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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
COMMISSION FILE NUMBER: 333-17865
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CENEX HARVEST STATES COOPERATIVES
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0251095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5500 CENEX DRIVE (651) 451-5151
INVER GROVE HEIGHTS, MINNESOTA 55077 (Registrant's Telephone number,
(Address of principal executive office) including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not applicable
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: The registrant has no voting stock outstanding.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: The registrant has
no common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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INDEX
PAGE
NO.
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PART I.
Item 1. Business
The Company ............................................................. 1
Energy .................................................................. 2
Crop Inputs ............................................................. 3
Grain Merchandising ..................................................... 4
Oilseed Processing and Refining Defined Business Unit ................... 8
Wheat Milling Defined Business Unit ..................................... 12
Farm Marketing and Supply ............................................... 15
Services ................................................................ 16
Membership in the Company and Authorized Capital ........................ 17
Equity Participation Units .............................................. 22
Cautionary Statement .................................................... 26
Item 2. Properties .............................................................. 26
Item 3. Legal Proceedings ....................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders ..................... 28
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ... 29
Item 6. Selected Financial Data
Consolidated Company .................................................... 29
Oilseed Processing and Refining Defined Business Unit ................... 30
Wheat Milling Defined Business Unit ..................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Consolidated Company .................................................... 32
Oilseed Processing and Refining Defined Business Unit ................... 39
Wheat Milling Defined Business Unit ..................................... 43
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk .............. 47
Item 8. Financial Statements and Supplementary Data ............................. 48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. 48
PART III.
Item 10. Directors and Executive Officers of the Registrant
Board of Directors ...................................................... 49
Executive Officers ...................................................... 54
Item 11. Executive Compensation .................................................. 57
Item 12. Security Ownership of Certain Beneficial Owners and Management .......... 62
Item 13. Certain Relationships and Related Transactions .......................... 64
PART IV.
Item 14. Exhibits, Financial Statements and Reports Filed on Form 8-K ............ 65
SUPPLEMENTAL INFORMATION ........................................................... 66
SIGNATURES ......................................................................... 67
PART I.
ITEM 1. BUSINESS
THE COMPANY
Pursuant to a Plan of Combination dated May 29, 1998 (the "Plan of
Combination"), CENEX, Inc. ("Cenex") and Harvest States Cooperatives combined
through merger on June 1, 1998 (the "Combination") and Harvest States
Cooperatives became the surviving corporation. In accordance with the Plan of
Combination, the Articles of Incorporation and By-Laws of Harvest States
Cooperatives were restated and the name of Harvest States Cooperatives was
changed to Cenex Harvest States Cooperatives ("Cenex Harvest States" or "the
Company"). The Combination constituted a tax-free reorganization and has been
accounted for as a pooling of interests.
Subsequent to the Combination, the Company changed its fiscal year end to
August 31, and filed a Form 10-Q Transition Report under Rule 15d-10(c) for the
three-month period ended August 31, 1998. The Company is filing this form 10-K
for its first fiscal year ended August 31, 1999.
The Company's consolidated financial statements reflect the financial
position and results of operations of the combined companies as if the merger
had occurred on June 1, 1996. The consolidated statements of operations and cash
flows for the years ended May 31, 1998 and 1997, reflect the results of
operations and cash flows of Harvest States Cooperatives for the years then
ended combined with the results of operations and cash flows of Cenex for the
years ended September 30, 1997 and 1996, respectively. The consolidated balance
sheet as of May 31, 1998 reflects the financial position of Harvest States
Cooperatives on that date combined with the financial position of Cenex as of
September 30, 1997. The consolidated results of operations of Cenex for the
eight months ended May 31, 1998, have been excluded from the reported results of
operations and, therefore, have been recorded as an adjustment to the Company's
equities and cash flows in the consolidated statements of equities and
comprehensive income and cash flows during the three months ended August 31,
1998.
Each person serving as a director of Cenex or Harvest States at the time of
the Combination became a director of Cenex Harvest States. At the 1999 annual
meeting to be held in December 1999, the number of directors will decrease from
27 to 17.
As a result of the Combination, each holder of common stock of Cenex became
a member of Cenex Harvest States, to the extent eligible for membership, and all
equity interests of Cenex were determined and exchanged for equal equity
interests in Cenex Harvest States at its stated dollar amount on a dollar for
dollar basis as more thoroughly set forth in the Plan of Combination, a copy of
which was filed as part of the Company's Form 8-K dated June 10, 1998.
In May 1999, the Company and Farmland Industries, Inc. (Farmland) announced
their intention to work towards a combination of the two companies. On September
8, 1999 the Board of Directors approved a resolution recommending this
combination to the Company's membership. A transaction agreement was signed as
of September 23, 1999. Approval of the merger by the membership requires a
two-thirds vote in favor of the merger from members of both Cenex Harvest States
and Farmland Industries, Inc., respectively, who vote on this proposal. Votes
must be cast by November 23, 1999. Assuming a favorable vote, the combination
will take one of two forms. Farmland may merge into the Company, with the
Company as the survivor, or both Farmland and the Company may merge into a new
Ohio cooperative. Assuming a favorable vote for the combination, the two
companies intend to consummate the combination on or before March 1, 2000.
The Company is an agricultural cooperative organized for the mutual benefit
of its members. Members of the Company are located primarily throughout the
Midwest and Northwest regions of the United States. Primary businesses of the
Company include petroleum refining and marketing, wholesale and retail agronomy
product marketing, grain marketing, and wheat milling and soybean processing and
refining. In addition, the Company offers a variety of agricultural services to
its members.
The Company has authorized three classes of membership: Individual Members
("Individual Members"), Cooperative Association Members ("Cooperative
Association Members") and Defined
1
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 as contemplated by Section 1388 of
the Internal Revenue Code. In the patronage consent filed with the Company, the
producer agrees to include both the cash and non-cash portion of any patronage
refund in taxable income for federal income tax purposes. Cooperative
Association Members are associations of producers of agricultural products
complying with certain federal requirements which have conducted a minimum
amount of business with the Company as prescribed by the Board of Directors
during its 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.
Individual Members, Defined Members and Cooperative Association Members who
sell grain to the Company, and Individual Members, Defined Members and
Cooperative Association Members 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 elect to add to
the Unallocated Capital Reserve an amount not to exceed 10% of the distributable
net income from patronage income, and may also elect to allocate
non-member-sourced income to its Members and Non-Member Consenting Patrons in
proportion to patronage.
The Board of Directors created the Oilseed Processing and Refining Defined
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 was allocated to the
Oilseed Processing and Refining Defined Business Unit the assets and
liabilities, including commitments, contingencies and obligations, appropriately
belonging to the Division.
The Board of Directors created the Wheat Milling Defined 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 was allocated to the Wheat Milling Defined Business Unit the assets and
liabilities, including commitments, contingencies and obligations, appropriately
belonging to the Division.
Effective August 1999, Grain Marketing operations, and the Wheat Milling
and Oilseed Processing and Refining Defined Business Units have been combined
into one operating division of Cenex Harvest States, called Aligned Grain, which
will be led by Senior Vice President Mark Palmquist. Mike Bergeland, Executive
Vice President Grain & Agri Services, will continue to lead Aligned Grain,
Country Services and Farm Marketing & Supply. The Company's foods and packaging
partnerships with Ventura Foods, LLC and Sparta Foods, Inc., have been organized
into a separate Consumer Foods group, which will be led by Executive Vice
President Jim Tibbetts and will focus on identifying further food processing and
packaging opportunities that will help deliver value to consumers.
The segment information for the Company is provided in Note 11 of the
consolidated financial statements on pages F-20 and F-21.
ENERGY
The energy operations of the Company include a 46,000 barrel per day
refinery in Laurel, Montana, which is wholly owned by the Company, and a 74.5%
ownership interest in a 75,500 barrel per day refinery in McPherson, Kansas. The
Company is not in the oil exploration business but rather purchases crude oil
from both domestic and foreign sources.
The Laurel, Montana refinery processes primarily heavy, high sulfur
Canadian crude oil and produces approximately 44% gasoline, 32% diesel and other
distillates and 24% asphalt and other residual products. Refined fuels are
shipped west on the Yellowstone Pipeline to Montana terminals and to Spokane and
Moses Lake, Washington; south on common carrier pipelines to Wyoming terminals
and Denver, Colorado, and east on the Company's wholly owned pipeline to
Glendive, Montana as well as to Minot and Fargo, North Dakota. Crude oil is
delivered to Laurel on the wholly owned Front Range Pipeline.
2
The McPherson refinery operated by National Cooperative Refinery
Association (NCRA), of which the Company owns 74.5%, receives its supply of
crude oil via the Jayhawk pipeline, which is wholly owned by NCRA, and through
the common carrier pipelines of Osage and Kaw. The Company holds ownership
interests of 35% and 33%, respectively, in these two pipelines. Approximately
86% of the crude oil processed is domestic from Kansas, Oklahoma and Texas, and
14% is Venezuelan crude. The McPherson refinery produces approximately 57%
gasoline, 34% distillates and 9% propane and other products. Refined fuels are
shipped via NCRA's proprietary products pipeline to its terminal in Council
Bluffs, Iowa and to other markets via Kaneb and Williams common carrier
pipelines. Approximately 9% of refined products are loaded to transport trucks
at the refinery.
The production from these two refineries is marketed by Country Energy,
LLC, a petroleum marketing joint venture with Farmland Industries, Inc. and sold
to the Company's member cooperatives, where the product is sold to farmers,
ranchers and the general public. In addition to distilled fuels, the Company
also wholesales other auto and farm machinery products such as oil, grease,
batteries and tires, as well as providing propane for heating fuel and grain
drying.
The Company also operates approximately 40 convenience stores where it
retails its own brand of distilled fuels along with typical convenience
products.
Upon the purchase of crude oil, the Company has risks of carrying the
inventory, including price changes and performance risk (including delivery,
quality, quantity and shipment period). To reduce the price change risk
associated with holding fixed price positions, the Company generally takes
opposite and offsetting positions by entering into a commodity futures contract
on a regulated mercantile exchange. While hedging activities reduce the risk of
loss from changing market values of crude oil and distilled products, such
activities also limit the gain potential which otherwise could result from
changes in market prices.
Because most of the Company's energy product market is located in rural
areas, sales activity tends to follow the planting and harvest cycles. More fuel
efficient equipment, reduced crop tillage, depressed prices for crops, warm
winter weather, and government programs which encourage idle acres all have the
effect of reducing demand for the Company's energy products. In addition,
private energy companies compete with the Company.
Effective September 1, 1999, NCRA and Farmland Industries formed a limited
liability company, Cooperative Refining, LLC, to operate jointly the refining,
pipeline and terminal assets of Farmland and NCRA. This includes NCRA's 75,500
barrel per day McPherson, Kansas refinery and Farmland's 95,000 barrel per day
Coffeyville, Kansas refinery. NCRA has a 57.565% interest in the LLC and
Farmland has a 42.435% interest. The refining, pipeline and terminal assets are
owned by NCRA and Farmland Industries, but are operated by the LLC with the
expenses of operation being reimbursed by the LLC to both members.
Currently, energy operations has 259 full time employees. Of these
employees, 125 are employed by the Company, and 134 are employed by Country
Energy, LLC.
CROP INPUTS
The Company, through a joint venture established by Cenex with Land
O'Lakes, Inc. (another regional cooperative headquartered in the St. Paul,
Minnesota area) participates in the crop input business. The Company has a 50%
ownership interest in the Cenex/Land O'Lakes Agronomy Company ("Agronomy"),
which acts as a sales agent for the two companies. The agronomy company markets
plant food (fertilizers) and crop protection products (herbicides and
insecticides) on behalf of its two owners. Such products are sold to the member
cooperatives of the Company on a wholesale basis, as well as marketed through
approximately 220 company owned facilities on a retail basis to individual
farmer-patrons.
The Company distributes a complete line of fertilizers, including potash,
nitrogen-based fertilizers and phosphate-based fertilizers. Approximately 80% of
the fertilizer products sold by the Company through its agency arrangement are
purchased from CF Industries, of which the Company owns 22%.
3
CF Industries is a large domestic fertilizer producer. The Company purchases
crop protection products from several chemical companies, including Imperial,
Inc., a wholly owned subsidiary of the Cenex/Land O'Lakes Agronomy Company.
Many of the risk factors related to the energy operations also apply to the
agronomy product operations. Spring and fall weather conditions, depressed grain
prices, idle acreage and genetic engineering of crops which are more insect and
disease resistant all effect the demand for agronomy products. Competition in
most of the Company's trade area for such products is also intense. Supply and
price of fertilizer ingredients fluctuates widely, which exposes the Company to
risk on any fixed price commitment. In addition, increased domestic and foreign
production of fertilizer expands supply and tends to depress the profitability
of CF Industries, and reduces the patronage paid by CF Industries to the
Company.
On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada,
Ltd. (the Entities), both companies owned 50/50 by the Company and Land O'Lakes,
Inc., purchased approximately 310 agronomy facilities from Terra International,
Inc., at a price of approximately $350.0 million. In conjunction with this
purchase transaction, the Company invested $51.5 million in the Entities and
issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd.
Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes
Agronomy Company, are without recourse to the Company.
The Cenex/Land O'Lakes Agronomy Company currently has 727 full time
employees, 48 part time employees and 407 seasonal employees. The Company does
not have any employees in crop inputs operations.
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.
A significant portion of high production grains (wheat, corn and soybeans)
grown domestically have been exported. United States production competes with
production in numerous other countries to supply the worldwide demand for these
grains. The ability of producers in particular countries to compete on a
worldwide basis may be enhanced by governmental support and protection.
Imports of grains into the U.S. consist mainly of wheat, oats and barley.
The amounts imported have not had a material effect on grain merchandising.
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.
The Freedom to Farm Act of 1996, enacted in April 1996, has had a profound
effect on the production patterns within the United States. The flexibility of
the program allows producers to grow crops, which provide the highest gross
financial return. For example, this year the U.S. producer reacted
4
to Loan Deficiency Payments (LDP) for oilseeds in the year ended May 31, 1998
with an increase in acreage for all oilseeds for the year ended August 31,
1999. U.S. export subsidies, principally the Export Enhancement Program,
continue to decline in importance and overall use.
INTRODUCTION
The Company buys grain through its Grain Marketing Division from
Cooperative Association Members (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. 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, the Company has significant capacity
to sell grain for export.
