, Wilsey and Cenex owned 60 percent and 40 percent of the
Company, respectively. On March 31, 2000, Wilsey sold a 10 percent interest in
the Company to Cenex. Accordingly, Wilsey and Cenex each own 50 percent of the
Company.
At the formation date, a liability equal to the net deferred income tax
liability of Wilsey at August 30, 1996 was assumed by the Company and was
included in long-term liability -Wilsey Foods, Inc. The amount is payable in
five equal annual installments of $487,000 plus a final installment of
$491,000.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION -- The consolidated
financial statements include the accounts of Ventura Foods, LLC and its 100
percent-owned subsidiary, Ventura Jets, Inc. All material intercompany
transactions have been eliminated.
FISCAL YEAR-END -- During 2001, the Company changed its fiscal year-end to
March 31. Prior to such change, the Company's fiscal year-end had been December
31.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -- In connection with the adoption
of Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES,
on January 1, 1999, the Company charged $563,000 of previously deferred
start-up costs to expense.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
INVENTORIES -- Inventories consist of the following at March 31, 2002 and
2001:
2002 2001
-------------- --------------
Bulk oil .......................... $17,654,000 $24,642,000
Finished goods .................... 27,696,000 24,692,000
Ingredients and supplies .......... 17,449,000 17,346,000
----------- -----------
Total ............................ $62,799,000 $66,680,000
=========== ===========
Inventories are accounted for at the lower of cost or market, using the
first-in first-out method.
DERIVATIVE FINANCIAL INSTRUMENTS -- The Company's use of derivative
financial instruments is limited to forwards, futures, and certain other
delivery contracts as discussed below. The Company enters into these contracts
to limit its exposure to price volatility of various food oils that are
critical to its processing and distribution activities. It is the Company's
policy to remain substantially hedged with respect to edible oil product price
risk; derivative contracts are used to maintain this hedged position. Forward
purchase and sales contracts with established market participants as well as
exchange traded futures contracts are entered into in amounts necessary to
protect against price changes on raw materials needed for the Company's food
oil processing and distribution activities. The Company also enters into
purchase and sales commitments with major suppliers and customers at a
specified premium or discount from a future market price ("Basis Contracts").
Additionally, the Company's policies do not permit
F-32
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2. ACCOUNTING POLICIES (CONTINUED)
speculative trading of such contracts. All of these qualify as derivatives
under Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and are stated at market
value. Changes in market value are recognized in the consolidated statements of
income, through cost of sales, in the periods such changes occur. The adoption
of SFAS No. 133, on January 1, 2001, did not have a significant impact on the
Company's results of operations, as the Company historically recorded its
financial instruments at market value. Prior to the adoption of SFAS No. 133,
the market value of futures contracts, basis contracts, and forward purchase
and sales contracts were recorded as a component of inventory. Beginning with
the adoption of SFAS No. 133, the market value of these contracts is now
recorded separately on the balance sheet as derivative contract assets or
liabilities. These contracts have maturities of less than one year.
The following summarizes the Company's various derivative contracts
outstanding at March 31, 2002 and 2001:
NET UNREALIZED
FORWARD CONTRACTS AND COMMITMENTS POUNDS GAIN (LOSS)
- ----------------------------------- ------------ ---------------
(IN THOUSANDS)
MARCH 31, 2002
Forward purchases ................. 490,500 $ 7,873
Forward sales ..................... 454,100 (1,117)
Basis purchase .................... 390,300 2,304
Basis sales ....................... 62,600 (303)
Futures contracts ................. 96,100 421
--------- --------
1,493,600 $ 9,178
========= ========
MARCH 31, 2001
Forward purchases ................. 391,800 $ 3,836
Forward sales ..................... 395,200 741
Basis purchase .................... 1,316,200 1,989
Basis sales ....................... 151,500 163
Futures contracts ................. 117,900 646
--------- --------
2,372,600 $ 7,375
========= ========
The fair value of futures contracts are determined from quotes listed on
the Chicago Board of Trade or other market makers. Forward purchase and sales
contracts are with various counterparties, and the fair values of such
contracts are determined from the market price of the underlying product.
The Company is exposed to loss in the event of nonperformance by the other
parties to the contracts. However, the Company does not anticipate
nonperformance by counterparties.
