Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
under
The Securities Act of 1933
HARVEST STATES COOPERATIVES
(Exact name of registrant as specified in charter)
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Minnesota 5150 41-0251095
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1667 North Snelling
P.O. Box 64594
St. Paul, Minnesota 55164
(612) 646-9433
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Thomas F. Baker
Group Vice President--Finance
Harvest States Cooperatives
1667 North Snelling
P.O. Box 64594
St. Paul, Minnesota 55164
(612) 641-3736
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
-------------
Copy To
William B. Payne
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
(612) 340-2722
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE(1)
======================================================================
Proposed
Maximum Aggregate
Title of Each Aggregate Amount of
Class of Securities Offering Registration
to be Registered Price (1) Fee
- - - - ----------------------------------------------------------------------
Equity Participation )
Units (Milling) )
Equity Participation ) $100,000,000 $30,303.04
Units (Processing )
and Refining) )
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(1) In accordance with Rule 457(o) under the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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HARVEST STATES COOPERATIVES
CROSS REFERENCE SHEET
Item Number and Heading Location in Prospectus
- - - - ----------------------- ----------------------
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page;
Pages of Prospectus Additional Information
3. Summary Information, Risk Factors and Cover Page; Prospectus Summary;
Ratio of Earnings to Fixed Charges Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Equity Participation Units
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Cover Page
9. Description of Securities to be Equity Participation Units;
Registered Dividend Policy; Membership in the Company
and Authorized Capital
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Capitalization;
Business; Management; Certain Transactions;
Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 13, 1996
HARVEST STATES COOPERATIVES
Equity Participation Units
____ Units (Milling)
____ Units (Processing and Refining)
Harvest States Cooperatives (the "Company") is offering Equity
Participation Units ("Units") in its Wheat Milling Defined Business Unit
("Milling Business Unit") and its Oilseed Processing and Refining Defined
Business Unit ("Processing and Refining Business Unit"), each of which has been
designated as a Defined Business Unit by the Company's Board of Directors. Each
subscriber for Units in a Business Unit is required to also enter into a Member
Marketing Agreement ("Agreement") by which such holder has the right and
obligation to deliver annually the number of bushels of wheat or soybeans equal
to the number of Units held. Pursuant to the Agreement and the Company's
Articles of Incorporation and Bylaws, subscribers for Units will participate in
the net patronage sourced income from operations of the applicable Business Unit
as patronage refunds. Net patronage sourced income from a Business Unit will be
allocated on the basis of wheat or soybeans delivered pursuant to the Agreement.
The Units in the Milling Business Unit are expected to represent 50% of
the milling capacity if all are sold (giving effect to construction of
additional capacity now in process and anticipated). The Units in the Processing
and Refining Business Unit are expected to represent 50% of the soybean crushing
capacity if all are sold.
Any person wishing to purchase Units must execute a Subscription
Agreement in the form of Exhibit A and an Agreement in the form of Exhibit B and
send them, accompanied by payment, to the Company at 1667 North Snelling, P.O.
Box 64594, St. Paul, Minnesota 55164. Such Subscription Agreement and Agreement
are subject to acceptance by the Company in its sole discretion. The
Subscription Agreement and the Agreement must both be accepted if either is
accepted. Pending acceptance, all payments will be deposited in a segregated
bank account. A subscriber will receive interest income at the rate borne by the
segregated account if the subscriber's subscription is not accepted.
The offering of Units pertaining to a particular Business Unit will
continue through May 31, 1997, unless earlier terminated by the Company, which
may occur when all such Units have been sold by the Company or for any other
reason without the sale of any Units. If by the close of business on May 31,
1997, all Units pertaining to a particular Business Unit have not been
subscribed for, the Company may (i) terminate the offering as to those Units,
(ii) accept subscriptions submitted for those Units and terminate the offering
for the remaining Units or (iii) accept subscriptions submitted for those Units
and continue the offering for the remaining Units. Upon acceptance, Agreements
will become effective as of June 1, 1997. The Company reserves the right to
offer Units where the subscriber has defaulted in payment.
No producer may subscribe for Units representing more than anticipated
1997 production. No subscription for less than $6,000 will be accepted (except
to the extent prorated, as described in the next paragraph). No one Defined
Member may own more than 1% of the outstanding capacity of any one Business
Unit.
If on ___________, 1997, the Units of either Business Unit have been
oversubscribed, subscriptions will be accepted, subject to approval of the Board
of Directors, on a prorata basis, based on subscriptions actually received by
the Company through the close of business on that date.
A member may elect to use outstanding Capital Equity Certificates for
the payment of up to one-sixth of the purchase price. In addition, patrons of
Affiliated Associations who wish to subscribe may, if authorized by an
Affiliated Association, elect to use outstanding patrons' equities of such
Affiliated Association for the payment of up to one-sixth the purchase price if
the Affiliated Association agrees that such patrons' equities will be redeemed
simultaneously with Capital Equity Certificates of the Company held by such
Affiliated Association.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE UNITS
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Underwriting
Discounts and Proceeds to the
Price Commissions(1) Company (2)
------------- --------------- ----------------
Milling
Per Unit ..................... $ $ -- $
Total ........................$ $ -- $
Processing and
Refining
Per Unit ..................... $ $ -- $
Total ........................$ $ -- $
- - - - ---------------
(1) Units are being offered by the Company, and no discounts or commissions
will be paid.
(2) Before deduction of expenses estimated to be $________.
The date of this Prospectus is ______________, 1997.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or a solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
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Page
Prospectus Summary 3
Risk Factors 5
Equity Participation Units
Trading of Units
Use of Proceeds
Dividend Policy
Capitalization
Business
Management
Certain Transactions
Membership in the Company and Authorized Capital
Validity of Units
Experts
Additional Information
Index to Financial Statements ...................... F-1
Exhibits
Subscription Agreement........................... Exhibit A
Member Marketing Agreement....................... Exhibit B
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Until ________, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Units offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
The Company intends to furnish holders of the Units with annual reports
containing financial statements audited by its independent public accountants,
but does not intend to furnish interim reports.
-2-
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and related notes included elsewhere in
this Prospectus.
The Company
Harvest States Cooperatives (the "Company") is an agricultural
cooperative. Its primary business is merchandising grain, which involves
purchase of various grains from its Individual Members, Affiliated Associations
and others, sale of the grain to users, exporters and other intermediaries and
arranging for transportation and storage of purchased grain for delivery to
buyers. The Company also sells feed and other farm supplies to its Individual
Members and others, offers services to its Individual Members and Affiliated
Associations, crushes and refines soybeans, through a joint venture participates
in the food processing and packaging business and mills wheat.
The Processing and Refining Division; the Milling Division
Through this Prospectus, the Company is offering an opportunity to
participate in the patronage sourced income from soybeans from its Oilseed
Processing and Refining Division (also known as Honeymead Products Company)
("Processing and Refining Division") and the patronage sourced income from its
Wheat Milling Division (also known as Amber Milling Company) ("Milling
Division"). While the Processing and Refining Division and the Milling Division
will remain part of the Company, patronage earnings from the businesses operated
by those Divisions will inure in part to the purchasers of the Units.
At its integrated crushing and refining facility in Mankato, Minnesota,
the Processing and Refining Division processes soybeans into soybean meal,
soyflour and crude soybean oil. The crude soybean oil, with additional purchased
crude oil, is refined.
The Milling Division mills durum wheat into flour and semolina and, to a
lesser extent, mills spring and winter (hard) wheats into bread flour. While the
Milling Division had historically concentrated on durum wheat milling and is the
largest miller of durum wheat in the United States, with the opening of a new
mill in 1995 and the scheduled opening of another mill in February 1997, the
Division has broadened its markets to include bakery flour and significantly
increased its capacity.
The Offering
The Company is offering Equity Participation Units in its Wheat Milling
Business Unit and its Oilseed Processing and Refining Business Unit, each of
which has been designated as a Defined Business Unit by the Company's Board of
Directors. Each subscriber for Units in a Business Unit is required to also
enter into an a Member Marketing Agreement ("Agreement") by which such holder
has the right and obligation to deliver annually the number of bushels of wheat
or soybeans equal to the number of Units held. Pursuant to the Agreement,
subscribers for Units will participate in the net patronage sourced income from
operations of the applicable Business Unit as patronage refunds. Net patronage
sourced income from a Business Unit will be allocated on the basis of wheat or
soybeans delivered pursuant to the Agreement.
Risk Factors
Certain material factors should be considered in connection with an
investment in the Units offered hereby. See "Risk Factors."
Summary Consolidated Financial Data
Income Statement Data:
Three Months Ended
Years Ended May 31, August 31,
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1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
Revenues
Sales:
Grain .............. $2,858,358,055 $2,793,407,187 $3,086,531,429 $4,191,665,535 $7,127,223,407 $1,341,016,649 $1,875,912,189
Processed
grain ............. 460,088,193 501,297,427 593,116,553 708,219,307 819,863,541 187,687,561 234,548,425
Feed and farm
supplies .......... 118,788,291 138,103,158 165,925,459 156,699,068 207,252,696 43,124,346 61,003,251
-------------- -------------- -------------- -------------- -------------- -------------- --------------
3,437,234,539 3,432,807,772 3,845,573,441 5,056,583,910 8,154,339,644 1,571,828,556 2,171,463,865
Patronage
dividends .......... 4,476,323 7,781,622 6,609,602 6,512,481 13,278,997 1,801,005 4,504,239
Other revenues ...... 39,803,692 41,671,562 45,895,922 57,556,984 68,339,523 16,782,771 14,839,801
-------------- -------------- -------------- -------------- -------------- -------------- --------------
3,481,514,554 3,482,260,956 3,898,078,965 5,120,653,375 8,235,958,164 1,590,412,332 2,190,807,905
Costs and expenses:
Cost of goods
sold ............... 3,384,418,840 3,384,637,000 3,786,336,764 4,981,820,272 8,076,073,326 1,556,325,280 2,156,922,994
Marketing, general,
and admin-
istrative .......... 48,266,596 52,545,022 60,847,099 69,509,491 70,054,248 18,505,661 19,595,114
Interest ............ 12,842,991 8,964,230 10,250,765 19,268,575 31,921,936 6,511,366 4,621,786
-------------- -------------- -------------- -------------- -------------- -------------- --------------
3,445,488,427 3,446,146,252 3,857,434,628 5,070,598,338 8,178,049,510 1,581,642,307 2,181,139,894
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Earnings before
income taxes ........ 36,026,127 36,114,704 40,644,337 50,055,037 57,908,654 8,770,025 9,668,011
Income taxes .......... 5,000,000 3,725,000 5,500,000 5,100,000 6,900,000 1,150,000 1,150,000
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Net earnings .......... $ 31,026,127 $ 32,389,704 $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 7,620,025 $ 8,518,011
============== ============== ============== ============== ============== ============== ==============
May 31, August 31,
-------------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
Balance Sheet Data
(at end of period):
Working capital ..... 66,880,378 69,550,702 69,409,621 66,904,085 95,874,938 64,971,312 98,393,079
Net property, plant
and equipment ...... 137,919,139 146,223,870 156,311,551 205,837,690 232,145,401 216,001,148 208,605,760
Total assets ....... 523,018,883 612,261,778 734,655,223 924,533,569 1,228,772,684 1,122,040,355 983,806,311
Long-term debt,
including current
maturities ......... 49,196,060 44,479,207 39,135,097 84,816,525 132,629,176 97,566,932 129,012,393
Total equity ........ 222,126,239 246,797,147 270,761,017 299,487,893 337,252,119 307,961,026 346,382,651
============== ============== ============== ============== ============== ============== ============
RISK FACTORS
Supply and Demand. The Company may be adversely affected by
supply and demand relationships, both domestic and international. Supply is
affected by weather conditions, disease, insect damage, acreage planted,
government regulation and policies and commodity price levels. The business is
also affected by transportation conditions, including rail, vessel, barge and
truck. Demand may be affected by foreign governments and their programs,
relationships of foreign countries with the United States, the affluence of
foreign countries, acts of war, currency exchange fluctuations and substitution
of commodities. Demand may also be affected by changes in eating habits, by
population growth and increased or decreased per capita consumption of some
products.
Recent Developments. Rising grain and oilseed prices in the 1995
growing and harvesting season, which continued into 1996, tended to reduce
inventories of stored grain, but prompted producers in Europe, Canada,
Argentina, Australia and other countries to plant additional grain. Prices for
most grains have fallen substantially in recent months. Worldwide wheat
production is reported to be up, and United States exports of wheat are expected
to be down, in the year ending May 31, 1997.
The Freedom to Farm Act of 1996, enacted in April 1996, removes a
requirement that some land be idled from production as a consequence of receipt
of federal farm subsidies. As a result, the amount of land planted in some types
of crops is expected to increase in the future. The budget for the federal
export subsidy program has decreased substantially from recent years, adversely
affecting the ability of the United States to sell grain in world markets.
Price Risk and Hedging. Upon purchase, the Company has risks of
carrying grain, including price changes and performance risks (including
delivery, quality, quantity and shipment period), depending upon the type of
purchase contract entered into. The Company is exposed to risk of loss in the
market value of positions held, consisting of grain 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 grain commodity futures contracts (either a straight futures
contract or an options futures contract) on regulated commodity futures
exchanges. While hedging activities reduce the risk of loss from changing market
values of grain, such activities also limit the gain potential which otherwise
could result from changes in market prices of grain. Hedging arrangements do not
protect against nonperformance of a contract.
At any one time the Company's inventory and purchase contracts for
delivery to the Company may be substantial.
Processing and Refining Risks. Competition in the soybean processing
and refining business is driven by price, transportation costs, service and
product quality. The industry is highly competitive. Competitors are adding new
plants and expanding capacity of existing plants. Unless exports increase or
existing refineries are closed, this extra capacity is likely to put additional
pressure on prices and erode margins. Several competitors operate over various
market segments and may be suppliers to or customers of other competitors.
Milling Risks. The Company's Wheat Milling Division has under
construction a flour mill in Houston, Texas, which is not yet operational, and
plans to construct semolina and flour and bread flour mills in Pocono,
Pennsylvania, but final approvals by local and state authorities have not been
received. There can be no assurance that these new mills, if completed, will be
competitively or operationally successful. There can be no assurance that the
necessary approvals for the Pocono facility will be obtained.
Taxation. The Internal Revenue Service could take a position on
patronage refunds adverse to the holders of the Units. Further, current income
tax laws and regulations pertaining to the receipt of patronage refunds could be
changed.
USE OF PROCEEDS
The net proceeds from the sale of the Units offered hereby are
estimated to be $_________, assuming that each subscriber uses Capital Equity
Certificates to the full extent allowed in payment of the purchase price, and
after deducting the estimated offering expenses.
The Company will use the net proceeds initially to repay outstanding
balances under the Company's unsecured revolving credit facility. As of January
31, 1997, $_________ of borrowings were outstanding under this facility. The
facility is used primarily to fund working capital needs. See "Capitalization."
Upon a change in its redemption policy for Patrons' Equities by the
Board of Directors (see "Membership in the Company and Authorized Capital--Debt
and Equity Instruments--Redemption or Retirement of Patrons' Equities and
Allocated Reserve"), a portion of the proceeds will be used for redemption of
Patrons' Equities. Proceeds may also be used for construction of the proposed
Pocono Mill (see "Business--Wheat Milling--Facilities") and for other capital
purposes.
DIVIDEND POLICY
The Company distributes net patronage earnings on an annual basis in
the form of patronage refunds which are distributed as a combination of cash and
Patrons' Equities. Patrons' Equities are retired in accordance with policies
established by the Board of Directors.
Holders of the Units will not be entitled to the payment of dividends by
virtue of holding such Units. However, holders of the Units will be entitled to
receive patronage refunds attributable to the patronage sourced income from
operations of the applicable Business Unit on the basis of wheat or soybeans
delivered pursuant to the Agreement. The Board of Directors has not yet
determined the proportion of such patronage refunds to be paid in cash and the
portion to be paid as Patrons' Equities, nor has it set a policy for retirement
of Patrons' Equities arising from Business Units. The Company expects that a
high percentage of patronage refunds will be payable in cash and that non-cash
patronage dividends from Business Units will be retired over a period not to
exceed 10 years.
The Company is not authorized to issue capital stock and accordingly
does not pay dividends on capital stock. The Board of Directors is authorized to
establish the rights, preferences and privileges of equity securities, which
could include the payment of dividends, but no such equity securities are
presently outstanding.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
November 30, 1996, as adjusted to give effect to the issuance and sale by the
Company of the Units offered hereby and the application of the estimated net
proceeds therefrom.
November 30, 1996
-----------------
Outstanding As Adjusted
------------------ -------------------
Short-term debt (1): ............................... $ (2) $
================== ===================
Long-term debt:
St. Paul Bank for Cooperatives, with
fixed and variable interest rates
from 6.24% to 7.51%, due in
installments through 2007 ....................... $ 69,675,333 $
National Bank for Cooperatives, with fixed and
variable interest rates from
6.24% to 7.51%, due in installments
through 2007..................................... 51,083,333
Industrial development revenues bonds, payable
through July 2005, interest
rate 7.4%....................................... 2,100,000
Capitalized lease obligations, with
fixed and variable rates from 8.0%
to 8.90%......................................... 5,979,743
Mortgages payable and other ....................... 1,736,579
------------------ -------------------
130,574,988
Equity
Equity Participation Units....................... -- 100,000,000
Capital equity certificates......................
Non-patronage certificates.......................
Capital reserve..................................
Patronage dividend payable in cash ..............
Net earnings.....................................
-------------------
------------------ -------------------
Total capitalization.......................... $
================== ===================
(1) The Company has a $550,000,000 Revolving Credit Facility provided by
CoBank, ACB, St. Paul Bank for Cooperatives and other lenders which
will remain in place until October 31, 1997, subject to extension. The
Company may select a method of calculating interest based on a base
rate, LIBOR or a bid rate.
(2) As of January 31, 1997.
BUSINESS
Harvest States Cooperatives (the "Company") is an agricultural
cooperative. Its primary business is merchandising grain, which involves
purchase of various grains from its Individual Members, Affiliated Associations
and others, sale of the grain to users, exporters and other intermediaries and
arranging for transportation and storage of purchased grain for delivery to
buyers. The Company also sells feed and other farm supplies to its Individual
Members and others, offers services to its Individual Members and Affiliated
Associations, crushes and refines soybeans, through a joint venture participates
in the food processing and packaging business and mills wheat.
Through this Prospectus, the Company is offering an opportunity to
participate in the patronage sourced income from its Oilseed Processing and
Refining Division (also known as Honeymead Products Company) ("Processing and
Refining Division") and its Wheat Milling Division (also known as Amber Milling
Company) ("Milling Division"). While the Processing and Refining Division and
the Milling Division will remain part of the Company, the patronage earnings
from the businesses operated by those Divisions will inure in part to the
purchasers of the Units.
Information is presented in this Prospectus on the historical
operations of the Company, including the Processing and Refining Division and
the Milling Division. In addition, certain historical and pro forma information
is presented for the Processing and Refining Business Unit and the Milling
Business Unit.
The Company has authorized three classes of membership: Individual
Members ("Individual Members"), Affiliated Associations ("Affiliated
Associations") and Defined Members ("Defined Members"). Individual Members are
producers of agricultural products who have done business with the Company
during its last fiscal year and have consented to take patronage into account
for tax purposes. Affiliated Associations are associations of producers of
agricultural products complying with certain federal requirements which have
done at least $100,000 of business with the Company during its last fiscal year
and have consented to take patronage into account for tax purposes. Defined
Members are persons otherwise eligible for membership who hold Equity
Participation Units. Currently, there are no Defined Members. As of June 1,
1996, the Company had 35,915 Individual Members and 503 Affiliated Associations.
The Company's principal executive offices are located at 1667 North
Snelling Avenue, St. Paul, Minnesota 55108 (612-646-9433). As of November 30,
1996, the Company employed 1,954 full and part-time regular employees.
Individual Members, Defined Members and Affiliated Associations who
sell grain to the Company, and Individual Members, Defined Members, Affiliated
Associations and consenting patrons who purchase goods and services from the
Company are entitled to receive patronage refunds from the Company, which are
declared on an annual basis. The Company may also allocate non-member-sourced
income to its Members and Non-Member Consenting Patrons in proportion to
patronage. See "Membership in the Company and Authorized Capital."
Selected Consolidated Financial and Operating Data
The selected financial information presented below has been derived from
the Company's consolidated financial statements. The consolidated financial
statements for the years ended May 31, 1992, 1993, 1994, 1995 and 1996, have
been audited by Deloitte & Touche LLP, independent auditors. The consolidated
financial statements for the three-month periods ended August 31, 1995 and 1996,
are unaudited. In management's opinion, the unaudited financial statements for
the three-month periods include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the Company's financial
condition and results of operations for such periods. The results for the
three-month period ended August 31, 1996, are not necessarily indicative of the
results expected for the full year. The selected consolidated financial
information should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
Income Statement Data:
Three Months Ended
Years Ended May 31, August 31,
-------------------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
Revenues
Sales:
Grain ........ $2,858,358,055 $2,793,407,187 $3,086,531,429 $4,191,665,535 $7,127,223,407 $1,341,016,649 $1,875,912,189
Processed
grain ........... 460,088,193 501,297,427 593,116,553 708,219,307 819,863,541 187,687,561 234,548,425
Feed and farm
supplies ........ 118,788,291 138,103,158 165,925,459 156,699,068 207,252,696 43,124,346 61,003,251
-------------- -------------- -------------- -------------- -------------- -------------- --------------
............... 3,437,234,539 3,432,807,772 3,845,573,441 5,056,583,910 8,154,339,644 1,571,828,556 2,171,463,865
Patronage
dividends ........ 4,476,323 7,781,622 6,609,602 6,512,481 13,278,997 1,801,005 4,504,239
Other revenues .... 39,803,692 41,671,562 45,895,922 57,556,984 68,339,523 16,782,771 14,839,801
-------------- -------------- -------------- -------------- -------------- -------------- --------------
3,481,514,554 3,482,260,956 3,898,078,965 5,120,653,375 8,235,958,164 1,590,412,332 2,190,807,905
Costs and expenses:
Cost of goods
sold ............. 3,384,418,840 3,384,637,000 3,786,336,764 4,981,820,272 8,076,073,326 1,556,325,280 2,156,922,994
Marketing, general,
and admin-
istrative ........ 48,266,596 52,545,022 60,847,099 69,509,491 70,054,248 18,505,661 19,595,114
Interest .......... 12,842,991 8,964,230 10,250,765 19,268,575 31,921,936 6,511,366 4,621,786
-------------- -------------- -------------- -------------- -------------- -------------- --------------
3,445,488,427 3,446,146,252 3,857,434,628 5,070,598,338 8,178,049,510 1,581,642,307 2,181,139,894
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Earnings before
income taxes ...... 36,026,127 36,114,704 40,644,337 50,055,037 57,908,654 8,770,025 9,668,011
Income taxes ........ 5,000,000 3,725,000 5,500,000 5,100,000 6,900,000 1,150,000 1,150,000
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Net earnings ........ $ 31,026,127 $ 32,389,704 $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 7,620,025 $ 8,518,011
============== ============== ============== ============== ============== ============== ==============
Balance Sheet Data
(at end of period):
May 31, August 31,
-------------------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
Working capital ... 66,880,378 69,550,702 69,409,621 66,904,085 95,874,938 64,971,312 98,393,079
Net property, plant
and equipment ..... 137,919,139 146,223,870 156,311,551 205,837,690 232,145,401 216,001,148 208,605,760
Total assets ...... 523,018,883 612,261,778 734,655,223 924,533,569 1,228,772,684 1,122,040,355 983,806,311
Long-term debt,
including current
maturities ........ 49,196,060 44,479,207 39,135,097 84,816,525 132,629,176 97,566,932 129,012,393
Total equity ...... 222,126,239 246,797,147 270,761,017 299,487,893 337,252,119 307,961,026 346,382,651
============== ============== ============== ============== ============== ============== ============
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Comparison of Three Months Ended August 31, 1996, with 1995
The Company's consolidated net earnings for the three month period
ended August 31, 1996 of $8,500,000 improved $900,000 over 1995 due to increased
volumes and slightly higher gross margins per bushel within its Milling
Division and increased patronage refunds received on purchases of wholesale
crop inputs, partially offset by lower earnings in the Grain Marketing Division
due to decreased volumes and gross margins per bushel.
Consolidated net sales of $2,171,000,000 increased by $600,000,000
(38%) during the three months ended August 31, 1996 compared to the same period
of 1995. This increase is primarily attributed to an increase in the weighted
average of all commodities sold of $5.83 compared to $3.58 for 1995.
Patronage dividends received increased $2,700,000 (150%) for the three
month period ended August 31, 1996 versus 1995 as a result of higher patronage
earnings distributed by cooperative customers and suppliers.
Other revenues decreased $2,000,000 (12%) through August 31, 1996
versus 1995 primarily due to a decrease in interest income of $1,800,000, a
decrease in joint venture income of $500,000, primarily from those joint
ventures involved in the exporting of grain, and a decrease in storage and
handling income of $400,000, partially offset by an increase in commission
income of $700,000.
Cost of goods sold of $2,157,000,000 for the three month period ended
August 31, 1996 increased $601,000,000 (39%) from the same period of 1995. This
increase is attributable primarily to an increase in the weighted average cost
of commodities of $5.79 in 1996 from $3.54 in 1995.
Marketing and administrative expenses increased $800,000 (4%) during
the 1996 period from the 1995 period due to an increase in the relative size of
the Company's operations.
Interest expense decreased $1,900,000 (29%) for the 1996 period from
1995 attributable to a decline in working capital requirements.
Tax expense for the three month period ended August 31, 1996 remained
relatively unchanged from 1995 with effective tax rates of 11.9% and 13.1%,
respectively.
Comparison of Year Ended May 31, 1996 with 1995
Consolidated net earnings of approximately $51,000,000 for the year
ended May 31, 1996 is a $6,100,000 increase from 1995. This increase is
attributed primarily to increased volumes of grain handled and increased returns
on investments.
Consolidated net sales of $8,154,000,000 in 1996 increased by
$3,097,000,000 (61%) in 1996. This increase was due principally to grain volume
of 1.7 billion bushels in 1996, an increase of 550 million bushels over 1995 and
an increase in grain price as a weighted average of all commodities sold
which was $4.21 for 1996, 56 cents per bushel greater than 1995.
Patronage dividends increased $6,800,000 (105%) in 1996 compared to
1995 resulting from higher patronage earnings distributed by cooperative
customers and suppliers.
Other revenues of $68,300,000 increased $10,700,000 (19%) in 1996. This
net increase was due primarily to an increase of $4,600,000 in service revenues,
from the Company's export facilities, and an increase in joint venture income of
$8,500,000, primarily from those joint ventures involved in the exporting of
grain, net of a $2,400,000 decrease in all other categories of other revenues,
including the write-down of investments totaling $1,100,000.
Cost of goods sold of $8,076,000,000 increased $3,094,000,000 (62%) in
1996. This increase is attributable primarily to an increase in the weighted
average cost of commodities of $4.16 in 1996 from $3.59 in 1995.
Marketing and administrative expenses were essentially flat compared to
1995. An expansion of the relative size of the Company's operations, which
increased costs in certain areas, was offset by a decrease in pension costs of
$4,000,000, principally caused by a settlement adjustment recognized in 1995.
Interest expense of $31,900,000 increased $12,600,000 (65%) in 1996.
This increase is substantially attributable to a $10,300,000 increase in
interest on short-term debt incurred to finance increased volumes at higher
prices and an increase of $3,200,000 in interest on long-term debt incurred
primarily for the expansion of property, plant, and equipment.
Income tax expense of $6,900,000 and $5,100,000 for 1996 and 1995,
respectively, results in effective tax rates of 11.9% and 10.2%. The increase in
the effective tax rate is primarily attributable to an increase in non-patronage
income during 1996.
Comparison of Year Ended May 31, 1995 with 1994
The Company's consolidated net earnings of approximately $45,000,000
for 1995 was a $9,900,000 increase from 1994 primarily attributed to increased
grain handled at margins per bushel equal to that of the prior year, along with
increased joint venture and export terminal service revenues.
Consolidated net sales of $5,057,000,000 increased by $1,211,000,000
(31%) in 1995. This increase was due principally to grain volume of 1.15 billion
bushels in 1995 compared to 816 million bushels in 1994, an increase of 334
million bushels (41%), offset by price as a weighted average of all commodities
sold of $3.65 for 1995 compared to $3.78 for 1994, a decrease of 13 cents per
bushel.
Other revenues of $57,600,000 increased $11,700,000 (25%) from 1994.
This net increase was due primarily to an increase of $2,200,000 in service
revenues, for the most part at the Company's export facilities, an increase in
joint venture income of $4,300,000, primarily from those joint ventures involved
in the exporting of grain, and an increase of $3,500,000 in interest income
primarily generated from short-term loans to local Affiliated Associations of
the Company.