PURCHASES. The number of bushels of grain purchased from Individual Members
and Cooperative Association Members, the total grain purchased and the
percentage relationship for the periods indicated are set forth below:
YEARS ENDED MAY 31,
------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996
----------------- ------------------- -------------- -------------- --------------
(BUSHELS IN THOUSANDS)
Member purchases ......... 785,999 172,180 720,421 757,705 959,167
Total purchases .......... 1,169,393 244,978 1,145,852 1,280,557 1,692,439
Percentage ............... 67.2% 70.3% 62.9% 59.2% 56.7%
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:
YEARS ENDED MAY 31,
------------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996
----------------- ------------------- ------------ ------------ ------------
(BUSHELS IN THOUSANDS)
Wheat .............. 412,967 100,941 416,067 478,979 505,607
Corn ............... 406,616 86,911 347,494 425,851 777,631
Soybeans ........... 230,239 36,220 229,558 219,687 234,930
Barley ............. 54,548 13,180 66,085 61,839 75,226
Milo ............... 40,826 4,426 37,816 51,723 48,200
Sunflowers ......... 7,814 549 28,789 14,603 25,953
Oats ............... 6,354 1,246 9,008 22,487 20,008
All other .......... 10,029 1,505 11,035 5,388 4,884
------- ------- ------- ------- -------
1,169,393 244,978 1,145,852 1,280,557 1,692,439
========= ======= ========= ========= =========
5
Sales of grain by the Company for the periods indicated are set forth
below:
YEARS ENDED MAY 31
-----------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996
----------------- ------------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS)
Wheat ............. $ 1,169.8 $ 373.1 $ 1,794.4 $ 2,490.3 $ 2,631.2
Corn .............. 896.6 215.0 989.8 1,558.4 2,518.9
Soybeans .......... 1,010.0 162.8 1,432.0 1,421.9 1,431.5
All other ......... 232.9 59.8 413.4 565.9 545.6
---------- -------- ---------- ---------- ----------
Total ............. $ 3,309.3 $ 810.7 $ 4,629.6 $ 6,036.5 $ 7,127.2
========== ======== ========== ========== ==========
MERCHANDISING
The Company buys and sells grain through offices of its Grain Marketing
Division located in Portland, Oregon; Lincoln, Nebraska; Kansas City, Kansas;
St. Paul, Minnesota; Winona, Minnesota; Davenport, Iowa; 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. Rail transportation is through independent
railroads, although approximately 30% of rail movement for Grain Merchandising
for the year ended August 31, 1999 was carried out through leased railcars
(either directly or by use of pools in which such leased railcars participate).
Vessel and truck transportation is carried out exclusively by third parties.
Barge transportation is carried out by third parties, but the Company is a party
to long-term affreightment agreements for approximately 20% of current needs.
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 that owns part of a Germany-based marketing organization involved in
trading grain and feedstuffs in Germany 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 Cooperative Association Members 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, 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
6
among these six. 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 locations 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 173 Farm Marketing and Supply 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'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 Cargill operates an export terminal at
Tacoma, Washington, for feed grain and oilseed shipments to Pacific Rim
customers. A Cargill facility in Seattle, Washington is also being utilized by
the joint venture until it is sold. A facility in Spokane, Washington is used
for storage and transloading, and an elevator in Petersburg, North Dakota is
used to standardize barley for a particular customer.
The Company entered into a joint venture with United Grain, located in
Portland, Oregon, forming a grain marketing company called United Harvest, LLC.
United Harvest, LLC is a joint venture 50% owned by each company, and began
operation in December 1998. United Harvest, LLC will operate the Kalama,
Washington and Kennewick, Washington terminal elevators owned by the Company,
and the Vancouver, Washington terminal of United Grain as well as market the
grain for each of the parent companies in the western United States, including
Washington, Oregon, Idaho, Utah and Montana. The Company has interests in three
river terminals located on the Snake River which are being utilized by United
Harvest LLC. These terminals include the 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 grain marketing operation 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
7
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 operation inventory and purchase
contracts for delivery to the Company may be substantial. The Grain Marketing
Group has a risk management policy and procedures that include 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 operation when any trader is outside of position limits
and also triggers review by management of the Company if the grain marketing
operation 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.
EMPLOYEES
As of August 31, 1999, the Grain Marketing Division had 445 employees, of
which 68 were traders, 249 production staff, 14 management and 114 support
staff. See "Farm Marketing and Supply" with respect to employment by
Agri-Service Centers. Of these employees, 169 at seven locations are subject to
collective bargaining agreements expiring at various times through 2000.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
The soybean crushing industry converts soybeans into meal used for feeding
animals, soyflour 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 close
to adequate sources of soybeans and strong demand for meal. 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 increased 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.
8
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 pork and poultry and an 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 acquiring other processors, expanding capacity of existing
plants or building new plants, domestically or internationally. Unless exports
increase or existing facilities are closed, this extra capacity is likely to put
additional pressure on prices and challenge 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 margin relationships have been
maintained.
EQUITY PARTICIPATION UNITS
At its integrated crushing and refining facility in Mankato, Minnesota, the
Oilseed Processing and Refining Defined Business Unit processes soybeans into
soybean meal, soyflour and crude soybean oil. The crude soybean oil, with
additional purchased crude oil, is refined.
At August 31, 1999 Equity Participation Units in the Oilseed Processing and
Refining Defined Business Unit represented the right to deliver 1,047,000
bushels of soybeans, approximately 3% of the processing capacity of the Defined
Business Unit.
PRICE RISK AND HEDGING
To reduce the price change risks associated with holding fixed price
commodity positions, the Company generally takes opposite and offsetting
positions by entering into commodity futures contracts (either a straight
futures contract or an options futures contract) on regulated commodity futures
exchanges. While hedging activities reduce the risk of loss from changing market
values of oilseeds, such activities also limit the gain potential which
otherwise could result from changes in market prices of oilseeds. The Company's
policy is to generally maintain hedged positions within limits, but the Company
can be long or short at any time. The Defined Business Unit's profitability is
primarily derived from margins on oilseeds processed, not from hedging
transactions. Management does not anticipate that its hedging activity will have
a significant impact on future operating results or liquidity. Hedging
arrangements do not protect against nonperformance of a cash contract.
At any one time the Defined Business Unit's inventory and purchase
contracts for delivery to the Defined Business Unit may be substantial. The
Defined Business Unit has a risk management policy and procedures that include
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 Defined Business Unit when any trader is outside of position
limits and also triggers review by management of the Company if the Defined
Business Unit is outside of its position limits. The position limits are
reviewed at least annually with management of the Company. The Defined Business
Unit 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.
SUPPLY
The Oilseed Processing and Refining Defined Business Unit purchases
virtually all of the soybeans processed by it from Members. Because the Oilseed
Processing and Refining Defined Business Unit 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 Oilseed Processing and Refining Defined Business Unit 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,
9
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 Oilseed Processing and Refining Defined Business Unit also purchases
crude soybean oil for processing at its refinery. Approximately 40% of the crude
oil refined is produced by the Oilseed Processing and Refining Defined Business
Unit, and the balance is purchased. Major suppliers have been AGP, South Dakota
Soybean Processors and ADM. Because ADM opened a refinery late in 1997 in
Minnesota, it is no longer a supplier of crude oil. However, there are several
producers of crude oil, and the Company has been 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 Oilseed Processing and
Refining Defined Business Unit has never experienced an inability to source
soybeans.
CUSTOMERS
REFINED OILS. The Oilseed Processing and Refining Defined Business Unit
sells refined oil throughout most of the United States although it concentrates
on customers located in Minnesota, Wisconsin, North Dakota, South Dakota,
northern Iowa and northern Illinois, which have lower freight costs and are
therefore slightly more profitable. Customers in these states accounted for more
than 50% of refined oil sales in the year ended August 31, 1999. The Company
estimates that of oil sold, 25% is used for margarine, 15% to 20% for salad
dressing and smaller percentages for snack foods, baked goods, imitation cheese
goods, processed potato goods and others. Approximately 5% of oil sales are for
industrial use. During the year ended August 31, 1999, the Oilseed Processing
and Refining Defined Business Unit had over 100 customers, the largest of which
was Ventura Foods, LLC and its predecessor operations described in the next
paragraph. One other customer was responsible for over 9% of refined oil sales
by the Defined Business Unit. Sales of refined oil are made by Defined Business
Unit employees and to a lesser extent by brokers.
The Company has a long-term supply agreement with Ventura Foods, LLC. which
commenced January 1, 1997 and will continue 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
that 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 Oilseed Processing and Refining
Defined Business Unit is used for feeding livestock. During the year ended
August 31, 1999, the Defined Business Unit sold meal to over 500 customers,
primarily feed lots and feed mills. During the year ended August 31, 1999, seven
customers accounted for approximately 48% of meal sold, and three customers,
which would be difficult to replace, accounted for approximately 32% of meal
sold. For the year ended August 31, 1999, 69% of meal was sold in Minnesota, 22%
in Wisconsin, 6% in Canada and the balance in Iowa, North Dakota and South
Dakota. 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 Defined Business Unit.
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 Oilseed Processing and Refining Defined
Business Unit has 6% to 8% of the domestic refined soybean oil market and less
than 3% of the domestic soybean crushing capacity.
10
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 that 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 Oilseed Processing and Refining Defined Business Unit 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 Oilseed Processing and Refining Defined Business Unit currently has one
facility located in Mankato, Minnesota, comprised of a crushing plant, a
refinery, a soyflour plant and self contained utilities. A quality control lab
with technically sophisticated equipment assures high quality standards.
In July 1998 the Company announced its site selection for the construction
of a new soybean processing and refining plant in southwestern Minnesota. The
facility, to be constructed near the city of Fairmont, Minnesota, is expected to
cost between $60 and $90 million. The precise configuration and size of the
crushing plant and oil refinery has yet to be determined.
EMPLOYEES
The Oilseed Processing and Refining Defined Business Unit currently employs
203 employees, 35 in the office in administration, sales and support service and
168 in the plant. Certain production workers are subject to collective
bargaining agreements with the American Federation of Grain Millers (137
employees) expiring in 2002 and the Pipefitters' Union (2 employees) expiring in
2000.
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 that 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 $55.6 million as
of August 31, 1999.
Sales by the Oilseed Processing and Refining Defined Business Unit to
Ventura Foods and its predecessors in interest (Holsum and Wilsey) are shown
below:
YEARS ENDED MAY 31,
-----------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996
----------------- ------------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Sales ...................... $ 93,565 $ 22,685 $ 101,440 $ 110,679 $ 124,299
Percentage of total refinery
sales ...................... 35% 34% 38% 45% 45%
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
11
and Wilsey Foods appoints half the committee members. The Company and Wilsey
Foods must each 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 DEFINED BUSINESS UNIT
INDUSTRY OVERVIEW
The Company's Wheat Milling Defined Business Unit mills durum wheat into
flour and semolina and mills spring and winter (hard) wheats into bread flour.
The Wheat Milling Defined Business Unit is the largest miller of durum wheat in
the United States. The Wheat Milling Defined Business Unit 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, its Houston facility, which began production in June 1997, Mount Pocono
facility, which began production in January 1999, the Defined Business Unit 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
ingredients 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 declined slightly in the past two years.
Pasta in its many forms is sold at retail, for restaurants and institutional use
and for use in other processed food products.
Major competitors in the industry include the Company, Italgrani and Miller
Milling. 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 had been increasing until 1998. Total production
and per capita consumption decreased 1.3% in the year ended December 31, 1998.
While there was a decline in consumption, 1998 was still the second largest
production year recorded. 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.
EQUITY PARTICIPATION UNITS
At August 31, 1999, Equity Participation Units in the Wheat Milling Defined
Business Unit represented the right to deliver 4,629,000 bushels of wheat,
approximately 7% of the processing capacity of the Defined Business Unit.
PRICE RISK AND HEDGING
To reduce the price change risks associated with holding fixed price
commodity positions, the Company generally takes opposite and offsetting
positions by entering into commodity futures contracts (either a straight
futures contract or an options futures contract) on regulated commodity futures
exchanges. While hedging activities reduce the risk of loss from changing market
values of grain, such activities also limit the gain potential which otherwise
could result from changes in market prices of grain. The Defined Business Unit's
policy is to generally maintain hedged positions in grain that is hedgeable, but
the Company can be long or short at any time. The Defined Business Unit's
profitability is primarily derived from margins on grain processed, not from
hedging transactions. Management does not anticipate that its hedging activity
will have a significant impact on future operating results or liquidity. Hedging
arrangements do not protect against nonperformance of a contract.
12
At any one time the Defined Business Unit's inventory and purchase
contracts for delivery to the Defined Business Unit may be substantial. The
Defined Business Unit has a risk management policy and procedures that include
net position limits. It is defined by commodity and includes both trader and
management limits. This policy triggers a review by management of the Defined
Business Unit when any trader is outside of position limits and also triggers
review by management of the Company if the Defined Business Unit is outside of
its position limits. The position limits are reviewed at least annually with
management of the Company. The Defined Business Unit 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.
SUPPLY
Most of the durum, spring and winter wheats processed by the Wheat Milling
Defined Business Unit are 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. Additionally, the new durum
futures market offers some limited potential for hedging. To minimize the price
volatility for winter and spring wheats, the Wheat Milling Defined Business Unit
usually hedges by purchasing wheat futures at the time of pricing the flour.
The availability, price and quality of durum and spring and winter wheat
affect the operations and profitability of the Wheat Milling Defined Business
Unit. The Wheat Milling Defined Business Unit has never experienced a supply
shortage of durum, but shortages have affected prices.
CUSTOMERS
SEMOLINA & DURUM FLOUR. The Wheat Milling Defined Business Unit sells
semolina and durum flour to ten major customers and approximately 50 smaller
customers, which are large and mid-size pasta manufacturers in the United
States. The customer base is broad and diverse with no single customer being
more than 15% of the total durum milling demand.
In 1999, American Italian Pasta Company ("AIPC") began operation of a new
pasta plant adjacent to the Wheat Milling Defined Business Unit's mill in
Kenosha, Wisconsin. AIPC is this country's largest pasta manufacturer. Direct
pipelines from the mill to the pasta plant will reduce costs to transfer
product, create efficiencies for both companies, as well as provide a dedicated
customer/supplier relationship. Production startup for the AIPC plant is
expected in about a year.
The Wheat Milling Defined Business Unit would be adversely affected by a
decline in pasta production in the United States.
Most of the Wheat Milling Defined Business Unit's products are marketed by
employees of the Defined Business Unit. The Wheat Milling Defined Business Unit
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 14% of the Wheat Milling Defined Business Unit's bread
flour production. The Company believes because of the large number of potential
customers and the fact that the Wheat Milling Defined Business Unit is not
dependent on any customer, it would not have substantial difficulty in replacing
an existing customer.
The Wheat Milling Defined Business Unit's first hard wheat milling unit
(Kenosha) began production in late 1995. In October 1996, the Wheat Milling
Defined Business Unit 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, which began production in June 1997, added additional hard wheat
capacity. The Company believes that there is a substantial customer base
available in the Houston area, as well as export markets. The mill serves a
sizeable population base and there are no other milling facilities within the
area. In January 1999, the Mount Pocono, Pennsylvania mill began production
supplying flour to major bakery customers in the Northeast.
13
COMPETITION
DURUM MILLING. The Wheat Milling Defined Business Unit's largest
competitors in durum milling are Italgrani and Miller Milling Company.
Dakota Growers has expanded its Carrington, North Dakota, milling facility
and its pasta production capacity and has added additional milling capacity to
supply its recently acquired New Hope, Minnesota plant. Philadelphia Macaroni
has completed a semolina mill in Minot, North Dakota. Miller Milling has
recently expanded its Winchester, Virginia, semolina mill. Barilla, an Italian
pasta manufacturer and durum miller, is operating an integrated mill and pasta
plant in Ames, Iowa. In the past, it has exported significant volumes of pasta
from Italy into the U.S. and will now compete with domestic manufacturers in the
dry retail pasta market.
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 Wheat Milling
Defined Business Unit. Capacity for hard wheat milling has been expanding faster
than consumption. This additional capacity has put pressure on margins.
PROCESSING
The Defined Business Unit 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 Wheat Milling Defined Business Unit has five milling facilities in
operation, including Mount Pocono that began production in January 1999. Each
facility includes a milling plant as well as an elevator to store grain.