PROPERTY AND DEPRECIATION -- Property is stated at cost, and depreciation
is provided for using the straight-line method over the estimated useful lives
of the assets, as follows:
Buildings ................................. 40 years
Leasehold improvements .................... 3 - 19 years
Machinery and equipment ................... 10 - 25 years
Other fixed assets ........................ 3 - 20 years
F-33
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2. ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company estimates the fair
value of financial instruments using the following methods and assumptions:
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE -- The carrying amounts
approximate fair value, due to the short maturities of these instruments.
LINES OF CREDIT -- The carrying amounts approximate fair value, as the
interest rates are based upon variable reference rates.
LONG-TERM DEBT -- Based on the borrowing rates currently available to
the Company for bank loans with similar terms and remaining maturities, the
carrying amounts approximate fair value.
FUTURES CONTRACTS -- The fair value of futures contracts (used for
hedging purposes) is determined from quotes listed principally on the
Chicago Board of Trade.
CONCENTRATION OF CREDIT RISK -- During the year ended March 31, 2002 and
the three months ended March 31, 2001 and the years ended December 31, 2000 and
1999, net sales to one customer were 22 percent, 22 percent, 21 percent, and 18
percent of total net sales, respectively. This customer represents
approximately 19 percent and 17 percent of trade receivables at March 31, 2002
and 2001, respectively. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses.
The Company maintains cash deposits with various financial institutions.
The Company periodically evaluates the credit standing of these financial
institutions and has not sustained any credit losses relating to such balances.
MARKETABLE SECURITIES -- The Company's marketable securities are composed
of equity securities that have been classified as trading securities. The
equity securities are carried at fair market value based upon quoted market
prices of those investments at March 31, 2002. Unrealized gains and losses on
equity securities are recognized in net income.
GOODWILL AND TRADEMARKS -- The Company's goodwill relates to various
acquisitions of businesses and is being amortized using the straight-line
method over periods ranging from 15 to 20 years. Trademarks are amortized using
the straight-line method over 10 to 15 years. Patents and other intangibles are
amortized using the straight-line method over 1 to 15 years (see "Recent
Accounting Pronouncements").
IMPAIRMENT OF LONG-LIVED ASSETS -- Long-lived assets, including
identifiable intangibles and goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In performing the review for recoverability,
future cash flows expected to result from the use of the asset and its eventual
disposition are estimated. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recorded under the discounted future cash flow
method. Impairment losses of $1,277,000 were recognized during 1999.
ADVERTISING COSTS -- The Company expenses advertising costs in the period
incurred. For the year ended March 31, 2002 and the three months ended March
31, 2001 and the years ended December 31, 2000 and 1999, the Company incurred
advertising expenses of approximately $7,100,000, $1,300,000, $6,100,000, and
$4,500,000, respectively.
INCOME TAXES -- The Company is a limited liability company and has no
liability for federal and state income taxes. Income is taxed to the members
based on their allocated share of taxable income or loss. However, certain
states tax the income of limited liability companies. The Company's liability
for such state income taxes is not significant.
F-34
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION -- Revenue is recognized after the related product has
been shipped and title has transferred to the customer. Sales are presented net
of discounts and sales allowances.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
periods' financial statements to conform to the 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 2001, the Financial Accounting
Standards Board ("FASB") approved the issuance of SFAS No. 141, BUSINESS
COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting
for goodwill from an amortization method to an impairment-only approach.
Amortization of goodwill, including goodwill recorded in business combinations
occurring prior to June 30, 2001, will cease upon adoption of this statement.
In addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill, and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. Under SFAS Nos. 141 and 142, goodwill and other intangibles are
initially assessed for impairment upon adoption of the statements, with
subsequent assessments required annually and when there is reason to suspect
that their values have been diminished or impaired and with any corresponding
write-downs recognized as necessary.
The Company adopted SFAS No. 141 on July 1, 2001. The adoption did not
have a material impact on its consolidated financial statements. The Company
adopted SFAS No. 142 on April 1, 2002. SFAS No. 142 requires the Company to
complete a transitional goodwill and other intangible assets impairment test.
The Company does not believe that the results of the impairment tests will have
a material impact on its consolidated financial statements. Annual goodwill
amortization of approximately $4,000,000 ceased upon the adoption of SFAS No.