Cost of goods sold of $4,982,000,000 increased $1,196,000,000 (32%).
This increase is primarily attributed to higher volumes of grain handled offset
to some extent by lower grain prices. The weighted average cost of commodities
was $3.59 in 1995, down from $3.72 in 1994.
Marketing and administrative expenses of $69,500,000 increased
$8,700,000 (14%) in 1995. This increase was due to an expansion of the relative
size of the Company's operations which increased costs in certain areas, and an
increase in pension costs of $4,000,000 principally caused by a benefit plan
settlement adjustment recognized in 1995.
Interest expense of $19,300,000 increased $9,000,000 (87%) in 1995.
This increase is substantially attributed to increased volumes of business and
an increase of $3,000,000 in interest on long-term debt incurred primarily for
the expansion of property, plant and equipment.
Income tax expenses of $5,100,000 and $5,500,000 for 1995 and 1994,
respectively, result in effective tax rates of 10.2% and 13.5%.
Liquidity and Capital Resources
Cash Flows from Operations
Operating activities of the Company provided cash of $302,100,000
during the three months ended August 31, 1996, while operating activities used
$18,700,000 of cash for the same period in 1995. Net cash provided and used for
operations during these periods is primarily attributable to the changes in
working capital requirements with such balance declining and therefore
contributing working capital of $292,500,000 in 1996. Working capital
requirements increased and therefore used cash in the net amount of $27,700,000
in 1995.
Net cash used for the Company's operating activities totaled
$105,700,000, $49,700,000 and $33,200,000, respectively, for the years ended
1996, 1995 and 1994. The increase in net cash used in operations in 1996,
compared to 1995 and 1994, resulted primarily from increases in grain
inventories and receivables due to higher volumes of grain processed.
Cash Flows from Investing
Net cash flows used in the Company's investing activities were $100,000
and $13,400,000 during the three months ended August 31, 1996 and 1995,
respectively. Acquisitions of property, plant and equipment comprised the
principal use of this cash in each of the periods.
On August 31, 1996 the Company formed a joint venture with a regional
food processing company, and contributed substantially all of the net assets of
its Holsum Foods Division as its capital investment in the joint venture. In
return for these net assets, the Company received a 40% interest in the joint
venture and the joint venture assumed debt of $33,000,000.
For the years ended 1996, 1995 and 1994, net cash flows used in the
Company's investing activities totaled $37,600,000, $71,400,000 and $24,300,000,
respectively. The acquisition of property, plant and equipment comprised the
primary use of cash in each of these three years, totaling $40,500,000,
$69,300,000 and $28,000,000 in 1996, 1995 and 1994, respectively.
Cash Flows from Financing
The Company finances its working capital needs through short-term lines
of credit with the banks for cooperatives and commercial banks. As of May 31,
1996 the Company had short-term lines of credit totaling $570,000,000, of which
$550,000,000 was committed and $324,000,000 was outstanding.
The Company decreased its outstanding net short-term borrowings by
$315,000,000 during the three months ended August 31, 1996 and increased such
borrowings by $10,500,000 during that period in 1995.
For the years ended May 31, 1996, 1995 and 1994, the Company increased
its outstanding net short-term borrowings by $124,000,000, $87,000,000 and
$79,500,000, respectively, in order to fund the working capital needs caused by
the increase in grain volumes.
The Company has financed its long-term capital needs, primarily the
acquisition of property, plant, and equipment, with long-term agreements through
the banks for cooperatives with maturities through the year 2007. Total
indebtedness of these agreements totaled $120,700,000 and $70,300,000 on May 31,
1996 and 1995, respectively. The Company also had long-term debt in the form of
capital leases, industrial development revenue bonds and miscellaneous notes
payable totaling $11,900,000 and $14,500,000 on May 31, 1996 and 1995,
respectively.
The Company borrowed on a long-term basis $15,000,000 during the three
months ended August 31, 1995 and repaid long-term debt in the amounts of
$3,600,000 and $2,500,000 for the same period of 1996 and 1995.
The Company borrowed on a long-term basis $58,000,000, $51,000,000 and
$1,200,000 and repaid long-term debt in the amounts of $11,300,000, $5,900,000
and $6,500,000 in 1996, 1995 and 1994, respectively.
The Company anticipates further short-term financing needs to fund
increases in the volume of grain handled and further long-term needs to fund
acquisitions of grain facilities and for expansion and development of existing
value-added businesses. Management believes such needs can be financed with a
combination of debt and the proceeds of this offering.
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 year and are based on amounts reportable for federal
income tax purposes as adjusted in accordance with the bylaws. The cash portion
of this distribution, deemed by the Board of Directors to be 30% of such
earnings for 1996, 1995 and 1994, respectively, totaled $11,000,000, $10,000,000
and $6,800,000.
The Board of Directors authorized the redemption of patronage
certificates held by patrons who were 72 years of age and those held by estates
of deceased patrons during the three months ended August 31, 1996 and 1995.
These amounts totaled $1,600,000 and $1,700,000, respectively.
The Board of Directors authorized the redemption of patronage
certificates held by patrons who were 72 years of age and those held by estates
of deceased patrons during the years ended May 31, 1996, 1995 and 1994. These
amounts totaled $6,600,000, $5,700,000 and $5,500,000, respectively.
GRAIN MERCHANDISING
Industry Overview
Grain and oilseed merchandising involves the sale and distribution of
grain and oilseeds from producer to processor, to be processed for human and
animal consumption and other uses. These commodities are produced and consumed
throughout the world. Increased worldwide demand is generated through population
growth and, for certain regions, increased per capita food consumption supported
by growing affluence. Demand for these commodities is satisfied by worldwide
production, which is in part determined by prevailing prices.
In recent years, a significant portion of high demand grains (wheat,
corn and soybeans) grown domestically has been exported. United States
production competes with production in numerous other countries to supply
worldwide demand for these grains. A portion of domestic demand for other grains
has been satisfied by imports, and United States producers compete against those
imports. The ability of producers in particular countries to compete on a
worldwide basis may be enhanced by governmental support and protection, which
may vary from time to time. Demand for grain and perceptions about prevailing
supplies and future production affect prices for grain, which can be erratic.
In the United States, grain merchandising involves the purchase of
grain, sale for export or further domestic use and storage and transportation to
export facilities or to users.
Grain merchandising may be adversely affected by supply and demand
relationships, both domestic and international. Supply is affected by weather
conditions, disease, insect damage, acreage planted, government regulation and
policies and commodity price levels. The business is also affected by
transportation conditions, including rail, vessel, barge and truck. Demand may
be affected by foreign governments and their programs, relationships of foreign
countries with the United States, the affluence of foreign countries, acts of
war, currency exchange fluctuations and substitution of commodities. Demand may
also be affected by changes in eating habits, by population growth and increased
or decreased per capita consumption of some products.
Recent Developments. Rising grain prices in the 1995 growing and
harvesting season, which continued into 1996, tended to reduce inventories of
stored grain, but prompted producers in Europe, Canada, Argentina, Australia and
other countries to plant additional grain. Prices for most grains have fallen
substantially in recent months.
Worldwide wheat production is reported to be up, and United States
exports of wheat are expected to be down, in the year ending May 31, 1997.
Demand for corn has been supported domestically by its use in feeding
cattle. United States exports of meat have continued to increase.
The Freedom to Farm Act of 1996, enacted in April 1996, removes a
requirement that some land be idled from production as a consequence of receipt
of federal farm subsidies. As a result, the amount of land planted in some types
of crops is expected to increase in the future. The budget for the federal
export subsidy program has decreased substantially from recent years, adversely
affecting the ability of the United States to sell grain in world markets.
Introduction
The Company buys grain through its Grain Marketing Division from
Affiliated Associations (typically a cooperative organization of local
producers), directly from Individual Members (to a limited extent) and from
third parties (such as grain dealers, non-Member producers, marketing
associations or marketing pools, elevators and other grain merchandising
companies) and through its Agri-Service Centers, which are country elevators
owned by the Company, directly from Individual Members. See "Farm Marketing and
Supply." Grain purchased by Agri-Service Centers is usually sold to the Grain
Marketing Division for resale. A small portion of grain is handled on a
consignment basis.
Grain is sold by the Company for future delivery at a specified
location. Grain sold by a producer is typically trucked to a local elevator for
sale. From local elevators, grain may be transported in a variety of ways to the
purchaser. The Company arranges transportation to delivery locations using
truck, rail and barge transportation. Grain intended for export may be shipped
by rail to an export terminal or to a barge loading facility to be shipped by
barge to an export terminal, where it is loaded on an ocean-going vessel. Grain
intended for domestic use may be shipped by truck or rail to various locations
throughout the United States. Because of its facilities (see "--Grain Handling
and Transportation"), the Company has significant capacity to sell grain for
export.
Purchases. The number of bushels of grain purchased from Individual
Members and Affiliated Associations, the total grain purchased and the
percentage relationship for each of the years ended May 31 are set forth below:
Three Months Ended
Years Ended May 31, August 31,
------------------- -----------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
Member purchases ... 525,715,235 720,024,458 959,166,596 228,722,782 162,520,929
Total purchases .... 816,421,362 1,148,952,019 1,692,438,700 364,896,189 312,493,669
Percentage ......... 64.4% 62.7% 56.7% 62.7% 52.0%
Substantially all of the grain purchased by the Company is grown in the Midwest,
Great Plains and Pacific Northwest. The Company also purchases grain grown in
other parts of the United States and other countries.
Grains Handled. The primary grains merchandised by the Company are
corn, wheat and soybeans. The Company also merchandises barley, milo, sunflowers
and oats as well as smaller quantities of canola, flax, rye, millet and others.
The number of bushels of grain purchased by the Company for the periods
indicated is set forth below:
Three Months Ended
Years Ended May 31, August 31,
------------------- ----------
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------- -------------
Wheat....... 445,201,610 457,684,648 505,606,729 110,670,137 101,099,229
Corn ....... 185,121,268 342,832,256 777,631,466 181,706,545 138,390,104
Soybeans ... 68,325,522 172,025,373 234,930,247 39,029,209 46,548,038
Barley ..... 82,842,737 93,699,078 75,225,773 14,116,222 11,225,436
Milo ....... 5,953,433 36,663,822 48,199,610 13,074,774 10,621,758
Sunflowers.. 12,322,105 28,929,026 25,952,855 1,742,018 459,686
Oats ....... 14,097,310 13,423,696 20,008,442 4,187,136 3,545,572
All other... 2,557,377 3,694,120 4,883,578 370,149 603,846
----------- ------------- ------------- ----------- -----------
816,421,362 1,148,952,019 1,692,438,700 364,896,190 312,493,669
============= ============= ============= ============= =============
The amounts above include grain sold to the Milling Division and the Processing
and Refining Division and for use in feeds.
Sales of grain by the Company for each of the years ended May 31 are
set forth below:
1994 1995 1996
-------------- -------------- --------------
Wheat ............... $1,973,640,146 $1,890,923,540 $2,631,202,689
Corn ................ 488,542,201 954,570,208 2,518,939,007
Soybeans ............ 304,681,449 880,627,929 1,431,485,630
All other ........... 319,667,633 465,543,859 545,596,081
-------------- -------------- --------------
TOTAL ............... $3,086,531,429 $4,191,665,535 $7,127,223,407
============== ============== ==============
Recent Developments. In recent years, sales of grain have been
substantially dependent on exports. During the year ended May 31, 1996,
approximately 40% of the Company's grain sales were domestic and approximately
60% were exports. See Note 1 of Notes to Financial Statements.
Because of a decline of grain prices and anticipation of increased
worldwide supplies of grain, the Company expects that United States exports of
grains will decline in the current year. It believes that many producers will
store current production, allowing domestic supplies, which have been at
historically low levels, to be replenished. As a result, the Company expects
that its own grain sales in the current year will decline materially from the
record level for the year ended May 31, 1996.
Merchandising
The Company buys and sells grain through offices of its Grain Marketing
Division located in Portland, Oregon, Great Falls, Montana, Lincoln, Nebraska,
Kansas City, Kansas, St. Paul, Minnesota, Winona, Minnesota, Davenport, Iowa,
and Lewiston, Idaho, and at its Agri-Service Centers.
Grain purchased through Agri-Service Centers is purchased on a cash and
futures basis. Grain purchased through the Grain Marketing Division is usually
purchased for future delivery.
Grain is sold for future delivery at a specified location, with the
Company usually responsible for arranging necessary transportation to that
location. Purchasers include millers, malters, exporters and foreign buyers as
well as the soybean, wheat and feed operations of the Company. The Company is
not dependent on any one customer. The Company has supply relationships calling
for delivery of grain at prevailing market prices. Grain users store varying
amounts of grain for their own use.
The Company's ability to arrange transportation is a significant part
of the service it offers to its customers. The Company's loading capabilities
onto unit trains, ocean going vessels and barges is a component of the selling
price of grain handled by the Company
Virtually all grain sold domestically is sold by employees while
approximately half of grain exported is sold by brokers or agents and the
balance by employees. The Company has a small ownership position in Intrade, a
company which owns part of a German-based marketing organization involved in
trading grain and feedstuffs in German and international markets. The Company
also has relationships with agents, brokers and marketing companies in other
countries to assist it in export sales.
Competition
The Company competes for both the purchase and sale of grain.
Competition is intense and margins are low. Some of the Company's competitors
are integrated food producers, which may also be customers. Many competitors
have substantially greater financial resources than the Company.
In the purchase of grain from producers, location of a delivery
facility is a prime consideration but producers are willing to truck grain for
sale over increasingly longer distances. Grain prices are affected by reported
trading prices on national markets, shipping costs and storage capabilities.
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
relationship with Individual Members serviced by local Agri-Service Centers and
with Affiliated Associations gives it a broad origination capability.
The Company competes in the sale of grain based on price and its
ability to provide quantity and quality of grains required and its ability to
deliver. Location of facilities is a major factor in ability to compete. Major
grain merchandising companies in addition to the Company include
Archer-Daniels-Midland, Cargill, Continental, ConAgra, Bunge and Louis Dreyfus,
each of which handles grain volumes of more than one billion bushels annually.
The Company estimates it would be among the smaller merchandisers among these
seven. The Company also competes with numerous other grain merchandisers with
annual volumes of less than one billion bushels.
Since the Company's facilities are located primarily in the Midwest,
Great Plains and Pacific Northwest, with a terminal in the Gulf, the Company
primarily competes with the companies whose facilities are in these areas. The
Company's export facilities in three major areas allow it to ship to anyplace in
the world.
Grain Handling and Transportation
The Company owns export terminals, river terminals and other elevators
involved in the handling of grain. All such facilities can receive inbound truck
and rail. Export facilities on river systems can receive grain by barge. In
addition, the Company owns 144 Agri-Service Centers, which are country elevators
which receive grain from producers.
The Company operates river terminals at Kansas City, Missouri (two),
St. Paul, Savage and Winona, Minnesota, and Davenport, Iowa (two), which are
used to load grain onto barges for shipment to both domestic and export
customers via the Mississippi River system, on trucks for domestic markets and
on rail for both domestic and export markets. The Company owns and operates a
terminal at Kennewick, Washington, on the Columbia River. The Company has
interests in three river terminals located on the Snake River: Lewis and Clark
Terminal Association's facility located at Lewiston, Idaho, Central Ferry
Terminal Association's facility located at Central Ferry, Washington and
Co-Grain Elevator Company's facilities located at Upper Monumental and Burbank,
Washington. Much of the grain from these terminals is loaded onto barges for
shipment to Pacific Northwest export terminals.
The Company's export terminal at Superior, Wisconsin, provides access
to the Great Lakes and St. Lawrence Seaway, and the Company's export terminal at
Myrtle Grove, Louisiana, serves the Gulf market. An export terminal at Kalama,
Washington, leased by the Company and an export terminal at Vancouver,
Washington, owned by a joint venture partner, serve the Pacific market. A
partnership between the Company and Continental Grain Company operates an export
terminal at Tacoma, Washington, for feed grain and oil seed shipments to Pacific
Rim customers. A facility in Spokane, Washington is used for storage and
transloading. An elevator in Petersburg, North Dakota, is used to standardize
barley for a particular customer.
The Division leases a fleet of covered hopper cars and enters into
various contracts for covered grain barges. In addition, at various times the
Company may charter vessels.
Price Risk and Hedging
Upon purchase, the Company has risks of carrying grain, including price
changes and performance risks (including delivery, quality, quantity and
shipment period), depending upon the type of purchase contract entered into.
These contracts include flat price, basis fixed, delayed price, deferred
payment, hedge to arrive and futures fixed. The Company is exposed to risk of
loss in the market value of positions held, consisting of grain 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 grain commodity futures contracts (either a straight futures
contract or an options futures contract) on regulated commodity futures
exchanges. Most of the grain 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 grain, such activities also limit the gain potential which otherwise
could result from changes in market prices of grain. The Company's policy is to
generally maintain hedged positions in grain which is hedgeable, but the Company
can be long or short at any time. The Grain Marketing Division's profitability
is primarily derived from margins on grain merchandised and revenues generated
from other merchandising activities with its customers, 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. 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 to be sent to the applicable
exchange. Subsequent price changes could require additional maintenance margins
or could result in the return of maintenance margins.
At any one time the Grain Marketing Division's inventory and purchase
contracts for delivery to the Company may be substantial. The Grain Marketing
Group has a risk management policy and procedures that includes net position
limits. It is defined by commodity and includes both trader and management
limits. This policy and computerized procedure triggers a review by management
of the Grain Marketing Division when any trader is outside of position limits
and also triggers review by management of the Company if the Grain Marketing
Division is outside of its position limits. 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.
Seasonality
Harvest for most crops occurs in the summer and fall, and the Company
purchases more grain during that 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. Because many producers have
significant on-farm storage capacity and because of the Company's own storage
capacity, grain is bought and moved throughout the year.
Working Capital
Due to the amount of grain purchased and held in inventory, the Company
has significant working capital needs at various times of the year. The amount
of borrowings for this purpose and the interest rate charged on such borrowings
directly affect the profitability of the grain merchandising operations. See
"Capitalization."
Employees
As of November 30, 1996, the Grain Marketing Division had 520
employees, of which 82 were traders, 300 production staff, 14 management and 124
support staff. See "Farm Marketing and Supply" with respect to employment by
Agri-Service Centers.
OILSEED PROCESSING AND REFINING
Industry Overview
The soybean crushing industry converts soybeans into meal used for
feeding animals, soy flour used for specialty food and other purposes and crude
soybean oil. The soybean refining industry refines the crude oil for use in
processed foods, such as margarine, salad dressings and baked goods, and to a
more limited extent industrial uses. Soybean production is concentrated in the
central United States, Brazil, China and Argentina. Crushing plants are
generally located in proximity to sources of soybeans and usage of meal often
arises in proximity to crushing plants. Refineries are generally located next to
the crushing plants. Oil is shipped throughout the United States and for export.
Per capita domestic consumption of soybean oil has declined slightly in
recent years. Exports of soybean oil are variable but generally a minor portion
of total production. In recent years, exports have varied widely, which
dramatically influenced margins in both crushing and refining.
Usage of meal is dependent on the amount of livestock being raised,
which has increased in recent years. While per capita domestic consumption of
meat has been stable in recent years, demand for meal has increased due to
an increase in the domestic consumption of white meat and in increase in meat
exports. Soybean meal provides a ready source of protein with a 44% or higher
protein content, compared to corn at 9%, wheat at 9.5% and barley at 11.5%
Major competitors in the industry include the Company,
Archer-Daniels-Midland (ADM), Cargill, Ag Processing, Inc. ("AGP"), Central Soya
and Bunge. Competition is driven by price, transportation costs, service and
product quality. The industry is highly competitive. These and other competitors
are adding new plants and expanding capacity of existing plants. Unless exports
increase or existing refineries are closed, this extra capacity is likely to put
additional pressure on prices and erode margins. Several competitors operate
over various market segments and may be suppliers to or customers of other
competitors.
Historically, in the Company's trade area there has been an adequate
supply of soybeans, even in years when there has been a substantial amount of
soybeans exported. While the price of soybeans has fluctuated substantially, the
prices of meal and oil have followed, so that margins have been maintained. The
amount of carryover soybeans domestically at the end of the 1996 harvest season
was at the lowest level since the 1988/1989 crop year.
Business
At its integrated crushing and refining facility in Mankato, Minnesota,
the Processing and Refining Division processes soybeans into soybean meal,
soyflour and crude soybean oil. The crude soybean oil, with additional purchased
crude oil, is refined.
Selected Financial and Operating Data
The selected financial information presented below has been derived
from the Processing and Refining Division's financial statements. The financial
statements for the years ended May 31, 1994, 1995 and 1996, were audited by
Deloitte & Touche LLP. The financial statements for the three-month periods
ended August 31, 1995 and 1996, are unaudited. In management's opinion, the
unaudited financial statements for the three-month periods include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the Division's financial condition and results of operations for
such periods. The results for the three-month period ended August 31, 1996, are
not necessarily indicative of the results expected for the full year. The
selected financial information should be read in conjunction with the Division's
financial statements and notes thereto included elsewhere in this Prospectus.
Three Months Ended
Years Ended May 31, August 31,
------------------- -----------
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
Revenue:
Processed Oilseed Sales............. $358,372,039 $398,095,108 $399,271,001 $ 93,227,683 $113,145,890
Other revenues ..................... 1,394,484 1,162,518 1,435,708 1,407,881 599,421
------------ ------------ ------------ ------------ ------------
359,721,523 399,257,626 400,706,709 94,635,564 113,745,311
Cost and expenses
Costs of goods sold ................ 334,968,474 366,407,451 371,424,566 88,122,829 107,833,751
Marketing and
administrative ................... 4,722,900 5,137,663 4,544,763 1,214,952 1,194,870
Interest ........................... 164,300 0 151,500 12,600 19,100
------------ ------------ ------------ ------------ ------------
............................ 339,855,674 371,545,114 376,120,829 89,350,381 109,047,721
------------ ------------ ------------ ------------ ------------
Earnings before income
taxes .............................. 19,865,849 27,712,512 24,585,880 5,285,183 4,697,590
Income taxes ......................... 1,650,000 1,500,000 1,600,000 375,000 350,000
------------ ------------ ------------ ------------ ------------
Net earnings ......................... $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 4,910,183 $ 4,347,590
============ ============ ============ ============ ============
Earnings per bushel:
Pretax earnings .................... $ 19,865,849 $ 27,712,512 $ 24,585,880 $ 5,285,183 $ 4,697,590
Earnings from purchased oil ........ (4,511,979) (4,680,813) (3,557,406) (1,198,320) (1,239,925)
Non-patronage joint venture income.. (1,300,427) (990,191) (1,353,708) (1,355,222) (567,093)
Book to tax differences ............ 135,170 393,608 (71,485)
------------ ------------ ------------ ------------ ------------
Tax basis soybean earnings ......... $ 14,188,613 $ 22,435,116 $ 19,603,281 $ 2,731,641 $ 2,890,572
============ ============ ============ ============ ============
Bushels processed .................. 22,630,472 30,807,933 30,466,475 6,579,233 8,237,817
Earnings per bushel ................ $ 0.63 $ 0.73 $ 0.64 $ 0.42 $ 0.35
Operating Data:
Quantities processed
Soybeans (bu.) ................... 24,136,364 30,807,933 30,446,475 6,585,202 8,237,817
Crude oil (lb.) .................. 860,221,089 894,970,248 920,492,402 222,386,518 241,044,985
Production
Meal (tons) ...................... 588,873 741,190 728,435 147,723 189,913
Flour (tons) ..................... 31,614 40,614 39,914 10,198 7,794
Refined oil (lbs.) ............... 799,908,000 835,396,000 858,240,000 223,090,442 241,813,167
1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ ------------
Balance Sheet Data (at end of period):
Working capital .................... $ 33,813,064 $ 32,980,590 $ 28,619,585 $ 31,690,281 $ 26,317,895
Net property, plant
and equipment .................... 19,577,934 20,410,408 24,771,413 21,700,717 27,073,103
Total assets ....................... 53,390,998 53,390,998 53,390,998 53,390,998 53,390,998
Long-term debt, including
current maturities ............... -- -- -- -- --
Total equity ................ 53,390,998 53,390,998 53,390,998 53,390,998 53,390,998
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Certain operating information pertaining to the Division is set forth
below, as a percentage of sales, except processing margins.
Three Months Ended
Years Ended May 31, August 31,
------------------- -----------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
Gross margin
percentage ..... 6.91% 8.25% 7.33% 6.99% 5.22%
Marketing and
administrative . 1.32% 1.29% 1.14% 1.30% 1.06%
Interest ......... 0.05% -- 0.04% 0.01% 0.02%
Processing margins
Crushing/bu .... $ .50 $ .59 $ .60 $ .38 $ .32
Refining/lb .... $.0132 $.0149 $.0154 $.0116 $.0110
Because of the volatility of commodity prices, the Company believes
that processing margins are a better measure of the Division's performance than
gross margin percentages.
Comparison of Three Months Ended August 31, 1996 with 1995
The Division's net earnings of $4,400,000 for the three months ended
August 31, 1996 represent a $500,000 decrease compared to the same period in
1995. This decrease in net earnings is primarily attributable to income from an
oilseed joint venture in 1995.
Net sales of $113,100,000 for the three months ended August 31, 1996
increased by $19,900,000 (21%) compared to the same period in 1995. Volume
increases of processed soybean products, primarily soymeal and soyflour,
contributed $6,100,000 to sales and increased volumes of refined oil contributed
$5,800,000. Increased sales prices for soymeal and soyflour contributed
$15,500,000 in sales, offset by a decline in the average sales price for refined
oils which reduced sales by $7,500,000.
Other revenues of $600,000 decreased $800,000 (57%) from the 1995
period due primarily to income from an oilseed joint venture in 1995.
Cost of goods sold for the 1996 period of $107,800,000 increased
$19,700,000 (22%) from 1995. Of this increase, $9,600,000 is attributable to
additional soybean processing volume (8,250,000 bushels in 1996 compared with
6,600,000 bushels in 1995). Additional requirements for crude soy oil in 1996
resulted in approximately $3,700,000 of increased costs over 1995. An increase
in the per bushel cost of soybeans in 1996 resulted in $15,600,000 in additional
costs compared to 1995. These costs were partially offset by a decline in the
cost per pound of crude soybean oil, which reduced cost of sales by $9,200,000.
Plant expenses were essentially unchanged in 1996.
Marketing and administrative expenses were unchanged for the 1996
period compared to the 1995 period.
Interest expense was unchanged for the three months ended August 31,
1996 compared with the same period in 1995.
Income tax expense of $350,000 and $375,000 for the three months ended
August 31, 1996 and 1995, respectively, results in effective tax rates of 7.5%
and 7.1%. The increase in the effective tax rate is the result of a higher
percentage of divisional nonpatronage income in 1996 to total divisional income,
versus 1995.
Comparison of Year Ended May 31, 1996 with 1995
The Division's net earnings of $23,000,000 for the year ended May
31, 1996 is a $3,200,000 decrease in net earnings from the prior year. This
decrease in net earnings is attributable to an increase in cost of goods sold
which could not entirely be passed on to the customer due to competitive
industry conditions.
Net sales of $399,300,000 increased by $1,200,000 in 1996 compared to
1995. Product volume increases, particularly refined oil, contributed $6,800,000
in additional sales, offset by a decline in overall average sale prices which
decreased net sales by $5,600,000.
Other revenues of $1,400,000 increased $200,000 (17%) compared to 1995.
This net increase was primarily attributed to an increase in income from an
oilseed joint venture.
Cost of goods sold of $371,400,000 in 1996 increased $5,000,000 (1.4%)
compared to 1995. Of this increase, $2,700,000 is due to increased volume of
production and $2,500,000 is due to increased prices of soybeans and crude
soybean oil. Plant expenses decreased by $200,000.
While the cost of raw materials (soybeans and soybean crude oil)
increased during the year on a per unit basis, the average sales price for
products declined because of an overall increase in production in the industry.
The increase in raw material costs could not be passed on in the form of higher
sales prices because of this competitive environment and is the primary cause
for the decline in gross margins and net earnings in 1996 when compared to 1995.
Marketing and administrative expenses declined by $600,000 in 1996.
This decrease largely results from additional pension expense of $600,000 in
1995 related to a benefit plan settlement adjustment which was allocated to all
Harvest States divisions.
The Division incurred interest expense of $152,000 in 1996 while in
1995 it incurred no such expense. This increase is attributable to increased
working capital requirements caused primarily by comparatively higher inventory
values caused by higher soybean and soybean oil prices and fixed asset additions
of $6,000,000 in 1996 which were partially financed by borrowings.