Information on the five mills, follows:
LOCATION GRAIN MILLED CAPACITY BUSHEL EQUIVALENT
- ------------------ ------------------------- ----------------- ------------------
Rush City, MN Primarily durum 10,000 cwts/day 23,500 bu/day
Huron, OH Primarily durum 9,500 cwts/day 22,800 bu/day
Spring and winter wheat 5,000 cwts/day 11,000 bu/day
Kenosha, WI Durum 11,000 cwts/day 26,400 bu/day
Spring and winter wheat 10,000 cwts/day 22,000 bu/day
Houston, TX Spring and winter wheat 13,000 cwts/day 28,600 bu/day
Pocono, PA Durum 4,000 cwts/day 9,600 bu/day
Spring and winter wheat 14,000 cwts/day 30,800 bu/day
----------------- ------------------
Total 76,500 cwts/day 174,700 bu/day
================= ==================
At Huron, Ohio, the land and buildings are leased from ConAgra.
The Rush City, Kenosha and Mount Pocono 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.
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, Mount Pocono and Houston mills are in proximity to a
large customer base.
Approximately 85% of the Wheat Milling Defined Business Unit'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. For the year ended
August 31, 1999 the Wheat Milling Defined Business Unit facilities ran at 70% of
capacity based upon a year of 307 operating days
14
being 100%, compared to 81% in 1998. This decrease in run time was due to
startup in Mount Pocono and a temporary shut down of Huron due to shifting one
line from semolina production to bread flour production.
EMPLOYEES
As of August 31, 1999 the Wheat Milling Defined Business Unit employed the
following full time equivalents: production and plant management (165) and
headquarters (22). Of these, 25 production workers at the Rush City Mill are
subject to a collective bargaining agreement with the American Federation of
Grain Millers expiring in 2001.
FARM MARKETING AND SUPPLY
The Farm Marketing and Supply Division owns and operates three types of
business units: Agri-Service Centers, Feed Manufacturing and Fin Ag, Inc.
AGRI-SERVICE CENTERS Agri Service Centers provide farm supplies and
services to producers for their production systems. Farm supplies include plant
food, feed, seed, energy products and crop protection products. Services include
grain and seed marketing and other related services in production agriculture.
There are 317 locations in the states of Minnesota, Iowa, North Dakota, South
Dakota, Nebraska, Colorado, Montana, Idaho, Oregon and Washington. Not all
locations provide every product and service. Locations are grouped into 65
operating units of which 17 are regionalizations; these regionalizations have
their own producer board and participate in separate patronage pools.
Agri Service Centers purchase grain and seed from member and non-member
producers and other elevators and grain dealers. Seventy-seven locations have
the capability of loading unit trains. Most of the grain purchased is sold
through the Company's grain marketing division, local feed usage or local
processing operations.
The farm supplies sold at these locations are purchased through other
company divisions in the respective areas whenever possible. The Agri Service
Centers sell agronomy products through 125 locations. Feed products are sold
through 89 locations and energy products through 87 locations.
Competitors for the purchase of grain include other elevators and large
grain marketing companies. Competitors for farm supply include a variety of
cooperatives, privately held and large national companies. The Company competes
on the basis of services and patronage.
On August 31, 1999, the group had 1,868 full time and 708
seasonal/temporary employees. Statistics for the periods indicated are as
follows:
YEARS ENDED MAY 31,
--------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ------ ------ ------ -----
Number of centers ......... 317 245 239 253 249 195
Number of operating
units .................... 65 70 73 71 74 69
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
CoBank, on which the Company bears a 15% residual exposure. The Company's
exposure at August 31, 1999, was approximately $3.0 million. Under the Company's
borrowing arrangements the maximum amount of the loans outstanding at any one
time may not exceed $50.0 million. On August 31, 1999 the total number of full
time employees was 15.
FEED MANUFACTURING The Company manufactures and sells feed products,
ingredients, supplements and animal health products. In addition, it provides
livestock production services and custom rations. The Company owns nine feed
plants, three retail operations and has joint venture agreements with three
additional plants.
15
On June 1, 1998, the Company formed a 50/50 LLC with Land O'Lakes, Inc.
called Land O'Lakes/Harvest States Feed LLC. The Company included eight plants
and three retail operations in the states of Minnesota, Nebraska, South Dakota,
North Dakota and Montana with Land O'Lakes plants in Beatrice and Norfold,
Nebraska and Dawson and Detroit Lakes, Minnesota to form the LLC. A four-person
board, two from Cenex Harvest States and two from Land O'Lakes govern the joint
venture. The administrative office and general manager of the joint venture is
located at the Sioux Falls, South Dakota location.
The Company is involved in joint ventures of plants in Owatonna, Minnesota,
Tillamook, Oregon and Hermiston, Oregon. The Company owns a plant in Snohomish,
Washington, which was not operating on August 31, 1999.
On August 31, 1999 the feed manufacturing group had 240 full time and 7
part time employees in all operations. All but three employees are leased to the
Land O'Lakes/Harvest States LLC.
Feed tons for the periods indicated are as follows:
YEARS ENDED MAY 31,
--------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- --------- --------- --------- --------
Manufactured feed (tons) ......... 591,510 133,381 377,000 326,000 351,000 333,000
These numbers include the total tons of the joint ventures and LLC's.
SERVICES
The Company's Country Services Division provides certain services to
Individual Members and Cooperative Association Members.
COUNTRY HEDGING, INC.
Country Hedging, Inc. offers full service commodity futures and options
brokerage. For the year ended August 31, 1999, 50% of revenues were from
Cooperative Association Members, 37% from Individual Members and 13% 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 August 31, 1999, 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, 93% 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 August 31, 1999, substantially all of its revenues were from local
cooperatives. Ag States Agency, LLC competes with other insurance agencies.
On January 1, 1998 Ag States Agency, LLC acquired 50% ownership in Ag
States Benefits, LLC. Ag States Benefits, LLC is an independent insurance agency
which sells primarily group benefit policies such as health, life, dental, long
term care and disability insurance to primarily local cooperative employees and
members of local cooperatives.
FINANCIAL SERVICES DEPARTMENT
The Financial Services Department provides business planning consulting and
financing to Cooperative Association Members. 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% by 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
16
account for settlement of grain purchases and as a cash management tool. Open
account financing has been provided to more than 200 Cooperative Association
Members in the past year.
During the year ended August 31, 1999, average aggregate loan balances
outstanding were $41,753,248 (of which CoBank's participation was $19,177,110)
and the highest aggregate loan balance outstanding at any one time was
$55,646,123 (of which CoBank's participation was $25,146,516). The Company's
borrowing arrangements limit loan balances outstanding to not more than
$150,000,000 at any one time.
Pursuant to its agreement with CoBank, the Company has additional credit
risk on CoBank participations up to 10% of total loan commitments.
Fin-Ag, Inc., 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 August 31, 1999, substantially
all of its revenues were from local cooperatives.
FIELD SERVICES DEPARTMENT
The Field Services Department acts as a liaison between cooperative
association members 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
cooperative association members and assists in planning meetings and organizing
visits to Company facilities.
MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL
INTRODUCTION
The Company is an agricultural membership cooperative organized to do
business with members and non-members. Net savings from member patronage of the
Company shall be distributed to members on the basis of patronage, except that
the Board of Directors may elect to add to the Unallocated Capital Reserve an
amount not to exceed 10% of the distributable net income from patronage
business. These net savings, when distributed, are referred to as "patronage
dividends," regardless of whether distributed in cash or Patron Equities. The
Company may obligate itself to do business with a non-member on a patronage
basis. The determination of net savings may be made by allocation units which
may be functional, divisional, departmental, geographic, or otherwise as
determined by the Board of Directors, provided that each Defined Business Unit
shall be accounted for as a separate allocation unit. Patronage refunds shall be
distributed in cash, allocated patronage equities, revolving fund certificates,
securities of this cooperative, other securities, or any combination thereof
designated by the Board of Directors. Any non-cash allocations are redeemable
only at the discretion of the Board of Directors.
The net earnings (after provision for income taxes) of the Company, 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 of Directors 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
Equity Certificates or any combination thereof designated by the Board of
Directors. The current redemption policy is to redeem to estates for
Non-Patronage Equity Certificates.
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.
17
GOVERNANCE
The business and affairs of the Company are managed by a Board of Directors
of not less than 17 persons, elected by the members at the Company's annual
meeting. The Board currently is comprised of 27 directors and will be decreased
to 17 at the December 1999 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 June, 1998.
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 restricted to associations of producers of
agricultural products which are organized and operating so as to adhere to the
provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as
amended, and to certain producers of agricultural products. The Board of
Directors may establish a minimum amount of business that cooperative
associations must transact with or through the Company to be eligible for
membership, and also may adopt such additional conditions, qualifications,
methods of acceptance, duties, rights and privileges of membership in this
Company as it may from time to time deem advisable.
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. As a membership cooperative, the Company does not issue capital
stock. Under the Minnesota Cooperative Law, under which the Company is
organized, a cooperative may be organized on a membership basis or a capital
stock basis. A cooperative is organized on a capital stock basis if holding
shares of common stock entitles the holder to vote. 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
authorized in, or by the Board of Directors pursuant to, the Company's Bylaws,
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
transferable 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.
Cooperative Associations are associations of agricultural producers.
Cooperative 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
Cooperative Association Members are entitled to: (i) one vote for each
producer of agricultural products registered and accepted as a member of such
cooperative association who patronized the Cooperative Association within the
preceding year; (ii) one vote for each $10,000 or major fraction thereof, of the
average annual business transacted with the Company during the past three fiscal
years;
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and (iii) one vote for each $1,000, or major fraction thereof, of equity issued
by the Company as patronage refunds and standing on the books of the Company in
the name of the Cooperative Association Member.
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 and Defined Members associated with a
grain elevator, feed mill, seed plant or any other Company facility, except
supply and marketing locations brought to the Company by Cenex, as designated
and recognized by the Board of Directors. 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. Patrons'
Associations are entitled to: (i) one vote for each Individual Member and
Defined Member grouped in such Patrons' Association (minus one vote for each
Individual Member or Defined Member in such Patrons' Association who chooses to
cast a vote personally); (ii) one vote for each $10,000 or major fraction
thereof, of the average annual business transacted with the Company by the
Individual Members and Defined Members grouped into such Patrons' Associations,
during the past three fiscal years; and (iii) one vote for each $1,000,or major
fraction thereof, of equity issued by this cooperative as a patronage refund and
standing on the books of this Company in the name of the Individual Members and
Defined Members grouped in such Patrons' Associations, calculated on an
aggregate basis.
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 is affiliated with a "Defined Business Unit" and holds
Equity Participation Units in that Defined Business Unit. Holders of Equity
Participation Units 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 is 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 was elected by the Company's
Board of Directors in June, 1997. Eight individuals were appointed to serve on
the Wheat Milling Defined Member Board, a Chairman plus one member from District
1, three members from District 2, one from District 3, one from District 4 and
one from District 5. Six individuals were appointed to serve on the Oilseed
Processing and Refining Defined Member Board, a Chairman plus three members from
District 1, one member from District 2 and one member from District 3. In
November of 1997 the Defined Member Boards of each Defined Business Unit were
elected by the Defined Members associated with the particular Defined Business
Unit on a one Defined Member/one vote basis. The Defined Member Boards adopted a
Nominating and Election Procedure that was sent to each Defined Member. In
subsequent years, Defined Members will elect members of the Defined Member
Boards as their terms expire. In December of 1998, Districts were renamed
"Regions" and the Region boundaries were changed. As a result, the Wheat Milling
Defined Member Board is comprised of a Chairman plus one Member from Region 1,
one member from Region 2, three from Region 3, one from Region 4, and one from
Region 6. The Oilseed Processing and Refining Defined Member Board is comprised
of a Chairman plus three members from Region 1, one member
19
from Region 3 and one from Region 4. The Chairperson is selected by and from the
Company's Board of Directors. Individuals serving on a Defined Member Board
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.
While the Board of Directors has no present intention of doing so, 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 as a "unit retain." Unit retains would only be established by the Board of
Directors to provide a source of cash for its immediate needs and would be
limited to a small percentage of the payments due for purchase of products
pursuant to the Agreement. The imposition of unit retains would adversely affect
a member's cash income and cash position. 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 is represented by Capital Equity
Certificates, non-patronage equity certificates, Equity Participation Units and
certain capital reserves.
The Company's Bylaws provide 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. Defined Members have
voting rights to elect a Defined Member Board.
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 EQUITY CERTIFICATES. The Board of Directors may issue
Non-Patronage Equity 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 Cooperative Association Members that meet all of
the requirements of membership as a Cooperative Association Member except
that they do not transact at least the minimum volume 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 Bylaws contain no restrictions on the issuance or the
terms of such other debt or equity instruments.
Voting rights arise by virtue of membership in the Company, not because of
holding any instrument. 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
20
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. No such Preferred Equities are
presently outstanding, and the Board of Directors has no present plan or intent
to issue Preferred Equities. However, if it were to do so, it could establish
rights, preferences and privileges relative to the holders of the Units and
other securities of the Company. Such preferences could include provisions for
priority in payment. The Board of Directors may authorize the issuance of
Preferred Capital Certificates pertaining to a particular Defined Business Unit.
If such Certificates were issued, they could have a preference in payment over
patronage refunds of a particular Business Unit.
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 Equity
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.
Beginning June 1, 1998, inactive direct members and patrons and active
direct members and patrons age 61 and older on that date will be eligible for
patronage certificate redemption at age 72 or death. For active direct members
and patrons who were age 60 or younger on June 1, 1998, and Cooperative
Association Members, equities will be redeemed annually based on a prorata
formula where the numerator is dollars available for such purpose as determined
by the Board of Directors, and the denominator is the sum of the patronage
certificates held by such eligible members and patrons. There can be no
assurance that the Company's Board of Directors will not elect to modify its
policy regarding the redemption of equities. The Board is under no restriction
in modifying such policy, other than legal agreements to which the Company may
be a party from time to time. Members are not required to approve a change in
such policy. The Board of Directors will establish a redemption policy for
Patrons' Equities arising from the Defined Business Units.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
In the event of any dissolution, liquidation or winding up this
cooperative, whether voluntary or involuntary, all debts and liabilities of this
cooperative shall be paid first according to their respective priorities. As
more particularly provided in the Bylaws, the remaining assets shall then be
paid to the holders of equity capital to the extent of their interests therein
and any excess shall be paid to the patrons of this cooperative on the basis of
their past patronage. The Bylaws provide more particularly for the allocation
among the members and nonmember patrons of this cooperative of the consideration
received in any merger or consolidation to which this cooperative is a party.
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 declares, by resolution adopted by a majority of the Board of
Directors present and voting, that the amendment involves or is 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. It is within the sole
determination of the Board of Directors to declare that a transaction involves a
"hostile takeover," which term is not further defined in the Minnesota
cooperative law or the governing documents.
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
21
redemption 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 ("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 is affiliated with a Defined Business Unit and holds Equity
Participation Units in that Defined Business Unit. Holders of Equity
Participation Units have delivery rights and obligations for farm products
pursuant to the Agreements between such Defined Members and the Company.
Each Defined Business Unit and the respective Equity Participation Units
were created by resolutions (the "Resolutions") of the Board of Directors,
acting pursuant to the governing documents, on January 11, 1997. The terms of
the Units are governed by the governing documents and the Resolutions. The
Resolutions may be amended by the Board of Directors, except in certain
respects, without a vote of holders of the Units. Holders of the Units have the
rights and remedies provided by the Minnesota Cooperative Law.
WHEAT MILLING DEFINED BUSINESS UNIT
Holders of Equity Participation Units in the Wheat Milling Defined Business
Unit have a right to participate in the patronage sourced income from the
operations of the Wheat Milling Defined Business Unit. Prior to the sale of any
Unit to any person, such person entered into an Agreement that gave the right
and obligation to such person to deliver the number of bushels of wheat equal to
the number of Units purchased by such Member.