142. Amortization of other intangible assets for the year ended March 31, 2002
and the three months ended March 31, 2001 and the years ended December 31, 2000
and 1999 was approximately $1,900,000, $430,000, $1,750,000 and $1,700,000,
respectively.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement will be adopted as
required in fiscal year 2004. The Company is currently assessing, but has not
yet determined, the impact this statement will have on its consolidated
financial statements.
In July 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, REPORTING THE RESULTS
OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS,
AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS.
This statement retains the requirements of SFAS No. 121 to (a) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows
F-35
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2. ACCOUNTING POLICIES (CONTINUED)
and (b) measure an impairment loss as the difference between the carrying
amount and fair value of the asset, and establishes a single accounting model,
based on the framework established in SFAS No. 121, for long-lived assets to be
disposed of by sale. This statement will be adopted as required in fiscal year
2003. The Company is currently assessing, but has not yet determined, the
impact this statement will have on its consolidated financial statements.
In November 2001, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 01-09, ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER
OR A RESELLER OF THE VENDOR'S PRODUCTS, which addresses the accounting for
consideration given by a vendor to a customer or a reseller of the vendor's
products. This new guidance provides that consideration from a vendor to a
reseller is generally presumed to be a reduction of the selling prices of the
vendor's products and therefore should be characterized as a reduction of
revenue when recognized in the vendor's income statement. This statement will
be adopted as required in fiscal year 2003. The Company is currently assessing,
but has not yet determined, the impact this guidance will have on its
consolidated financial statements.
3. ACQUISITIONS
During 2000, the Company acquired substantially all the assets and
liabilities of Sona and Hollen for $5,740,000. Sona and Hollen is a portion
packing company located in Los Alamitos, California. The acquisition has been
accounted for as a purchase, and accordingly, the purchase price has been
allocated based on the estimated fair values of the assets acquired. The excess
of the purchase price over the fair value of the assets acquired, approximately
$4,276,000, was recorded as goodwill and had been amortized using a 15-year
life. The following is a summary of the assets acquired at estimated fair
market value:
Inventories ............................... $ 637,000
Prepaid expenses and other assets ......... 208,000
Property and equipment .................... 600,000
Trademark ................................. 19,000
Goodwill .................................. 4,276,000
----------
Net assets of business acquired ........... $5,740,000
==========
On January 11, 1999, the Company acquired substantially all the assets and
liabilities of Sunnyland Refining Company ("Sunnyland") from its parent,
Kane-Miller Corp, for $53.2 million in cash. Sunnyland is a manufacturer and
national distributor of margarine products located in Birmingham, Alabama.
The acquisition has been accounted for as a purchase, and accordingly, the
purchase price has been allocated based on the estimated fair values of the
assets acquired. The excess of the purchase price over the fair value of the
assets acquired, approximately $38.8 million, was recorded as goodwill and has
been amortized using a 15-year life.
F-36
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
3. ACQUISITIONS (CONTINUED)
The following is a summary of the assets acquired and liabilities assumed
at estimated fair market value:
Cash ...................................... $ 3,201,000
Accounts receivable ....................... 6,513,000
Inventories ............................... 2,577,000
Prepaid expenses and other assets ......... 486,000
Property and equipment .................... 12,445,000
Goodwill .................................. 38,837,000
-------------
Assets acquired ........................... 64,059,000
-------------
Accounts payable .......................... (7,653,000)
Accrued liabilities ....................... (3,177,000)
-------------
Liabilities assumed ....................... (10,830,000)
-------------
Net assets of business acquired ........... $ 53,229,000
=============
4. LINES OF CREDIT AND LONG-TERM DEBT
LINES OF CREDIT -- At March 31, 2002, the Company had a revolving
line-of-credit agreement with a banking group to provide for borrowings of up
to an aggregate of $72,000,000. Borrowings at March 31, 2002 and 2001 under
such lines were $8,000,000 and $5,000,000, respectively. The interest rates
applicable to borrowings are based, at the option of the Company, at a London
Interbank Offered Rate ("LIBOR") or a term federal funds rate ("TFFR") option.
The weighted-average rate at March 31, 2002 and 2001 was 2.24 percent and 5.67
percent, respectively. The credit agreement is subject to renewal annually with
the banking group.
LONG-TERM DEBT -- At March 31, 2002 and 2001, balances outstanding on
long-term debt were $109,936,000 and $122,539,000, respectively, and represent
term loans with a banking group. The interest rate applicable to these term
loans is based, at the option of the Company, at a TFFR-based, LIBOR-based, or
a fixed rate option. The weighted-average interest rate on borrowings at March
31, 2002 and 2001 was 6.59 percent and 6.83 percent, respectively.