Income tax expense of $1,600,000 and $1,500,000 for 1996 and 1995,
respectively, results in effective tax rates of 6.5% and 5.4%. The increase in
the effective tax rate is the result of a higher percentage of divisional
nonpatronage income in 1996.
Comparison of Year Ended May 31, 1995 With 1994
The Division's net earnings of $26,200,000 for 1995 improved $8,000,000
over 1994 due primarily to increased unit sales of soybean meal and oil.
Net sales of $398,100,000 increased by $39,700,000 (11%) over 1994.
This increase was due primarily to expansion of the facility's soybean crushing
capacity and production time lost in the 1994 season due to an extended
construction project. Soybeans crushed totaled 30,808,000 bushels in 1995
compared to 24,136,000 bushels in 1994, an increase of 28%. This increase
contributed approximately $41,000,000 in additional sales. A slight decline in
the average sales price of products reduced sales by approximately $1,300,000.
Other revenues of $1,200,000 decreased $200,000 (14%) compared to 1994.
This net decrease was due primarily to a decrease in income from the supply
contract assigned to another processor of $300,000, offset by an increase in
interest income of $100,000.
Cost of goods sold of $366,400,000 increased $31,400,000 (9.4%) from
1994. Increased volume, particularly soybeans purchased and crushed, produced
approximately $49,400,000 in additional costs. This volume increase was
partially offset by a decline in the per unit cost of soybeans and soybean oil,
which produced a favorable variance compared to the prior year of approximately
$18,700,000. Plant expense increased approximately $700,000 in 1995 due to the
additional operating time related to the volume increases.
Marketing and administrative expenses increased $400,000 (8.5%) over
1994 primarily attributed to an increase in pension costs arising from a benefit
plan settlement adjustment recognized in 1995 partially offset with a decrease
of $200,000 in other marketing and administrative expenses.
The Division incurred no interest expense in 1995 compared with
interest expense of $164,000 in 1994, primarily because of lower working capital
requirements in 1995. Working capital requirements, primarily attributed to
inventories, declined $16,900,000 between May 31, 1994 and May 31, 1995.
Income tax expenses of $1,500,000 and $1,650,000 for 1995 and 1994,
respectively, result in effective tax rates of 5.4% and 8.3%. This decrease was
the result of a lower percentage of divisional nonpatronage income to total
divisional pretax income in 1995 versus 1994.
Liquidity and Capital Resources
The Division's cash requirements result from capital improvements and
from a need to finance additional inventories and receivables based on increased
raw material costs or levels. These cash needs are expected to be fulfilled by
the Company.
Cash Flows from Operations
Operating activities for the three months ended August 31, 1996 and
1995, respectively, provided cash of $15,300,000 and $7,300,000 due to net
earnings contributions of $4,400,000 and $4,900,000, and a decrease in working
capital requirements of $10,600,000 and $25,000,000.
For the years ended May 31, 1996, 1995 and 1994, the Division's
operating activities generated net cash of $14,400,000, $44,900,000 and
$9,100,000. Net earnings of $23,000,000, $26,200,000 and $18,200,000 in 1996,
1995 and 1994, respectively, were offset by an increase in working capital
requirements in 1996 of $10,200,000, in 1994 of $5,800,000, while a decrease in
working capital requirements in 1995 added $16,900,000.
Cash Flows Used for Investing
The Division used $2,700,000 and $1,700,000 during the three months
ended August 31, 1996 and 1995, respectively, for the purchase of property,
plant and equipment.
Net cash flows used in the Division's investing activities for the
years ended 1996, 1995 and 1994 were $6,000,000, $2,600,000 and $6,300,000,
respectively. Essentially all of these cash usages were for the acquisition of
property, plant and equipment.
Cash Flows from Financing Activities
The Division's financing activities are coordinated through the
Company's cash management department. Cash from all of the Company's operations
is deposited with the Company's cash management department and disbursements are
made centrally. As a result, the Division has a zero cash position. Financing is
available from the Company to the extent of the Company's working capital
position and corporate loan agreements with various banks, and cash requirements
of all other Company operations.
Working capital requirements for each Division of the Company are
reviewed on a periodic basis, and could potentially be restricted based upon
management's evaluation of the prevailing business conditions and availability
of funds.
The Division had debt of $1,200,000 on August 31, 1996, an increase of
$400,000 over 1995 which reflects working capital and fixed asset financing
requirements.
Debt outstanding and payable to the Company as of May 31, 1996 and 1994
was $2,300,000 and $2,400,000, respectively, whereas the Division had a
receivable from the Company of $1,900,000 on May 31, 1995. These interest
bearing balances reflect working capital and fixed asset financing requirements
of the respective years.
Supply
The Processing and Refining Division purchases virtually all of the
soybeans processed by it from Members. The balance is purchased in the
commercial marketplace. Because the Processing and Refining Division has not had
long-term contracts with customers, it does not obligate itself to purchase
soybeans based on orders received from customers but instead on its
contemplation of future production. The Processing and Refining Division does
not hold significant inventories of raw beans; capacity for raw bean storage is
approximately three to four weeks of production. At any one time, inventories of
beans and contracts for future delivery represent two to ten weeks of
requirements. Inventories of raw beans and contracted purchases for future
delivery are substantially hedged.
The Processing and Refining Division also purchases crude soybean oil
for processing at its refinery. Approximately 40% of the crude oil refined is
produced by the Processing and Refining Division, and the balance is purchased.
Major suppliers have been AGP and ADM. Because ADM is opening a refinery early
in 1997 in Minnesota, it will no longer be a major supplier of crude oil.
However, there are several producers of crude oil, and the Company believes it
will be able to replace this supply source. The refining facility has storage
capacity for approximately 10 days' supply of crude oil, so it depends on a
steady supply of crude oil to supplement its own output of crude oil to maintain
constant production. It typically commits for several months' supply, to be
priced prior to delivery.
As with other agricultural commodities, the availability and price of
soybeans fluctuate with forces of supply and demand. The Processing and Refining
Division has never experienced a supply shortage of soybeans.
Customers
Refined Oils. The Processing and Refining Division sells refined oil
throughout most of the United States although it concentrates on customers
located in Minnesota, Wisconsin, North and South Dakota, northern Iowa and
northern Illinois, which can be reached by truck rather than rail and are
therefore slightly more profitable. Customers in these states accounted for more
than 50% of refined oil sales in the year ended May 31, 1996. The Company
estimates that of oil sold, 25% is used for margarine, 15 to 20% for salad
dressing and smaller percentages for snack foods, bakeries, imitation cheese
manufacturers, processed potato manufacturers and others. Approximately 5% of
oil sales are for industrial use. During the year ended May 31, 1996, the
Processing and Refining Division had over 100 customers, the largest of which
was Ventura Foods and its predecessor operations described in the next
paragraph. One other customer was responsible for over 10% of refined oil sales
by the Division. Sales of refined oil are made by Division employees and to a
lesser extent by brokers.
The Company has a long-term supply agreement with Ventura Foods, LLC.
(see "--Ventura Foods") which commences January 1, 1997 and continues for 15
years or longer if the Company continues to hold at least a 25.5% interest in
Ventura Foods. The Company has agreed to supply and Ventura has agreed to
purchase a minimum quantity of soybean salad oil, hydrogenated soybean oil and
other edible oils which the Company may refine during the term of the agreement.
The Company has agreed to sell to Ventura Foods, and Ventura Foods has agreed to
purchase from the Company, during each calendar year at least 430,000,000 pounds
of products or 50% of its requirements if greater, but not more than 100% of its
requirements. The price for the products sold to Ventura Foods is a formula
adjusted annually to be competitive with alternative sources.
Soybean Meal. Soybean meal sold by the Processing and Refining Division
is used for feeding animals. During the year ended May 31, 1996, the Division
sold meal to over 500 customers, primarily feed lots and feed mills. During the
year ended May 31, 1996, ten customers accounted for approximately 55% of meal
sold, and two customers, which would be difficult to replace, accounted for
approximately 34% of meal sold. For the year ended May 31, 1996, 55% of meal was
sold in Minnesota, 25% in Wisconsin, 13% in Canada and the balance in Iowa, the
Dakotas and Montana. These sales could be adversely affected by a decline in the
livestock or turkey industries in these areas. Substantially all meal sales are
made directly by employees of the Division.
Soyflour. Soyflour is used in the baking industry, as milk replacers in
animal feed and in industrial applications. Sales of soyflour have not been
significant relative to sales of meal.
Competition
The Company believes that the Processing and Refining Division has 6 to
8% of the refined soybean oil market and less than 3% of the soybean crushing
capacity. See "Industry Overview."
Processing
Soybeans arriving by truck or rail are sampled, weighed, dumped and
unloaded into bean storage. When brought out of storage, beans are cleaned,
dehulled, cracked and conditioned and are compressed into flakes. Oil is removed
from the flakes through a solvent process. Flakes are then further processed
into soyflour or soymeal. Soymeal can be made into animal feed at various
protein levels.
Crude oil is filtered to remove remaining meal particles and
centrifuged to separate out trace constituents. The oil can be sold as an
industrial product used in plastics, inks and paints. Further processing
prepares the oil for food use, by bleaching with a special clay to remove trace
metals, chlorophyll and other impurities to make salad oil. By adding hydrogen
under pressure to bleached oil, the Company makes partially hydrogenated soybean
oil which may be used in products such as shortenings or margarines. To remove
unwanted odors, flavors and mild color constituents, bleached or hydrogenated
oil is heated under vacuum. The result is a product that is flavorless,
odorless, tasteless and virtually clear.
While the Processing and Refining Division runs at between 80 to 100%
of capacity throughout the year, volume is typically higher at harvest time
since soybean supplies are more abundant in the fall. Producer and cooperative
elevator storage capabilities allow suppliers to sell for delivery throughout
the year.
Facilities
The Division has one facility located in Mankato, Minnesota, comprised
of a crushing plant, a refinery, a flour plant and self contained utilities. A
quality control lab with technically sophisticated equipment assures high
quality standards.
The Division expects to expend approximately $26 to $36 million over
the three years ending May 31, 1999, to expand the capacity of its crushing
plant, to increase processing efficiency and to meet environmental requirements.
Employees
The Processing and Refining Division currently employs 202 employees,
34 in the office in administration, sales and support service and 168 in the
plant.
VENTURA FOODS
On August 30, 1996, the Company and Wilsey Foods, Inc. combined the
assets and certain liabilities of the Company's Holsum Foods consumer products
packaging division with the assets and liabilities of Wilsey Foods, Inc. as
Ventura Foods, LLC ("Ventura Foods"). A joint venture owned by Wilsey Foods,
Inc. and the Company which operated a manufacturing facility in Chambersburg,
Pennsylvania, was merged into Ventura Foods. The Company owns 40% and Wilsey
Foods owns 60% of the equity and rights to distribution of profits of Ventura
Foods. The Company's total net investment in Ventura Foods was $27,000,000 as of
August 30, 1996.
Sales by the Processing and Refining Division to Ventura Foods and its
predecessors in interest are shown below:
Three Months Ended
Years Ended May 31, August 31,
------------------- ----------
1994 1995 1996 1995 1996
----------- ----------- ------------ ----------- -----------
Sales ($) $80,425,000 $99,150,000 $111,650,000 $29,632,000 $30,322,000
Percentage of total
refinery sales ........... 31% 35% 40% 41% 42%
Ventura Foods is in the business of manufacturing and/or packaging and
selling food products, including salad dressings, mayonnaise, margarine, salad
oils, jams, jellies, olives, syrups, soup bases and sauces. Its customers are
national. Ventura Foods is governed by a committee, and each of the Company and
Wilsey Foods appoints half the committee members. Neither the Company nor Wilsey
Foods may transfer any part of its interest in Ventura Foods until September 1,
1999. Thereafter a transferring party must retain at least a 25.5% interest in
Ventura Foods. Ventura Foods will be dissolved if it has cumulative losses in
excess of $25 million or is unable to discharge its liabilities as they become
due.
WHEAT MILLING
Industry Overview
The Company's Milling Division mills durum wheat into flour and semolina
and, to a lesser extent, mills spring and winter (hard) wheats into bread flour.
The Milling Division is the largest miller of durum wheat in the United States.
The Milling Division had historically concentrated on durum wheat milling at its
Rush City and Huron facilities. With the opening of its Kenosha mill in late
1995, which can produce durum and bakery flours, and its Houston facility,
scheduled to open in February 1997, which will produce primarily bakery flour,
the Division has broadened its markets and significantly increased its capacity.
Semolina and Durum Flour. Durum wheat millers process durum wheat into
semolina and durum flours. Semolina and high grade durum flours are the chief
ingredient in pasta; low grade durum flour is used for pet food. Durum is grown
in arid regions of the United States, such as North Dakota and certain areas of
the Southwest, as well as in other countries. Most of the quality durum is grown
in the Midwest, particularly North Dakota. Durum milling plants are generally
located in proximity to customers; wheat is shipped to the mill for milling.
Sale of semolina and durum flour is entirely dependent on pasta
production. Per capita consumption of pasta has continued to increase in recent
years, and the number of consumers continues to grow with population growth.
Pasta in its many forms is sold at retail, for restaurants and institutional use
and for use in other processed food products.
Imported pasta accounted for approximately 11% of the domestic market
in the year ended May 31, 1996. The International Trade Commission in July 1996
determined that certain Italian and Turkish companies benefitted unfairly from
subsidies and had sold product in the United States at less than fair value and
imposed countervailing and anti-dumping duties. However, the Company does not
believe the amount of imports has decreased significantly.
Major competitors in the industry (and estimates by the Company of
their respective market shares) include the Company (30%), Italgrani (20%) and
Miller Milling (10%). Competition is driven by price, service and product
quality. Some competitors have developed long-term relationships with customers
by locating plants adjacent to pasta manufacturing plants.
Bakery Flour. Bakery flour milled from spring and hard winter wheat is
used in breads, cookies, pizza crusts, tortillas and other products. The baking
industry is highly fragmented, with the largest participant being no more than
four percent of the market.
Demand for bakery flour has been stable, although per capita
consumption fell slightly in the year ended May 31, 1996. New dietary guidelines
established by the United States Department of Agriculture emphasize cereal
grains in the food pyramid. The Company believes that demand for bakery flour
will increase based on population growth. Imports and exports of bakery flour do
not significantly affect the domestic business.
Selected Financial and Operating Data
The selected financial information presented below has been derived
from the Milling Division's financial statements. The financial statements for
the years ended May 31, 1994, 1995 and 1996, were audited by Deloitte & Touche
LLP. The financial statements for the three-month periods ended August 31, 1995
and 1996, are unaudited. In management's opinion, the unaudited financial
statements for the three-month periods include all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of the
Division's financial condition and results of operations for such periods. The
results for the three-month period ended August 31, 1996, are not necessarily
indicative of the results expected for the full year. The selected financial
information should be read in conjunction with the Division's financial
statements and notes thereto included elsewhere in this Prospectus.
Three Months Ended
Years Ended May 31, August 31,
------------------- ----------
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------- -------------
Sales ................................ $ 103,716,012 $ 119,725,183 $ 173,315,613 $ 32,416,461 $ 55,647,949
Costs and expenses
Cost of goods sold ................. 97,206,374 112,690,679 161,293,430 30,005,525 51,323,046
Marketing and
administrative ................... 2,415,155 3,834,289 4,471,563 985,644 1,104,186
Interest ........................... 1,832,037 2,278,544 4,457,797 766,517 1,411,133
------------- ------------- ------------- ------------- -------------
101,453,566 118,803,512 170,222,790 31,757,686 53,838,365
Earnings before income:
taxes .............................. 2,262,446 921,671 3,092,823 658,775 1,809,584
Income taxes ......................... 150,000 125,000 200,000 50,000 125,000
------------- ------------- ------------- ------------- -------------
Net earnings ......................... $ 2,112,446 $ 796,671 $ 2,892,823 $ 608,775 $ 1,684,584
============= ============= ============= ============= =============
Earnings per bushel:
Pretax earnings .................... $ 2,262,446 $ 921,671 $ 3,092,823 $ 658,775 $ 1,809,584
Book to tax differences ............ (135,715) 123,844 (84,481)
------------- ------------- ------------- ------------- -------------
Tax basis earnings ................. $ 2,126,731 $ 1,045,515 $ 3,008,342 $ 658,775 $ 1,809,584
============= ============= ============= ============= =============
Bushels milled ..................... 16,930,702 17,696,689 22,390,011 4,374,157 6,971,473
============= ============= ============= ============= =============
Earnings per bushel ................ $ 0.13 $ 0.06 $ 0.13 $ 0.15 $ 0.26
Operating Data:
Wheat used (bu.)
Durum ............................ 15,763,000 16,058,000 19,376,000 4,055,528 5,405,721
Spring ........................... 1,167,000 1,638,000 3,013,000 318,629 1,565,752
Shipments (cwt)
Semolina/flour ................... 8,088,000 8,718,000 10,085,000 2,149,063 2,849,659
Baking flour ..................... -- -- 634,000 -- 576,530
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------- -------------
Balance Sheet Data (at end of period):
Working capital .................... $ (4,703,152) $ 1,604,146 $ 3,337,317 $ (11,244,789) $ 250,603
Net property and
equipment ........................ 19,739,029 43,395,670 59,233,046 50,584,430 62,587,320
Total assets ....................... 55,031,562 82,606,055 125,321,564 92,360,887 133,899,743
Long-term debt, including
current maturities ............... 19,000,000 33,750,000 54,000,000 45,500,000 54,000,000
Total equity ....................... 27,797,072 27,797,072 27,797,072 27,797,072 27,797,072
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Certain operating information pertaining to the Division is set forth
below, as a percentage of sales, except for margins/cwt.
Three Months Ended
Years Ended May 31, August 31,
------------------- ----------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
Gross margin
percentage ....... 6.28% 5.88% 6.94% 7.44% 7.77%
Marketing and
administrative ... 2.33% 3.20% 2.58% 3.04% 1.98%
Interest ........... 1.80% 1.90% 2.57% 2.36% 2.54%
Margins/cwt ........ $ .80 $ .81 $ 1.12 $ 1.33 $ 1.31
Because of the volatility of commodity prices, the Company believes
that margins per hundred weight (manufacturing margins) are a better measure of
the Division's performance than gross margin percentages.
Comparison of Three Months Ended August 31, 1996 with 1995
The Division's net earnings of $1,700,000 for the three months ended
August 31, 1996 represents a $1,100,000 increase from the same period in 1995
due to a modest increase in gross margins and the control of marketing and
administrative expenses despite the substantial increase in sales.
Net sales of $55,700,000 for the three months ended August 31, 1996,
increased by $23,300,000 (72%) from the same period in 1995 due to an increase
in shipments from 2,700,000 cwt to 4,400,000 cwt as the Division's Kenosha mill
came on line in late 1995 and an increase in average price per cwt from
$11.82 in 1995 to $12.67 in 1996.
Cost of goods sold of $51,300,000 for the three months ended August 31,
1996 increased by $21,300,000 (71%) from the same period in 1995. Raw material
costs increased $19,800,000 due to an average increase of 48 cents per bushel
for durum and wheat and a 60% increase in bushels used (4.4 million bushels in
the 1995 period and 7.0 million bushels in the 1996 period). Plant expenses
increased by $1,500,000 in the 1996 period, of which $1,300,000 is attributable
to the Kenosha mill, which was not in operation in fiscal year 1995.
Marketing and administrative expenses were $1,100,000 for the three
months ended August 31, 1996 compared with $1,000,000 for the same period in
1995. This increase is attributable to an increase in staff and system expansion
to handle the additional volumes generated by the Kenosha mill.
Interest expense of $1,400,000 for the 1996 period increased by
$600,000 compared to the similar period of 1995. This increase is attributable
to additional short-term borrowings necessary to carry increased inventories and
receivables caused primarily by comparatively higher prices for durum and wheat
and volume increases, primarily the result of production from the Kenosha mill,
and additional interest expense on the debt used to finance the construction of
the Kenosha mill.
Comparison of Year Ended May 31, 1996 with 1995
The Division's net earnings of $2,900,000 for the year ended May 31,
1996 increased $2,100,000 over 1995. This increase in net earnings is
attributable to higher volumes, largely the result of increased processing
capacity generated by the opening of the Kenosha milling facility during the
fiscal year 1996, and higher sales prices.
Net sales of the Division of $173,300,000 increased by $53,600,000
(45%) from 1995, due to an increase in shipments of semolina and flour from
8,720,000 cwt to 10,720,000 cwt and an increase in the average price per cwt
from $11.03 in 1995 to $12.64 in 1996.
Cost of goods sold of $161,300,000 increased $48,600,000 (43%) from
1995. Raw material costs increased $46,000,000 due to an average increase of 83
cents per bushel for durum and wheat and a 38% increase in bushels sold of 6.7
million bushels, from 17.7 million bushels in 1995 to 24.4 million bushels in
1996. Plant expenses increased $2,600,000 in 1996, essentially all due to
operations of the Kenosha mill, which did not begin milling until late 1995.
Marketing and administrative expenses were $4,500,000 in 1996 and
increase of $700,000 from 1995. This increase is attributable primarily to an
increase of $900,000 due to staffing and system expansion to handle the
additional volumes generated by the Kenosha mill, offset by a decrease of
approximately $200,000 in pension expense related to a benefit plan settlement
adjustment in 1995.
The Division incurred interest expense of $4,500,000 in 1996 compared
with $2,300,000 in 1995. This increase was attributable to increased short-term
borrowings used to finance higher inventories and receivables primarily the
result of production from the Kenosha mill and increased long-term debt used to
finance construction of the Kenosha mill.
Comparison of Year Ended May 31, 1995 with 1994
The Division's net earnings of $800,000 for the year ended May 31, 1995
decreased $1,300,000 from 1994. The decrease is attributable to increases in
marketing and administrative expenses and interest expense which were only
partially offset by a small increase in gross margins.
Net sales of $119,700,000 increased $16,000,000 (15%) from 1994
despite a 6.4% increase in shipments, due primarily to an increase in average
sales price from $10.18 per cwt in 1994 to $11.03 per cwt in 1995.
Cost of goods sold of $112,700,000 in 1995 increased $15,500,000 (16%)
from 1994. The primary cause for this increase was a 750,000 bushel increase in
raw material input, from 16,950,000 bushels in 1994 to 17,700,000 bushels in
1995. Cost per bushel and plant expenses remained relatively unchanged between
1994 and 1995.
Marketing and administrative expenses of $3,800,000 increased
$1,400,000 (58%) from 1994. This increase was due partially to an increase in
pension cost relative to a benefit plan settlement adjustment reflected in 1995
and an increase of $1,200,000 for all other marketing and administrative
expenses, primarily for staffing and system expansion relative to the Kenosha
mill which was under construction in 1995.
The Division incurred interest expense of $2,300,000 in 1995 increased
from $1,800,000 in 1994. Increased short-term borrowings to support higher
inventory and receivable balances caused additional interest expense of $300,000
in 1995. Borrowings for additions to property, plant and equipment in 1995
contributed an increase in interest expense of $200,000 over 1994.
Liquidity and Capital Resources
The Division's cash needs are primarily the result of continued capital
additions. The Division's Kenosha plant, which began operations in late 1995,
represented an investment of $39,000,000. The Division's Houston plant, which is
expected to begin operations in February 1997, is expected to represent an
investment of $15,400,000. In addition, if the Pocono facility is constructed
(see "--Facilities"), the Division expects capital additions of $38,800,000. The
Division expects capital additions to all its facilities.
Commencement of operations at a particular facility involves increased
working capital to fund required inventories and receivables related to
increased sales. In addition, increased carrying value of inventories and
receivables because of higher prices, increased receivables because of slow
collections or increased inventories above historical levels requires additional
financing.
All of the Division's financing needs are expected to be met by the
Company.
Cash Flows from Operations
Operating activities for the three months ended August 31, 1996 and
1995, respectively, provided net cash of $4,600,000 and $3,400,000 due to net
earnings contributions of $1,700,000 and $600,000, a decrease in working capital
requirements of $1,900,000 and $2,200,000, and non-cash expenses such as
depreciation and amortization of $1,000,000 and $600,000, respectively.
Operating activities used net cash of $16,200,000 in the year ended May
31, 1996, provided $7,800,000 in 1995, and used $8,500,000 in 1994, generally
attributable to working capital needs, namely an increase in working capital
requirements in 1996 of $22,400,000, a decrease in working capital requirements
of $4,500,000 in 1995, and an increase in working capital requirements in 1994
of $12,800,000. Cash requirements were offset by net earnings of $2,900,000,
$800,000 and $2,100,000 in 1996, 1995 and 1994, respectively, and depreciation
and amortization of $3,300,000, $2,500,000 and $2,200,000 in 1996, 1995 and
1994, respectively.
Cash Flows Used from Investing
Cash expended for the acquisition of property, plant and equipment
during the three months ended August 31, 1996 and 1995 totaled $4,100,000 and
$7,600,000, respectively.
Net cash flows used in the Company's investing activities for the years
ended 1996, 1995 and 1994 were $18,100,000, $25,100,000 and $800,000,
respectively. All of these cash usages were for the acquisition of property,
plant and equipment. The Division also acquired intangibles of $476,000 and
$5,600,000 in 1996 and 1995, respectively, related to the elimination of a
minority interest effective June 1, 1994.
Cash Flows from Financing Activities
The Division's financing activities are coordinated through the
Company's cash management department. Cash from all of the Company's operations
is deposited with the Company's cash management department and disbursements are
made centrally. As a result, the Division has a zero cash position. Financing is
available from the Company to the extent of the Company's working capital
position and corporate loan agreements with various banks and cash requirements
of all other Company operations.
Working capital requirements for each division of the Company are
reviewed on a periodic basis, and could potentially be restricted based upon
management's evaluation of the prevailing business conditions and availability
of funds.
The Division had short-term debt of $32,200,000 on August 31, 1996, an
increase of $5,200,000 over May 31, 1996, which reflects working capital and
fixed asset financing requirements.
Short-term debt outstanding and payable to the Company as of May 31,
1996 and 1995 was $27,000,000 and $9,750,000, respectively. These interest
bearing balances reflect working capital and fixed asset financing requirements
of the respective years.
On May 31, 1996 and 1995 the Division's long-term debt was $54,000,000
and $33,750,000. This debt was incurred by the Division to retire debt assumed
with the acquisition of the Huron facility in 1990, to expand the Huron facility
in 1990 and 1991, and to construct Kenosha in the 1995 and 1996 fiscal years.
Supply
Most of the durum, spring and winter wheats processed by the Milling
Division is purchased from Members. Some grain is purchased from Canada and a
small percentage is purchased from the Southwest.
Semolina and durum flour sales are hedged to a significant extent by
buying durum at the time of pricing the semolina or flour. To minimize the price
volatility for winter and spring wheats, the Milling Division usually hedges by
purchasing wheat futures at the time of pricing the flour. There is no futures
market for durum, and except for limited cross hedging using other commodities
the Milling Division does not hedge durum.
The availability, price and quality of durum and spring and winter
wheat affect the operations and profitability of the Milling Division. The
Milling Division has never experienced a supply shortage of durum, but shortages
have affected prices.
Customers
Semolina & Durum Flour. The Milling Division sells semolina and durum
flour to eight major customers and approximately 50 smaller customers, which are
large and mid-size pasta manufacturers in the United States. In the year ended
May 31, 1996, over 38% of the Milling Division's total production was sold to
its two largest customers, Borden and Hershey, which are estimated by the
Company to represent approximately 60% of the country's pasta production. The
Milling Division would be adversely affected by the loss of either of these
customers or a decline in the market share of either customer.
The Milling Division would be adversely affected by a decline in pasta
production in the United States.
Most of the Milling Division's products are marketed by employees of
the Milling Division. The Milling Division uses outside agents and distributors
for the balance of its production.
Bread Flour. The baking industry is composed of many companies. No one
customer buys more than 10% of the Milling Division's bread flour production.
The Company believes because of the large number of potential customers and the
fact that the Milling Division is not dependent on any customer, it would not
have substantial difficulty in replacing an existing customer.
The Milling Division's first hard wheat milling unit (Kenosha) began
production in late 1995. In October 1996, the Milling Division expanded hard
wheat capacity with the addition of a swing mill at Kenosha capable of milling
either durum or hard wheat flour. A plant in Houston, expected to open in
February 1997, will add additional hard wheat capacity. The Company believes
that there is a substantial customer base available in the Houston area. The
area serves a sizeable population base and there are no other milling facilities
within the area.
Competition
Durum Milling. The Milling Division's largest competitors in durum
milling are Italgrani and Miller Milling Company.
Dakota Growers has expanded its Carrington, North Dakota, milling
facility and has begun expansion of its pasta production capacity. Philadelphia
Macaroni has announced plans to build a semolina mill in Minot, North Dakota.
General Mills has announced a plant expansion in Great Falls, Montana.