Patronage sourced income from the operations of the Wheat Milling Defined
Business Unit is allocated by the Company as patronage refunds based on the
total amount of wheat processed. 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 are entitled to the allocation of patronage refunds
originating from the Wheat Milling Defined Business Unit, they may also receive,
upon allocation by the Board of Directors, nonpatronage income from operations
of the Company, including operations of the Wheat Milling Defined Business Unit
generating nonpatronage income.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Holders of Equity Participation Units in the Oilseed Processing and
Refining Defined Business Unit have a right to participate in the patronage
sourced income from the operations of the Oilseed Processing and Refining
Defined Business Unit. Prior to the sale of any Unit to any person, such person
entered into an Agreement that gave the right and obligation to such person to
deliver the number of bushels of soybeans equal to the number of Units purchased
by such Member.
Patronage sourced income from the operations of the Oilseed Processing and
Refining Defined 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, giving effect to Units held and
Units deemed to be held by the Company. 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 are entitled to the allocation of patronage refunds
originating from the Oilseed Processing and Refining Defined Business Unit, they
may also receive, upon allocation by the Board of Directors, nonpatronage income
from operations of the Company, including operations of the Oilseed Processing
and Refining Defined Business Unit generating nonpatronage income.
22
ALLOCATIONS RELATING TO DEFINED BUSINESS UNITS
Revenues from the sale of products of a Defined Business Unit shall be
credited to the Defined Business Unit, and all direct expenses incurred by a
Defined Business Unit shall be charged against the Defined Business Unit.
Corporate, general and administrative expenses of the Company shall be allocated
to each Defined Business Unit in a reasonable manner based on the utilization by
such Defined Business Unit. Intracompany accounts have been established for the
advancements to, and the loan of funds by, each Defined Business Unit, with
interest thereon imputed at prevailing rates. Income taxes shall be allocated to
each Defined Business Unit as if it were a separate taxpayer. Each Defined
Business Unit shall perform and be responsible for commitments, contingencies
and obligations allocated to such Defined Business Unit.
Patronage sourced income from the operations of a Defined Business Unit
(except as set forth above with respect to the Oilseed Processing and Refining
Defined Business Unit) will be allocated by the Company as patronage refunds
based on the total amount of grain processed, giving effect to Units held and
Units deemed to be held by the Company. As between holders of the Units,
patronage sourced income will be allocated to each Defined Member proportionate
to the number of bushels of grain delivered pursuant to the Agreement. Defined
Members may also receive, upon allocation by the Board of Directors,
nonpatronage income from operations of the Company, including operations of a
Defined Business Unit generating nonpatronage income.
With respect to each year, the total net income from a Defined Business
Unit will be withdrawn by the Company from the Defined Business Unit, except to
the extent that patronage dividends are not paid in cash and are retained in the
Defined Business Unit as equity. The Company will be responsible for the
allocation of net income arising from operations of a Defined Business Unit
between Defined Members of any one or more Defined 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 Defined Business Unit, such assets and
related liabilities, including commitments, contingencies and obligations, shall
be allocated to that Defined Business Unit and the aggregate cost or fair market
value of such assets and liabilities shall be paid by the Defined 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 Defined 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 Defined Business Unit. If an asset is
allocated to more than one Defined Business Unit, the proceeds or the fair
market value of the disposition shall be allocated among all Defined 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
Defined Business Unit to the Company or any other Defined Business Unit of the
Company at fair market value. Such 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 Company shall not enter into any agreement by which the net patronage
sourced earnings of a Defined Business Unit shall be allocated to any person
except to a person who owns or is deemed to own Units proportionate to the
patronage being so allocated.
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
23
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
Defined Business Unit.
There are no limitations on the issuance or sale of additional Units in the
governing documents or in any loan agreements or other agreements or instruments
to which the Company is a party.
Holders of Units shall have no preemptive rights to subscribe for or
purchase additional Units or any other securities issued by a Defined 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 Defined Business Unit.
MERGER, CONSOLIDATION OR SALE
In connection with the merger, consolidation, liquidation or sale of all or
substantially all of the assets of the Company as an entirety or upon the sale
of all or substantially all of the assets of a Defined Business Unit, all, but
not less than all, Units of such Defined Business Unit shall be redeemed by the
Company at their original purchase price, provided that the Preferred Capital
Certificates or unit retains of such Defined Business Unit not previously paid
are also redeemed in connection therewith; that such payments include any
prorata profit (or loss) associated with disposition of the assets of the
Defined Business Unit as though the assets, subject to the liabilities, of the
Defined Business Unit had been sold in connection with such event at their fair
market value; and that provision is made for the allocations of patronage
sourced income arising prior to such transaction. 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. A
sale of more than 75% of the assets or earning power will be deemed "all or
substantially all" of the assets of the Company or a Defined Business Unit.
OPERATIONS
The operations of a Defined 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 Defined Business Unit may be disposed of in the ordinary
course of business and the disposition of any substantial portion of the assets
of a Defined 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 Defined Business Unit or to abandon or shut down the operations
of a Defined Business Unit. Abandonment or shutting down the operations of a
Defined Business Unit (other than on a temporary basis) will be considered sale
of all of the assets of the Defined Business Unit and will have the effect
described under "-- Merger, Consolidation or Sale."
AMENDMENT OF BOARD RESOLUTIONS
The resolutions adopted by the Board of Directors establishing the Wheat
Milling Defined Business Unit and the Oilseed Processing and Refining Defined
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
Business Units" and "Merger, Consolidation or Sale," which may be amended only
with the approval of a majority of Defined Members owning Units not held or
deemed held by the Company.
MEMBER MARKETING AGREEMENT
A Defined Member is obligated to deliver during each delivery year one
bushel of wheat or soybeans which is of merchantable quality, according to
industry standards, to the Company for each applicable Unit held, subject to
adjustment as described below, at delivery points designated 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 during the Processing Year. Certain
Cooperative Association Members have contracted with the Company to act as an
agent for handling required deliveries (and will receive funds for that
service). In
24
addition, the Company has designated most of its owned and operated elevators as
delivery points (approx. 135). 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 an Individual Member effective on
August 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 days' written notice from the party not in breach. The Agreement may
be terminated by the Company upon sale, liquidation, dissolution or winding up
of the applicable Defined Business Unit in accordance with the Company's Bylaws.
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 at the
point of delivery agreed to between the Defined Member and the Company or its
agent at the time of sale. The final settlement price must be established prior
to the end of the processing year. 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 Company affecting the
conduct of the Company's business to the extent of preventing or unreasonably
restricting the receiving, handling, production, marketing or other operations,
the Company shall be excused from performance during the period that the
Company's business or operations are so affected. The Member shall not be liable
for failure or delay in performance of the 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.
The Company will pay to each Defined Member an annual patronage refund
equal to the portion arising from the net savings of the applicable Defined
Business Unit attributable to such Defined Member's patronage of the Defined
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 Defined Business Unit.
As a result, in the event that Members holding the majority of the voting power
of the applicable Defined 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.
Upon the termination of the operations of a Defined Business Unit, the
Marketing Agreement will automatically terminate.
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 as 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.
TAXATION
Patronage dividends arising under the Agreements with respect to the Units
will have the same tax treatment as patronage currently payable to members.
TRANSFER OF EQUITY PARTICIPATION UNITS
Upon any transfer of Units, the transferee will be required to certify as
to eligibility and then current anticipated annual production and to sign an
Agreement. In approving any transfer, the Board of Directors will require that
such certificate show that the number of Units transferred does not exceed
anticipated annual production, that any transferee does not own more than 1% of
the outstanding capacity of any one Defined Business Unit and that the Units
held by each transferor retaining units and transferee represent at least 3,000
bushels of wheat or 1,500 bushels of soybeans.
25
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The information in this Annual Report on Form 10-K for the year ended
August 31, 1999, includes forward-looking statements with respect to the
Company. Risks and uncertainties could cause actual results to differ materially
from those discussed in such forward-looking statements. These risks and
uncertainties include, but are not limited to: supply and demand forces, price
risks, business competition and competitive trends, year 2000, taxation of
cooperatives and dependence on certain customers. The risks and uncertainties
are further described in Exhibit 99.1, and other risks or uncertainties may be
described from time to time in the Company's future filings with the Securities
and Exchange Commission.
ITEM 2. PROPERTIES
The Company owns or leases energy, grain handling and processing, and
agronomy related facilities throughout the United States. Below is a summary of
these locations.
ENERGY
Facilities include the following, all of which are owned except where
indicated as leased:
Refinery Laurel, Montana
Propane Plants 33 locations in Iowa, Idaho, Minnesota, North Dakota, Oregon,
South Dakota, Wisconsin, and Wyoming
Propane Terminals 3 locations in Minnesota, North Dakota and Wisconsin
Transportation Terminals/ 10 locations in Iowa, Minnesota, Montana, North Dakota,
Repair Facilities South Dakota, Washington and Wisconsin, 2 of which
are leased
Petroleum & Asphalt 12 locations in Kansas, Montana, North Dakota, Washington
Terminals/Storage Facilities and Wisconsin
Pump Stations 10 locations in Montana and North Dakota
Pipelines
Cenex Pipeline Company Laurel, Montana to Fargo, North Dakota
Front Range Pipeline Canadian Border to Laurel, Montana
Convenience Stores/Gas Stations 40 locations in Iowa, Minnesota, Montana, Nebraska,
South Dakota, and Wyoming
Lube Plants/Warehouses 3 locations in Minnesota and Ohio
The Company has a 74.5% interest in the following facilities of NCRA:
Refinery McPherson, Kansas
Petroleum Terminals/Storage 2 locations in Iowa and Kansas
Pipeline McPherson, Kansas to Council Bluffs, Iowa
Jayhawk Pipeline Throughout Kansas, with branches in Oklahoma and Texas
Jayhawk Stations 40 locations located in Kansas and Oklahoma
26
GRAIN MERCHANDISING
The Company owns or leases grain terminals at the following locations:
Davenport, Iowa I(1)
Davenport, Iowa II(2)
Kalama, Washington(2)
Kansas City, Missouri I(2)
Kansas City, Missouri II(2)
Kennewick, Washington(1)
Myrtle Grove, Louisiana(1)
Petersburg, North Dakota(2)
St. Paul, Minnesota(2)
Savage, Minnesota(1)
Spokane, Washington(1)
Superior, Wisconsin(1)
Winona, Minnesota(1)
- ------------------
(1) Owned
(2) Leased
OILSEED PROCESSING AND REFINING
The Oilseed Processing and Refining Defined Business Unit owns one facility
in Mankato, Minnesota, comprised of a crushing plant, a refinery, a soyflour
plant, and a quality control laboratory.
WHEAT MILLING
The Wheat Milling Defined Business Unit owns or leases flour milling
facilities at the following locations:
Rush City, MN(1) .................. 10,000 cwts/day
Huron, OH(2) ...................... 14,500 cwts/day
Kenosha, WI(1) .................... 21,000 cwts/day
Houston, TX(1) .................... 13,000 cwts/day
Mount Pocono PA(1) ................ 18,000 cwts/day
- -------------------
(1) Owned
(2) Owned equipment, leased land and facilities
AGRI SERVICES CENTERS
The Company owned 317 Agri Service Centers (of which some of the facilities
are on leased land) located in Minnesota, Nebraska, North Dakota, South Dakota
and Montana, Washington, Oregon, Idaho, Iowa and Colorado.
FEED
The Company owns the following feed manufacturing facilities:
Dickinson, North Dakota
Edgeley, North Dakota
Gettysburg, South Dakota
Great Falls, Montana
Hardin, Montana
Minot, North Dakota
Norfolk, Nebraska
Sioux Falls, South Dakota
Snohomish, Washington
Willmar, Minnesota
27
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits and administrative proceedings
incidental to its business. It is impossible at this time, to estimate what the
ultimate legal and financial liability of the Company will be; nevertheless,
management believes, based on the information available to date and the
resolution of prior proceedings, that the ultimate liability of all litigation
and proceedings will not have a material impact on the financial statements of
the Company taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
No equity securities were sold by the Registrant during the year ended
August 31, 1999, or the three-month period ended August 31, 1998, that were not
registered under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED COMPANY
The selected financial information below has been derived from the
Company's consolidated financial statements for the periods indicated below. The
selected consolidated financial information should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
elsewhere in this filing.
SUMMARY CONSOLIDATED FINANCIAL DATA
YEARS ENDED MAY 31,
YEAR ENDED THREE MONTHS ENDED --------------------------------------------------------
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
--------------- ------------------- ------------- --------------- ------------- ------------
(DOLLARS IN THOUSANDS)
Income Statement Data:
Revenues:
Grain and Oilseed ................... $3,309,310 $ 810,723 $4,629,553 $ 6,036,503 $ 7,127,223 $4,191,665
Energy .............................. 1,345,772 343,747 1,858,069 1,676,842 1,402,314 1,401,262
Agronomy ............................ 593,927 91,231 696,441 683,429 560,032 528,869
Processed grain and oilseed ......... 531,877 145,645 615,049 730,101 819,864 708,219
Feed and farm supplies .............. 547,732 126,907 546,063 531,177 451,882 376,906
---------- ----------- ---------- ------------ ----------- ----------
6,328,618 1,518,253 8,345,175 9,658,052 10,361,315 7,206,921
Patronage dividends ................. 5,876 5,111 70,387 71,070 47,170 9,642
Other revenues ...................... 100,031 19,271 98,520 85,390 81,980 68,385
---------- ----------- ---------- ------------ ----------- ----------
6,434,525 1,542,635 8,514,082 9,814,512 10,490,465 7,284,948
Costs and expenses:
Cost of goods sold .................. 6,140,580 1,473,243 8,149,605 9,475,682 10,185,544 6,962,256
Marketing, general, and
Administrative ..................... 148,510 34,998 126,061 126,297 130,274 131,133
Interest ............................ 42,438 12,311 34,620 33,368 46,450 34,199
Minority Interests .................. 10,017 3,252 6,880 7,984 (147) 11,806
---------- ----------- ---------- ------------ ----------- ----------
6,341,545 1,523,804 8,317,166 9,643,331 10,362,121 7,139,394
---------- ----------- ---------- ------------ ----------- ----------
Income before income taxes,
discontinued operations, and
cumulative effect of a change in
accounting .......................... 92,980 18,831 196,916 171,181 128,344 145,554
Loss from discontinued operations .... 5,558
Cumulative effect of a change in
accounting .......................... (6,480)
Income taxes ......................... 6,980 2,895 19,615 19,280 13,139 19,929
---------- ----------- ---------- ------------ ----------- ----------
Net income ........................... $ 86,000 $ 15,936 $ 177,301 $ 151,901 $ 115,205 $ 126,547
========== =========== ========== ============ =========== ==========
Balance Sheet Data (at end of period):
Working capital ..................... $ 219,045 $ 284,452 $ 235,720 $ 219,395 $ 220,581 $ 206,205
Net property, plant and
equipment .......................... 968,333 915,770 868,073 798,757 713,643 642,111
Total assets ........................ 2,787,664 2,469,103 2,436,515 2,422,564 2,484,006 2,111,882
Long-term debt, including
current maturities ................. 482,666 456,840 378,408 335,737 315,985 260,328
Total equity ........................ 1,117,636 1,065,877 1,029,973 944,798 849,701 776,116
29
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
The selected financial information presented below has been derived from
the Oilseed Processing and Refining Defined Business Unit's financial statements
for the periods indicated below. The selected financial information should be
read in conjunction with the Defined Business Unit's financial statements and
notes thereto included elsewhere in this filing.