The term loans are collateralized by substantially all property,
equipment, and intellectual property rights, and the lines of credit are
collateralized by substantially all trade receivables and inventories of the
Company. The loan agreements contain various covenants, including compliance
with tangible net worth (as defined) and other financial ratios, restrictions
on the payment of dividends, and restrictions on the incurrence of additional
debt.
Annual maturities of long-term debt at March 31, 2002 are as follows:
2003 ........................... $ 12,758,000
2004 ........................... 74,223,000
2005 ........................... 2,799,000
2006 ........................... 2,987,000
2007 ........................... 3,187,000
Thereafter ..................... 13,982,000
------------
Total .......................... 109,936,000
Less current portion ........... 12,758,000
------------
Long-term debt ................. $ 97,178,000
============
F-37
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
5. TRANSACTIONS WITH AFFILIATES
At March 31, 2002, the Company had a receivable balance of $47,000 due
from Wilsey for reimbursement of expenses paid by the Company on behalf of
Wilsey.
Included in accounts payable at March 31, 2002 and 2001 were $5,976,000
and $3,347,000, respectively, payable to Cenex for purchases of oil. Purchases
from Cenex for the year ended March 31, 2002 and for the three months ended
March 31, 2001 and the years ended December 31, 2000 and 1999 were $47,745,000,
$8,575,000, $48,916,000, and $84,872,000, respectively. Sales to Cenex for the
year ended March 31, 2002 and for the three months ended March 31, 2001 and the
years ended December 31, 2000 and 1999, totaled $883,000, $109,000, $950,000,
and $1,130,000, respectively.
Included in accounts payable at March 31, 2002 and 2001 were $817,000 and
$448,000, respectively, payable to Mitsui USA for the Company's participation
in Mitsui USA's insurance plans. During the year ended March 31, 2001 and the
three months ended March 31, 2001 and the years ended December 31, 2000 and
1999, the Company recorded expenses of $8,487,000, $1,380,000, $5,049,000, and
$5,677,000, respectively, in connection with its participation in such plans.
Included in trade receivables at March 31, 2002 and 2001 were $69,000 and
$110,000, respectively, of receivables from Mitsui USA for product sales. Sales
to Mitsui USA for the year ended March 31, 2002 and the three months ended
March 31, 2001 and the years ended December 31, 2000 and 1999, totaled
$1,406,000, $341,000, $1,569,000, and $2,509,000, respectively.
Forward purchase contracts as of March 31, 2002 included commitments for
purchases of 78,653,000 pounds of oil from Cenex. The Company recognized gains
(losses) of $934,000, $1,788,000, $(363,000), and $(25,000), respectively, on
such related party commitments for the year ended March 31, 2002 and for the
three months ended March 31, 2001 and the years ended December 31, 2000 and
1999.
6. EMPLOYEE BENEFIT PLANS
The Company had long-term incentive arrangements for certain key
executives. Benefits under the arrangements were based on earnings over a
three-to five-year period (as defined) from inception of the arrangements
(January 1, 1997) through December 31, 2001. The incentive period ended on
December 31, 2001. An amount equal to the obligation incurred under the plan
was contributed to a rabbi trust that would be available to general creditors
in the event of bankruptcy. The trust holds investments primarily in marketable
securities that are recorded at market value (classified as trading
securities). The assets in the trust are to be distributed to the employees
upon retirement. The liability under the arrangements was $14,240,000 and
$8,774,000 as of March 31, 2002 and 2001, respectively, and is included in
accrued compensation in the accompanying consolidated balance sheets.
On January 1, 2002, the Company established new long-term incentive
arrangements with certain key executives under which they can earn additional
compensation. Under these arrangements, the amount of additional compensation
is based on the attainment of cumulative income-based or equity-based targets
over a two-to three-year period. At the end of such periods, amounts earned by
individual executives will be contributed to a rabbi trust, unless
representatives of Wilsey and Cenex elect to pay such amounts directly to the
respective key executives. At March 31, 2002, a liability for such awards of
$439,000 is classified as accrued compensation in the accompanying consolidated
balance sheets.
For the year ended March 31, 2002 and the three months ended March 31,
2001 and the years ended December 31, 2000 and 1999, the Company recognized
compensation expense under the long-term incentive arrangements of $5,657,544,
$749,815, $5,883,929, and $1,780,445, respectively.