Bread Flour. Competitors include ConAgra, ADM, Cargill, Bay State
Milling, Cereal Foods and General Mills. All of these competitors have multiple
milling facilities with larger bakery flour production capacity than the Milling
Division. Capacity for hard wheat milling has been expanding faster than
consumption. This additional capacity may put pressure on margins.
Processing
The Division mills wheat into flour using standard industry processes.
More recently manufactured equipment has reduced the labor component of wheat
milling. The Company believes that its facilities are, on average, newer than
its competitors. Operations are somewhat seasonal in anticipation of reduced
demand for pasta in summer months.
Facilities
The Milling Division has four milling facilities in operation;
production in Houston is scheduled to begin in February 1997. Each facility
includes a milling plant as well as an elevator to store grain. Information on
the four mills is set forth below:
Location Grain Milled Capacity
-------- ------------ --------
Rush City, MN Primarily durum 10,000 cwts/day
Huron, OH Primarily durum 14,500 cwts/day
Kenosha, WI Durum 11,000 cwts/day
Spring and winter wheat 10,000 cwts/day
Houston, TX Spring and winter wheat 13,000 cwts/day
The Rush City and Kenosha facilities are owned entirely by the Company. At
Houston, the milling plant is constructed on property leased from the Port of
Houston on a long-term basis and the elevator is owned by the Port of Houston,
but is subject to a put through agreement with the Company. The Huron facility
is leased on a long-term basis, but the equipment is owned.
Because transportation costs for durum, spring and winter wheats are
cheaper than for the milled products, it is a strategic advantage for a mill to
be located close to a large customer base rather than close to the producer.
Each of the Huron, Kenosha and Houston mills are in proximity to a large
customer base. The Company's Rush City mill is in an area close to one customer
that currently takes, under contract, most or all of the production. However,
there is no large customer base in proximity to the Rush City Plant.
Approximately 85% of the Milling Division's current milling capacity
uses equipment that is less than 10 years old. This newer equipment generates
cost advantages in labor, energy, improved yields and better and more
consistent products. In the last few years, some competitors have closed less
efficient mills in less strategic locations.
The Milling Division plans to construct semolina and flour and bread
flour mills in Pocono, Pennsylvania, but has not received final approval of the
plans by the local and state authorities. If it is unable to secure necessary
approvals, it intends to seek an alternative location.
For the year ended May 31, 1996 the Milling Division facilities ran at
97% of capacity based upon a year of 307 operating days being 100%.
Employees
As of November 30, 1996 the Milling Division employed the following
full time equivalents: production (97), plant management (15) and headquarters
(20).
FARM MARKETING AND SUPPLY
The Farm Marketing and Supply Division owns and operates Agri-Service
Centers at 144 locations in Minnesota, North Dakota, South Dakota, Montana,
Idaho and Washington. Agri-Service Centers sell farm supplies, including
fertilizer, feed, seed and crop protection products, and other related services
and have grain elevator operations that buy grain. Some Centers have only grain
operations or grain and feed operations, while some have only supply operations.
Locations are grouped together into 47 units for operational purposes. A small
number of Centers are grouped into seven regionalizations, which have their own
producer board and participate in separate patronage pools.
Agri-Service Centers purchase grain from member and nonmember producers
and others, such as other elevators and grain dealers. Of these facilities, 55
have the capability of loading unit trains, while other facilities can load only
single cars or are truck stations. Most of the grain purchased is sold through
the Company's Grain Marketing division, with the balance going to local feed and
grain processors.
The supplies and services offered vary from location to location.
Agronomy supplies and services are sold at approximately 70 locations to member
and non-member producers. Feed is sold at approximately 75 locations. Agronomy
and feed sales are considered district operations involving different expertise
and sales forces.
Most feed sold is purchased from the Feed Division. Fertilizer is
obtained from co-op sources and other suppliers. Crop protection products are
bought through co-op programs and directly from industry sources. Other goods
are obtained through commercial channels.
The Company has increased the number of Agri-Service Centers in recent
years. The number, the number of bushels of grain purchased and sales of Centers
for the years ended May 31 are shown below:
1992 1993 1994 1995 1996
-------------- -------------- -------------- -------------- --------------
No. of centers ..... 107 105 115 121 144
No. of op. units ... 42 42 43 43 47
Grain purchased (bu) 175,773,000 175,492,000 141,238,000 159,891,000 214,085,000
Sales .............. $ 636,266,516 $ 651,697,000 $ 613,151,000 $ 679,200,000 $1,126,600,000
Competitors for the purchase of grain include other elevators and large
grain marketing companies. Competitors for the sale of agronomy supplies and
feed include a variety of cooperative and privately owned facilities. The
Company competes on the basis of service and patronage.
On November 30, 1996, the Division had over 1,000 full time employees
and over 300 temporary employees.
Fin-Ag, Inc. Fin-Ag, Inc. is a wholly owned subsidiary of the Company
located in Sioux Falls, South Dakota. It provides seasonal cattle feeding and
swine financing loans, facility financing loans and crop production loans for
producers. It also provides consulting services to member cooperatives. Its
competitors are other financial institutions. Most whole loans are sold to the
St. Paul Bank for Cooperatives, on which the Company bears a 15% residual
exposure. The Company's exposure at November 30, 1996, was approximately
$7,500,000. Under the Company's borrowing arrangements (see "Capitalization")
the maximum amount of the loans outstanding at any one time may not exceed
$35,000,000.
FEED
The Company manufactures and sells feed products and sells feed
ingredients, supplements and animal health products under several brand names,
including GTA Feeds(R), Norco Feeds, CC Bar Feeds, Let'er Buck Feeds(R) and
Pantec(TM). In addition, it provides livestock production services, including
customized ration planning, feedstuffs analysis, profit projections, livestock
nutritional management, recordkeeping, animal health and environmental
engineering and facility management. Sales are made at retail through five
retail stores and through Agri-Service Centers and at wholesale to cooperatives
(both Affiliated Associations and otherwise) and to other retail farm supply
businesses located in Minnesota, North Dakota, South Dakota, Nebraska, Montana,
Wyoming, Idaho, Washington and Oregon.
Sales of feed for the years ended May 31 is set forth below:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Manufactured feed (tons) . . 262,000 301,000 306,000 333,000 351,000
The Company has been able to increase sales and production capacity through
several joint venture arrangements entered into in recent years.
The Company owns nine manufacturing facilities located in Sioux Falls,
South Dakota; Great Falls, Montana; Hardin, Montana; Dickinson, North Dakota;
Minot, North Dakota; Edgeley, North Dakota; Willmar, Minnesota; Gettysburg,
South Dakota; and Norfolk, Nebraska. The Company also has an interest in three
joint ventures with facilities in Hermiston, Oregon; Tillamook, Oregon; and
Owatonna, Minnesota. The administrative office for the feed business is located
in Sioux Falls, South Dakota.
The Feed Division's operations reflect the condition of the livestock
business. Recent increases in poultry and swine production have been driven by
increased exports. The transition from individual producers to more integrated
producers has affected the demand for and composition of the Division's
products.
At November 30, 1996, the Division had 265 full time and 9 part time
employees.
Competitors in the feed business are other cooperatives and private
companies.
The Company is a part of the Cooperative Research Farms, a research
partnership of 12 regional cooperatives in the United States, Canada and France.
This partnership provides the Company with production research.
SERVICES
The Company's Country Services Division provides certain services to
Individual Members and Affiliated Associations.
Country Hedging, Inc.
Country Hedging, Inc. offers full service commodity futures and options
brokerage. For the year ended May 31, 1996, 60% of revenues were from Affiliated
Associations, 30% from Individual Members and 10% from others. This separate
subsidiary of the Company is a registered futures commission merchant and a
clearing member of both the Minneapolis Grain Exchange and the Kansas City Board
of Trade. On November 30, 1996, it had 38 employees operating primarily out of
St. Paul, Minnesota.
Competitors include international brokerage firms, national brokerage
firms, regional brokerage firms (both co-op and non-co-op) as well as local
introducing brokers. Competition is driven by price and service.
Ag States Agency, LLC
Ag States Agency, LLC, 50% owned by the Company, is an independent
insurance agency which sells insurance primarily to local cooperatives,
including group benefits, property and casualty, and bonding programs. For the
year ended May 31, 1996, substantially all of its revenues were from local
cooperatives. Ag States Agency, LLC competes with other insurance agencies.
Financial Services Department
The Financial Services Department provides business planning consulting
and financing to Affiliated Associations. It offers open account financing,
involving the discretionary extension of credit, and term and seasonal loans.
Most of the term and seasonal loans are participated up to 90% to National Bank
for Cooperatives (CoBank). Participation by CoBank is subject to credit approval
on a loan-by-loan basis by CoBank subject to an overall limit of participation
of $150,000,000. In addition to financing, the open account between the Company
and an Affiliated Association is used as a clearing account for settlement of
grain purchases and as a cash management tool. Open account financing has been
provided to more than 200 Affiliated Associations in the past year.
During the year ended May 31, 1996, average aggregate loan balances
outstanding were $106,581,000 (of which CoBank's participation was $59,836,000)
and the highest aggregate loan balance outstanding at any one time was
$177,939,000 (of which CoBank's participation was $78,287,000). The Company's
borrowing arrangements limit loan balances outstanding to not more than
$150,000,000 at any one time. See "Capitalization."
Pursuant to its agreement with CoBank, the Company has additional
credit risk on CoBank participations to 10% of total loan commitments.
A wholly owned subsidiary of the Company provides certain types of
financing to members. See "Farm Marketing and Supply."
Affiliated Accounting Department
The Affiliated Accounting Department offers computerized country
elevator accounting systems and a full complement of accounting support systems
for local cooperatives, including tax and patronage allocation services,
dividend ledger services and payroll services. For the year ended May 31, 1996,
substantially all of its revenues were from local cooperatives.
Field Services Department
The Field Service Department acts as a liaison between Affiliated
Associations and the Company, providing consulting services in marketing,
management, operations, accounting, tax, finance and government regulations.
Member Relations Department
The Member Relations Department conducts cooperative education programs
for Affiliated Associations and assists in planning meetings and organizing
visits to Company facilities.
MANAGEMENT
Board of Directors
The table below lists the current directors of the Company, consisting
of four members from District One (comprised of the states of Minnesota,
Illinois, Iowa and Wisconsin), four members from District Two (comprised of the
state of North Dakota), two members from District Three (comprised of the states
of South Dakota, Kansas and Nebraska), two members from District Four (comprised
of the states of Montana and Wyoming) and two members from District Five
(comprised of the states of Washington, Oregon, Utah and Idaho). Each director
must be an agricultural producer and an active patron of the Company (either
directly or through an Affiliated Association) for a period of five years at the
time of the director's election, must be less than 68 years of age at the time
of election and cannot be an employee of the Company or of an Affiliated
Association. The directors have been elected for three-year terms, expiring in
November of the years listed in the table below.
Term
Director Expires
Name and Address Age District Since in Nov.
- - - - ---------------- --- -------- ----- -------
Steven Burnet 56 5 1983 1998
94699 Monkland Lane
Moro, OR 97039-9705
Steve Carney 45 4 1988 1997
P.O. Box 1122
Scobey, MT 59263-1122
Edward Ellison 61 1 1978 1999
RR 1, Box 46
Elbow Lake, MN 56531-9740
Sheldon Haaland 58 1 1984 1997
RR 2, Box 55
Hanley Falls, MN 56245-9731
Jerry Hasnedl 50 1 1995 1998
RR 1, Box 39
St. Hilaire, MN 56754
Edward Hereford 57 5 1983 1997
RR 1, Box 53
Thornton, WA 99176-9710
Gerald Kuster 61 2 1979 1997
RR 1, Box 46
Reynolds, ND 58275-9742
Leonard Larsen 60 2 1993 1999
RR 1, Box 88
Granville, ND 58741
Tyrone Moos 58 3 1991 1997
HCR 1, Box 1
Phillip, SD 57567-9601
Duane Risan 60 2 1989 1998
RR 1, Box 4
Parshall, ND 58770-9703
Duane Stenzel 50 1 1993 1999
RR 2, Box 173
Wells, MN 56097
Russell Twedt 47 4 1993 1999
P.O. Box 296
Rudyard, MT 59540-0296
Merlin Van Walleghen 60 3 1993 1999
RR 1, Box 188
Letcher, SD 57359
William Zarak 61 2 1983 1998
3711 124th Ave. S.W.
South Heart, ND 58655-9767
STEVEN BURNET. Mr. Burnet has been a director since 1983 and currently
serves as Chairman of the Board. He grows dryland wheat and barley and supports
a cow/calf and yearling operation. Mr. Burnet is a member of the Oregon Wheat
Growers League and the Oregon Cattlemen's Association. He also serves as a
director on the Agricultural Co-op Council of Oregon.
STEVE CARNEY. Mr. Carney has been a director since 1988 and currently
serves as Secretary Treasurer. Mr. Carney operates a spring wheat and durum farm
with his wife and brother. He is a former president of Farmers Union Grain
Company (Peerless) and Farmers Union Grain Terminal of Daniels County. He is
also a member of several local cooperatives.
EDWARD ELLISON. Mr. Ellison has been a director since 1978. Together
with his sons, he raises wheat, soybeans and corn on his Grant County,
Minnesota, farm. Mr. Ellison is on the board of the Minnesota Association for
Cooperatives and an alternate to the Agricultural Cooperative Development
International (ACDI) board of directors. He also serves as a member of the
Farmland Insurance and the Ag Utilization Research Institute (AURI) boards of
directors.
SHELDON HAALAND. Mr. Haaland has been a director since 1984 and
currently serves as Assistant Secretary and Treasurer. He and his family farm
550 acres of corn, soybeans and wheat. Mr. Haaland is a member of several
cooperatives and has previously served on the boards of Cottonwood Co-op Oil
Company and Western Transport Co-op and as an advisory board member of the
Southwest State University Co-op Program.
JERRY HASNEDL. Mr. Hasnedl has been a director since 1995. He farms
wheat, barley, sunflowers, corn, alfalfa and registered seed for MCIA. Mr.
Hasnedl is a member of several cooperatives as well as the Minnesota Crop
Improvement Association and Minnesota Farmers Union. He also is a farmer/dealer
for Northrup King Seeds.
EDWARD HEREFORD. Mr. Hereford has been a director since 1983. He and
his two sons produce wheat, barley, peas and lentils on his dryland farm. Mr.
Hereford is a director of the Idaho Co-op Council, a board member of the ACDI
and a member of the Thornton Grange, the Washington Association of Wheat Growers
and the Washington Association of Peas and Lentils Growers.
GERALD KUSTER. Mr. Kuster has been a director since 1979. He and his
sons operate a 3,000-acre farm. Mr. Kuster is President of Agri City Cooperative
Services in Grand Forks, North Dakota, and Central Valley Bean Cooperative in
Buxton, North Dakota. He also serves as president of Reynolds United
Cooperative.
LEONARD LARSEN. Mr. Larsen has been a director since 1993. He farms a
1,440-acre grain and sunflower operation and is vice president of the Granville
area Development Corp. Mr. Larsen is also a member of Dakota Growers Pasta
Company.
TYRONE MOOS. Mr. Moos has been a director since 1991 and currently
serves as Second Vice Chairman. He and his wife, together with their son and
son-in-law, operate a combination farm and ranch raising winter wheat, barley
and millet as well as managing cow-calf and hog finishing operations. Mr. Moos
is a former member of the local co-op elevator board.
DUANE RISAN. Mr. Risan has been a director since 1989. He raises durum,
spring wheat and barley and, as a former educator, has a degree in mathematics
and education from Jamestown College. He is a member of Dakota Growers Pasta
Company and a patron of Dakota Quality Grain Co-op.
DUANE STENZEL. Mr. Stenzel has been a director since 1993. He raises
620 acres of sweet corn, corn and soybeans on his south central Minnesota farm.
Mr. Stenzel is a board member of Grainland Cooperative and past president of the
Wells Farmer Elevator.
RUSSELL TWEDT. Mr. Twedt has been a director since 1993. He is a
third-generation Hill County farmer and rancher, and he and his family raise
wheat and barley, with a cow/calf operation. He is a member of the Montana Grain
Growers Association and Montana Farmers Union.
MERLIN VAN WALLEGHEN. Mr. Van Walleghen has been a director since 1993.
He and his son raise corn and soybeans and operate a livestock finishing
operation. He is a past Board president of the Mitchell Farmers Cooperative
Elevator Association and past member of Mitchell Technical Institutes
Agricultural Advisory Board. He is also Chairman of the Sanborn County
Development Board.
WILLIAM ZARAK. Mr. Zarak has been a director since 1983 and currently
serves as First Vice Chairman. He owns and operates a 2,000-acre farm with his
wife and two sons where they raise small grains, corn, beef cows and hogs and
also backgrounds calves. Mr. Zarak is also a member of Dakota Growers Pasta
Company.
Directors' Compensation
The Board of Directors meets monthly. The Company provides its
directors with annual compensation of $24,000, paid in twelve monthly payments,
with the Chairman of the Board receiving an additional annual compensation of
$2,400, paid in twelve monthly payments, a per diem payment of $122.50 plus
travel allowance for actual days away from home while attending Board Meetings,
a per diem of $200 plus actual expenses and travel allowance for each day spent
on other Company business, life insurance, and an annuity plan providing for
benefits to become payable monthly when a director reaches age 62.
Committees of the Board of Directors
The Board of Directors does not have any standing committees. The Board
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 salary and incentive compensation of
the Chief Executive Officer and reviews the results and scope of the audit and
other services provided by the Company's independent auditors, as well as the
Company's accounting principles and its system of internal controls.
Compensation Committee Interlocks and Insider Participation
As noted above, the Company's Board of Directors does not have a
Compensation Committee. The entire Board of Directors determines the
compensation of the Chief Executive Officer and the terms of the employment
agreement with the Chief Executive Officer. The Chief Executive Officer
determines the compensation for all other executive officers.
Limitation of Liability and Indemnification
The Company's Articles of Incorporation limit the liability of
directors in their capacity as directors to the full extent permitted by
Minnesota law. As permitted by Minnesota law, the Company's Articles of
Incorporation provide that a director shall not be personally liable to the
Company or its members for monetary damages for breach of fiduciary duty as a
director, except for liability for a breach of the director's duty of loyalty to
the Company or its members, for acts of omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, for a transaction
from which the director derived an improper personal benefit or for an act or
omission occurring prior to the date when such provisions became effective.
The provision of the Articles of Incorporation limits only the
liability of directors, not officers. These provisions do not affect the
availability of equitable remedies, such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty, although, as a practical
matter, equitable relief may not be available. The above provisions also do not
limit liability of the directors for violations of, or relieve them from the
necessity of complying with, the federal securities laws.
The Bylaws of the Company require the Company to indemnify each
director, officer, manager, employee or agent of the Company, and any person
serving at the request of the Company as a director, officer, manager, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred to the fullest
extent permitted under the laws of Minnesota.
Executive Officers
The table below lists the executive officers of the Company, none of
whom holds any equity in the Company. Officers are elected annually by the Board
of Directors.
Name Age Position
---- --- --------
John D. Johnson 48 President and Chief Executive Officer
T. F. Baker 54 Group Vice President - Finance
Michael H. Bergeland 52 Group Vice President - Grain & Agri Services
Garry A. Pistoria 55 Group Vice President - Wheat Milling
James Tibbetts 46 Group Vice President - Oilseed Processing and Packaging
JOHN D. JOHNSON. Mr. Johnson was appointed President and Chief
Executive Officer on January 1, 1995. Prior to his appointment to that position
he held positions as Group Vice President of Farm Marketing & Supply, GTA Feeds
Division General Manager, Director of Sales and Marketing for the GTA Feeds
Division, Regional Sales Manager for GTA Feeds Division, and Feed Consultant GTA
Feeds Division. He has 20 years total experience with the Company. Mr. Johnson
graduated in 1970 from Black Hills State University at Spearfish, South Dakota,
with a degree in Business Administration and Economics. He also serves on the
Board of Directors of the National Council of Farmer Cooperatives (NCFC) and A.
C. Toepfer Intrade Grain Companies, and is Chairman of the NCFC Agriculture,
Trade & Credit Committee. Mr. Johnson also serves on the Management Committee
for Ventura Foods, LLC.
T. F. BAKER. Mr. Baker joined the Company in 1982 as Vice President of
Finance. In 1992 he was appointed Group Vice President of Finance and holds that
position at the present time. Mr. Baker obtained a Bachelor's Degree in
accounting from the College of St. Thomas, did graduate work at the University
of Minnesota, and obtained his CPA in the State of Minnesota. Mr. Baker serves
on the Board of Governors for Ag States Agency, LLC and on the Management
Committee for Ventura Foods, LLC. He is also a member of Minnesota Certified
Public Accountants and Financial Executives Institute.
MICHAEL H. BERGELAND. Mr. Bergeland, Group Vice President of Grain and
Agri-Services, joined the Company in 1967. He is a native of Minnesota and
attended Moorhead State College. Mr. Bergeland also serves as a board member of
the Minneapolis Grain Exchange, Chairman of the Grain Committee for the National
Council of Farmer Cooperatives, and a Committee Member and alternate director
for A.C. Toepfer Intrade Grain.
GARRY A. PISTORIA. Mr. Pistoria has been Group Vice President of Wheat
Milling since 1985 has been with the Company since 1961. Mr. Pistoria attended
Montana State University and the College of Great Falls. He is a member of the
National Pasta Association, the American Bakers Association and the Minneapolis
Grain Exchange.
JAMES TIBBETTS. On January 1, 1997, Mr. Tibbetts was appointed to the
position of Group Vice President of the Oilseed Processing and Packaging
Division. From November of 1995 (when he joined the Company) through 1996, Mr.
Tibbetts was Senior Vice President for the former Consumer Products Packaging
Division (Holsum Foods Division). From 1977 to 1995, Mr. Tibbetts was a Senior
Vice President for Farm Credit Leasing in Minneapolis, Minnesota. Mr. Tibbetts
received a Bachelor of Science Degree in Business Administration in 1972 from
Northern State University in Aberdeen, South Dakota. He serves on the Management
Committee for Ventura Foods, LLC.
Executive Compensation
Summary Compensation. The following table sets forth the cash and
noncash compensation earned by the Chief Executive Officer and each of the four
most highly compensated executive officers of the Company (other than the Chief
Executive Officer) whose total salary and bonus or similar incentive payment
earned during the year ended May 31, 1996, exceeded $100,000 (the "Named
Executive Officers"):
Summary Compensation Table
Annual Compensation
-------------------------------------------------------------
Year Ended Other Annual All Other
May 31, Salary(1) Bonus(1) Compensation(2) Compensation(3)
------- --------- -------- --------------- ---------------
John D. Johnson
President and Chief
Executive Officer........... 1996 $450,000 $162,500 $3,659 $7,508
Thomas F. Baker
Group Vice President--
Finance..................... 1996 225,300 127,500 7,400 7,908
Michael H. Bergeland
Group Vice President--
Grain and Agri-
Services.................... 1996 215,000 129,000 3,970 9,216
Garry A. Pistoria
Group Vice President--
Wheat Milling............... 1996 166,500 78,000 7,361 4,138
James Tibbetts(4)
Group Vice President--
Oilseed Processing
and Packaging
Division.................... 1996 87,500 70,000 510 29
- - - - --------------------
(1) Amounts shown include amounts deferred at the employee's election under
the Company's Deferred Compensation Program.
(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.
(4) Information for Mr. Tibbetts is from November 1, 1995, the
beginning of his employment with the Company.
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 May 31, 1997. The Incentive Program is based on Company and group or
division performance. The criteria for measurement consists of Economic Value
Added (EVA), earnings and Member Value Index; a subjective evaluation of value
provided to members and customers. These amounts will be paid after May 31,
1997. The maximum incentive is 60% of base compensation.
Retirement Plan
Each of the Named Executive Officers is entitled to receive benefits
under the Harvest States Cooperatives Cash Balance Retirement Plan (the
"Retirement Plan"). An employee's benefit under the Retirement Plan 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 plan, 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, 1997, Pay Credits are earned according to the following
schedule:
Years of Benefit Service: Pay Credit Equals:
------------------------- ------------------
1 to 7 years 4% of total salary
8 to 11 years 5% of total salary
12 years and more 6% of total salary
Special Career Credits were designed to supplement the benefits of
mid-career employees affected by the change from the former plan to the current
Retirement Plan. Employees qualify for Special Career Credits only if they were
employed by the Company and met certain age and service requirements (as defined
by the Retirement Plan) on January 1, 1988. The following table shows the
credits for those who qualify:
Total of Age and Benefit
Service on January 1, 1988: Special Career Credits:
--------------------------- -----------------------
50 to 54 1% of total salary
55 to 59 2% of total salary
60 to 64 3% of total salary
65 to 69 4% of total salary
70 or more 5% of total salary
Special Career Credits continue at the percentage rate determined from the
employee's status on January 1, 1988, for as long as the employee is with the
Company.
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, 1996, the dollar value of the account of each of the
Named Executive Officers was:
Balance
-------
John D. Johnson
..................................................
Thomas F. Baker
............................................................
Michael H. Bergeland
...........................................................
Garry A. Pistoria
.......................................................
James Tibbetts
..........................................................
Deferred Compensation Plan
Effective April 1, 1994, the Company established the Harvest Sates
Cooperatives Deferred Compensation Plan (the "Deferred Compensation Plan").
Participants in the Deferred Compensation 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. Under the Deferred
Compensation Plan, a participant may elect to have an amount of deferred
compensation credited to the participant's account for the applicable Plan Year
(as defined in the Deferred Compensation Plan). The compensation actually earned
during the Plan Year by a participant who elects deferred compensation is
reduced by the percentage or amount so elected. A participant may elect to
contribute no more than 30% of each payment of base compensation, provided that
the percentage selected is expected to result in annual contributions totaling
at least $1,000. Also, the participant may elect to contribute either a
percentage or a specific dollar amount of any bonus or similar incentive payment
that may become payable during the Plan Year, provided the contribution will not
be less than the smaller of $1,000 or 100% of the bonus payable. The deferred
compensation credited under the Deferred Compensation Plan is allocated to the
account of the participant as of the date that the compensation would otherwise
have been paid to the Participant in cash. Income is credited to each account
each Plan Year at an annual rate equal to 1% over the five-year U.S. Treasury
Bond rate as of October 1 of the year preceding the Plan Year, as adjusted as
appropriate to reflect contributions to and distributions from the account
during the Plan Year.
A participant's credits to his or her account are unsecured obligations
of the Company to pay the participant the actual amount of the credits upon
distribution pursuant to the Deferred Compensation Plan. Each participant or
beneficiary is only a general creditor of the Company with respect to his or her
account. Accounts are maintained for recordkeeping purposes only. Obligations of
the Company to pay benefits under the Deferred Compensation Plan may be
satisfied by distributions from a grantor trust created by the Company in its
sole discretion for such purpose. The Company has not created any such trust.
Amounts credited to a participant's account are distributed on a
predetermined date, such as the date of retirement or the date the participant
attains a particular age, in either a lump sum or in installments pursuant to
the participant's prior irrevocable election. The Deferred Compensation Plan
also provides for distribution upon the participant's death or disability, for
unforeseeable emergencies and upon termination of the plan.
The President of the Company may at any time amend the Plan in whole
or in part for any reason. No amendment may decrease the benefits under the Plan
which have accrued prior to the date of such amendment, but any amendment may
modify the interest rate to be used for future deferrals and for the balance in
each account on the date the amendment was adopted. The Company, by action of
the President, may at any time terminate the Plan.
401(k) Plan
Each Named Executive Officer is eligible to participate in the Harvest
States Cooperatives Savings Plan (the "401(k) Plan"). All employees of the
Company who are eligible for the Retirement Plan and who are not production
employees and who are not covered by a collective bargaining agreement are
eligible to participate in the 401(k) Plan. Effective January 1, 1997
participants may contribute between 1% and 15% (not to exceed 8% 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 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 Harvest
Sates Cooperatives 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 deferred under the Deferred Compensation Plan is not eligible
for Pay Credits or Special Career 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. As of December 31, 1996,
the dollar value of the account of each of the Named Executive Officers will be
approximately:
Balance
-------
John D. Johnson
..................................................
Thomas F. Baker
............................................................
Michael H. Bergeland
...........................................................
Garry A. Pistoria
......................................................
James Tibbetts
..........................................................
CERTAIN 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. During each
of the three years ended May 31, 1996, the value of those transactions between a
particular director (and members of such directors' immediate family) and the
Company may have exceeded $60,000.
MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL
Introduction
The Company is a membership cooperative organized to manufacture,
process, market, purchase, handle, deal in and sell the agricultural products of
its members, non-member patrons and others, including the processing and
exporting of grain and other agricultural products; to procure supplies and
equipment and to perform any and all services for its members, non-member
patrons and others; and to engage in any other activity for which cooperative
associations may be lawfully organized under Minnesota law. All net savings from
member patronage of the Company shall be distributed to members on the basis of
patronage. All net savings from non-member patronage of the purchasing
operations and from "Non-Member Consenting Patron" patronage of marketing
operations shall be distributed to such patrons on the basis of patronage. The
determination of net savings may be made by divisions or units representing
separate or different operations of the Company, as determined by the Board of
Directors. Patronage refunds may be distributed in cash, written evidences of
equity or book credits, or any combination thereof. Any non-cash allocations are
redeemable only in the discretion of the Board of Directors.
The net earnings (after provision for income taxes) of this
Association, as reported in its financial statements for the year, less
patronage dividends paid with respect to the fiscal year may be distributed in
the discretion of the Board to member patrons and to non-member "consenting
patrons" (defined as cooperative associations meeting all requirements for
membership in this Association other than transacting the minimum amount of
business) on the basis of their patronage. Distributions may be in cash,
property, Non-Patronage Earnings Certificates, or any combination thereof
designated by the Board of Directors. To date, the Board of Directors has always
used Non-Patronage Earnings Certificates for distributions, and the current
redemption policy is to redeem to estates.
In making any such non-member/non-patronage distributions, the Board of
Directors may use any method of allocating the earnings on the basis of
patronage to member patrons and Non-Member Consenting Patrons as shall be
reasonable and equitable in the judgment of the Board of Directors.
The method of allocation for the non-member/non-patronage earnings of
this Association for the fiscal year ended May 31, 1996 was based on bushels of
the grain marketing/processing activity and dollars on the purchasing and other
activity. This method is subject to change, in the discretion of the Board of
Directors.
Governance
The business and affairs of the Company are managed by a Board of
Directors of not less than 13 persons (currently set at 14), elected by the
members at the Company's annual meeting. Various rights and obligations of
members are contained in its articles of incorporation and bylaws (together, the
"governing documents"), each of which was amended and restated in November
1996. The governing documents may only be amended 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 Effects."
Membership
Membership in the Company is limited to individuals or entities
actually engaged in the production of agricultural products and associations of
agricultural producers organized and operating under the provisions of the
Agricultural Marketing Act and the Capper-Volstead Act. In addition, only those
persons that are "currently active patrons" (defined as agricultural producers
and associations of agricultural producers that have patronized the Company
during the year for which such status is being determined in a minimum amount
established by the Board of Directors) may be members of the Company.
Under the Company's governing documents, the Company has several
classes of membership and has authority to issue a variety of debt and equity
instruments to members. The Company has no capital stock. Membership is
transferable only with the consent and approval of the Board of Directors. The
Company may issue equity or debt securities, on a patronage basis or otherwise,
but unless otherwise authorized, such securities shall not entitle the holders
thereof to any voting, membership or other rights to participate in the affairs
of the Company and are not transferrable without the prior consent of the Board
of Directors.
The Company's governing documents establish three classes of
membership:
Individual Members are individuals or entities actually engaged in the
production of agricultural products. Such Individual Members include
both natural persons as well as any legal entity owned or controlled by
individual farmers or their families, such as joint ventures,
corporations, partnerships, limited liability companies and other
entities.
Affiliated Associations are associations of agricultural producers that
have transacted at least $100,000 of business with the Company during
the preceding fiscal year. Affiliated Associations must be cooperatives
or other associations of agricultural producers organized and operating
under the provisions of the Agricultural Marketing Act and the
Capper-Volstead Act.
Defined Members are either persons actually engaged in the production
of agricultural products or associations of producers of agricultural
products that are holders of Equity Participation Units. See "--Defined
Members" below.
Membership in the Company will be terminated by the Board of Directors
if a member has become ineligible for membership (for example, by the cessation
of agricultural production activities). The Board of Directors has the
discretion to terminate membership for a variety of reasons, including repeated
violations of the Company's Bylaws, failure to patronize the Company for a
period of 12 consecutive months and breach of any contract with the Company. In
addition, any member's membership in the Company is terminated when that member
either dies or is legally dissolved. Upon termination of membership, a former
member loses any and all voting rights in the Company. A former member has no
right to require immediate repayment of patronage.
Voting Rights
Affiliated Associations are entitled to a number of delegates based on
the dollar volume of business done with the Company during the last full fiscal
year ending prior to the date of the meeting at which the voting power is to be
exercised. The number of delegates ranges from one delegate for any Affiliated
Association with business from $100,000 up to $1,500,000 during the prior year
to 15 delegates for any Affiliated Association with business in excess of
$45,000,000 during the prior year. Each delegate from an Affiliated Association
is entitled to cast 200 votes on any matter presented to the members for a vote.
The dollar volume of business delivered by a Defined Member to an Affiliated
Association for handling on behalf of the Company and Defined Member will be
included in calculating the dollar volume of an Affiliated Association for
purposes of voting.
Individual Members and Defined Members are entitled to one vote.
Individual Members and Defined Members may directly cast their votes on matters
presented to the members of the Company only if, for Defined Members, they have
provided notice of such intention to the Company, and, for Individual Members,
if they have obtained a certificate signed by a manager of the Company facility
patronized by such Individual Member. Any such certificate or notice must be
provided to the Company at least 10 days before the meeting at which the voting
rights are to be exercised.
Individual Members and Defined Members may exercise their voting power
through the designation of a "patrons' association." A patrons' association is
an association of the Individual Members associated with a grain elevator, feed
mill, seed plant or any other Company facility or an association of Defined
Members, as designated and recognized by the Board of Directors. The membership
of a Patrons' Association may include both Individual Members and Defined
Members. The Individual Members and Defined Members that are identified with a
particular patrons' association may, at an annual meeting of the patrons'
association, elect delegates and alternates for the patrons' association on the
basis of one vote per member. Each patrons' association is entitled to a number
of delegates based on the dollar volume of business activities of the
patrons' association's currently active patrons and Defined Members with 200
votes per delegate, reduced by the number of individual votes personally voted.
Members may cast their votes, if the Board of Directors so elects, by
mail voting in certain situations. At least 50 members of the Company
represented in person, by delegates or by mail votes constitutes a quorum for
business at any meeting, unless the Company has fewer than 500 members, in which
case a quorum is comprised of 10% of the total number of members.
Defined Members
Each Defined Member will be affiliated with a "Defined Business Unit"
and will hold Equity Participation Units in that Defined Business Unit. Holders
of Equity Participation Units will have delivery rights and obligations for farm
products pursuant to a member marketing agreement between such Defined Member
and the Company.
Each Defined Business Unit will be represented by a Defined Member
Board, comprised of between five and ten individuals. The members of a Defined
Member Board must be either Defined Members or representatives of Defined
Members and in good standing and in full compliance with all delivery
obligations with respect to the applicable Defined Business Unit, provided,
however, no employee of the Company may serve as a member of the Defined Member
Board. The initial Defined Member Board of each Defined Business Unit will be
elected by the Company's Board of Directors. Thereafter the Defined Member Board
of a Defined Business Unit will be elected by the Defined Members associated
with a particular Defined Business Unit on a one Defined Member/one vote basis.
The Chairperson shall be selected by and from the Company's Board of Directors.
Individuals serving on a Defined Member Board shall serve staggered three-year
terms. Each Defined Member Board shall meet at least quarterly and shall be
charged with reflecting Defined Member concerns and providing a direct
communication mechanism to the Company's Board of Directors.
The Company is authorized to retain a portion of the payments otherwise
due to Defined Members for purchases of products from them. Such retention is
referred to a "unit retain." The Company has the option to treat any such unit
retains as taxable to the Company or to treat the unit retains as nontaxable by
declaring the unit retains as "qualified." Qualified unit retains are taxable to
the Defined Member in the tax year when the Defined Member receives notification
that a unit retain has been established. When a qualified unit retain is
reimbursed or redeemed, the Defined Member reports no additional income. Unit
retains may be called for payout at the lesser of their stated or book value at
the discretion of the Board of Directors. The Company intends to establish a
redemption schedule if it authorizes unit retains.
Debt and Equity Instruments
The Company is authorized to issue a variety of debt and equity
instruments to its current members, patrons and to persons who are neither
members nor patrons. The Company's outstanding capital (see "Capitalization") is
represented by Capital Equity Certificates, non-patronage certificates and
certain capital reserves.
The following securities may be issued to current or former members or
patrons:
Equity Participation Units. Equity Participation Units may be
held only by Defined Members and have no voting rights.
Capital Equity Certificates. Capital Equity Certificates may
be issued by the Company in partial or complete distribution of
patronage refunds. Capital Equity Certificates do not bear any interest
or carry any dividends. They do not have a specified maturity date
unless established by the Company's Board of Directors.
Certificates of Indebtedness. The Board of Directors may issue
Certificates of Indebtedness from time to time. Such Certificates will
carry such terms and conditions as the Board of Directors establishes
in its discretion. The Board may also establish the conditions upon
which such Certificates of Indebtedness may be called for payment by
the Company.
Non-Patronage Earnings Certificates. The Board of Directors
may issue Non-Patronage Earnings Certificates. Such certificates will
not have a maturity date and will not bear interest or annual
dividends. They will be issued and distributed only to member patrons
and to Non-Member Consenting Patrons as part of a
non-member/non-patronage distribution. (Non-Member Consenting Patrons
include Affiliated Associations that meet all of the requirements of
membership as an Affiliated Association except that they do not
transact at least $100,000 of business with the Company during the
preceding fiscal year.)
Preferred Capital Certificates. The Board of Directors may
establish and designate the designation, preferences and relative
rights of one or more series of Preferred Capital Certificates.
Preferred Capital Certificates will not carry any voting rights.
Other. The Board of Directors may issue other debt or
equity instruments.
The Board of Directors may issue "Preferred Equities" and other debt or
equity instruments to individuals who are not members or patrons of the Company.
The Board of Directors has the discretion to establish and designate one or more
series of Preferred Equities and to fix the relative rights, preferences and
privileges of such preferred equities. Any Preferred Equities will not carry
voting rights.
Transfer of Patrons' Equities. Debt or equity instruments held by the
Company's members and patrons, including Equity Participation Units, Capital
Equity Certificates, Certificates of Indebtedness, Non-Patronage Earning
Certificates and Preferred Capital Certificates, may be transferred only with
the consent and approval of the Company's Board of Directors. The Company may
require the execution of appropriate transfer documentation, as well as
representations and warranties from the proposed transferee indicating that he
or she is eligible to be the holder of the instrument proposed to be
transferred.
Redemption or Retirement of Patrons' Equities and Allocated Reserve.
Redemption or retirement of Patrons' Equities is solely within the discretion of
and on the terms as determined by the Board of Directors. The Board of Directors
has authorized the redemption of Capital Equity Certificates held by patrons who
are 72 years of age, as well as Capital Equity Certificates held by estates of
deceased patrons. The Board of Directors intends to change its redemption policy
following the completion of this offering. There can be no assurance that the
Company's Board of Directors will not elect to modify its policy regarding the
redemption of Capital Equity Certificates. The Board of Directors will establish
a policy for Preferred Equity Certificates arising from Defined Business Units.
Distribution of Assets Upon Dissolution
Upon dissolution, liquidation or winding up of the Company, all debts
and liabilities of the Company will be paid in accordance with their respective
priorities. All equity capital will then be allocated among the various holders
of the equity instruments in accordance with the following priorities: first,
the assets held by any Defined Business Unit will be used to redeem the Equity
Participation Units and Preferred Capital Certificates of such Defined Business
Unit, on a pro rata basis; next, all Equity Participation Units and Preferred
Capital Certificates will be paid to the extent of their face amount or par
value; next all Capital Equity Certificates and other outstanding equities
(other than Non-Patronage Earning Certificates) will be paid in the amount of
the par value or face amount of such instruments; next, payment will be made in
the face amount of any issued and outstanding Non-Patronage Earning
Certificates. Any remaining assets of the Company will be distributed on an
allocation unit basis among the members of the Company in proportion to their
patronage.
Certain Antitakeover Effects
The governing documents may be amended upon the approval of a majority
of the votes cast at an annual or special meeting. However, in the event that
the Board of Directors by majority resolution has declared that the proposed
amendment involves a resolution related to a hostile takeover, the proposed
amendment must be adopted by the approval of 80% of the total voting power of
the members 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 amounts withheld from its
members in the form of qualified unit retains or patronage dividends, or in the
amount distributed in the form of patronage payments. Consequently, such amounts
are taxed only at the patron level. However, the amounts of any non-qualified
unit retains or patronage dividends are taxable to the Company when allocated.
Upon revolvement of any such non-qualified unit retains or patronage dividends,
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.
EQUITY PARTICIPATION UNITS
Equity Participation Units may be held only by Defined Members. Defined
Members are either persons actually engaged in the production of agricultural
products or associations of producers of agricultural products. Each Defined
Member will be affiliated with a Defined Business Unit and will hold Equity
Participation Units in that Defined Business Unit. Holders of Equity
Participation Units will have delivery rights and obligations for farm products
pursuant to the Agreements between such Defined Member and the
Company. See "--Member Marketing Agreements" below.
Certain rights and limitations pertaining to all Equity Participation
Units, including those being offered by this Prospectus, are described in
"Membership in the Company and Authorized Capital." Additional rights and
limitations established by the Board of Directors in creating the Equity
Participation Units offered hereby are described below.
In determining the offering price of the Units, the Board of Directors
has considered the historic and expected operations of, the risks associated
with and an appropriate rate of return for each Business Unit.
Milling Business Unit
The Board of Directors has created the Milling Business Unit for the
purpose of purchasing wheat (including durum) and the processing and sale
thereof into flour and various byproducts, effective at the close of business on
May 31, 1997, to carry on the operations of the Milling Division. On that date
there will be allocated to the Milling Business Unit the assets and liabilities,
including commitments, contingencies and obligations, appropriately belonging to
the Division. In connection with the organization of the Milling Business Unit
the Company will contribute an amount sufficient to bring its net worth to
$__________, which is its net worth on May 31, 1996, plus additional capital so
that the construction of the Pocono facility can be financed from equity
capital.
Holders of Equity Participation Units in the Milling Business Unit have
a right to participate in the patronage sourced income from the operations of
the Milling Business Unit. Prior to the sale of any Unit to any person, such
person shall enter into an Agreement which gives the right and obligation to
such person to deliver the number of bushels of wheat as shall equal the number
of Units to be purchased by such Member. The delivery obligation and right under
the Agreement for the Milling Business Unit will become fully effective for the
fiscal year in which the Pocono facility begins operating. Defined Members will
be notified. Initially and until the Agreement becomes fully effective, it will
represent a right and obligation to deliver 78% of the wheat set forth therein.
For information on earnings per bushel of the Milling Division, see
"Business -- Wheat Milling -- Selected Financial and Operating Data."
Allocations of overhead and interest expense to the Milling Business Unit by the
Company will vary from the allocations to the Milling Division. See Note 15 to
the Milling Division financial statements.
Patronage sourced income from the operations of the Milling Business
Unit will be allocated by the Company as patronage refunds based on the total
amount of wheat processed. For example, if the Milling Business Unit were to
process 50,000,000 bushels of wheat and holders of Equity Participation Units
had delivered 20,000,000 bushels, 40% of the net income would be allocated to
holders of Equity Participation Units. As between the holders of Equity
Participation Units, patronage sourced income will be allocated to each Defined
Member proportionate to the wheat delivered pursuant to the Agreement.
While Defined Members will be entitled to the allocation of patronage
refunds originating from the Milling Business Unit, they may also receive, upon
allocation by the Board of Directors, nonpatronage income from operations of the
Company, including operations of the Milling Business Unit generating
nonpatronage income.
The initial Defined Member Board of the Milling Business Unit shall be
designated by the Board of Directors, to hold such office until their successors
are duly elected and qualified, after the completion of the offering. See
"Membership in the Company and Authorized Capital" with respect to the Defined
Members to elect successor directors.
Processing and Refining Business Unit
The Board of Directors has created the Processing and Refining Business
Unit for the purpose of purchasing soybeans and crude soybean oil and the
processing and sale thereof into meal, flour, oil and various byproducts,
effective at the close of business on May 31, 1997, to carry on the operations
of the Processing and Refining Division. On that date there will be allocated to
the Processing and Refining Business Unit the assets and liabilities, including
commitments, contingencies and obligations, appropriately belonging to the
Division. In connection with the organization of the Processing and Refining
Business Unit, the Company will withdraw an amount sufficient to bring its net
worth to $53,400,000, which was its net worth on May 31, 1996.
Holders of Equity Participation Units in the Processing and
Refining Business Unit have a right to participate in the patronage sourced
income from the operations of the Processing and Refining Business Unit. Prior
to the sale of any Unit to any person, such person shall enter into an
Agreement which gives the right and obligation to such person to
deliver the number of bushels of soybeans as shall equal the number of Units to
be purchased by such Member.
For information on earnings per bushel of the Processing and Refining
Division, see "Business -- Processing and Refining -- Selected Financial and
Operating Data." Allocations of overhead and interest income to the Processing
and Refining Business Unit by the Company will vary from the allocations to the
Processing and Refining Division. See Note 14 to the Processing and Refining
Division financial statements.
Patronage sourced income from the operations of the Processing and
Refining Business Unit, excluding patronage sourced income from the refining of
crude oil purchased from others and excluding patronage sourced income from
Ventura Foods, will be allocated by the Company as patronage refunds based on
the total amount of soybeans processed. For example, if the Processing and
Refining Business Unit were to process 25,000,000 bushels of soybeans and
holders of Equity Participation Units had delivered 10,000,000 bushels, 40% of
the patronage sourced income would be allocated to holders of Equity
Participation Units. As between the holders of Equity Participation Units,
patronage sourced income will be allocated to each Defined Member proportionate
to the soybeans delivered pursuant to the Agreement.
While Defined Members will be entitled to the allocation of patronage
refunds originating from the Processing and Refining Business Unit, they may
also receive, upon allocation by the Board of Directors, nonpatronage income
from operations of the Company, including operations of the Processing and
Refining Business Unit generating nonpatronage income.
The operations of Ventura Foods are not included in the Processing and
Refining Division. Should the Company create an additional Business Unit
pertaining to those operations, it may offer participation in that Business Unit
to holders of Equity Participation Units in the Processings and Refining
Business Unit.
The initial Defined Member Board of the Processing and Refining
Business Unit shall be designated by the Board of Directors, to hold such office
until their successors are duly elected and qualified, after the completion of
the offering. See "Membership in the Company and Authorized Capital" with
respect to the Defined Members to elect successor directors.
Allocations Relating to Business Units
Revenues from the sale of products of a Business Unit shall be credited
to the Business Unit, and all direct expenses incurred by a Business Unit shall
be charged against the Business Unit. Corporate, general and administrative
expenses of the Company shall be allocated to each Business Unit in a reasonable
manner based on the utilization by such Business Unit. Intracompany accounts
shall be established for the advancements to, and the loan of funds by, each
Business Unit, with interest thereon imputed at prevailing rates. Income taxes
shall be allocated to each Business Unit as if it were a separate taxpayer. Each
Business Unit shall perform and be responsible for commitments, contingencies
and obligations allocated to such Business Unit.
With respect to each year, the total net income from a Business Unit
will be withdrawn by the Company from the Business Unit, except to the extent
that patronage dividends are not paid in cash and are retained in the Business
Unit as equity. The Company will be responsible for the allocation of net income
arising from operations of a Business Unit between Defined Members of any one or
more Business Units and the remainder of the Company's operations.
Upon the acquisition by the Company from a third party of any assets
(whether by means of an acquisition of assets or stock, merger, consolidation or
otherwise) reasonably related to a Business Unit, such assets and related
liabilities, including commitments, contingencies and obligations, shall be
allocated to that Business Unit and the aggregate cost or fair market value of
such assets and liabilities shall be paid by the Business Unit. Such allocation
and determination of fair market value may be made by the Board of Directors
taking into account such matters as it and its advisers, if any, deem relevant,
and any such allocation and determination of fair market value shall be final
and binding for all purposes whatsoever.
Upon any sale, transfer, assignment or other disposition by the Company
of any or all assets of a Business Unit (whether by means of a disposition of
assets, merger, consolidation, liquidation or otherwise), all proceeds
(including non-cash consideration received) or the fair market value from such
disposition shall be allocated to the Business Unit. If an asset is allocated to
more than one Business Unit, the proceeds or the fair market value of the
disposition shall be allocated among all Business Units, based upon their
respective interests in such assets. Such allocation and determination of fair
market value shall be made by the Board of Directors taking into account such
matters as the Board of Directors and its advisers, if any, deem relevant, and
any such allocation and determination of fair market value shall be final and
binding for all purposes whatsoever.
The Board of Directors may from time to time reallocate any asset from
one Business Unit to the Company or any other Business Unit of the Company. All
such reallocations shall be done at fair market value as determined by the Board
of Directors.
Additional Equity Participation Units; Sale
The Board of Directors from time to time may authorize the sale by the
Company of Units deemed owned by the Company for the account of the Company
provided that sales shall be at a price determined by the Board of Directors
taking into account such matters as the Board of Directors and its financial
advisers, if any, deem relevant.
The Board of Directors may authorize the creation, issuance and sale of
additional Equity Participation Units from time to time on such terms and for
such consideration as it shall deem appropriate. Any proceeds from the sale of
such additional Equity Participation Units shall be allocated to the applicable
Division.
Holders of Units shall have no preemptive rights to subscribe for or
purchase additional Units or any other securities issued by a Business Unit or
the Company. The Company intends to provide an opportunity for existing holders
to subscribe for additional Equity Participation Units.
The Company may, if authorized by the Board of Directors, purchase
Units at such price as it shall determine from time to time for its own account,
or for the account of a Division.
Merger, Consolidation or Sale
In connection with the merger, consolidation, liquidation or sale of
all or substantially all of the assets of the Company substantially as an
entirety or upon the sale of all or any substantial portion of the assets of a
Business Unit, all, but not less than all, Units of such Business Unit may be
redeemed at their face amount, provided that the Preferred Capital Certificates
or unit retains of such Business Unit not previously paid are also redeemed in
connection therewith, and that such payments include any prorata profit (or
loss) associated with disposition of the assets of the Business Unit as though
the assets, subject to the liabilities, of the Business Unit had been sold in
connection with such event at their fair market value. Any determination of fair
market value shall be made by the Board of Directors taking into account such
matters as the Board of Directors and its advisers, if any, deem relevant.
Operations
The operations of a Business Unit shall be carried out by the Company
through the Board of Directors, officers and management of the Company. The
capital assets of a Business Unit may be disposed of in the ordinary course of
business and the disposition of any substantial portion of the assets of a
Business Unit as an entirety may be authorized by the Board of Directors. The
Board of Directors may determine to sell the assets and operations of a Business
Unit or to abandon or shut down the operations of a Business Unit.
Amendment of Board Resolutions
The resolutions adopted by the Board of Directors establishing the
Milling Division and Business Unit and the Processing and Refining Division and
Business Unit may be amended from time to time by the Board of Directors of the
Company, except for those matters described under "Allocations Relating to Each
Division," which may be amended only with the approval of a majority of Defined
Members owning Units not held or deemed held by the Company.
Individual Member Marketing Agreement
A Defined Member will be obligated to deliver during each delivery year
one bushel of wheat or soybeans to the Company for each applicable Unit held,
subject to adjustment as described below, at delivery points designated by the
Company and of a quality specified by the Company. Wheat or soybeans that do not
meet applicable standards may either be rejected or accepted with such discounts
as may be established by the Company or agents. Deliveries may be made at any
time from June 1 through May 31. The Company expects that certain Affiliated
Associations will contract with the Company to act as an agent for handling
required deliveries (and will receive funds for that service), and that the
Company will designate some or all of its owned and operated elevators as
delivery points. The Board of Directors may establish annual "tolerance ranges"
allowing a Defined Member the option to deliver more or less wheat or soybeans
in any given year. Upon transfer of Units, the remaining obligations under the
Agreement must also be assumed by the transferee of the Units. The Agreement may
be terminated by a Individual Member effective on May 31 of any year upon
written notice of termination. In addition, the Agreement may be terminated
following a breach of the Agreement by either party, upon thirty written notice
from the party not in breach. The Agreement may be terminated by the Company in
connection with termination of the business of the applicable Defined Business
Unit.
The Company is obligated to take and pay for deliveries in accordance
with the Agreement. The price to be paid is based on the prevailing price posted
at the point of delivery. The Company's obligation to take delivery may be
excused due to events beyond the control of the Company. The Defined Member's
obligation to deliver may be excused due to Acts of God as provided in the
Agreement.
The Company will pay to each Defined Member an annual patronage refund
equal to the portion arising from the net savings of the applicable Business
Unit attributable to such Defined Member's patronage of the Business Unit.
Each Agreement is subject to amendment upon the approval of the Company
and the majority vote of the voting power of the applicable Business Unit. As a
result, in the event that Members holding the majority of the voting power of
the applicable Business Unit approve an amendment to the Agreement which has
been approved by the Company, those Defined Members who voted against or oppose
the amendment will be bound to performance of the Agreement as amended.
The Company is authorized to retain a portion of the payments otherwise
due to Defined Members for purchases of products from them. Such retention is
referred to a "unit retain." The Company has the option to treat any such unit
retains as taxable to the Company or to treat the unit retains as nontaxable by
declaring the unit retains as "qualified." Qualified unit retains are taxable to
the Defined Member in the tax year when the Defined Member receives notification
that a unit retain has been established. When a qualified unit retain is
reimbursed or redeemed, the Defined Member reports no additional income. Unit
retain may be called for payout at the lesser of their stated or book value at
the discretion of the Board of Directors.
TRADING OF UNITS
The Company intends to create an electronic bulletin board to
facilitate the purchase and sale of Units among Members, although Members are
free to make other arrangements in the purchase and sale of Units. A seller may
post the seller's name, telephone number, address, number of Units offered and
the asking price per Unit. A buyer may post the buyer's name, telephone number,
address, number of Units sought and the bid price per Unit. Any sale and
purchase of Units will be subject to negotiation of price and other terms of
purchase. The Company will not act as a broker or dealer in connection with any
such sale and will not receive any commission or other fee.
The Company also intends to publish information on transfers of Units,
including date, the number of Units transferred and, in the case of a sale, the
sale price per Unit.
VALIDITY OF UNITS
The validity of the securities offered hereby will be passed upon for
the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of Harvest States Cooperatives
and the financial statements of the Milling Division and the Processing and
Refining Division as of May 31, 1995 and 1996, and for each of the three years
in the period ended May 31, 1996, included in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their reports
thereon appearing herein and have been so included in reliance upon such reports
given upon the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Units offered hereby has been filed with the Securities and
Exchange Commission (the "Commission"). This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete, and
in each instance reference is made to the copy of such contract or documents
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Units offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. A copy of the
Registration Statement, including exhibits and schedules thereto, may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C. and copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of certain fees prescribed by the Commission.