YEARS ENDED MAY 31,
-----------------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER BUSHEL AMOUNTS)
Revenues:
Processed oilseed sales ................. $ 358,042 $ 98,919 $410,386 $441,738 $399,271 $398,095
Other revenues and costs ................ 30 1,115 1,746 (1,660) 1,436 1,163
---------- -------- -------- -------- -------- --------
358,072 100,034 412,132 440,078 400,707 399,258
Costs and expenses:
Cost of goods sold ...................... 338,386 95,304 379,272 405,791 371,425 366,407
Marketing and administrative ............ 5,095 1,257 4,730 4,342 4,545 5,138
Interest ................................ 557 251 380 322 151 --
---------- -------- -------- -------- -------- --------
344,038 96,812 384,382 410,455 376,121 371,545
---------- -------- -------- -------- -------- --------
Income before income taxes ............... 14,034 3,222 27,750 29,623 24,586 27,713
Income taxes ............................. 800 525 1,825 2,100 1,600 1,500
---------- -------- -------- -------- -------- --------
Net income ............................... $ 13,234 $ 2,697 $ 25,925 $ 27,523 $ 22,986 $ 26,213
========== ======== ======== ======== ======== ========
Operating Data:
Quantities processed Soybeans (bu.) ..... 36,759 4,607 32,626 32,232 30,446 30,808
Crude oil (lb.) ......................... 1,024,900 226,024 953,359 960,407 920,492 894,970
Production:
Meal (tons) ............................. 841 217 754 742 728 741
Flour (tons) ............................ 33 10 32 36 40 41
Refined oil (lbs.) ...................... 996,176 219,918 948,797 957,398 858,240 835,396
Balance Sheet Data (at end of period):
Working capital ......................... $ 22,193 $ 22,881 $ 23,111 $ 20,306 $ 28,620 $ 32,981
Net property, plant and equipment ....... 39,001 35,596 34,953 33,085 24,771 20,410
Total assets ............................ 80,735 82,868 91,482 92,416 74,113 63,673
Long-term debt, including current
maturities ............................. -- -- -- -- -- --
Total equity ............................ 61,194 58,477 58,064 53,391 53,391 53,391
Other Data(1):
Pretax income ........................... 14,034 3,222 $ 27,750 $ 29,623 $ 24,586 $ 27,713
Earnings from purchased oil ............. (2,907) (58) (3,265) (7,015) (3,558) (4,681)
Non-patronage joint venture income ...... (976) (738) (615) (1,354) (990)
Book to tax differences ................. 13 (121) (384) 2,210 (71) 393
---------- -------- -------- -------- -------- --------
Tax basis soybean income ................. $ 11,140 $ 2,067 $ 23,363 $ 24,203 $ 19,603 $ 22,435
========== ======== ======== ======== ======== ========
Bushels processed ....................... 36,759 9,467 32,626 32,232 30,466 30,808
Income per bushel ....................... $ 0.30 $ 0.22 $ 0.72 $ 0.75 $ 0.64 $ 0.73
YEAR ENDED
AUGUST 31, 1999
----------------
Equity Participation Units delivered (bushels) 1,253
Patronage rate ................................ $ 0.30
-------
Income to holders ............................. $ 370
=======
- -----------------
(1) Because patronage dividends attributable to the Units are allocated based on
the number of bushels of soybeans delivered, information on earnings per
bushel is believed by the Company to be the most relevant indicator of
performance of the Oilseed Processing and Refining Defined Business Unit.
30
WHEAT MILLING DEFINED BUSINESS UNIT
The selected financial information presented below has been derived from
the Wheat Milling Defined Business Unit's financial statements for the periods
indicated below. The selected financial information should be read in
conjunction with the Defined Business Unit's financial statements and notes
thereto included elsewhere in this filing.
YEARS ENDED MAY 31,
YEAR ENDED THREE MONTHS ENDED ------------------------------------------------
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER BUSHEL AMOUNTS)
Income Statement data:
Revenues:
Processed grain sales ................... $ 174,133 $ 46,914 $ 205,282 $199,079 $173,316 $ 119,725
Other revenues .......................... 1,820
---------- -------- --------- -------- -------- ---------
174,133 46,914 207,102 199,079 173,316 119,725
Costs and expenses:
Cost of goods sold ...................... 170,510 43,733 189,614 181,566 161,293 112,691
Marketing and administrative ............ 10,610 2,071 8,072 6,749 4,472 3,834
Interest ................................ 5,184 843 3,122 5,230 4,458 2,278
Other ................................... 826 162 2,000
---------- -------- --------- -------- -------- ---------
187,130 46,647 200,970 195,545 170,223 118,803
(Loss) income before income taxes ........ (12,997) 267 6,132 3,534 3,093 922
Income taxes (benefit) ................... (1,125) 25 475 300 200 125
---------- -------- --------- -------- -------- ---------
Net (loss) income ........................ $ (11,872) $ 242 $ 5,657 $ 3,234 $ 2,893 $ 797
========== ======== ========= ======== ======== =========
Operating Data:
Wheat used (bu.) Durum .................. 15,863 4,453 19,307 21,372 19,376 16,058
Spring .................................. 11,144 2,251 8,891 6,732 3,013 1,638
Winter .................................. 9,368 1,453 3,165
Shipments (cwt):
Semolina/flour .......................... 9,258 2,351 10,505 11,168 10,085 8,718
Baking flour ............................ 7,671 1,389 4,270 2,599 634 --
Balance Sheet Data (at end of period):
Working capital ......................... $ (25,112) $ (1,361) $ 12,787 ($ 1,939) $ 3,338 $ 1,604
Net property and equipment .............. 110,547 97,428 85,627 69,130 59,233 43,396
Total assets ............................ 165,471 162,461 146,311 120,918 125,322 82,606
Long-term debt, including current
maturities ............................. 38,515 48,520 51,209 61,214 54,000 33,750
Total equity ............................ 66,340 68,033 67,958 27,797 27,797 27,797
Other Data(1):
Pretax (loss) income .................... $ (12,997) $ 267 $ 6,132 $ 3,534 $ 3,093 $ 922
Book to tax differences ................. 2,249 103 690 2,376 (85) 124
---------- -------- --------- -------- -------- ---------
Tax basis (loss) income .................. $ (10,748) $ 370 $ 6,822 $ 5,910 $ 3,008 $ 1,046
========== ======== ========= ======== ======== =========
Bushels milled ........................... 36,375 8,156 31,363 28,104 22,390 17,697
(Loss) income per bushel ................. $ (0.30) $ 0.05 $ 0.22 $ 0.21 $ 0.13 $ 0.06
YEAR ENDED
AUGUST 31, 1999
---------------
Equity Participation Units delivered (bushels) ................ 5,728
Patronage rate ................................................ $ (0.30)
--------
Loss to holders to be carried forward against future income ... $ (1,693)
========
- -----------------
(1) Because patronage dividends attributable to the Units are allocated based on
the number of bushels of wheat delivered, information on earnings per bushel
is believed by the Company to be the most relevant indicator of performance
of the Wheat Milling Defined Business Unit.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
CONSOLIDATED COMPANY
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives combined
through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives
became the surviving corporation. In accordance with the Plan of Combination,
the Articles of Incorporation and By-Laws of Harvest States Cooperatives were
restated and the name of Harvest States Cooperatives was changed to Cenex
Harvest States Cooperatives (Cenex Harvest States or the Company). The
combination constituted a tax-free reorganization and has been accounted for as
a pooling of interests.
Prior to the Combination, Cenex's year end was September 30 and Harvest
States Cooperatives' year end was May 31. Subsequent to the Combination, the
Company changed its fiscal year end to August 31 and is filing this Report on
Form 10-K representing the first fiscal year of the Company based upon that
date. The management discussion and analysis which follows includes the
consolidated statements of operations and cash flows for the years ended May 31,
1998 and 1997, which reflect the results of operations and cash flows of Harvest
States Cooperatives for the years then ended combined with the results of
operations and cash flows of Cenex for the years ended September 30, 1997 and
1996, respectively. The consolidated balance sheet as of May 31, 1998 reflects
the financial position of Harvest States Cooperatives on that date combined with
the financial position of Cenex as of September 30, 1997. The consolidated
results of operations of Cenex for the eight months ended May 31, 1998 have been
excluded from the reported results of operations and, therefore, have been
recorded as an adjustment to the Company's equities and cash flows in the
consolidated statements of equities and comprehensive income and cash flows
during the three months ended August 31, 1998.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31,
1998
The Company's consolidated net income of approximately $86.0 million for
the year ended August 31, 1999 represents a $91.3 million (51%) decrease from
the year ended May 31, 1998. This decrease is partially attributable to the
absence of a plant food patronage refund of which approximately $57.4 million
was received from the Company's primary supplier of plant food during the year
ended May 31, 1998. In addition, depressed gross margins in the Company's food
processing and energy operations also contributed to the decrease in net income.
Consolidated net sales of $6.3 billion for the year ended August 31, 1999
decreased approximately $2.0 billion (24%) compared to the year ended May 31,
1998.
Grain and oilseed sales of $3.3 billion decreased $1.3 billion (29%) during
the year ended August 31, 1999 when compared to the year ended May 31, 1998.
Although grain volumes declined 22.2 million bushels, the primary cause for the
decreased sales is a decline in the average sales price of all grain and
oilseeds marketed by the Company of $1.15 per bushel.
Energy sales of $1.3 billion decreased $0.5 billion (28%) during the year
ended August 31, 1999 compared to the year ended May 31, 1998. Refined fuels
sales volumes decreased slightly in 1999 compared to 1998, and contributing to
the overall energy sales decline was the refined fuels reduced average sales
price of 18 cents per gallon.
Agronomy sales of $593.9 million decreased $102.5 million (15%) during the
year ended August 31, 1999 as compared to the year ended May 31, 1998. Plant
food sales volumes decreased slightly in 1999 compared to 1998, and contributing
to the overall agronomy sales decline was plant foods reduced average sales
price of $36.00 per ton.
Processed grain and oilseed sales of $531.9 million decreased $83.2 million
(14%) during the year ended August 31, 1999 compared to the year ended May 31,
1998. This decrease is primarily attributable
32
to a reduction in sales price for processed soybean products, primarily soymeal,
of approximately $76.00 per ton, in addition to a reduction of the average sales
price of $2.89 per hundred weight for milled wheat products partially offset by
a 3.1 million hundred weight volume increase.
Feed and farm supplies sales of $547.7 million during the year ended August
31, 1999 were essentially unchanged in total when compared to the year ended May
31, 1998. Although there was a decrease in sales related to agronomy products
due to decreased volume and price, this was offset by an increase in sales for
feed, seed and energy products.
Patronage dividends received of $5.9 million decreased $64.5 million (92%)
during the year ended August 31, 1999 compared to the year ended May 31, 1998.
During the year ended May 31, 1998 a patronage dividend in the amount of $57.4
million was received from the Company's primary plant food supplier. During the
year ended August 31, 1998 the Company did not receive a patronage dividend from
this supplier.
Other revenues of $100.0 million for the year ended August 31, 1999 were
essentially unchanged from the year ended May 31, 1998. The most significant
change within other revenues was from the Company's share of income from joint
ventures. Income from the Company's food packaging joint venture, grain
marketing joint ventures and the newly formed agronomy joint ventures increased
by $5.1 million and $2.3 million, and decreased by $4.3 million, respectively
for the current year as compared to May 31, 1998. This net increase in joint
ventures income was offset by a decline in other miscellaneous revenues.
Cost of goods sold of $6.1 billion decreased $2.0 billion (25%) during the
current fiscal year compared to the year ended May 31, 1998. During the year
ended August 31, 1999 the average cost per bushel of all grains and oilseed
procured by the Company through its grain marketing and country elevator system
decreased $1.15 per bushel and the average cost of refined fuels decreased 17
cents per gallon as compared to the year ended May 31, 1998. Also during the
year ended August 31, 1999 plant food volumes decreased 103,000 tons as compared
to the year ended May 31, 1998. In the Company's food processing operations, the
average cost per bushel of wheat and soybeans declined $1.45 and $1.94 per
bushel, respectively.
Marketing, general and administrative expenses of $148.5 million for the
year ended August 31, 1999 increased $22.4 million (18%) compared to the year
ended May 31, 1998. This increase is primarily related to additional locations
and expansion of many of the Company's business segments.
Interest expense of $42.4 million for the year ended August 31, 1999
increased $7.8 million (23%) compared to the year ended May 31, 1998. The
average seasonal borrowings during 1999 increased as a result of higher working
capital needs, and long-term borrowings which reflected finance activities
related to the acquisition of property, plant and equipment, generated most of
this additional expense.
Minority interests in operations of $10.0 million for the year ended August
31, 1999 increased $3.1 million (46%) compared to the year ended May 31, 1998.
Substantially all of the minority interest is in National Cooperative Refinery
Association (NCRA), which operates a refinery near McPherson, Kansas. The
Company owns approximately 75% of NCRA. This net change in minority interests
during the current year is reflective of more profitable operations within the
Company's majority owned subsidiaries.
Income tax expense of $7.0 and $19.6 for the years ended August 31, 1999
and May 31, 1998 resulted in effective tax rates of 7.5% and 10.0%,
respectively. The reduced effective tax rate for the year ended August 31, 1999
is primarily reflective of reduced nonpatronage earnings as a percentage of
total pretax earnings.
COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997
The Company's consolidated net income of $177.3 million for the year ended
May 31, 1998 represents a $25.4 million (17%) increase from 1997. This increase
is primarily attributable to improved gross margins in 1998 compared to 1997.
Consolidated net sales of $8.3 billion in 1998 decreased $1.3 billion (14%)
from the prior year.
33
The decrease in grain and oilseed sales of $1.4 billion (23%) was due
primarily to reduced grain prices in 1998, when the weighted average sales price
of all grain and oilseeds marketed by the Company declined 85 cents a bushel
compared to 1997. In addition, volumes declined approximately 88 million bushels
in 1998.
Energy sales of $1.9 billion in 1998 increased $181.2 million (10%) as
compared to the same period in 1997. This increase in energy sales is primarily
attributable to volume increases in refined fuels and propane gallons of 44
million and 57 million, respectively.
Agronomy sales of $696.4 million in 1998 increased $13.0 million (2%) as
compared to 1997. Crop protection product sales in 1998 of $287.2 million
increased $35.2 million (14%) as compared to the same period in 1997. This
increase was offset by a decrease in the plant food average sales price of $3.71
per ton for the same period.
Processed grain and oilseed sales of $615.0 million in 1998 decreased
$115.1 million (16%) when compared to 1997. This decrease is primarily
attributable to a reduction in sales price for processed soybean products of
approximately $40.00 per ton, partially offset by increased sales volumes for
milled wheat products.
Feed and farm supplies sales of $546.1 million in 1998 were substantially
the same as the prior year with an increase of $14.9 million (3%).
Patronage dividends received during the year ended May 31, 1998 of $70.4
million remained at about the same level as the previous year.
Other revenue of $98.5 million in 1998 increased $13.1 million (15%) when
compared to 1997. The major factors contributing to this change were the
expansion of various country elevator services during 1998, and losses
recognized on certain properties in the amount of approximately $4.0 million in
1997.
Cost of goods sold of $8.1 billion decreased $1.3 billion (14%) in 1998
when compared to 1997. During 1998 the average cost per bushel of all grains and
oilseed procured by the Company through its grain marketing and country elevator
system decreased 87 cents per bushel and the average cost of refined fuels
increased $.02 per gallon when compared to 1997. Also during the year ended May
31, 1998 the cost of plant food decreased $4.00 per ton compared to the prior
year. In the Company's food processing operations, the average cost of wheat and
soybeans declined 42 cents and 70 cent per bushel, respectively.