F-38
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has a combined 401(k) and defined contribution profit-sharing
plan (the "Plan") covering substantially all employees not covered by
collective bargaining agreements. Under the Plan, employees can make annual
voluntary contributions not to exceed the lesser of an amount equal to 15
percent of their compensation or limits established by the Internal Revenue
Code. The Company is required by the Plan to make certain matching
contributions of up to 4 percent of each participant's salary and may make
discretionary profit-sharing contributions. The Company also established a
401(k) defined contribution plan covering employees under certain collective
bargaining agreements. Under this plan, employees can make annual voluntary
contributions of up to 15 percent of their compensation. Expense for the years
ended March 31, 2002 and the three months ended March 31, 2001 and the years
ended December 31, 2000 and 1999 was $5,855,000, $1,343,000, $5,139,000, and
$5,212,000, respectively. Certain of the Company's union employees are
participants in multi-employer plans. Payments to multi-employer pension plans
are negotiated in various collective bargaining agreements and aggregated
$1,162,000, $416,000, $1,641,000, and $1,465,000, for the year ended March 31,
2002 and for the three months ended March 31, 2001 and the years ended December
31, 2000 and 1999, respectively. The actuarial present value of accumulated
plan benefits and net assets available for benefits to union employees under
these multi-employer pension plans are not available, as the Company does not
administer these plans.
Effective January 1, 1999, the Company established a Supplemental
Executive Retirement Plan for certain of its employees. The projected benefit
obligation as of March 31, 2002 and 2001 was $2,049,000 and $1,484,000,
respectively. A liability of $1,668,000 and $1,557,000, as of March 31, 2002
and 2001, respectively, is included in long-term accrued compensation in the
accompanying consolidated balance sheets. The plan is unfunded. During the year
ended March 31, 2002 and the three months ended March 31, 2001 and the years
ended December 31, 2000 and 1999, the Company recorded benefit expense related
to the plan of $111,000, $420,000, $379,000, and $412,000, respectively.
The assumptions used in the measurement of the Company's benefit
obligation are as follows:
MARCH 31, DECEMBER 31,
--------------------- ---------------------
2002 2001 2000 1999
--------- --------- --------- ---------
Discount rate ......................... 7.0% 7.0% 7.0% 7.5%
Rate of compensation increase ......... 3.0% 3.0% 3.0% 4.0%
The Company accrues the actuarially determined amount necessary to fund
the participants' benefits in accordance with the requirements of the Employee
Retirement Income Security Act of 1974.
7. COMMITMENTS AND CONTINGENCIES
Future minimum annual payments under noncancelable operating leases with
lease terms in excess of one year at March 31, 2002 are as follows:
2003 ................. $ 4,960,000
2004 ................. 3,881,000
2005 ................. 3,092,000
2006 ................. 1,826,000
2007 ................. 669,000
Thereafter ........... 203,000
------------
Total ................ $ 14,631,000
============
Under the lease agreements, the Company is obligated to pay certain
property taxes, insurance, and maintenance costs. Certain leases contain
renewal and purchase options. Rental expense for the year
F-39
VENTURA FOODS, LLC AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002 AND THE THREE MONTHS ENDED
MARCH 31, 2001 AND THE YEARS ENDED DECEMBER 31, 2000 AND 1999
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ended March 31, 2002 and for the three months ended March 31, 2001 and the
years ended December 31, 2000 and 1999 under operating leases totaled
$5,671,000, $1,476,000, $5,205,000, and $5,121,000, respectively.
During the year ended December 31, 2000, the Company received a payment of
approximately $2.4 million in connection with the settlement of a class action
lawsuit. This amount has been recorded as a component of other income in the
accompanying consolidated statements of income.
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's business,
financial condition, or results of operations.
8. QUARTERLY INFORMATION (UNAUDITED)
As discussed in Note 2, the Company changed its fiscal year-end to March
31. Audited financial information for the three months ended March 31, 2001 has
been included herein. For comparison purposes, selected unaudited financial
information for the three months ended March 31, 2000 is as follows:
Sales ........................ $211,815,000
Cost of goods sold ........... 172,818,000
Net income ................... 17,123,000
Total assets ................. 362,382,000
Total liabilities ............ 231,789,000
Members' capital ............. 130,593,000
F-40