INDEX TO FINANCIAL STATEMENTS
PAGE
Harvest States Cooperatives
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of May 31, 1995 and 1996 and
August 31, 1996 (unaudited) F-3
Consolidated Statements of Earnings for the Years Ended May 31, 1994, 1995,
and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-4
Consolidated Statements of Capital for the Years Ended May 31, 1994, 1995,
and 1996 and the Three Months Ended August 31, 1996 (unaudited) F-5
Consolidated Statements of Cash Flows for the Years Ended May 31, 1994, 1995,
and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-6
Notes to Consolidated Financial Statements for the Years Ended May 31, 1994, 1995,
and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-7
Wheat Milling Division
(A Division of Harvest States Cooperatives)
Independent Auditors' Report F-16
Financial Statements:
Balance Sheets as of May 31, 1995 and 1996 and August 31, 1996 (unaudited) F-17
Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996
and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-18
Statements of Divisional Equity for the Years Ended May 31, 1994, 1995,
and 1996 and the Three Months Ended August 31, 1996 (unaudited) F-19
Statements of Cash Flows for the Years Ended May 31, 1994, 1995, and 1996
and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-20
Notes to Financial Statements for the Years Ended May 31, 1994, 1995, and 1996
and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-21
Oilseed Processing And Refining Division
(A Division of Harvest States Cooperatives)
Independent Auditors' Report F-28
Financial Statements:
Balance Sheets as of May 31, 1995 and 1996 and August 31, 1996 (unaudited) F-29
Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996
and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-30
Statements of Divisional Equity for the Years Ended May 31, 1994, 1995,
and 1996 and the Three Months Ended August 31, 1996 (unaudited) F-31
Statements of Cash Flows for the Years Ended May 31, 1994, 1995, and 1996
and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-32
Notes to Financial Statements for the Years Ended May 31, 1994, 1995, and 1996
and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-33
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the consolidated balance sheets of Harvest States Cooperatives
and subsidiaries (the Company) as of May 31, 1995 and 1996 and the related
consolidated statements of earnings, capital, and cash flows for each of the
three years in the period ended May 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated
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 the Company at May 31, 1995 and
1996 and the results of its operations and its cash flows for each of the three
years in the period ended May 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
August 19, 1996
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31,
-------------------------------- AUGUST 31,
1995 1996 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 11,656,677 $ 21,426,227 $ 3,213,034
Receivables (Note 2) 334,241,233 367,244,539 417,376,700
Inventories (Note 3) 247,538,620 434,507,118 173,296,763
Prepaid expenses and deposits 19,252,023 41,825,850 26,955,089
-------------- -------------- --------------
Total current assets 612,688,553 865,003,734 620,841,586
OTHER ASSETS:
Investments (Note 4) 57,523,420 83,269,566 119,582,159
Other (Note 5) 48,483,906 48,353,983 34,776,806
-------------- -------------- --------------
Total other assets 106,007,326 131,623,549 154,358,965
PROPERTY, PLANT, AND EQUIPMENT
(Notes 6 and 7) 205,837,690 232,145,401 208,605,760
-------------- -------------- --------------
$ 924,533,569 $1,228,772,684 $ 983,806,311
============== ============== ==============
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Notes payable (Note 7) $ 200,000,000 $ 324,000,000 $ 9,000,000
Patron credit balances 59,490,643 29,007,419 80,004,593
Advances received on grain sales 123,421,988 201,825,190 226,044,833
Drafts outstanding 17,581,091 23,837,715 23,857,186
Accounts payable and accrued expenses 127,569,277 163,435,268 150,022,182
Patronage dividends payable 11,000,000 13,100,000 15,100,000
Current portion of long-term debt (Note 7) 6,721,469 13,923,204 18,419,713
-------------- -------------- --------------
Total current liabilities 545,784,468 769,128,796 522,448,507
LONG-TERM DEBT (Note 7) 78,095,056 118,705,972 110,592,680
OTHER LIABILITIES 1,166,152 3,685,797 4,382,473
COMMITMENTS AND CONTINGENCIES
(Notes 8 and 13)
CAPITAL (Note 8) 299,487,893 337,252,119 346,382,651
-------------- -------------- --------------
$ 924,533,569 $1,228,772,684 $ 983,806,311
============== ============== ==============
See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED
FOR THE YEARS ENDED AUGUST 31,
------------------------------------------------ -------------------------------
1994 1995 1996 1995 1996
(UNAUDITED)
REVENUES:
Sales:
Grain and oilseed $3,086,531,429 $4,191,665,535 $7,127,223,407 $1,341,016,649 $1,875,912,189
Processed grain and oilseed 593,116,553 708,219,307 819,863,541 187,687,561 234,548,425
Feed and farm supplies 165,925,459 156,699,068 207,252,696 43,124,346 61,003,251
-------------- -------------- -------------- -------------- --------------
3,845,573,441 5,056,583,910 8,154,339,644 1,571,828,556 2,171,463,865
Patronage dividends 6,609,602 6,512,481 13,278,997 1,801,005 4,504,239
Other revenues (Note 12) 45,895,922 57,556,984 68,339,523 16,782,771 14,839,801
-------------- -------------- -------------- -------------- --------------
3,898,078,965 5,120,653,375 8,235,958,164 1,590,412,332 2,190,807,905
COSTS AND EXPENSES:
Cost of goods sold 3,786,336,764 4,981,820,272 8,076,073,326 1,556,325,280 2,156,922,994
Marketing, general, and administrative 60,847,099 69,509,491 70,054,248 18,805,661 19,595,114
Interest 10,250,765 19,268,575 31,921,936 6,511,366 4,621,786
-------------- -------------- -------------- -------------- --------------
3,857,434,628 5,070,598,338 8,178,049,510 1,581,642,307 2,181,139,894
-------------- -------------- -------------- -------------- --------------
EARNINGS BEFORE INCOME TAXES 40,644,337 50,055,037 57,908,654 8,770,025 9,668,011
INCOME TAXES (Note 11) 5,500,000 5,100,000 6,900,000 1,150,000 1,150,000
-------------- -------------- -------------- -------------- --------------
NET EARNINGS $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 7,620,025 $ 8,518,011
============== ============== ============== ============== ==============
See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL
PATRONAGE NONPATRONAGE PATRONAGE CAPITAL
TOTAL CERTIFICATES CERTIFICATES PAYABLE RESERVE
BALANCE AT MAY 31, 1993:
Stated as capital $ 246,797,147 $ 184,835,249 $ 16,100,000 $ 45,861,898
Stated as current liability 6,900,000 6,900,000
------------- ------------- ------------- -------------
253,697,147 184,835,249 23,000,000 45,861,898
Distribution of patronage dividends payable
for preceding year, including cash payment
of $6,833,455 (6,833,455) 15,819,222 (23,000,000) 347,323
Redemption of capital equity certificates (5,484,613) (5,484,613)
Equities issued 3,249,624 3,249,624
Other 387,977 (262,036) 650,013
Net earnings 35,144,337 31,300,000 3,844,337
Patronage dividends payable in cash,
stated as a current liability (9,400,000) (9,400,000)
------------- ------------- ------------- -------------
BALANCE AT MAY 31, 1994:
Stated as capital 270,761,017 198,157,446 21,900,000 50,703,571
Stated as current liability 9,400,000 9,400,000
------------- ------------- ------------- -------------
280,161,017 198,157,446 31,300,000 50,703,571
Distribution of patronage dividends payable
for preceding year, including cash payment
of $9,945,967 (9,945,967) 23,187,069 $ 1,832,136 (31,300,000) (3,665,172)
Redemption of capital equity certificates (5,728,997) (5,728,997)
Other 1,046,803 150,004 896,799
Net earnings 44,955,037 36,700,000 8,255,037
Patronage dividends payable in cash,
stated as a current liability (11,000,000) (11,000,000)
------------- ------------- ------------- ------------- -------------
BALANCE AT MAY 31, 1995:
Stated as capital 299,487,893 215,765,522 1,832,136 25,700,000 56,190,235
Stated as current liability 11,000,000 11,000,000
------------- ------------- ------------- ------------- -------------
310,487,893 215,765,522 1,832,136 36,700,000 56,190,235
Distribution of patronage dividends payable
for preceding year, including cash payment
of $10,992,918 (10,992,918) 25,617,898 7,912,297 (36,700,000) (7,823,113)
Redemption of capital equity certificates (6,554,160) (6,547,372) (6,788)
Equities issued 8,721,542 8,721,542
Other (2,318,892) (2,041,438) 2,350 (279,804)
Net earnings 51,008,654 43,700,000 7,308,654
Patronage dividends payable in cash,
stated as a current liability (13,100,000) (13,100,000)
------------- ------------- ------------- ------------- -------------
BALANCE AT MAY 31, 1996 337,252,119 241,516,152 9,739,995 30,600,000 55,395,972
Stated as current liability (unaudited) 13,100,000 13,100,000
Redemption of capital equity certificates
(unaudited) (1,612,773) (1,564,868) (47,905)
Equities issued (unaudited) 4,193,985 4,193,985
Other (unaudited) 31,309 (7,500) (181) 38,990
Net earnings (unaudited) 8,518,011 6,700,000 1,818,011
Patronage dividends payable in cash, stated
as a current liability (unaudited) (15,100,000) (15,100,000)
------------- ------------- ------------- ------------- -------------
BALANCE AT AUGUST 31, 1996 (UNAUDITED) $ 346,382,651 $ 244,137,769 $ 9,691,909 $ 35,300,000 $ 57,252,973
============= ============= ============= ============= =============
See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
FOR THE YEARS ENDED AUGUST 31,
----------------------------------------- ---------------------------
1994 1995 1996 1995 1996
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 7,620,025 $ 8,518,011
Adjustments to reconcile net earnings to
net cash flows:
Depreciation and amortization 17,705,185 18,907,903 20,421,425 4,991,428 5,713,837
Noncash loss (gain) on investment 277,340 (4,025,854) (12,517,993) (2,323,009) (1,753,575)
Noncash portion of patronage dividends
received (4,598,180) (4,622,221) (9,607,657) (1,376,946) (2,912,654)
Loss (gain) on sale of property, plant,
and equipment 273,843 (1,196,717) (853,024) 30,920 32,070
Change in assets and liabilities:
Receivables (57,084,091) (103,580,123) (33,013,948) (137,406,104) (50,108,075)
Inventories (36,647,598) (19,046,875) (186,968,498) (32,107,470) 261,210,354
Patron credit balances 8,493,415 23,282,391 (30,483,224) 6,043,774 50,997,174
Advances received on grain and oilseed sales (2,184,948) (1,264,842) 78,403,202 155,490,766 24,219,643
Accounts payable, accrued expenses,
and drafts outstanding 16,534,719 4,852,493 43,477,378 2,748,704 (8,736,938)
Prepaid expenses, deposits, and other (11,119,894) (7,973,268) (25,590,317) (22,461,103) 14,940,372
------------- ------------- ------------- ------------ -------------
Total adjustments (68,350,209) (94,667,113) (156,732,656) (26,369,040) 293,602,208
------------- ------------- ------------- ------------ -------------
Net cash (used in) provided by
operating activities (33,205,872) (49,712,076) (105,724,002) (18,749,015) 302,120,219
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant,
and equipment 1,174,196 3,351,119 3,729,810 48,791 89,216
Investments redeemed 7,028,580 3,662,026 2,518,863 712,160 1,522,295
Acquisition of property, plant, and equipment (28,035,021) (69,314,689) (40,501,980) (13,021,407) (11,407,775)
Payments on notes receivable 682,313 391,412 398,851 214,688 200,095
Investments (2,008,822) (1,843,097) (1,274,069)
Investments in joint ventures (6,650,000) (727,266) 8,515,059
Other (3,157,854) (1,004,755) (1,778,678) (1,343,039) 1,003,723
------------- ------------- ------------- ------------ -------------
Net cash used in investing activities (24,316,608) (71,407,984) (37,634,469) (13,388,807) (77,387)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of
credit agreements 79,500,000 87,000,000 124,000,000 10,500,000 (315,000,000)
Long-term debt borrowings 1,160,000 51,000,000 57,961,058 15,000,000
Principal payments on long-term debt (5,869,940) (5,215,106) (10,546,075) (2,157,380) (3,081,864)
Principal payments under capital lease
obligations (634,170) (680,901) (739,884) (365,277) (534,917)
Redemption of capital equity certificates (5,484,613) (5,728,997) (6,554,160) (1,732,344) (1,639,244)
Cash patronage dividends paid (6,833,455) (9,945,967) (10,992,918)
------------- ------------- ------------- ------------ -------------
Net cash provided by (used in) financing
activities 61,837,822 116,429,029 153,128,021 21,244,999 (320,256,025)
------------- ------------- ------------- ------------ -------------
INCREASE (DECREASE) IN CASH 4,315,342 (4,691,031) 9,769,550 (10,892,823) (18,213,193)
CASH AT BEGINNING OF PERIOD 12,032,366 16,347,708 11,656,677 11,656,677 21,426,227
------------- ------------- ------------- ------------ -------------
CASH AT END OF PERIOD $ 16,347,708 $ 11,656,677 $ 21,426,227 $ 763,854 $ 3,213,034
============= ============= ============= ============ =============
See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND THREE MONTHS
ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED)
- - - - -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Harvest States Cooperatives is a producer-owned
agricultural cooperative organized for the mutual benefit of its
members. Membership extends from the Midwest to the Pacific Northwest.
The Cooperative's primary lines of business are grain marketing,
milling, and oilseed processing. Members' grain is marketed through a
network of inland and export elevators. Sales are both domestic and
international.
UNAUDITED INTERIM FINANCIAL STATEMENTS - Harvest States Cooperatives and
its majority-owned subsidiaries' (the Company) consolidated balance
sheet as of August 31, 1996, consolidated statements of earnings and
cash flows for the three months ended August 31, 1995 and 1996,
consolidated statement of capital for the three months ended August 31,
1996, and the interim information in the notes to consolidated financial
statements as of August 31, 1996 and for the three months ended August
31, 1995 and 1996 are unaudited. In the opinion of management, such
unaudited consolidated financial statements include all adjustments
(consisting of only normal, recurring accruals) necessary for a fair
presentation thereof. The results of operations for any interim period
are not necessarily indicative of the results for the year.
CONSOLIDATION - The consolidated financial statements include the
accounts of Harvest States Cooperatives and its majority-owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated.
INVENTORIES - Grain and oilseed and certain processed grain and oilseed
products are stated at market, including appropriate adjustment of open
purchase, sales, and futures contracts. Substantially all other
inventories are priced at the lower of cost (first-in, first-out method)
or market.
The Company follows the general policy of hedging its grain and oilseed
inventories and unfilled orders for grain and oilseed products to the
extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging are purchased and sold
through regulated commodity exchanges. Inventories, however, are not
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 appraisal of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may
expose the Company to risk in the event that a counterparty to a
transaction is unable to fulfill its contractual obligation. The Company
manages its risk by entering into purchase contracts with preapproved
producers and establishing appropriate limits for individual suppliers.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated.
INVESTMENTS - Investments in cooperatives are stated at cost including
allocated equity and retainings. Patronage dividends are recorded at the
time written notices of allocation are received. Joint ventures and
other significant equity investments are accounted for under the equity
method. Under the equity method, the Company recognizes its
proportionate share of earnings or loss of the investee. Investments in
other debt and equity securities are considered available for sale and
are stated at market value, with unrealized amounts included in other
equity.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets.
INTANGIBLE ASSETS - Leasehold rights and other intangible assets are
amortized using the straight-line method over 3 to 40 years.
GRAIN AND OILSEED SALES - Grain and oilseed sales are recorded at time
of shipment. Export sales, including those through joint ventures, were
approximately $.9, $1.6, and $3.1 billion of total grain sales for the
years ended May 31, 1994, 1995, and 1996, respectively.
INCOME TAXES - Deferred income taxes are provided on temporary
differences between the tax basis of an asset or liability and its
reported amount in the financial statements. Due to the high proportion
of patronage earnings, deferred taxes resulting from temporary
differences are not significant.
ASSET IMPAIRMENT - In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. This statement is effective for fiscal years
beginning after December 15, 1995; however, earlier adoption is allowed.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expense during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1994
and 1995 consolidated financial statements to conform to the 1996
presentation. These reclassifications have no effect on the operating
results of those years, as previously reported.
2. RECEIVABLES
May 31,
---------------------------------- August 31,
1995 1996 1996
Trade $ 222,522,967 $ 297,112,614 $ 330,061,790
Elevator accounts 100,849,459 59,163,181 65,044,922
Other 15,293,807 18,003,744 29,347,584
--------------- --------------- ----------------
338,666,233 374,279,539 424,454,296
Less allowance for losses (4,425,000) (7,035,000) (7,077,596)
--------------- --------------- ----------------
$ 334,241,233 $ 367,244,539 $ 417,376,700
=============== =============== ================
3. INVENTORIES
May 31,
---------------------------------- August 31,
1995 1996 1996
Grain and oilseed $ 166,797,308 $ 351,504,342 $ 135,519,919
Processed grain and oilseed products 42,294,295 52,555,945 27,531,605
Feed and farm supplies 38,447,017 30,446,831 10,245,239
--------------- --------------- ----------------
$ 247,538,620 $ 434,507,118 $ 173,296,763
=============== =============== ================
4. INVESTMENTS
May 31,
---------------------------------- August 31,
1995 1996 1996
Cooperatives:
St. Paul Bank for Cooperatives $ 7,358,124 $ 8,180,068 $ 8,180,068
National Bank for Cooperatives 1,385,580 2,855,489 2,851,920
Cenex 8,534,259 12,361,642 12,958,616
Central Ferry Terminal Association 1,279,674 1,222,283 1,222,415
Pro Fac Cooperative 2,816,625 1,769,656 1,769,656
Land O' Lakes, Inc. 2,056,032 3,460,903 6,483,807
Ag Processing, Inc. 9,969,001 14,044,556 14,034,306
Intrade Corporation 886,543 1,869,073 1,869,073
Farmland Industries 628,500 891,625 891,268
Lewis-Clark Terminal, Inc. 484,027 1,003,433 1,003,433
Joint Ventures:
HSPV, L.L.C. 2,341,263 6,408,265 6,463,766
Tacoma Export Marketing Company 2,583,904 9,330,337 10,540,717
Ventura Foods, L.L.C. 4,152,815 4,651,933 37,212,482
Harvest States - Farmland Specialty Feed 1,007,139 954,678 976,974
Ag States Agency, L.L.C. 3,925,310 4,963,174 3,860,205
Archer Daniels Midland Common Stock 5,213,400 5,770,031 5,770,031
International Malting Company 700,000 700,000 700,000
Other 2,201,224 2,832,420 2,793,422
--------------- --------------- ----------------
$ 57,523,420 $ 83,269,566 $ 119,582,159
=============== =============== ================
5. OTHER ASSETS
May 31,
---------------------------------- August 31,
1995 1996 1996
Leasehold rights and other intangibles, less
accumulated amortization of $6,307,759,
$7,145,101, and $6,207,027, respectively $ 26,770,619 $ 24,908,896 $16,032,709
Notes receivable 1,245,992 1,780,474 1,721,296
Prepaid expenses and other assets 20,467,295 21,664,613 17,022,801
--------------- -------------- -----------
$ 48,483,906 $ 48,353,983 $34,776,806
=============== ============== ===========
6. PROPERTY, PLANT, AND EQUIPMENT
Estimated May 31,
Useful Life ---------------------------------- August 31,
in Years 1995 1996 1996
Grain terminals and country
elevators 3 to 50 $ 196,193,481 $ 210,151,675 $ 215,027,562
Grain and oilseed processing
plants 3 to 40 171,909,217 199,403,336 153,580,008
Feed plants 3 to 40 24,930,654 23,137,566 23,806,898
Corporate office facilities 3 to 40 11,221,624 11,512,620 11,780,215
--------------- --------------- ----------------
404,254,976 444,205,197 404,194,683
Less accumulated depreciation (198,417,286) (212,059,796) (195,588,923)
--------------- --------------- ----------------
$ 205,837,690 $ 232,145,401 $ 208,605,760
=============== =============== ================
7. BORROWINGS
NOTES PAYABLE:
The Company had a seasonal loan agreement of $200,000,000 committed with
St. Paul Bank for Cooperatives, $65,000,000 and $128,250,000 of which
were outstanding on May 31, 1995 and 1996, respectively. The Company has
a seasonal loan agreement of $200,000,000 committed with National Bank
for Cooperatives, $55,000,000 and $95,750,000 of which were outstanding
on May 31, 1995 and 1996, respectively. The Company also has seasonal
loan agreements of $170,000,000 of which $150,000,000 is committed with
commercial banks, $80,000,000 and $100,000,000 of which were outstanding
on May 31, 1995 and 1996, respectively. The average weighted interest
rates as of May 31, 1995 and 1996 were 6.07% and 6.05%, respectively.
Major conditions of the loan agreements provide that (1) the aggregate
principal outstanding under the agreements shall not exceed
$650,000,000; (2) the Company will not change its patronage dividend
payment policy or equity redemption policy without the consent of the
banks; and (3) the Company will maintain working capital of $85,000,000.
The total unused seasonal loan commitment at May 31, 1996 was
$226,000,000.
The Company has entered into a seasonal loan agreement of $550,000,000
that is effective as of November 11, 1996 which replaces the above
agreements. The agreement is provided by the National Bank for
Cooperatives, St. Paul Bank for Cooperatives, and a group of commercial
banks, and is committed through October 31, 1997. This agreement can be
extended in one year increments through October 29, 1999, if mutually
agreed to. No amounts are outstanding as of November 30, 1996.
Major financial covenants of the new seasonal loan agreement provide
that (1) the Company will maintain a working capital amount of not less
than $100,000,000; (2) the Company shall have consolidated members and
patrons' equity of not less than $275,000,000; and (3) the Company shall
not have consolidated funded debt to consolidated members and patrons'
equity in excess of .80 to 1.00.
LONG-TERM DEBT:
May 31,
---------------------------------- August 31,
1995 1996 1996
St. Paul Bank for Cooperatives, with fixed
and variable interest rates from 6.24% to
8.50%, due in installments through 2007 $ 44,792,000 $ 68,192,000 $ 66,937,833
National Bank for Cooperatives, with fixed
and variable interest rates from 6.24% to
7.51%, due in installments through 2007 25,500,000 52,500,000 52,145,833
Industrial Development Revenue Bonds,
payable through July 2005, interest rate
of 7.4% 4,750,000 3,300,000 2,100,000
Capitalized lease obligations with fixed and
variable rates, 8.0% to 8.90% 7,262,508 6,522,624 5,987,707
Mortgages payable and other 2,512,017 2,114,552 1,841,020
----------------- --------------- ----------------
84,816,525 132,629,176 129,012,393
Less current portion (6,721,469) (13,923,204) (18,419,713)
----------------- --------------- ----------------
$ 78,095,056 $ 118,705,972 $ 110,592,680
================= =============== ================
The principal maturities of outstanding long-term indebtedness
outstanding at May 31, 1996 are as follows:
Year ending May 31:
1997 $ 13,923,204
1998 19,385,645
1999 15,061,743
2000 15,981,172
2001 11,638,564
2002 and thereafter 56,638,848
8. PATRONS' EQUITY
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 year and are based on amounts
reportable for federal income tax purposes as adjusted in accordance
with the bylaws. The cash portion of this distribution is determined
annually by the Board of Directors, with the balance issued in the form
of Patronage Certificates.
Annual net earnings from sources other than patronage may be added to
the Capital Reserve or, upon action by the Board of Directors, allocated
to members in the form of Nonpatronage Certificates.
The Board of Directors has authorized the redemption of Patronage
Certificates held by patrons who are 72 years of age and those held by
estates of deceased patrons. The Board of Directors has also authorized
the redemption of Nonpatronage Certificates held by estates of deceased
patrons.
9. RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans
covering substantially all salaried and full-time hourly employees. The
retirement plan benefits for salaried employees are based on years of
service and the participants' total compensation. Benefits for hourly
employees are based on various monthly amounts for each year of credited
service. The plans are funded by annual contributions to tax-exempt
trusts in accordance with federal law and regulations. Plan assets
consist principally of corporate obligations, U.S. Government bonds,
money market funds, and immediate participation guarantee contracts.
Net pension expense for the years ended May 31 consists of the
following:
1994 1995 1996
Service cost - benefits earned during
the period $ 2,334,299 $ 2,564,115 $ 2,496,711
Interest cost on projected benefit obligation 6,161,068 6,376,612 5,587,377
Actual return on plan assets (7,256,145) (7,329,046) (6,860,278)
Net amortization and deferral 1,029,260 1,165,499 555,130
Benefit plan settlement adjustment 3,020,077
-------------- ------------- --------------
$ 2,268,482 $ 5,797,257 $ 1,778,940
============== ============= ==============
The funded status of the plans and the amount recognized on the
consolidated balance sheets as of May 31 are as follows:
1995 1996
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $67,539,069 and $74,406,137, respectively $ 69,898,635 $ 77,127,866
============== ===============
Projected benefit obligation for service rendered to date $ 73,686,670 $ 81,036,131
Plan assets at fair value 70,122,276 75,743,570
-------------- ---------------
Plan assets less than projected benefit obligation (3,564,394) (5,292,561)
Unrecognized net loss 19,551,900 25,449,810
Unrecognized transition gain at June 1, 1985 being
recognized over 13 years (3,614,924) (2,517,627)
Unrecognized prior service cost 1,606,315 1,520,901
Additional minimum liability (1,098,275)
-------------- ---------------
Prepaid pension cost $ 13,978,897 $ 18,062,248
============== ===============
The determination of the actuarial present value of the projected
benefit obligation was based on a weighted average discount rate of
8.25% in 1994 and 1995 and 7.75% in 1996 and a rate of increase in
future compensation of 5% in 1994, 1995, and 1996. The expected
long-term rate of return on plan assets was 8.5% in 1994 and 1995 and 8%
in 1996.
10. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Company provides certain health care benefits for retired employees.
Employees become eligible for these benefits if they meet minimum age
and service requirements and are eligible for retirement benefits.
The accrued postretirement medical and other benefits costs that are not
funded were as follows at May 31:
1995 1996
Accumulated postretirement benefit obligation (APBO):
Retirees $ 5,991,309 $ 2,993,307
Fully eligible active plan participants 1,041,742 1,019,071
Other active plan participants 2,730,508 3,624,620
------------- --------------
Total APBO 9,763,559 7,636,998
Unrecognized transition obligation (9,984,815) (9,430,105)
Unrecognized net gains 2,000,094 4,059,863
------------- --------------
Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756
============= ==============
The components of the net periodic cost are as follows for the years
ended May 31:
1994 1995 1996
Service cost - benefits earned during the year $ 299,000 $ 312,814 $ 337,182
Interest cost on projected benefit obligation 866,000 739,055 548,997
Amortization of unrecognized gains (41,435) (228,025)
Amortization of transition obligation 566,000 554,710 554,710
-------------- ------------- --------------
Net periodic postretirement cost $ 1,731,000 $ 1,565,144 $ 1,212,864
============== ============= ==============
The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996
and a health care cost trend rate of 10% in 1996, declining to 6% in
2004. If the health care cost trend rate increased by 1%, the APBO would
increase by 8.7% and the service cost and interest cost components would
increase by 10%.
11. PROVISION FOR INCOME TAXES
The provision for income taxes for each of the three years ended May 31
was as follows:
1994 1995 1996
Current provision $ 5,900,000 $ 5,400,000 $ 7,100,000
Deferred - principally federal (400,000) (300,000) (200,000)
-------------- ------------- --------------
Total provision $ 5,500,000 $ 5,100,000 $ 6,900,000
============== ============= ==============
Deferred income taxes, which are not significant, relate principally to
allowances and accruals.
A reconciliation of the statutory federal tax rate to the effective rate
for each of the three years ended May 31 follows:
1994 1995 1996
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3
Patronage earnings (27.0) (27.6) (29.6)
Other 2.9 .2 2.2
------ ------ ------
Effective rate 13.5% 10.2% 11.9%
====== ====== ======
12. OTHER REVENUES
Three Months Ended
For the Years Ended May 31, August 31,
-------------------------------------------- -----------------------------
1994 1995 1996 1995 1996
Storage and handling $ 8,665,157 $ 9,168,022 $ 8,722,537 $ 1,603,537 $ 1,229,497
Service revenues 13,695,050 15,942,394 20,572,679 5,599,794 5,383,704
Commission 8,023,254 6,722,261 6,837,272 1,568,684 2,273,715
Joint venture (loss) income (277,340) 4,025,854 12,517,993 2,323,009 1,753,579
(Loss) gain on sale of
property, plant, and
equipment (211,081) 1,196,717 853,024 (30,920) (32,070)
Interest income 7,935,682 11,471,627 11,581,221 3,431,556 1,641,447
Other 8,065,200 9,030,109 7,254,797 2,287,111 2,589,929
-------------- ------------- ------------- -------------- -------------
$ 45,895,922 $ 57,556,984 $ 68,339,523 $ 16,782,771 $ 14,839,801
============== ============= ============= ============== =============
13. COMMITMENTS AND CONTINGENCIES
At May 31, 1995 and 1996, the Company stored grain and oilseed and
processed grain and oilseed products for others totaling $30,700,000 and
$37,900,000, respectively.
The Company is a guarantor for lines of credit for related companies
totaling $100,000,000, of which $30,300,000 was outstanding as of May
31, 1996. All outstanding loans are current with respective creditors as
of May 31, 1996.
The Company leases approximately 3,400 rail cars with remaining lease
terms of one to ten years. In addition, the Company leases vehicles and
various manufacturing equipment.
Minimum rental payments due under these operating leases at May 31,
1996, are as follows:
Rail Cars Vehicles Other Total
Years ending May 31:
1997 $ 17,940,667 $ 4,823,359 $ 2,128,587 $ 24,892,613
1998 17,450,431 3,795,690 1,753,844 22,999,965
1999 15,807,151 2,771,987 1,398,045 19,977,183
2000 11,938,430 1,675,650 1,056,157 14,670,237
2001 6,906,800 789,227 861,043 8,557,070
2002 and thereafter 13,599,870 648,190 4,186,672 18,434,732
------------- ------------- -------------- -------------
$ 83,643,349 $ 14,504,103 $ 11,384,348 $ 109,531,800
============= ============= ============== =============
Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was approximately $10,196,000, $11,378,000, and
$12,454,000 for the years ended May 31, 1994, 1995, and 1996,
respectively. Mileage credits and sublease income were $3,437,000,
$5,126,000, and $7,257,000 for the years ended May 31, 1994, 1995, and
1996, respectively.
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 condition of the Company.
14. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities is as follows:
Three Months Ended
For the Years Ended May 31, August 31,
------------------------------------------------- ------------------------------
1994 1995 1996 1995 1996
Net cash paid for:
Interest $ 10,149,452 $ 17,741,969 $ 31,836,722 $ 6,327,153 $ 6,533,042
Income taxes 5,610,503 7,054,563 3,934,688 597,299 115,805
Also, the Company issued capital equity certificates in transactions to
acquire interest in elevator properties valued at $3,249,624 during the
year ended May 31, 1994, $8,721,542 during the year ended May 31, 1996,
and $4,467,230 during the three months ended August 31, 1995 and
$4,193,983 during the three months ended August 31, 1996. No capital
equity certificates to acquire interests in elevator properties were
issued in 1995.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of the fair value of all financial instruments to
which the Company is a party. All financial instruments are carried at
amounts that approximate estimated fair value, except for investments in
cooperatives, for which it is not practicable to provide fair-value
information.
HARVEST STATES COOPERATIVES
WHEAT MILLING DIVISION
FINANCIAL STATEMENTS FOR THE YEARS ENDED
MAY 31, 1994, 1995, AND 1996 AND THE THREE MONTHS
ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED)
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the balance sheets of the Wheat Milling Division, formerly known
as Amber Milling Company, a division of Harvest States Cooperatives (HSC), as of
May 31, 1995 and 1996 and the related statements of earnings, divisional equity
and cash flows for each of the three years in the period ended May 31, 1996.
These financial statements are the responsibility of the Division's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Wheat Milling Division at May 31, 1995
and 1996 and the results of its operations and its cash flows for each of the
three years in the period ended May 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
December 11, 1996
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
BALANCE SHEETS
MAY 31,
----------------------------- AUGUST 31,
1995 1996 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Receivables (Note 2) $ 18,633,076 $ 43,749,134 $ 43,319,822
Inventories (Note 3) 7,006,187 9,308,275 15,117,452
Prepaid expenses and deposits 98,866 149,873 260,584
------------ ------------ ------------
Total current assets 25,738,129 53,207,282 58,697,858
OTHER ASSETS (Note 4) 13,472,256 12,881,236 12,614,565
PROPERTY, PLANT, AND
EQUIPMENT (Note 5) 43,395,670 59,233,046 62,587,320
------------ ------------ ------------
$ 82,606,055 $125,321,564 $133,899,743
============ ============ ============
LIABILITIES AND CAPITAL
CURRENT LIABILITIES:
Due to HSC (Note 6) $ 13,642,180 $ 31,044,150 $ 32,200,000
Accounts payable and accrued expenses 7,416,803 12,480,342 19,902,671
Current portion of long-term debt (Note 6) 3,075,000 6,344,584 6,344,584
------------ ------------ ------------
Total current liabilities 24,133,983 49,869,076 58,447,255
LONG-TERM DEBT (Note 6) 30,675,000 47,655,416 47,655,416
COMMITMENTS AND CONTINGENCIES (Note 11)
DIVISIONAL EQUITY (Note 7) 27,797,072 27,797,072 27,797,072
------------ ------------ ------------
$ 82,606,055 $125,321,564 $133,899,743
============ ============ ============
See notes to financial statements.
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
THREE MONTHS ENDED
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
(UNAUDITED)
REVENUES -
Processed grain sales $ 103,716,012 $ 119,725,183 $ 173,315,613 $ 32,416,461 $ 55,647,949
COSTS AND EXPENSES:
Cost of goods sold 97,206,374 112,690,679 161,293,430 30,005,525 51,323,046
Marketing, general, and administrative 2,415,155 3,834,289 4,471,563 985,644 1,104,186
Interest 1,832,037 2,278,544 4,457,797 766,517 1,411,133
------------- -------------- ------------- ------------- --------------
101,453,566 118,803,512 170,222,790 31,757,686 53,838,365
------------- -------------- ------------- ------------- --------------
EARNINGS BEFORE INCOME TAXES 2,262,446 921,671 3,092,823 658,775 1,809,584
INCOME TAXES (Note 10) 150,000 125,000 200,000 50,000 125,000
------------- -------------- ------------- ------------- --------------
NET EARNINGS $ 2,112,446 $ 796,671 $ 2,892,823 $ 608,775 $ 1,684,584
============= ============== ============= ============= ==============
See notes to financial statements.
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF DIVISIONAL EQUITY
BALANCE AT MAY 31, 1993 $ 27,797,072
Net earnings 2,112,446
Divisional equity distributed (2,112,446)
------------
BALANCE AT MAY 31, 1994 27,797,072
Net earnings 796,671
Divisional equity distributed (796,671)
------------
BALANCE AT MAY 31, 1995 27,797,072
Net earnings 2,892,823
Divisional equity distributed (2,892,823)
------------
BALANCE AT MAY 31, 1996 27,797,072
Net earnings (unaudited) 1,684,584
Divisional equity distributed
(unaudited) (1,684,584)
------------
BALANCE AT AUGUST 31, 1996 (UNAUDITED) $ 27,797,072
============
See notes to financial statements.
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------- -----------------------------
1994 1995 1996 1995 1996
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 2,112,446 $ 796,671 $ 2,892,823 $ 608,775 $ 1,684,584
Adjustments to reconcile net earnings
to net cash flows:
Depreciation and amortization 2,185,697 2,512,430 3,309,307 633,127 997,533
Change in assets and liabilities:
Receivables (4,884,658) (3,781,655) (25,116,058) 660,342 429,312
Inventories (8,459,257) 4,387,100 (2,302,088) 366,806 (5,809,177)
Prepaid expenses, deposits,
and other 82,151 55,168 (51,007) (3,851,961) (110,711)
Accounts payable and accrued
expenses 443,220 3,854,638 5,063,539 4,990,928 7,422,329
------------ ------------ ------------ ------------ ------------
Total adjustments (10,632,847) 7,027,681 (19,096,307) 2,799,242 2,929,286
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
operating activities (8,520,401) 7,824,352 (16,203,484) 3,408,017 4,613,870
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of additional intangibles (5,624,405) (475,654)
Acquisition of property, plant,
and equipment (803,647) (25,123,131) (18,080,009) (7,563,146) (4,085,136)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities (803,647) (30,747,536) (18,555,663) (7,563,146) (4,085,136)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings from
(repayments to) HSC 12,136,494 8,969,855 17,401,970 (6,986,096) 1,155,850
Long-term debt borrowings 14,750,000 20,250,000 11,750,000
Principal payments on long-term debt (700,000)
Divisional equity distributed (2,112,446) (796,671) (2,892,823) (608,775) (1,684,584)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) financing activities 9,324,048 22,923,184 34,759,147 4,155,129 (528,734)
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH -- -- -- -- --
CASH AT BEGINNING OF PERIOD -- -- -- -- --
------------ ------------ ------------ ------------ ------------
CASH AT END OF PERIOD $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
See notes to financial statements.
WHEAT MILLING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND THREE
MONTHS ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED)
- - - - -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS - Harvest States Cooperatives -
Wheat Milling Division (the Division), formerly known as Amber Milling
Company, is a division of Harvest States Cooperatives (HSC) and is not
organized as a separate legal entity. In the year ended May 31, 1994,
the Division was operated as a joint venture in which HSC owned a 70%
interest. Effective June 1, 1994, HSC purchased the minority interest.
The Division operates commercial bakery and semolina flour milling
facilities in Rush City, Minnesota; Huron, Ohio; and Kenosha,
Wisconsin. These mills produce semolina and durum flour, which are the
primary ingredients in pasta products and wheat flour in the bakery
industry. The Division serves customers throughout the United States.
UNAUDITED INTERIM FINANCIAL STATEMENTS - The Division's balance sheet as
of August 31, 1996, statements of earnings and cash flows for the three
months ended August 31, 1995 and 1996, statement of divisional equity
for the three months ended August 31, 1996, and the interim information
in the notes to financial statements as of August 31, 1996 and for the
three months ended August 31, 1995 and 1996 are unaudited. In the
opinion of management, such unaudited financial statements include all
adjustments (consisting of only normal, recurring accruals) necessary
for a fair presentation thereof. The results of operations for any
interim period are not necessarily indicative of the results for the
year.
SALES - Sales of Processed Grains are recongnized upon shipment to
customers, net of freight charges.
CASH MANAGEMENT - The Division draws all of its cash requirements from
and deposits all cash generated with a centralized HSC cash management
system.
INVENTORIES - Grain and certain processed grain products are stated at
market, including appropriate adjustment of open purchase, sales, and
futures contracts and deferral of normal profit on processed grain
products.
The Division follows the general policy of hedging its grain inventories
and unfilled orders for grain products to the extent considered
practicable for minimizing risk from market price fluctuations. Futures
contracts used for hedging are purchased and sold through regulated
commodity exchanges. Inventories, purchase commitments, and sales
commitments, however, are not completely hedged, due in part to the
absence of satisfactory hedging facilities for certain commodities and
geographical areas and in part to the Division's appraisal of its
exposure from expected price fluctuations. Noncommodity exchange
purchase and sale contracts may expose the Division to risk in the event
that a counterparty to a transaction is unable to fulfill its
contractual obligation. The Division manages its risk by entering into
purchase contracts with preapproved producers and companies and by
establishing appropriate limits for individual suppliers. Sales
contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets.
OTHER ASSETS - Leasehold rights and other intangible assets are
amortized using the straight-line method over 15 to 18 years.
IMPAIRMENT OF LONG-LIVED ASSETS - Management periodically reviews the
carrying value of property and equipment for potential impairment by
comparing its carrying value to the estimated undiscounted future cash
flows expected to result from the use of these assets. Should the sum of
the related, 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.
INCOME TAXES - Earnings generated on grain purchased by the Division
from nonmembers is characterized as nonpatronage and taxable. Earnings
generated on grain purchased from HSC are considered to be patronage to
the extent of HSC's patronage purchase percentage of that particular
commodity; the other portion of those earnings is considered taxable.
Due to the high proportion of patronage earnings, deferred taxes
resulting from temporary differences are not significant.
REVENUE FROM SIGNIFICANT CUSTOMERS - Sales to individual customers in
excess of 5% of total sales were approximately $68,800,000 to six
customers, $90,500,000 to nine customers, and $116,200,000 to seven
customers for the years ended May 31, 1994, 1995, and 1996.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expense during the reporting period. Actual results could differ
from those estimates.
2. RECEIVABLES
May 31,
------------------------------- August 31,
1995 1996 1996
Trade $ 18,504,796 $ 43,530,542 $ 43,199,805
Other 257,468 459,530 393,954
Less allowance for losses (129,188) (240,938) (273,937)
--------------- -------------- ---------------
$ 18,633,076 $ 43,749,134 $ 43,319,822
=============== ============== ===============
3. INVENTORIES
May 31,
------------------------------- August 31,
1995 1996 1996
Grain $ 6,799,010 $ 8,327,021 $ 11,450,458
Processed grain products (75,951) 629,647 3,259,686
Other 283,128 351,607 407,218
--------------- -------------- ---------------
$ 7,006,187 $ 9,308,275 $ 15,117,452
=============== ============== ===============
4. OTHER ASSETS
May 31,
------------------------------- August 31,
1995 1996 1996
Goodwill, less accumulated amortization of
$374,960, $781,635, and $883,305 respectively $ 5,249,445 $ 5,318,424 $ 5,216,754
Leasehold rights and other intangibles, less
accumulated amortization of $3,788,723,
$4,484,723, and $4,649,724 respectively 8,222,811 7,562,812 7,397,811
--------------- -------------- ---------------
$ 13,472,256 $ 12,881,236 $ 12,614,565
=============== ============== ===============
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is as follows:
Estimated May 31,
Useful Life ---------------------------------- August 31,
in Years 1995 1996 1996
Land $ 142,060 $ 181,420 $ 181,420
Grain processing plants 15 to 45 7,435,649 30,835,636 30,835,640
Machinery and equipment 5 to 20 23,431,415 35,520,073 35,520,071
--------------- --------------- ----------------
31,009,124 66,537,129 66,537,131
Less accumulated depreciation (12,387,180) (14,677,871) (15,408,733)
--------------- --------------- -----------------
18,621,944 51,859,258 51,128,398
Construction-in-progress 24,773,726 7,373,788 11,458,922
--------------- --------------- ----------------
$ 43,395,670 $ 59,233,046 $ 62,587,320
=============== =============== ================
6. BORROWINGS
DUE TO HSC:
The Division satisfies its working capital needs through borrowings,
both long and short term, from HSC to the extent HSC's borrowing
capacity permits. Short-term borrowings of $9,750,000 and $27,000,000
were outstanding on May 31, 1995 and 1996, respectively. Interest on
short-term borrowings from HSC is charged to the Division and all other
HSC divisions based upon a ratable allocation of consolidated HSC
interest expense related to short term borrowings based upon working
capital employed by each division. This results in an effective
borrowing rate that may be less than what the Division could obtain on
an independent basis.
May 31,
------------------------------- August 31,
1995 1996 1996
Harvest States Cooperatives, with fixed and
variable interest rates from 6.24% to 8.50%,
due in installments through 2005 $ 31,250,000 $ 51,700,000 $ 51,700,000
Industrial Development and Public Grain Elevator
Revenue Bonds, payable through July 2004,
with an interest rate of 7.375% 2,500,000 2,300,000 2,300,000
--------------- -------------- ---------------
33,750,000 54,000,000 54,000,000
Less current portion (3,075,000) (6,344,584) (6,344,584)
--------------- -------------- ---------------
$ 30,675,000 $ 47,655,416 $ 47,655,416
=============== ============== ===============
The principal maturities of outstanding long-term indebtedness
outstanding at May 13, 1996 are as follows:
Year ending May 31:
1997 $ 6,344,584
1998 8,026,875
1999 8,026,875
2000 8,026,875
2001 6,151,875
2002 and thereafter 17,422,916
7. DIVISIONAL EQUITY
The Division's earnings are distributed to HSC at the end of each
quarter. All patronage-related liability and capital accounts are
maintained at HSC's consolidated level.
8. RETIREMENT PLANS
The Division, through HSC, has noncontributory defined benefit
retirement plans covering substantially all salaried and full-time
hourly employees. The retirement plan benefits for salaried employees
are based on years of service and the participants' total compensation.
Benefits for hourly employees are based on various monthly amounts for
each year of credited service. The plans are funded by annual
contributions to tax-exempt trusts in accordance with federal law and
regulations. Plan assets consist principally of corporate obligations,
U.S. Government bonds, money market funds, and immediate participation
guarantee contracts. Pension costs billed to the Division for 1994,
1995, and 1996 were approximately $52,000, $101,000, and $46,000,
respectively. The Division's portion of the actuarial present value or
accumulated benefit obligations and net pension assets available for
benefits has not been determined. Selected information at May 31 for
HSC's plans are as follows:
1995 1996
Accumulated benefit obligation, including vested benefits
of $67,539,069 and $74,406,137, respectively $ 69,898,635 $ 77,127,866
Projected benefit obligation for services rendered to date 73,686,670 81,036,131
Plan assets at fair value 70,122,276 75,743,570
The determination of the actuarial present value of the projected
benefit obligation was based on a weighted average discount rate of
8.25% in 1994 and 1995 and 7.75% in 1996 and a rate of increase in
future compensation of 5% in 1994, 1995, and 1996. The expected
long-term rate of return on plan assets was 8.5% in 1994 and 1995 and 8%
in 1996.
9. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Division, through HSC, provides certain health care benefits for
retired employees. Employees become eligible for these benefits if they
meet minimum age and service requirements and are eligible for
retirement benefits.
The accrued postretirement medical and other benefits costs of HSC that
are not funded were as follows at May 31:
1995 1996
Accumulated postretirement benefit obligation (APBO):
Retirees $ 5,991,309 $ 2,993,307
Fully eligible active plan participants 1,041,742 1,019,071
Other active plan participants 2,730,508 3,624,620
------------- -------------
Total APBO 9,763,559 7,636,998
Unrecognized transition obligation (9,984,815) (9,430,105)
Unrecognized net gains 2,000,094 4,059,863
------------- -------------
Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756
============= =============
The net periodic costs billed to the Division for 1994, 1995, and 1996
were approximately $30,000, $44,000, and $42,000, respectively.
The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996
and a health care cost trend rate of 10% in 1996, declining to 6% in
2004. If the health care cost trend rate increased by 1%, the APBO would
increase by 8.7% and the service cost and interest cost components would
increase by 10%.
10. PROVISION FOR INCOME TAXES
HSC and its divisions, including the Wheat Milling Division, file
consolidated federal income tax returns. HSC has a policy that provides
for the payment of taxes on an individual company basis for each of its
divisions.
No significant deferred income tax provision was recorded by the
Division.
A reconciliation of the statutory federal tax rate to the effective rate
for the years ended May 31 follows:
1994 1995 1996
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3
Patronage earnings (33.9) (24.2) (31.9)
Other 2.9 .2 2.2
------ ------ ------
Effective rate 6.6% 13.6% 9.6%
====== ====== ======
11. COMMITMENTS AND CONTINGENCIES
The Division leases approximately 242 rail cars with remaining lease
terms of one to ten years. In addition, the Division leases a milling
facility, vehicles, and various manufacturing equipment.
Minimum rental payments due under these operating leases at May 31, 1996
are as follows:
Year ending May 31:
Milling
Rail Cars Facility Other Total
1997 $ 1,423,200 $ 399,996 $ 5,844 $ 1,829,040
1998 1,001,475 426,668 5,844 1,433,987
1999 825,125 440,004 2,435 1,267,564
2000 815,630 440,004 1,255,634
2001 610,300 440,004 1,050,304
2002 and thereafter 52,850 2,986,672 3,039,522
------------- -------------- ------------- ---------------
$ 4,728,580 $ 5,133,348 $ 14,123 $ 9,876,051
============= ============== ============= ===============
Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was approximately $1,190,606, $1,180,836, and
$1,624,576 for the years ended May 31, 1994, 1995, and 1996,
respectively. Mileage credits and sublease income were $273,384,
$321,909, and $338,700 for the years ended May 31, 1994, 1995, and 1996,
respectively.
The Division 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
Division 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 condition of the Division.
At May 31, 1996, the Division had outstanding grain purchase contracts
of approximately 7,800,000 bushels at prices for durum ranging from
$5.93 per bushel to $7.50 per bushel and prices for spring wheat ranging
from $5.03 per bushel to $7.54 per bushel. In addition, the Division had
outstanding sales contracts of both semolina and commercial baking flour
totaling approximately $59,800,000.
12. RELATED-PARTY TRANSACTIONS
Net sales for the year ended May 31, 1994, 1995, and 1996 included
$870,000, $321,768, and $647,416, respectively, to related parties.
The Division purchases substantially all of its durum and wheat from
HSC, a related party. Included in cost of goods sold for the years ended
May 31, 1994, 1995, and 1996 were $58,900,000, $69,900,000, and
$122,900,000, respectively, of these purchases.
Additionally, HSC performs various direct management services and incurs
certain costs for its operating divisions. Such costs, including data
processing, office services, and insurance, are charged directly to the
divisions. Indirect expenses, such as publications, board expense,
executive management, legal, finance, and human resources, are allocated
to the divisions based on approximate usage.
13. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:
1994 1995 1996
Net cash paid during year for:
Interest $ 1,832,037 $ 2,278,544 $ 4,457,797
Income taxes 350,000 150,000 125,000
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair
value of all financial instruments to which the Division is a party. All
financial instruments are carried at amounts that approximate estimated
fair value.
15. SUBSEQUENT EVENT
HSC has announced a plan to offer Equity Participation Units (EPUs) to
its members. Each EPU will represent the rights and obligation to
deliver a specified quantity of wheat to HSC. Holders of EPUs will be
entitled to receive patronage earnings related to the Division's
milling of wheat delivered by the holder to HSC, as well as a ratable
share of consolidated HSC non-patronage earnings based upon total
member deliveries to HSC by members of all commodities. EPU's will
represent an equity interest in HSC and will not represent an ownership
interest in any assets of the Division.
In conjunction with the offering of EPUs, HSC announced its intention
to begin charging the Division interest on its daily average of
short-term borrowings at a rate equivalent to the weighted average
interest rate on short-term borrowings of HSC. On May 31,1996, the
weighted average borrowing rate of EPUs short-term borrowings was
6.05%. Amounts due from HSC will accrue interest in the same manner at
the same rate.
OILSEED PROCESSING AND
REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
FINANCIAL STATEMENTS FOR THE YEARS ENDED
MAY 31, 1994, 1995, AND 1996 AND THE THREE MONTHS
ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED)
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the balance sheets of the Oilseed Processing and Refining
Division, formerly known as Honeymead Products Company, a division of Harvest
States Cooperatives (HSC) as of May 31, 1995 and 1996 and the related statements
of earnings, divisional equity, and cash flows for each of the three years in
the period ended May 31, 1996. These financial statements are the responsibility
of the Division's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements present fairly, in all material
respects, the financial position of the Oilseed Processing and Refining Division
at May 31, 1995 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended May 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
December 10, 1996
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
BALANCE SHEETS
MAY 31,
--------------------------- AUGUST 31,
1995 1996 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Receivables (Note 2) $20,387,921 $22,795,612 $25,219,890
Inventories (Note 3) 17,255,215 26,235,220 12,414,154
Prepaid expenses and deposits 524,151 310,692 1,685,087
Due from HSC 5,095,299
----------- ----------- -----------
Total current assets 43,262,586 49,341,524 39,319,131
PROPERTY, PLANT, AND EQUIPMENT (Note 4) 20,410,408 24,771,413 27,073,103
----------- ----------- -----------
$63,672,994 $74,112,937 $66,392,234
=========== =========== ===========
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Due to HSC (Note 5) $ 9,482,351 $ 1,200,000
Accounts payable and accrued expenses $10,281,996 11,239,588 11,801,236
----------- ----------- -----------
Total current liabilities 10,281,996 20,721,939 13,001,236
COMMITMENTS AND CONTINGENCIES (Note 10)
DIVISIONAL EQUITY (Note 6) 53,390,998 53,390,998 53,390,998
----------- ----------- -----------
$63,672,994 $74,112,937 $66,392,234
=========== =========== ===========
See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF EARNINGS
THREE MONTHS ENDED
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------- -----------------------------
1994 1995 1996 1995 1996
(UNAUDITED)
REVENUES:
Processed oilseed sales $ 358,372,039 $ 398,095,108 $ 399,271,001 $ 93,227,683 $ 113,145,890
Other revenue 1,349,484 1,162,518 1,435,708 1,407,881 599,421
------------- -------------- ------------- ------------- --------------
359,721,523 399,257,626 400,706,709 94,635,564 113,745,311
COSTS AND EXPENSES:
Cost of goods sold 334,968,474 366,407,451 371,424,566 88,122,829 107,833,751
Marketing, general, and administrative 4,722,900 5,137,663 4,544,763 1,214,952 1,194,870
Interest 164,300 151,500 12,600 19,100
------------- -------------- ------------- ------------- --------------
339,855,674 371,545,114 376,120,829 89,350,381 109,047,721
------------- -------------- ------------- ------------- --------------
EARNINGS BEFORE INCOME TAXES 19,865,849 27,712,512 24,585,880 5,285,183 4,697,590
INCOME TAXES (Note 9) 1,650,000 1,500,000 1,600,000 375,000 350,000
------------- -------------- ------------- ------------- --------------
NET EARNINGS $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 4,910,183 $ 4,347,590
============= ============== ============= ============= ==============
See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF DIVISIONAL EQUITY
BALANCE AT MAY 31, 1993 $ 53,390,998
Net earnings 18,215,849
Divisional equity distributed (18,215,849)
BALANCE AT MAY 31, 1994 53,390,998
Net earnings 26,212,512
Divisional equity distributed (26,212,512)
BALANCE AT MAY 31, 1995 53,390,998
Net earnings 22,985,880
Divisional equity distributed (22,985,880)
BALANCE AT MAY 31, 1996 53,390,998
Net earnings (unaudited) 4,347,590
Divisional equity distributed (unaudited) (4,347,590)
BALANCE AT AUGUST 31, 1996 (UNAUDITED) $ 53,390,998
============
See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------------- -----------------------------
1994 1995 1996 1995 1996
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 4,910,183 $ 4,347,590
Adjustments to reconcile net earnings
to net cash flows:
Depreciation and amortization 1,940,793 1,724,844 1,598,965 378,976 412,040
Gain (loss) on sale of property,
plant, and equipment 40,721 (431) 31,765
Change in assets and liabilities:
Receivables (116,143) (568,635) (2,407,691) (2,102,406) (2,424,278)
Inventories (8,481,765) 16,861,993 (8,980,005) 1,074,792 13,821,066
Prepaid expenses and deposits 303,248 152,531 213,459 (700,872) (1,374,395)
Accounts payable and accrued
expenses (2,821,112) 482,095 957,592 3,756,061 561,648
------------ ------------ ------------ ------------ ------------
Total adjustments (9,134,258) 18,652,397 (8,585,915) 2,406,551 10,996,081
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating activities 9,081,591 44,864,909 14,399,965 7,316,734 15,343,671
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from disposition of property,
plant, and equipment 1,000
Acquisition of property, plant,
and equipment (6,293,164) (2,557,886) (5,991,735) (1,669,286) (2,713,730)
------------ ------------ ------------ ------------ ------------
Net cash used in
investing activities (6,293,164) (2,556,886) (5,991,735) (1,669,286) (2,713,730)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings from (repayments to) HSC 15,427,422 (16,095,511) 14,577,650 (737,265) (8,282,351)
Divisional equity distributed (18,215,849) (26,212,512) (22,985,880) (4,910,183) (4,347,590)
------------ ------------ ------------ ------------ ------------
Net cash used in financing
activities (2,788,427) (42,308,023) (8,408,230) (5,647,448) (12,629,941)
------------ ------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH -- -- -- -- --
CASH AT BEGINNING OF PERIOD -- -- -- -- --
------------ ------------ ------------ ------------ ------------
CASH AT END OF PERIOD $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION
(A DIVISION OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND THREE
MONTHS ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED)
- - - - -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS - Harvest States Cooperatives -
Oilseed Processing and Refining Division (the Division), formerly known
as Honeymead Products Company, is a division of Harvest States
Cooperatives (HSC) and is not organized as a separate legal entity. The
Division operates a single soybean crushing and oil refining plant in
Mankato, Minnesota and serves customers throughout the United States.
UNAUDITED INTERIM FINANCIAL STATEMENTS - The Division's balance sheet as
of August 31, 1996, statements of earnings and cash flows for the three
months ended August 31, 1995 and 1996, statement of divisional equity
for the three months ended August 31, 1996, and the interim information
in the notes to the financial statements as of August 31, 1996 and for
the three months ended August 31, 1995 and 1996 are unaudited. In the
opinion of management, such unaudited financial statements include all
adjustments (consisting of only normal, recurring accruals) necessary
for a fair presentation thereof. The results of operations for any
interim period are not necessarily indicative of the results for the
year.
SALES - Sales of processed oilseeds are recognized upon shipment to
customers, net of freight charges.
CASH MANAGEMENT - The Division draws all of its cash requirements from
and deposits all cash generated with a centralized HSC cash management
system.
INVENTORIES - Oilseed and certain processed oilseed products are stated
at market, including appropriate adjustment of open purchase, sales, and
futures contracts and deferral of profit on processed oilseed products.
The Division follows the general policy of hedging its oilseed
inventories and unfilled orders for oilseed products to the extent
considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging are purchased and sold
through regulated commodity exchanges. However, inventories, purchase
commitments, and sales commitments are not completely hedged, due in
part to the Division's appraisal of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may
expose the Division to risk in the event that a counterparty to a
transaction is unable to fulfill its contractual obligation. The
Division manages its risk by entering into purchase contracts with
preapproved producers and companies and by establishing appropriate
limits for individual suppliers. Sales contracts are entered into with
organizations of acceptable creditworthiness, as internally evaluated.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets.
INCOME TAXES - Earnings generated on oilseed purchased by the Division
from nonmembers is characterized as nonpatronage and taxable. Earnings
generated on oilseed purchased from HSC are considered to be patronage
to the extent of HSC's patronage purchase percentage of that particular
commodity; the other portion of those earnings is considered taxable.
Due to the high proportion of patronage earnings, deferred taxes
resulting from temporary differences are not significant.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expense during the reporting period. Actual results could differ
from those estimates.
REVENUE FROM SIGNIFICANT CUSTOMERS - Sales to individual customers in
excess of 5% of total sales were approximately $103,700,000 to two
customers, $132,500,000 to three customers, and $152,500,000 to three
customers for the years ended May 31, 1994, 1995, and 1996.