Marketing, general and administrative expenses of $126.1 million for the
year ended May 31, 1998 compares to $126.3 million for the same period in 1997.
This decrease is primarily related to the transfer of the Consumer Products
Packaging Division to a nonconsolidated joint venture at the end of the first
quarter of the year ended May 31, 1997, partially offset by increased costs in
the Company's growth areas, specifically country elevator operations and wheat
milling.
Interest expense of $34.6 million decreased $1.3 million (4%) in 1998. This
decrease is primarily attributable to lower inventory and receivable levels,
partially offset by interest on additional long-term borrowings incurred
primarily to finance property, plant and equipment expenditures.
Income tax expense of $19.6 million and $19.3 million for 1998 and 1997,
respectively, resulted in effective tax rates of 10.0% and 11.3%. The reduced
effective tax rate for the year ended May 31, 1998 is primarily reflective of
reduced nonpatronage earnings as a percentage of total pretax earnings.
COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH THE THREE MONTH
ENDED AUGUST 31, 1997
The Company's consolidated net income for the three months ended August 31,
1998 and 1997 was $15.9 million and $35.2 million, respectively, which
represents a $19.3 million (55%) decrease. Relatively low commodity prices had a
direct impact on volume at the Company's country elevator and grain exporting
facilities and influenced demand for crop protection and plant food products.
With reduced volumes in most of the Company's business operations, gross margins
were eroded considerably by fixed costs.
34
Consolidated net sales of $1.5 billion decreased $0.3 billion (18%) during
the three-month period ended August 31, 1998 compared to the same period in
1997. Grain volume of approximately 230.0 million bushels during the three
months ended August 31, 1998 declined 27.0 million bushels compared to 1997. In
addition to decreased volumes, the average sales price for all grains and
oilseeds marketed by the Company declined by 41 cents a bushel. Total grain and
oilseed sales decreased $219.3 million (21%) as a result of these two factors.
While the gallon sales of refined fuels increased slightly during the
three-month period ended August 31, 1998 compared with the same period in 1997,
a reduced average sales price of 18 cents a gallon resulted in a decline in
sales of $71.2 million (17%) for energy products during the 1998 period compared
with 1997.
Agronomy sales declined $47.4 million (34%) during the three months ended
August 31, 1998 compared to the same period in 1997, resulting in a 12% decrease
in plant food volumes, and 10% decrease in the average per ton sales price of
such products.
Processed grain and oilseed sales increased $14.9 million (11%) during the
three months ended August 31, 1998 compared to the same period in 1997. This
change is primarily attributable to increased volume within the Company's
Oilseed Processing and Refining Defined Business Unit, where soymeal sales
volume increased from approximately 105,000 tons during the three months ended
August 31, 1997 to approximately 215,000 tons in 1998. During the three months
ended August 31, 1997, the oilseed crushing plant was closed for 41 days to
allow for the installation of equipment. During the 1998 period, this crushing
plant operated at its normal capacity.
Feed and farm supplies sales remained essentially unchanged between the two
periods, although sales during the 1998 period represented a decline in sales
relationship to actual retail capacity due to the addition of several retail
locations since the end of the 1997 period.
Patronage dividends decreased $2.3 million (31%) during the three months
ended August 31, 1998 compared to the same period in 1997 resulting from higher
patronage earnings distributed by cooperative customers and suppliers in 1997.
Other revenue of $19.3 million decreased $0.2 million (1%) for the three
months ended August 31, 1998 compared to the same period in 1997. Earnings from
the Company's nonconsolidated consumer products packaging joint venture
decreased approximately $1.1 million for the three months ended August 31, 1998
compared to the same period in 1997. Earnings from the Company's share of a
grain exporting joint venture declined approximately $0.9 million during the
1998 period compared to 1997. In addition, the Company experienced a decline in
service income at its export terminals due to reduced bushel volume activity at
these locations. These reductions in other revenues were partially offset by a
$2.9 million increase in interest income. Due to of the relatively low cost of
grain during the period ended August 31, 1998, the Company did not have any
short term borrowing requirements. In addition, the Company's refinancing
program in anticipation of long term capital requirements, completed in June of
1998, produced temporary cash available for short term investments.
Cost of goods sold of $1.5 billion decreased $306.9 million (17%) during
the three months ended August 31, 1998 compared to the same period in 1997.
Reduced volumes and raw material costs in most of the Company's business
activities, as discussed in the sales section of this analysis, produced most of
this reduction in costs. Although the commodity and other raw material costs
which are a component of costs of goods sold changed in relative proportion to
sales dollars, fixed operating costs remain constant regardless of volume and
price activity. This factor contributed to an erosion in total gross margin of
approximately $28.0 million (46%) during the three months ended August 31, 1998
compared with the same period in 1997.
Marketing, general and administrative expenses of $35.0 million for the
three months ended August 31, 1998 increased $5.4 million (18%) compared to the
same three months ended in 1997. Costs related to the relocation of staff and
consolidation of the business units, and a warranty claim for the re-roofing of
a building which had been part of the Company's capital contribution to the
consumer products packaging joint venture comprised the majority of this
increase.
35
Interest expense of $12.3 million for the three months ended August 31,
1998 represents an increase of $4.1 million (50%) compared to the same period in
1997. Long-term borrowings to finance the acquisition of property, plant and
equipment generated most of this additional expense. Long-term debt proceeds not
yet expended for fixed assets generated interest income as discussed in the
other revenue discussion above, and should be considered as an offset to a
portion of the increase in interest expense.
Minority interests in operations for the three-month periods ended August
31, 1998 and 1997 was $3.3 million and $5.5 million, respectively.
Substantially all of the minority interest is in NCRA.
Income tax expense of $2.9 million and $8.9 million for the three-month
periods ended August 31, 1998 and 1997, respectively, resulted in effective tax
rates of 15.4% and 20.1%. The effective tax rate changes from period to period
based upon the portion of non-patronage business activity compared to total
business activity during each period.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
Operating activities of the Company used net cash of $27.5 million during
the year ended August 31, 1999. Net income of $86.0 million and a positive
adjustment of $17.2 million from net non-cash expenses, costs and revenues were
offset by increased working capital requirements of approximately $130.7
million.
Operating activities for the year ended May 31, 1998 provided net cash of
approximately $223.6 million. Net income of $177.3 million, a positive
adjustment for non-cash expenses, costs and revenues of $1.5 million, and
decreased working capital requirements of approximately $44.8 million provided
this net cash from operations.
Operating activities for the year ended May 31, 1997 provided net cash of
approximately $401.5 million. Net income of $151.9 million and decreased working
capital requirements of approximately $267.5 million, were partially offset by a
negative adjustment of approximately $11.3 million for net non-cash expenses,
costs and revenues and net cash used for discontinued operations of
approximately $6.6 million.
CASH FLOWS FROM INVESTING ACTIVITIES
For the years ended August 31, 1999, and May 31, 1998 and 1997, the net
cash flows used in the Company's investing activities totaled approximately
$160.7 million, $99.9 million and $115.8 million, respectively.
The acquisition of property, plant and equipment comprised the primary use
of cash totaling $124.5 million, $145.2 million and $200.3 million for the three
years ended August 31, 1999, and May 31, 1998 and 1997, respectively.
On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada,
Ltd. (the Entities), both companies owned 50/50 by the Company and Land O'Lakes,
Inc., purchased approximately 310 agronomy facilities from Terra International,
Inc., at a price of approximately $350.0 million. In conjunction with this
purchase transaction, the Company invested $51.5 million in the Entities and
issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd.
Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes
Agronomy Company (of which Cenex Harvest States owns 50%), are without recourse
to the Company.
Cash outlays for the acquisition of property, plant and equipment and
investments in other entities were partially offset by proceeds from the
disposition of property, plant and equipment of approximately $6.8 million,
$21.9 million and $28.4 million for the years ended August 31, 1999, and May 31,
1998 and 1997, respectively. For the year ended August 31, 2000 the Company
expects to spend approximately $139.6 million for the acquisition of property,
plant and equipment.
Also partially offsetting cash usage were proceeds received from joint
ventures and investments totaling $11.2 million, $31.5 million and $27.3 million
for the years ended August 31, 1999, and May 31,
36
1998 and 1997, respectively. For the year ended May 31, 1997, discontinued
operations of petroleum exploration and production operations also provided net
cash of $33.2 million from the liquidation of this investment.
On August 30, 1996 the Company formed a joint venture with a regional
consumer products packaging company, and contributed substantially all of the
net assets of the Company's consumer products packaging division as its capital
investment in the joint venture. In return for these assets, the Company
received a 40% interest in the joint venture, and the joint venture assumed debt
of approximately $33.7 million.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company finances its working capital needs through short-term lines of
credit with National Bank for Cooperatives (CoBank) and commercial banks. In
June 1998, the Company established a 364-day credit facility of $400.0 million,
which was renewed in May 1999, and a five-year revolving facility of $200.0
million, all of which is committed. In addition to these lines of credit, the
Company has a 364 day credit facility dedicated to NCRA, with CoBank in the
amount of $50.0 million, all of which is committed. On August 31, 1999 the
Company had short-term indebtedness on the 364-day credit facility of $196.0
million, and had no amount drawn on the five-year revolving facility. In
addition to these bank facilities, the Company, on August 31, 1999, had
additional short-term indebtedness of approximately $1.0 million in the form of
other notes payable. On August 31, 1998, the Company had short-term indebtedness
of approximately $0.5 million. On May 31, 1998, the Company had short-term
indebtedness on its bank facilities and other short-term notes payable of
approximately $52.5 million. This short-term borrowing activity follows the
working capital requirements created by commodity volumes and prices as
discussed in the "Cash Flows from Operations" section of this analysis.
The Company has financed its long-term capital needs in the past, primarily
for the acquisition of property, plant, and equipment, with long-term agreements
through the banks for cooperatives. On May 31, 1998, the Company had total
indebtedness related to these long-term lines of credit of $332.1 million of
which approximately $17.6 million represented long-term borrowings of NCRA. The
Company also had long-term debt in the form of capital leases, industrial
development revenue bonds and miscellaneous notes payable totaling approximately
$46.3 million on May 31, 1998.
In June 1998, the Company established a new long-term loan agreement
through the banks for cooperatives whereby the Company repaid $279.6 million of
long-term debt and borrowed $134.0 million on the long-term credit facility.
This facility committed $200.0 million of long-term borrowing capacity to the
Company, with repayments through the year 2009, of which an additional $30.0
million was drawn by the Company before the commitment expired on May 31, 1999.
The amount outstanding on this credit facility was $164.0 million and $134.0
million on August 31, 1999 and 1998, respectively.
Also in June 1998, as part of the refinancing program for the merged
operations, the Company issued a private placement with several insurance
companies for long-term debt in the amount of $225.0 million, with repayments
beginning in the year 2008 and ending in the year 2013.
During the year ended August 31, 1999, the Company, through NCRA, borrowed
an additional $10.0 million from CoBank with equal annual repayments through the
year 2009.
During the years ended August 31, 1999, May 31, 1998 and 1997, the Company
borrowed on a long-term basis $40.0 million, $83.9 million and $74.9 million,
respectively, and during the same periods repaid long-term debt of $14.6
million, $42.2 million and $55.5 million, respectively.
On August 31, 1999, the Company had total long-term debt outstanding of
$482.7 million, of which approximately $227.2 million was bank financing, $225.0
was private placement proceeds and $30.5 million was industrial development
revenue bonds, capitalized leases and miscellaneous notes payable.
In accordance with the By-Laws and action of the Board of Directors, annual
net earnings from patronage sources were distributed to consenting patrons
following the close of each fiscal year and were based on amounts reportable for
federal income tax purposes as adjusted in accordance with the By-Laws. The cash
portion of this distribution, deemed by the Board of Directors to be 30% for
regular
37
patronage and 80% for Equity Participation Units, totaled approximately $43.8
million, $35.9 million and $30.8 million distributed in the years ended August
31, 1999, and May 31, 1998 and 1997, respectively.
Cash patronage for the year ended August 31, 1999, deemed by the Board of
Directors to be 75% for Equity Participation Units and 30% for regular patronage
earnings, to be distributed in fiscal year 2000, is expected to be approximately
$17.3 million and is classified as a current liability on the August 31, 1999
balance sheet.
For the years ended August 31, 1999, May 31, 1998 and 1997, the Company
redeemed patronage related equities in accordance with authorization from the
Board of Directors in the amounts of approximately $23.8 million, $36.9 million
and $18.6 million, respectively. During the three months ended August 31, 1998,
the Company redeemed approximately $4.4 million of such patronage certificates.
The current equity redemption policy, as authorized by the Board of
Directors, allows for the redemption of capital equity certificates held by
inactive direct members and patrons and active direct members and patrons at age
72 or death who were of age 61 or older on June 1, 1998. For active direct
members and patrons who were of age 60 or younger on June 1, 1998, and member
cooperatives, equities will be redeemed annually based on a prorata formula
where the numerator is dollars available for such purpose as determined by the
Board of Directors, and the denominator is the sum of the patronage certificates
held by such eligible members and patrons. Such redemptions related to the year
ended August 31, 1999, to be distributed in fiscal year 2000, are expected to be
approximately $25.7 million and are classified as a current liability on the
August 31, 1999 balance sheet.
During the year ended May 31, 1997, the Company offered securities in the
form of Equity Participation Units (EPUs)in its Wheat Milling and Oilseed
Processing and Refining Defined Business Units. These EPUs give the holder the
right and obligation to deliver to the Company a stated number of bushels in
return for a prorata share of the undiluted grain based patronage earnings of
these respective DBUs. The offering resulted in the issuance of such equity with
a stated value of $13,870,000 and generated additional capital and cash of
$10,837,000, after issuance cost and conversion privileges. Conversion
privileges allowed a member to elect to use outstanding patrons' equities for
the payment of up to one-sixth the purchase price of the EPUs.
Holders of the EPUs will not be entitled to payment of dividends by virtue
of holding such units. However, holders of the units will be entitled to receive
patronage refunds attributable to the patronage sourced income from operations
of the applicable defined business unit on the basis of wheat or soybeans
delivered pursuant to the Member Marketing Agreement. The Board of Directors'
goal is to distribute patronage refunds attributable to the EPUs in the form of
75% cash and 25% capital equity certificates, and to retire those capital equity
certificates on a revolving basis seven years after declaration. However, the
decision as to the percentage of cash patronage will be made each fiscal year by
the Board of Directors and will depend upon the cash and capital needs of the
respective Defined Business Units and is subject to the discretion of the Board
of Directors. The redemption policy will also be subject to change at the
discretion of the Board of Directors.
EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS
The Company believes that inflation and foreign currency fluctuations have
not had a significant effect on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, a new standard related to the accounting for derivative transactions
and hedging activities. In July 1999, the FASB issued SFAS No. 137 which defers
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. While management does not believe this standard
will materially impact the financial position and results of operations of the
Company, it is currently evaluating the reporting requirements under this new
standard.
38
YEAR 2000
In preparation for the year 2000, the Company has engaged an information
technology consulting firm specializing in year 2000 systems projects. The scope
of the program management effort at the Company includes internal mainframe,
midrange, and LAN based systems as well as facilities, package software vendors,
and interfaces with external vendors, processors and customers. Remediation and
upgrades of these systems have been completed for all mission critical systems.
Management believes that the total cost to the Company to review and correct its
own computer systems will be approximately $2.0 million, of which $1.8 million
has been expensed through August 31, 1999.
Based on its assessment, the Company's management believes that the Company
has in place an effective program to address the year 2000 issue in a timely
manner and that it is taking the steps reasonably necessary to resolve this
issue with respect to matters within its control. However, it also recognizes
that failure to sufficiently resolve all aspects of the year 2000 issue in a
timely fashion presents substantial risks for the Company. Furthermore, while
the Company has taken, and will continue to take, steps to determine the extent
of remediation efforts being undertaken by key customers and suppliers, there is
no guarantee that the systems of other companies on which this Company relies
will be remediated in a timely fashion to avoid having a material adverse effect
on the Company's results of operations or its financial position.
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives combined
through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives
became the surviving corporation. In accordance with the Plan of Combination,
the Articles of Incorporation and By-Laws of Harvest States Cooperatives were
restated and the name of Harvest States Cooperatives was changed to Cenex
Harvest States Cooperatives (Cenex Harvest States or the Company).
Subsequent to the Combination, the Company changed its fiscal year to
August 31 and is filing this Report on Form 10-K representing the first fiscal
year of the Company based upon that date. The management discussion and analysis
of the Oilseed Processing and Refining Defined Business Unit which follows,
compares the first new fiscal year ended August 31, 1999 with the previous
fiscal year ended May 31, 1998, as well the year ended May 31, 1998 with the
year ended May 31, 1997. In addition, the three-month transition period ended
August 31, 1998 is compared with the unaudited three-month period ended August
31, 1997.
See the Management Discussion and Analysis for the Company in regard to new
accounting pronouncements and discussion of the Year 2000.
RESULTS OF OPERATIONS
Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of sales,
except processing margins.
YEARS ENDED MAY 31
----------------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ---------- ---------- ---------- ----------
Gross margin percentage ......... 5.49% 3.65% 7.58% 7.76% 7.33% 8.25%
Marketing, general and
administrative ................. 1.42% 1.27% 1.15% .98% 1.14% 1.29%
Interest ........................ 0.16% 0.25% 0.09% 0.07% 0.04% --
Processing margins
Crushing/bu .................... $ .18 $ .14 $ .57 $ .59 $ .60 $ .59
Refining/lb .................... $.0127 $.0099 $.0133 $.0173 $.0154 $.0149
Because of the volatility of commodity prices, the Company believes that
processing margins are a better measure of the Defined Business Unit's
performance than gross margin percentages.
39
COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31,
1998
The Oilseed Processing and Refining Defined Business Unit's net income of
$13.2 million for the year ended August 31, 1999 represents a $12.7 million
decrease (49%) compared to the twelve-month period ended on May 31, 1998. This
decrease is primarily attributable to reduced gross margins for soymeal and
other processed soybean products. The average gross margin for such products
declined approximately $15.60 per ton during the twelve months ended August 31,
1999, compared to the gross margin per ton generated on those products during
the twelve months ended May 31, 1998.
Net sales of $358.0 million for the year ended August 31, 1999 decreased by
$52.3 million (13%) compared to the twelve months ended May 31, 1998. A
reduction in the sales price for processed soybean products, primarily soymeal,
of approximately $76.00 per ton and a decline of about $0.02 a pound for refined
oil, partially offset by an 11% increase in sales volume for processed soybean
products and a 7% increase in refined oil volume produced this change in sales
dollars.
Other revenues decreased approximately $1.7 million during the year ended
August 31, 1999 compared to the year ended May 31, 1998. For the year ended May
31, 1998, the Oilseed Processing and Refining Defined Business Unit received
approximately $0.7 million from an oilseed joint venture, and also recognized
net gains on the sale of property, plant and equipment totaling approximately
$0.7 million. During the twelve-month period ended August 31, 1999, the Oilseed
Processing and Refining Defined Business Unit recorded a net loss on the
disposal of property, plant and equipment of approximately $0.2 million, and did
not receive any joint venture income during the period.
Cost of goods sold of $338.4 million for the year ended August 31, 1999
decreased $40.9 million (11%) compared to the year ended May 31, 1998. Reduced
cost for soybeans averaging $1.94 per bushel and reduced cost for crude soybean
oil averaging $0.012 per pound during the year ended August 31, 1999, compared
to the year ended May 31, 1998, were partially offset by a 13% increase in crush
volume (4.1 million bushels) and a 7% increase in refining volume (71.5 million
pounds).
Marketing, general and administrative expenses of $5.1 million for the year
ended August 31, 1999 increased approximately $0.4 million (8%) compared to the
year ended May 31, 1998. Essentially all of this increase relates to wages and
employee benefits.
Interest expense for the year ended August 31, 1999 was $0.6 million,
compared with approximately $0.4 million for the year ended May 31, 1998. This
change is primarily attributable to capital expenditures made during and
subsequent to the 1998 period.
Income tax expense of $0.8 million and $1.8 million for the years ended
August 31, 1999 and May 31, 1998 respectively, resulted in effective tax rates
of 5.7% and 6.6%, respectively. The effective tax rate changes from period to
period based upon the portion of non-patronage business activity compared to
total business activity during each period.
COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997
The Oilseed Processing and Refining Defined Business Unit's net income of
$25.9 million for the year ended May 31, 1998 represents a $1.6 million decrease
(6%) compared to the same period in 1997. This decrease is primarily
attributable to reduced gross margins for soymeal and lower demand for refined
soy oil, which reduced the Defined Business Unit's sales volume for refined oil.
Net gains on the disposal of fixed assets of about $0.7 million partially offset
the decline in gross margins.
Net sales of $410.4 million for the year ended May 31, 1998 decreased by
$31.4 million (7%) compared to the same period in 1997. A reduced average sales
price for processed soybean products of $201.93 per ton in 1998 compared to
$241.59 per ton in 1997 was the primary contributor to the reduction in sales
dollars.
Other revenues of $1.7 million for the year ended May 31, 1998 compared to
1997, increased $3.4 million. During the year ended May 31, 1997 the Defined
Business Unit recognized a loss of $2.0 million on equipment to be replaced by
plant expansion and recognized a loss of $0.3 million on an investment. During
the year ended May 31, 1998, the Oilseed Processing and Refining Defined
Business Unit recognized gains on fixed asset disposals of approximately $0.7
million.
40
Cost of goods sold for the year ended May 31, 1998 of $379.3 million
decreased $26.5 million (7%) compared to the year ended May 31, 1997. This
reduction in cost is primarily attributable to a decline in the average price of
soybeans during the year ended May 31, 1998, from $7.50 a bushel in 1997 to
$6.80 in 1998, and to a reduction in refined oil volume, from 968 million pounds
in 1997 to 953 million pounds in 1998.
Interest expense for the year ended May 31, 1998 was $0.4 million, compared
with $0.3 million a year ago.
Income tax expense of $1.8 million and $2.1 million for the years ended May
31, 1998 and 1997 respectively, results in effective tax rates of 6.6% and 7.1%,
respectively. The effective tax rate changes from period to period based upon
the portion of non-patronage business activity compared to total business
activity during each period.
COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH 1997
The Oilseed Processing and Refining Defined Business Unit's net income of
$2.7 million for the three months ended August 31, 1998 represents a $0.5
million decrease (15%) compared to the same period in 1997. This decrease is
primarily attributable to lower gross margins for refined oil. The average gross
margin per pound on refined oil generated by the Oilseed Processing and Refining
Defined Business Unit during the three months ended August 31,1998 declined 33%
compared to that margin for the same three-month period in 1997. The impact of
that reduction in profitability was partially offset by increased sales volume
of soymeal, at an average gross margin 40% higher per ton than that of a year
ago.
Net sales of $98.9 million for the three-month period ended August 31, 1998
increased by $12.6 million (15%) compared to the same period in 1997. During the
three months ended August 31, 1997, the crushing portion of the plant was
shutdown for 41 days to allow for the installation of new equipment. As a
result, soymeal and soyflour sales activity was reduced to approximately 110,000
tons during the 1997 three-month period, compared with almost 230,000 tons
during the 1998 three-month period. While increased processing volume increased
sales dollars, a significant decline of approximately $110 a ton in the sales
price partially offset the volume variance. Together, these factors increased
sales approximately $6.0 million. For the refined oil portion of the business,
volumes were approximately the same in each of the three-month periods, while an
increase in the per pound price of refined soybean oil increased sales
approximately $6.6 million.
Other revenues of $1.1 million during the three months ended August 31,
1998 decreased approximately $0.1 million (7%) compared to the same period in
1997. During the 1997 period, the Oilseed Processing and Refining Defined
Business Unit recognized gains on disposal of replaced equipment of
approximately $0.5 million. Also included in other revenues for both of the
three-month periods is income from an oilseed joint venture. Income from this
source during the 1998 period exceeded that recognized in the 1997 period by
approximately $0.3 million.
Cost of goods sold of $95.3 million for the three months ended August 31,
1998 increased $12.8 million (16%) compared to the same period ended in 1997.
This change is primarily attributable to the increase in soymeal volume
discussed above in the sales analysis, partially offset by a decline of
approximately $2 per bushel in cost of soybeans.
Marketing, general and administrative expenses of $1.3 million for the
three months ended August 31, 1998 were essentially unchanged from the same
period in 1997.
Interest expense for the three months ended August 31, 1998 was $0.3
million, compared with $0.01 million of a year ago. This increase is primarily
attributable to increased average inventory levels during the 1998 three-month
period. During the 1997 period, soybean and processed product inventories were
minimal during the shutdown period discussed above, as were receivables related
to the sale of processed soybean products.
Income tax expense of $0.5 million and $0.7 million for the three months
ended August 31, 1998 and 1997 respectively, resulted in effective tax rates of
16.3% and 17.6%, respectively. The effective tax rate
41
changes from period to period based upon the portion of non-patronage business
activity compared to total business activity during each period.
LIQUIDITY AND CAPITAL RESOURCES
The Oilseed Processing and Refining Defined Business Unit'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 years ended August 31, 1999, May 31, 1998 and
May 31, 1997 provided net cash of $22.0 million, $27.2 million, and $23.6
million, respectively. For the year ended August 31, 1999, net income of $13.2
million, non-cash revenues and expenses of approximately $2.5 million, and
decreased working capital requirements of approximately $6.3 million provided
this net cash from operating activities. For the year ended May 31, 1998, net
income of $25.9 million and non-cash revenues and expenses of approximately $1.4
million were partially offset by increased working capital requirements of
approximately $0.1 million. For the year ended May 31, 1997, net income of $27.5
million and non-cash revenues and expenses of approximately $3.8 million were
partially offset by increased working capital requirements of approximately $7.7
million.
Operating activities for the three-month periods ended August 31, 1998 and
1997, respectively, provided net cash of $11.3 million and $21.2 million due to
net income of $2.7 million and $3.2 million respectively, non-cash revenues and
expenses of $0.6 million in 1998 and decreased working capital requirements of
approximately $8.0 million and $18.0 million, respectively.
CASH FLOWS USED FOR INVESTING ACTIVITIES
The Oilseed Processing and Refining Defined Business Unit used net cash of
approximately $6.0 million during the year ended August 31, 1999 for the
acquisition of property, plant and equipment. During the year ended May 31,
1998, the Oilseed Processing and Refining Defined Business Unit received cash of
approximately $10.7 million from the sale of soybean processing equipment and
entered into a leaseback transaction for that equipment. During that same
period, the Oilseed Processing and Refining Defined Business Unit expended
approximately $14.0 million for the purchase of property, plant and equipment.
For the year ended May 31, 1997, the Oilseed Processing and Refining Defined
Business Unit expended approximately $12.1 million for the purchase of property,
plant and equipment. For the year ended August 31, 2000, the Oilseed Processing
and Refining Defined Business Unit expects to spend approximately $14.7 million
for the acquisition of property, plant and equipment.
The Oilseed Processing and Refining Defined Business Unit used net cash of
approximately $1.2 million and $8.2 million during the three-month periods ended
August 31, 1998 and 1997, respectively, for the purchase of property, plant and
equipment. During the three-month period ended August 31, 1997, the Oilseed
Processing and Refining Defined Business Unit received cash of approximately
$10.3 million for the sale of soybean processing equipment, which was
subsequently leased back from the purchaser. This transaction, as well as the
capital expenditures for this three-month period of $8.2 million, are included
in the activity for the year ended May 31, 1998.
CASH FLOWS FROM FINANCING ACTIVITIES
The Defined Business Unit's financing activities are coordinated through
the Company's cash management department. Cash from all of the Company's
operations is deposited with the Company's cash management department and
disbursements are made centrally. As a result, the Defined Business Unit has a
zero cash position. Financing is available from the Company to the extent of the
Company's working capital position and corporate loan agreements with various
banks, and cash requirements of all other Company operations.
Working capital requirements for a Defined Business Unit 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.
42
With respect to earnings for the year ended August 31, 1999, total income
from the Oilseed Processing and Refining Defined Business Unit will be withdrawn
by the Company from the Oilseed Processing and Refining Defined Business Unit
except to the extent that patronage dividends are not paid in cash and are
instead retained in the Oilseed Processing and Refining Defined Business Unit as
equity. Such dividends retained as equity from the Equity Participation Unit
share of earnings, which equals 30% of the total patronage refund to such
patron's share of earnings, totaled approximately $1.0 million and will be
matched with equity on behalf of the Company's open membership in proportion to
non-Equity Participation Unit bushels processed totaling approximately $2.6
million.
The Oilseed Processing and Refining Defined Business Unit had debt
outstanding to the Company of $9.5 million on August 31, 1999 compared with
$15.1 million on August 31, 1998. On May 31, 1998, the Oilseed Processing and
Refining Defined Business Unit had debt outstanding to the Company of $22.9
million. These interest-bearing balances reflect working capital and fixed asset
financing requirements at the end of the respective years.
WHEAT MILLING DEFINED BUSINESS UNIT
Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of
Combination), Cenex, Inc. (Cenex) and Harvest States Cooperatives combined
through merger on June 1, 1998 (the Combination) and Harvest States Cooperatives
became the surviving corporation. In accordance with the Plan of Combination,
the Articles of Incorporation and By-Laws of Harvest States Cooperatives were
restated and the name of Harvest States Cooperatives was changed to Cenex
Harvest States Cooperatives (Cenex Harvest States or the Company).
Subsequent to the Combination, the Company changed its fiscal year to
August 31 and is filing this Report on Form 10-K representing the first fiscal
year of the Company based upon that date. The management discussion and analysis
of the Wheat Milling Defined Business Unit which follows, compares the first new
fiscal year ended August 31, 1999 with the previous fiscal year ended May 31,
1998, as well the year ended May 31, 1998 with the year ended May 31, 1997. In
addition, the three-month transition period ended August 31, 1998 is compared
with the unaudited three-month period ended August 31, 1997.
See the Management Discussion and Analysis for the Company in regard to new
accounting pronouncements and discussion of the Year 2000.
RESULTS OF OPERATIONS
Certain operating information pertaining to the Defined Business Unit is
set forth below, as a percentage of sales, except for margins per hundred weight
(Margins/cwt).
YEARS ENDED MAY 31,
-------------------------------------------------
YEAR ENDED THREE MONTHS ENDED
AUGUST 31, 1999 AUGUST 31, 1998 1998 1997 1996 1995
----------------- ------------------- ---------- ---------- ---------- ----------
Gross margin percentage ......... 2.08% 6.78% 7.63% 8.80% 6.94% 5.88%
Marketing, general and
administrative ................. 6.09% 4.41% 3.93% 3.39% 2.58% 3.20%
Interest ........................ 2.98% 1.80% 1.52% 2.63% 2.57% 1.90%
Margins/cwt ..................... $ .21 $ .85 $ 1.06 $ 1.27 $ 1.12 $ .81
Because of the volatility of commodity prices, the Company believes that
margins per hundred weight (manufacturing margins) are a better measure of the
Defined Business Unit's performance than gross margin percentages.