2. RECEIVABLES
May 31,
------------------------------- August 31,
1995 1996 1996
Trade $ 20,782,921 $ 23,190,612 $ 25,614,890
Less allowance for losses (395,000) (395,000) (395,000)
--------------- -------------- ---------------
$ 20,387,921 $ 22,795,612 $ 25,219,890
=============== ============== ===============
3. INVENTORIES
May 31,
------------------------------- August 31,
1995 1996 1996
Oilseed $ 8,369,881 $ 17,141,111 $ 4,567,147
Processed oilseed products 8,885,334 9,094,109 7,847,007
--------------- -------------- ---------------
$ 17,255,215 $ 26,235,220 $ 12,414,154
=============== ============== ===============
4. PROPERTY, PLANT, AND EQUIPMENT
Estimated
Useful Life May 31,
------------------------------- August 31,
in Years 1995 1996 1996
Land $ 630,043 $ 630,043 $ 630,043
Elevators, crushing plant,
and refinery 15 to 20 19,743,982 21,268,532 21,268,532
Machinery and equipment 5 to 18 37,924,258 41,077,104 41,077,104
Furniture and fixtures 3 to 12 357,263 379,363 379,363
Other 5 to 12 99,112 99,112 99,112
--------------- -------------- ----------------
58,754,658 63,454,154 63,454,154
Less accumulated depreciation (40,532,200) (42,310,640) (42,722,680)
--------------- -------------- -----------------
18,222,458 21,143,514 20,731,474
Construction-in-progress 2,187,950 3,627,899 6,341,629
--------------- -------------- ----------------
$ 20,410,408 $ 24,771,413 $ 27,073,103
=============== ============== ================
5. DUE TO HSC
The Division satisfies its working capital needs through borrowings,
both long and short term, from HSC to the extent HSC's borrowing
capacity permits. Short-term borrowings of $2,300,000 were outstanding
on May 31, 1996. No balance was outstanding on May 31, 1995.
Interest on short-term borrowings from HSC is charged to the Division
and all other HSC divisions based upon a ratable allocation of
consolidated HSC interest expense related to short term borrowings based
upon working capital employed by each division. This results in an
effective borrowing rate that may be less than what the Division could
obtain on an independent basis.
6. DIVISIONAL EQUITY
The Division's earnings are distributed to HSC at the end of each
quarter. All patronage-related liability and capital accounts are
maintained at HSC's consolidated level.
7. RETIREMENT PLANS
The Division, through HSC, has noncontributory defined benefit
retirement plans covering substantially all salaried and full-time
hourly employees. The retirement plan benefits for salaried employees
are based on years of service and the participants' total compensation.
Benefits for hourly employees are based on various monthly amounts for
each year of credited service. The plans are funded by annual
contributions to tax-exempt trusts in accordance with federal law and
regulations. Plan assets consist principally of corporate obligations,
U.S. Government bonds, money market funds, and immediate participation
guarantee contracts. Pension costs billed to the Division for the years
ended May 31, 1994, 1995, and 1996 were approximately $166,000,
$264,000, and $169,000, respectively. The Division's portion of the
actuarial present value or accumulated benefit obligations and net
pension assets available for benefits has not been determined. Selected
information at May 31 for HSC's plans are as follows:
1995 1996
Accumulated benefit obligation, including vested benefits
of $67,539,069 and $74,406,137, respectively $ 69,898,635 $ 77,127,866
Projected benefit obligation for service rendered to date 73,686,670 81,036,131
Plan assets at fair value 70,122,276 75,743,570
The determination of the actuarial present value of the projected
benefit obligation was based on a weighted average discount rate of
8.25% in 1994 and 1995 and 7.75% in 1996 and a rate of increase in
future compensation of 5% in 1994, 1995, and 1996. The expected
long-term rate of return on plan assets was 8.5% in 1994 and 1995 and 8%
in 1996.
8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Division, through HSC, provides certain health care benefits for
retired employees. Employees become eligible for these benefits if they
meet minimum age and service requirements and are eligible for
retirement benefits.
The accrued postretirement medical and other benefits costs of HSC that
are not funded were as follows at May 31:
1995 1996
Accumulated postretirement benefit obligation (APBO):
Retirees $ 5,991,309 $ 2,993,307
Fully eligible active plan participants 1,041,742 1,019,071
Other active plan participants 2,730,508 3,624,620
------------- -------------
Total APBO 9,763,559 7,636,998
Unrecognized transition obligation (9,984,815) (9,430,105)
Unrecognized net gains 2,000,094 4,059,863
------------- -------------
Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756
============= =============
The net periodic costs billed to the Division for the years ended May
31, 1994, 1995, and 1996 were approximately $301,000, $238,000, and
$197,000, respectively.
The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996
and a health care cost trend rate of 10% in 1996, declining to 6% in
2004. If the health care cost trend rate increased by 1%, the APBO would
increase by 8.7% and the service cost and interest cost components would
increase by 10%.
9. PROVISION FOR INCOME TAXES
HSC and its divisions, including the Oilseed Processing and Refining
Division, file consolidated federal income tax returns. HSC has a policy
that provides for the payment of taxes on an individual company basis
for each of its divisions.
No significant deferred income tax provision was recorded by the
Division.
A reconciliation of the statutory federal tax rate to the effective rate
for the years ended May 31 follows:
1994 1995 1996
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3
Patronage earnings (32.2) (32.4) (35.0)
Other 2.9 .2 2.2
------ ------ ------
Effective rate 8.3% 5.4% 6.5%
====== ====== ======
10. COMMITMENTS AND CONTINGENCIES
The Division leases approximately 347 rail cars with remaining lease
terms of one to ten years.
Minimum rental payments due under these operating leases at May 31,
1996 are as follows:
Year ending May 31:
1997 $ 1,983,390
1998 1,669,740
1999 1,494,810
2000 1,219,640
2001 1,002,660
2002 and thereafter 1,905,600
--------------
$ 9,275,840
==============
Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was approximately $1,634,253, $1,771,790, and
$1,832,413 for the years ended May 31, 1994, 1995, and 1996,
respectively.
The Division 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
Division 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 condition of the Division.
At May 31, 1996, the Division had outstanding oilseed purchase contracts
of 3,401,670 bushels at prices ranging from $6.27 per bushel to $8.23
per bushel, and outstanding oil purchase contracts of 284,958,713 pounds
at prices ranging from $0.2505 per pound to $0.2930 per pound. In
addition, the Division had outstanding sales contracts totaling
$36,953,870.
11. RELATED-PARTY TRANSACTIONS
Net sales for the years ended May 31, 1994, 1995, and 1996 included
$22,354,368, $79,133,437, and $124,299,369, respectively, to related
parties.
The Division purchases substantially all of it soybeans from HSC, a
related party. Included in cost of goods sold for the years ended May
31, 1994, 1995, and 1996 were $11,468,610, $5,502,705, and $3,772,327,
respectively, of these purchases.
Additionally, HSC performs various direct management services and incurs
certain costs for its operating divisions. Such costs, including data
processing, office services, and insurance, are charged directly to the
divisions. Indirect expenses, such as publications, board expense,
executive management, legal, finance, and human resources, are allocated
to the divisions based on approximate usage.
12. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:
1994 1995 1996
Net cash paid to HSC during year for:
Interest $ 164,300 $ - $ 151,500
Income taxes 1,900,000 1,650,000 1,500,000
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair
value of all financial instruments to which the Division is a party. All
financial instruments are carried at amounts that approximate estimated
fair value.
14. SUBSEQUENT EVENT
HSC has announced a plan to offer Equity Participation Units (EPUs) to
its members. Each EPU will represent the rights and obligation to
deliver a specified quantity of soybeans to HSC. Holders of EPUs will
be entitled to receive patronage earnings related to the Division's
crushing and refining of soybeans delivered by the holder to HSC, as
well as a ratable share of consolidated HSC non-patronage earnings based
upon total member deliveries to HSC by members of all commodities. EPUs
will represent an equity interest in HSC and will not represent an
ownership interest in any assets of the Division.
In conjunction with the offering of EPUs, HSC announced its intention
to begin charging the Division interest on its daily average of
short-term borrowings at a rate equivalent to the weighted average
interest rate on short-term borrowings of HSC. On May 31,1996, the
weighted average borrowing rate of HSC's short-term borrowings was
6.05%. Amounts due from HSC will receive interest in the same manner at
the same rate.
Exhibit A
Exhibit A
SUBSCRIPTION AGREEMENT
HARVEST STATES COOPERATIVES
The undersigned ("Subscriber") subscribes and agrees to purchase:
* _______ Equity Participation Units (Milling) at a price of $_______
per unit.
* _______ Equity Participation Units (Processing and Refining) at a
price of $_______ per unit.
Subscriber certifies that:
* Subscriber has received and carefully reviewed a copy of the Company's
Prospectus dated _______________, 1997.
* Subscriber is [check one]:
[ ] an agricultural producer actually engaged in the production of
agricultural products, or
[ ] an agricultural cooperative (an association of producers of
agricultural products organized and operating so as to adhere to
the provisions of the Agricultural Marketing Act, 12
U.S.C.ss.1141(j)(a), as amended, and the Capper-Volstead Act, 7
U.S.C.ss.ss.291-292, as amended).
* Subscriber (if a producer) is capable of producing in the 1997 growing
season the number of bushels of wheat or soybeans covered by the
Member Marketing Agreement.
This Subscription Agreement is accompanied by:
* A Member Marketing Agreement signed by the Subscriber.
* A check for the purchase price.
The Units shall be registered (please print or type):
_________________________________
Name of Subscriber
_________________________________
Social Security Number or
Taxpayer I.D. Number
Mailing Address:
_________________________________
_________________________________
_________________________________
Signatures
Date: ____________________ ______________________________________
Signature of Subscriber or
Subscriber's authorized representative
If Subscriber is an association of producers (please print or type):
_________________________________
Name of Subscriber's authorized
representative
_________________________________
Position of Subscriber's authorized
representative
Accepted:
HARVEST STATES COOPERATIVES
By ________________________________
Its ______________________________
Exhibit B
HARVEST STATES COOPERATIVES
MEMBER MARKETING AGREEMENT
THIS AGREEMENT is made and entered into as of this _______ day
of ___________________, 199__, by and between HARVEST STATES COOPERATIVES, a
Minnesota cooperative corporation (the "Association"), and __________________, a
____________________ ("Member").
In consideration of the mutual terms and conditions contained
in this agreement (including the Standard Terms and Conditions attached hereto,
as in force from time to time) (this "Agreement"), the Association and Member
agree that Member shall deliver grain to the Association, and the Association
shall accept grain from member, as further provided in this Agreement. This
Agreement contains the entire agreement, and supersedes and replaces any prior
agreements (either written or oral), between the parties with respect to the
subject matter hereof. This Agreement may be modified only as provided in
Section 9 hereof.
IN WITNESS WHEREOF, the Association and Member have executed
this Agreement as of the date first above written.
HARVEST STATES COOPERATIVES ______________________________
MEMBER
By: _____________________________
Its: ____________________________
Address: ________________________ Address: ________________________
________________________ ________________________
________________________ ________________________
HARVEST STATES COOPERATIVES
MEMBER MARKETING AGREEMENT
(STANDARD TERMS AND CONDITIONS)
1. Obligation to Deliver Grain. During each processing year of the term
of this Agreement, Member shall deliver to the Association, and the Association
shall accept from Member, a base amount of one bushel of _______________ (the
"Grain") for each equity participation unit held by Member, subject to tolerance
ranges for deliveries of the Grain that may be established each year by the
Board of Directors of the Association. For purposes of this Agreement, a
processing year shall begin on June 1 of each year and end on May 31 of the
following year. Member understands and agrees that its obligation to deliver
Grain hereunder is unconditional, except as provided in Paragraph 7.2 of this
Agreement. If the undersigned is a producer, rather than a cooperative, Member
warrants that the Grain delivered will be produced by Member.
2. Price and Payment. The Association (directly or through its
agent) shall pay Member the price for Grain delivered, received, accepted and
processed as provided hereunder. The price shall be based on the prevailing
price posted at the authorized local elevator, Association's elevator, plant or
receiving station. In addition, any and all distributions, per-unit retains and
patronage payments relating to the Defined Business Unit of which Member is a
Defined Member (as such terms are defined in the Association's Bylaws)
(including, without limitation, any patronage payments to which Member is
entitled pursuant to the Association's Bylaws), subject to necessary or
appropriate accounting adjustments, shall be paid by the Association to Member.
3. Delivery of Grain. The full legal title of and to Grain
received by the Association shall pass to and vest in the Association
contemporaneously with its delivery to the Association or to its authorized
agent. The Association shall take and hold the full and absolute title of and to
all Grain, including any product or by-products made therefrom; and the
Association shall have and may exercise all of the rights of an absolute owner
in respect of said Grain, except those in express violation of its obligations
hereunder. The Association may reject and refuse to accept delivery of any and
all Grain which in its judgment does not conform to the Association's standards.
Member shall receive credit for the quantity of Grain accepted for delivery.
4. Product Quality Standards. The Member warrants that the Grain
sold under this Agreement shall be merchantable and shall not be adulterated or
misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as
amended, and regulations, or include any article or commodity that may not,
under the provisions of such Act, be introduced in interstate commerce. All
Grain delivered on behalf of Member to the Association shall meet such
specifications, and be subject to such allowances, deductions and premiums, as
may from time to time be determined by the Association. Grain of substandard
quality, as determined by the Association, shall be either (a) rejected and
returned to Member with all costs relating to the rejection and return charged
to Member; or (b) accepted with deductions and allowances made and charged
against Member because of the inferior quality or condition at the time of
delivery. The Association may credit Member for certain premiums to be paid on
the basis of quality standards which may from time to time be established by the
Association. The Association shall use accepted standards to assess the quality
of Grain delivered by Member. Member agrees to observe and accept any rules and
regulations established by the Association.
5. Security Interests. The Member warrants that the Grain sold
under this Agreement shall be free and clear of any security interest, lien,
penalty, charge, or encumbrance, governmental or otherwise. If Member grants a
security interest in any of the Grain delivered, Member shall inform the
Association, in writing, of any security interest it has granted in such Grain
prior to delivery. The Association shall have the right, but not the obligation,
after acceptance of the Grain, to name the lienholder as a payee on the payment
for the Grain.
6. Consequences of Failure to Deliver. If during any processing
year Member fails to deliver the quantity of Grain required by Section 1 of this
Agreement, (i) Member shall forfeit patronage payments to the extent of such
nondelivery, and (ii) in the event of a loss by the Defined Business Unit of
which Member is a Defined Member, each equity participation unit held by Member
shall be charged, on a pro rata basis, with the amount of such loss, as
liquidated damages for such nondelivery.
7. Force Majeure.
7.1 In case of fire, explosions, interruption of
power, strikes or other labor disturbances, lack of transportation facilities,
shortage of labor or supplies, floods, action of the elements, riot,
interference of civil or military authorities, enactment of legislation or any
unavoidable casualty or cause beyond the control of the Association affecting
the conduct of the Association's business to the extent of preventing or
unreasonably restricting the receiving, handling, production, marketing, or
other operations, the Association shall be excused from performance during the
period that the Association's business or operations are so affected. The
Association in its judgment may, during such period, accept such portion of the
Grain as the Association has informed Member it can economically handle. The
Association shall give written notice to Member of its inability to perform and
the specific cause or causes for the nonperformance. In any event, the
Association shall pay, pursuant to this Agreement, for all the Grain it accepts.
7.2 The Member shall not be liable for failure or
delay in performance of this Agreement to the extent such failure or delay is
caused by a crop failure due to an Act of God, such as drought or flood. If
Member's performance is excused pursuant to this paragraph, Member shall give
written notice to the Association of Member's inability to perform, and shall
forfeit patronage payments to the extent of any resulting nondelivery of Grain,
unless Member elects to buy-in in accordance with policies and procedures
established by Association.
8. Term and Termination. This Agreement shall enter into force as
of the date hereof and shall continue in force indefinitely unless earlier
terminated as follows:
(i) This Agreement may be terminated at any time
by written agreement of Member and the
Association as an incident to Member's
transfer of equity participation Units in
the Association, which transfer must be
approved by the Board of Directors of the
Association as provided in the Bylaws; or
(ii) This Agreement shall terminate within 180
days of the death of Member, unless within
such time period the estate of Member has
entered into a definitive binding
arrangement to transfer Member's equity
participation Units in the Association and
such transfer has been approved by the Board
of Directors of the Association as provided
in the Bylaws; or
(iii) The nonbreaching party may terminate this
Agreement in the event of a breach hereof,
if the breach continues for thirty (30) days
after the nonbreaching party provides notice
of the breach to the breaching party; or
(iv) Member may terminate this Agreement upon
written notice to the Association. Such
termination shall be effective at the end of
the processing year in which the notice was
given.
(v) The Association may terminate this Agreement
upon termination of the business of the
Defined Business Unit.
Upon termination of this Agreement, the rights and obligations of each party
with respect to utilization of, marketing of and payment for Grain previously
delivered by Member to the Association hereunder shall continue in force until
such Grain has been utilized or marketed by the Association, and paid for by the
Association. Termination of this Agreement shall not release either party from
liabilities accrued prior to such termination; provided, however, that a
terminating Member shall not be entitled to receive patronage or other
distributions with respect to equity participation units held by Member.
9. Modification. This Agreement shall at all times remain subject
to modification by the Association upon written notice to Member, provided that
such modification is first approved by Defined Members of the Association
holding a majority of the voting power of the Defined Business Unit of which
Member is a Defined Member who are present and voting at a regular or special
meeting of such Defined Members, where notice of such meeting includes a
statement of the proposed modification.
10. Miscellaneous.
10.1 Assignment. Member may not assign this Agreement
or delegate performance of its obligations without the written consent of the
Board of Directors of the Association. Consent may be granted or denied as the
Association shall determine in the exercise of business judgment, and with due
consideration to related provisions of the Bylaws. This restriction on
assignment shall not be construed to limit Member's right to grant to a third
party a security interest in growing crops or proceeds, subject to Section 6
hereof, and provided that any such security agreement shall not empower either
Member or any secured party other than the Association to avoid Member's
obligations to deliver Grain in performance of this Agreement. Subject to the
foregoing, all of the terms, covenants and conditions of this Agreement shall
inure to the benefit of and shall bind the parties hereto and their successors,
heirs and permitted assigns.
10.2 Waiver of Breach. No waiver of a breach of any
of the agreements or provisions contained in this Agreement shall be construed
to be a waiver of any subsequent breach of the same or of any other provision of
this Agreement.
10.3 Notices. Whenever notice is required by the
terms hereof, it shall be given in writing by delivery or by certified or
registered mail addressed to the other party at the address appearing below such
party's signature above or such other address as such party shall designate by
appropriate notice. If notice is given by mail, it shall be effective three (3)
days after mailing.
10.4 Construction of Terms of Agreement. The language
in all parts of this Agreement shall be constructed as a whole according to its
fair meaning and not strictly for or against any party hereto. Headings in this
Agreement are for convenience only and are not construed as a part of this
Agreement or in any way defining, limiting or amplifying the provisions hereof.
In the event any term, covenant or condition herein contained is held to be
invalid or void by any court of competent jurisdiction, the invalidity of any
such term, covenant or condition shall in no way affect any other term, covenant
or condition herein contained.
10.5 Marketing Commitments; Indemnifications. Member
represents and warrants that it is not under contract or obligation to sell,
market, consign or deliver any of the Grain committed to the Association under
this Agreement to any other person, firm, association, corporation or other
entity. Further, Member shall defend and hold harmless the Association from any
costs, claims, liabilities, suits or other proceedings or actions of any nature
or kind whatsoever arising from or connected with any such prior agreement,
contract or arrangement or the termination or cancellation of any prior
agreements, contracts or arrangements.
10.6 Choice of Law; Dispute Resolution. This
Agreement shall be governed in all respects by the laws of the State of
Minnesota, excluding its conflict of laws rules. All disputes arising under this
Agreement which cannot be amicably resolved between the parties shall be settled
exclusively in state or federal court in the State of Minnesota, and the parties
specifically consent to personal jurisdiction in any such court.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following fees and expenses will be paid by the Company in
connection with the issuance and distribution of the securities registered
hereby. All such expenses, except for the SEC fee are estimated.
SEC registration fee .......................... $30,304
Legal fees and expenses ........................
Accounting fees and expenses ..................
Blue Sky fees and expenses .....................
Transfer Agent's and Registrar's fees ..........
Printing and engraving expenses ................
Miscellaneous ..................................
----------
Total ................................ $
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The statutes of the State of Minnesota give the Company the power to
indemnify any director, officer, manager, employee or agent, who was or is a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, against certain
liabilities and expenses incurred in connection with the action, suit or
proceeding.
Article VII of the Bylaws of the Company provides that the Company
shall indemnify each director, officer, manager, employee, or agent of the
Company, and any person serving at the request of the Company as a director,
officer, manager, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses, including attorneys'
fees, judgments, fines, and amounts paid in settlement actually and reasonably
incurred to he fullest extent to which such directors, officers, managers,
employee or agents of an association may be indemnified under the law of the
State of Minnesota or any amendments thereto or substitutions therefor. Article
VII provides that the Company shall have power to purchase and maintain
insurance against any liability asserted against such persons and incurred by
such persons in any such capacity.
Article X of the Company's Amended and Restated Articles of
Incorporation provides that a director shall not be personally liable to the
Company or its members for monetary damages for breach of fiduciary duty as a
director, except for liability: (i) for a breach of the director's duty of
loyalty to the Company or its members; (ii) for acts of omissions not in good
faith or that involve intentional misconduct or a knowing violation of law;
(iii) for a transaction from which the director derived an improper personal
benefit; or (iv) for an act or omission occurring prior to the date when the
provisions of such Article (or predecessor thereto) became effective. It is the
stated intention of the members of the Company to eliminate or limit the
personal liability of the directors of the Company to the greatest extent
permitted under Minnesota law. Such Article X provides that if amendments to the
Minnesota Statues are passed after the effective date of such Article X which
authorize associations to act to further eliminate or limit the personal
liability of directors, then the liability of the directors of the Company shall
be eliminated or limited to the greatest extent permitted by the Minnesota
Statues, as so amended.
The Company maintains a standard policy of officers' and directors'
liability insurance.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1* Resolutions of the Board of Directors creating the Equity
Participation Units (Processing and Refining).
4.2* Resolutions of the Board of Directors creating the Equity
Participation Units (Milling).
5.1* Opinion of Dorsey & Whitney LLP.
10.1+ Lease Agreement between Peavey Company and Amber Milling
Company, a division of Harvest States Cooperatives, effective
as of August 31, 1994.
10.2 Lease between the Port of Kalama and North Pacific Grain
Growers, Inc., dated November 22, 1960.
10.3 Limited Liability Company Agreement for the Wilsey-Holsum
Foods, LLC dated July 24, 1996.
10.4+ Long Term Supply Agreement between Wilsey-Holsum Foods, LLC
and Harvest States Cooperatives dated August 30, 1996.
10.5 Partnership Agreement between Continental Grain Company and
Harvest States Cooperatives dated September 28, 1992.
10.6 Harvest States Cooperatives Deferred Compensation Plan.
10.7 Harvest States Cooperatives Deferred Compensation Supplemental
Retirement Plan.
10.8 Harvest States Cooperatives Management Compensation Program.
10.9 Revolving Credit Agreement by and among Harvest States
Cooperatives, Banque Nationale de Paris et al., the St. Paul
Bank for Cooperatives and CoBank, ACB dated November 1, 1996.
10.10 Amended and Restated Master Syndicated Loan Agreement by and
among Harvest States Cooperatives, CoBank, ACB (successor to
the National Bank for Cooperatives) and the St. Paul Bank for
Cooperatives dated October 28, 1996.
10.11 Fourth Supplement to the August 30, 1994 Master Syndicated
Loan Agreement by and among Harvest States Cooperatives,
CoBank, ACB (successor to the National Bank for Cooperatives)
and the St. Paul Bank for Cooperatives dated October 28, 1996.
10.11(a) Promissory Note of Harvest States Cooperatives to the St. Paul
Bank for Cooperatives for $25,000,000 dated October 28, 1996.
10.11(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB
for $25,000,000 dated October 28, 1996.
10.12 Third Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, CoBank,
ACB (successor to the National Bank for Cooperatives) and the
St. Paul Bank for Cooperatives dated December 15, 1995.
10.12(a) Promissory Note of Harvest States Cooperatives to the St. Paul
Bank for Cooperatives for $10,000,000 dated December 15, 1995.
10.12(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB
for $10,000,000 dated December 15, 1995.
10.13 First Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, the
National Bank for Cooperatives and the St. Paul Bank for
Cooperatives dated August 30, 1994.
10.13(a) Promissory Note of Harvest States Cooperatives to the St. Paul
Bank for Cooperatives for $42,500,000 dated August 30, 1994.
10.13(b) Promissory Note of Harvest States Cooperatives to the National
Bank for Cooperatives for $42,500,000 dated August 30, 1994.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to
this Registration Statement).
24 Power of Attorney.
----------------------------
* To be filed by amendment.
+ Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibits 10.1 and 10.4 have been deleted
and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment.
Pursuant to Instruction 4(iii) of Item 601(b) of Regulation S-K, copies
of certain instruments defining the rights of holders of certain long-term debt
of the Company and its subsidiaries are not filed and, in lieu thereof, the
Company agrees to furnish copies thereof to the Securities Exchange Commission
upon request.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change to such information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 320% change in the "maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change in the
information set forth in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Falcon Heights, State of Minnesota, on December 13, 1996.
HARVEST STATES COOPERATIVES
By: /s/John D. Johnson
-------------------------------------
John D. Johnson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities indicated on December 13, 1996.
Signature Title
- - - - --------- -----
/s/John D. Johnson President and Chief Executive Officer
- - - - ----------------------------------- (principal executive officer)
John D. Johnson
/s/T. F. Baker Group Vice President--Finance
- - - - ----------------------------------- (principal financial officer)
T. F. Baker
/s/John Schmitz Vice President--Corporate Accounting
- - - - ----------------------------------- (principal accounting officer)
John Schmitz
Steven Burnet* Chairman of the Board of Directors
Steve Carney* Director
Sheldon Haaland* Director
Jerry C. Hasnedl* Director
Edward Hereford* Director
Gerald Kuster* Director
Tyrone A. Moos* Director
Duane G. Risan* Director
William J. Zarak, Jr.* Director
Edward Ellison* Director
Leonard D. Larsen* Director
Duane Stenzel* Director
Russell W. Twedt* Director
Merlin Van Walleghen* Director
*By /s/John D. Johnson
- - - - -----------------------------------
John D. Johnson
Attorney-in-fact
EXHIBIT INDEX
Number Description Page
- - - - ------ ----------- ----
3.1 Amended and Restated Articles of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
10.1+ Lease Agreement between Peavey Company and Amber Milling
Company, a division of Harvest States Cooperatives, effective
as of August 31, 1994.
10.2 Lease between the Port of Kalama and North Pacific Grain
Growers, Inc., dated November 22, 1960.
10.3 Limited Liability Company Agreement for the Wilsey-Holsum
Foods, LLC dated July 24, 1996.
10.4+ Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and
Harvest States Cooperatives dated August 30, 1996.
10.5 Partnership Agreement between Continental Grain Company and
Harvest States Cooperatives dated September 28, 1992.
10.6 Harvest States Cooperatives Deferred Compensation Plan.
10.7 Harvest States Cooperatives Deferred Compensation Supplemental
Retirement Plan.
10.8 Harvest States Cooperatives Management Compensation Program.
10.9 Revolving Credit Agreement by and among Harvest States
Cooperatives, Banque Nationale de Paris et al., the St. Paul
Bank for Cooperatives and CoBank, ACB dated November 1, 1996.
10.10 Amended and Restated Master Syndicated Loan Agreement by and
among Harvest States Cooperatives, CoBank, ACB (successor to
the National Bank for Cooperatives) and the St. Paul Bank for
Cooperatives dated October 28, 1996.
10.11 Fourth Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, CoBank, ACB
(successor to the National Bank for Cooperatives) and the St.
Paul Bank for Cooperatives dated October 28, 1996.
10.11(a) Promissory Note of Harvest States Cooperatives to the St. Paul
Bank for Cooperatives for $25,000,000 dated October 28, 1996.
10.11(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB
for $25,000,000 dated October 28, 1996.
10.12 Third Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, CoBank, ACB
(successor to the National Bank for Cooperatives) and the St.
Paul Bank for Cooperatives dated December 15, 1995.
10.12(a) Promissory Note of Harvest States Cooperatives to the St. Paul
Bank for Cooperatives for $10,000,000 dated December 15, 1995.
10.12(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB
for $10,000,000 dated December 15, 1995.
10.13 First Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, the
National Bank for Cooperatives and the St. Paul Bank for
Cooperatives dated August 30, 1994.
10.13(a) Promissory Note of Harvest States Cooperatives to the St. Paul
Bank for Cooperatives for $42,500,000 dated August 30, 1994.
10.13(b) Promissory Note of Harvest States Cooperatives to the National
Bank for Cooperatives for $42,500,000 dated August 30, 1994.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
24 Power of Attorney.
- - - - -------------------------
+ Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibits 10.1 and 10.4 have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.