COMPARISON OF THE YEAR ENDED AUGUST 31, 1999 WITH THE YEAR ENDED MAY 31,
1998
The Wheat Milling Defined Business Unit incurred a net loss of $11.9
million for the year ended August 31, 1999 compared to net income of $5.7
million for the year ended May 31, 1998, for a decrease of $17.5 million.
Approximately $9.4 million of this decrease was created by a reduction in
production at the Huron mill, where the conversion of a semolina line to hard
wheat bakery flour reduced volume
43
30% compared to the year ended May 31, 1998, with essentially the same fixed
costs applied against lower volumes. The Huron conversion was operational in
February 1999, and the Wheat Milling Defined Business Unit is currently
attempting to grow its share of the bakery flour market from this mill's
production. A general deterioration in gross margins of approximately $0.66 per
hundred weight for all products, along with increased marketing, general and
administrative and interest expenses of $4.6 million created most of the balance
of the decline in income.
Net sales of $174.1 million for the year ended August 31, 1999 decreased
approximately $31.1 million (15%) compared to the twelve-month period ended May
31, 1998. A reduction in the average sales price of $2.89 per hundred weight,
partially offset by a 3.1 million hundred weight volume increase produced this
decline in sales revenue. Increased volume at the Houston mill of 1.5 million
hundred weight, increased volume at the Rush City mill of 0.7 million hundred
weight, and additional production of 2.9 million hundred weight at the Mount
Pocono mill which commenced operations during the current fiscal year offset a
significant decline in volume of 1.7 million hundred weight at the Huron mill.
Cost of goods sold of $170.5 million for the year ended August 31, 1999,
decreased $19.1 million (10%) compared to the year ended May 31, 1998. This
decrease was created primarily by a $1.45 per bushel decline in the cost of raw
material during the year ended August 31, 1999, compared to the year ended May
31, 1998. This price variance was partially offset by an increase in volume of
approximately 5.0 million bushels, and by a $5.8 million increase in plant
expense, primarily attributable to the Mt. Pocono mill which commenced
operations in January 1999, the Houston mill which was operating in a startup
phase during much of the 1998 period and Rush City, where 1999 volume exceeded
1998 volume by 29%.
Marketing, general and administrative expenses were $10.6 million for the
year ended August 31, 1999, and increased approximately $2.5 million (31%)
compared to the year ended May 31, 1998. Approximately $1.5 million of this
increase is attributable to a provision for uncollectable accounts receivable.
The balance of this increase is primarily attributable to expenses incurred at
the Mount Pocono mill, which commenced operations during the current fiscal
year.
Interest expense of $5.2 million for the year ended August 31, 1999
increased $2.1 million (66%) compared to the year ended May 31, 1998. During the
year ended May 31, 1998, the Wheat Milling Defined Business Unit received credit
for cooperative bank patronage refunds received by the Company attributable to
the Wheat Milling Defined Business unit's borrowings totaling approximately $0.7
million. The comparable amount received during the year ended August 31, 1999
was less than $0.1 million. On June 1, 1997 the Company contributed $38.8
million of additional capital to the Wheat Milling Defined Business Unit for the
purpose of constructing the Mount Pocono mill. Throughout the construction phase
of this project, the unexpended balance of this cash contribution reduced
borrowing requirements to finance inventories and receivables, and consequently,
reduced interest expense. As cash has been expended for Mount Pocono
construction, additional borrowings have been required to finance working
capital. The balance of the increase in interest expense during the year ended
August 31, 1999 compared to the year ended May 31, 1998 is primarily
attributable to this activity.
Other expenses of $0.8 million and $0.2 million for the years ended August
31, 1999 and May 31, 1998, respectively, primarily represent the recognition of
losses on certain equipment, either disposed of or obsolete for the Wheat
Milling Defined Business Unit's purposes and therefore available for sale.
An income tax benefit of $1.2 million for the year ended August 31, 1999 is
based upon an effective tax rate of 8.7% applied to the pretax loss of $13.0
million. For the year ended May 31, 1998, income tax expense of $0.5 million
resulted in an effective tax rate of 7.7%. The effective tax rate changes from
period to period based upon the portion of non-patronage business activity
compared to total business activity during each period.
COMPARISON OF THE YEAR ENDED MAY 31, 1998 WITH 1997
The Wheat Milling Defined Business Unit's net income of $5.7 million for
the year ended May 31, 1998 increased $2.4 million (75%) compared to the same
period in 1997. For the year ended May 31, 1997, the Defined Business Unit
recognized a $2.0 million loss on the impairment of fixed asset value at its
Rush City, Minnesota mill which represents the primary difference in net income
between the two fiscal years.
44
Net sales for the year ended May 31, 1998 of $205.3 million increased $6.2
million (3%) compared to the same period ended in 1997. Increased sales volumes
during the year ended May 31, 1998 contributed $19.4 million to sales, while
lower average sales prices during this same period reduced sales revenue by
approximately $13.2 million. The increased sales volume was generated through
expanded Kenosha operations and the commencement of operations at the Houston,
Texas mill during fiscal 1998 partially offset by reduced production at the Rush
City, Minnesota mill.
The Wheat Milling Defined Business Unit recognized other income during the
year ended May 31, 1998 of $1.8 million. Of this amount $1.5 million represents
warranty proceeds for milling equipment. Interest income of approximately $0.4
million was generated during the year ended May 31, 1998 on the Wheat Milling
Defined Business Unit's working capital account with the Company. This interest
income is primarily the result of additional capital of $38.8 million
contributed by the Company on June 1, 1997 for the purpose of constructing the
mill at Mt. Pocono, Pennsylvania. Construction at Mt. Pocono commenced in early
September 1997, and as disbursements have made for that purpose, interest-
generating funds have been depleted.
Cost of goods sold of $189.6 million for the year ended May 31, 1998,
increased $8.0 million (4%) compared to the same period ended in 1997. The raw
material component of cost of goods sold increased approximately $5.7 million in
1998. The Wheat Milling Defined Business Unit milled approximately 31.4 million
bushels during the year ended May 31, 1998, an increase of approximately 3.2
million bushels over the prior year. The cost of this additional volume was
partially offset by a decline of $0.42 a bushel in the average cost of raw
material. The mill expense component of cost of goods sold increased
approximately $2.3 million during the year ended May 31, 1998 compared to the
prior year. This increase is primarily attributable to the commencement of
operations in June at the mill in Houston, Texas, partially offset by reduced
variable costs at the Rush City, Minnesota mill. As a start-up operation during
fiscal 1998, the Houston mill ran at approximately 50% of capacity, which
generated inadequate revenue to cover costs for that location. The Rush City
mill, which was closed throughout the month of June and early July of calendar
year 1997, operated at approximately two-thirds of its 1997 fiscal year
production level.
Marketing, general and administrative expenses were $8.1 million during the
year ended May 31, 1998, an increase of $1.3 million (20%) from 1997. This
increase is primarily attributable to additional staffing and system expansion
costs related to the Houston mill and in anticipation of future volumes from the
Mt. Pocono mill.
The Wheat Milling Defined Business Unit incurred interest expense of $3.1
million and $5.2 million during the years ended May 31, 1998 and 1997,
respectively. This decrease of approximately $2.1 million (40%) during the 1998
twelve-month period is primarily the result of the additional capital
contributed by the Company on June 1, 1997, which decreased short-term
borrowing.
Other expenses were $0.2 million and $2.0 million for the years ended May
31, 1998 and 1997, respectively. During the 1998 year, the Wheat Milling Defined
Business Unit recognized a loss on certain equipment and during 1997, the
Company assessed the carrying value of the Rush City mill relative to expected
cash flows and recognized a loss due to impairment.
Income tax expenses of $0.5 million and $0.3 million for the years ended
May 31, 1998 and 1997, respectively, resulted in effective tax rates of 7.7% and
8.5%. The effective tax rate changes from period to period based upon the
percentage of non-patronage business activity to total business activity.
COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 1998 WITH 1997
The Wheat Milling Defined Business Unit's net income of $0.2 million for
the three-month period ended August 31, 1998 decreased $1.0 million (81%)
compared to the same period in 1997. Commencing in June 1998 and continuing
throughout the period, the Defined Business Unit began conversion of a semolina
line at the Huron mill to hard wheat bakery flour. This disruption of production
resulted in a 35% decline in volume, compared to the same period in 1997. While
fixed costs at the facility remained relatively constant with the prior period,
revenues net of raw material costs declined significantly. This situation caused
operating earnings to decline approximately $1.4 million. This decline in profit
contribution from the Huron mill was partially offset by increased volume from
the other mills.
45
Net sales for the three months ended August 31, 1998 of $46.9 million
increased $2.5 million (6%) compared to the same period in 1997. Increased sales
volume for all products of approximately 600,000 hundred weights, offset by a
$0.76 per hundred weight average reduction in sales price produced this increase
in sales dollars. The increased sales volume was primarily through the Houston
and Rush City mills, offset by a decline in production at the Huron mill. The
Houston mill was in its early startup phase during the 1997 three-month period,
while the Rush City mill was not operating in June and early July of 1997 due to
a shortage of business. The Huron mill operated at approximately 65% of its
normal volume during the three months ended August 31, 1998, as one of the
semolina milling lines at that facility was in the process of being converted to
hard wheat bakery flour milling capacity.
Cost of goods sold of $43.7 million for the three months ended August 31,
1998, increased $3.2 million (8%) compared to the same period in 1997. The raw
material component of cost of goods sold increased $3.0 million for the 1998
period compared with 1997. Increased volume contributed $5.4 million to this
increase, partially offset by $2.4 million in lower per bushel costs. Mill
expenses were essentially the same between the two periods.
Marketing, general and administrative expenses were $2.1 million during the
three months ended August 31, 1998, an increase of $0.4 million (26%) compared
to 1997. This increase was primarily attributable to additional staffing and
system expansion costs related to the Houston mill and in anticipation of future
volumes from the Mt. Pocono mill.
During the three months ended August 31, 1998, the Wheat Milling Defined
Business Unit incurred interest expense of $0.8 million. During the same period
of 1997, the Wheat Milling Defined Business Unit generated interest income of
approximately $0.3 million on its working capital account with the Company,
which is attributable to the capital contribution of $38.8 million made by the
Company on June 1, 1997 for the purpose of constructing the Mt. Pocono,
Pennsylvania mill. During the three months ended August 31, 1997, the Wheat
Milling Defined Business Unit incurred interest expense on its long-term debt of
$1.1 million, for a net interest expense during the period of approximately $0.8
million. While the working capital credit balance which generated the prior
year's interest income was depleted as construction costs for Mt. Pocono mill
were paid, resulting interest costs have been capitalized as part of the new
mill fixed asset. Consequently, net interest expense for the two periods was
essentially unchanged.
LIQUIDITY AND CAPITAL RESOURCES
The Defined Business Unit's cash requirements result from capital
improvements and from a need to finance additional inventories and receivables
based on increased raw material cost and levels.
The Company's Board of Directors has authorized the purchase of land near
Orlando, Florida as the site for a new mill. The Board has authorized
expenditures up to $1.8 million for the cost of the land and an access road. The
land was purchased during the second quarter of the current fiscal year at a
cost of approximately $1.2 million. Plans for this mill are subject to due
diligence, routine regulatory review and cost verification. Anticipated costs
for this mill are approximately $35.0 million and may be financed with debt,
open member equity, additional equity participation units, or a combination of
these financing alternatives. No determination has been made at this time as to
when construction will commence.
CASH FLOWS FROM OPERATIONS
Operating activities for the years ended August 31, 1999, May 31, 1998 and
May 31, 1997 provided net cash of approximately $2.9 million, $1.5 million and
$19.6 million, respectively. For the year ended August 31, 1999, the net loss of
$11.9 million was offset by non-cash expenses of approximately $6.7 million and
decreased working capital requirements of approximately $8.1 million. For the
year ended May 31, 1998, net income of $5.7 million and non-cash expenses of
approximately $4.9 million were partially offset by increased working capital
requirements of approximately $9.1 million. For the year ended May 31, 1997, net
income of $3.2 million, non-cash expenses of $6.1 million decreased working
capital requirements of approximately $10.3 million provided net cash from
operating activities of $19.6 million.
Operating activities for the three months ended August 31, 1998 and 1997,
respectively, used net cash of $0.9 million and $1.3 million. For the
three-month period ended in 1998, net income of $0.3
46
million and non-cash expenses of $1.3 million were offset by increased working
capital requirements of approximately $2.5 million. For the same period ended in
1997, net income of $1.3 million and non cash expenses of $1.2 million were
offset by increased working capital requirements of approximately $3.8 million.
CASH FLOWS USED FOR INVESTING ACTIVITIES
Cash flows expended for the acquisition of property, plant, and equipment
during the years ended August 31, 1999, May 31, 1998 and May 31, 1997, totaled
approximately $18.7 million, $20.3 million and $15.0 million, respectively. For
the year ended August 31, 2000 the Wheat Milling Defined Business Unit expects
to spend approximately $3.4 for the acquisition of property, plant and
equipment.
During the three-month periods ended August 31, 1998 and 1997, the Wheat
Milling Defined Business Unit expended approximately $12.8 million and $2.3
million, respectively, for the acquisition of property, plant and equipment.
CASH FLOWS FROM FINANCING ACTIVITIES
The Wheat Milling Defined Business Unit's financing activities are
coordinated through the Company's cash management department. Cash from all of
the Company's operations is deposited with the Company's cash management
department and disbursements are made centrally. As a result, the Defined
Business Unit has a zero cash position. Financing is available from the Company
to the extent of the Company's working capital position and corporate loan
agreements with various banks and cash requirements of all other Company
operations.
Working capital requirements for a Defined Business Unit of the Company are
reviewed on a periodic basis, and could potentially be restricted based upon
management's evaluation of the prevailing business conditions and the
availability of funds.
The Wheat Milling Defined Business Unit had short-term debt outstanding and
payable to the Company of $48.9 million on August 31, 1999, compared with $33.2
million on August 31, 1998. On May 31, 1998 the Wheat Milling Defined Business
Unit had short-term debt outstanding to the Company of $16.7 million. This
increase is primarily due to payments for Mount Pocono capital expenditures, for
which the Company had contributed $38.8 million of capital to this account on
June 1, 1997.
The Wheat Milling Defined Business Unit had long-term debt outstanding to
the Company of $38.5 million on August 31, 1999 compared with $48.5 million on
August 31, 1998. On May 31, 1998, the Wheat Milling Defined Business Unit had
long-term debt outstanding to the Company of $51.2 million. This debt, net of
subsequent repayments, was incurred for the acquisition, expansion and
construction of certain mills with the Wheat Milling Defined Business Unit.
With respect to the net operating loss of the current period, the Company's
Board of Directors has resolved that the portion of this loss attributable to
the Equity Participation Units be carried forward, as authorized in the
Company's By-Laws, against future earnings attributable to the Equity
Participation Units. The total loss carryforward attributed to the Equity
Participation Units is approximately $1.7 million.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as part of its trading activity, utilizes futures and option
contracts offered through regulated commodity exchanges to reduce risk. The
Company is exposed to risk of loss in the market value of inventories and fixed
or partially fixed purchase and sale contracts. So as to reduce that risk, the
Company generally takes opposite and offsetting positions using future contracts
or options.
Certain commodities cannot be hedged with future or option contracts
because such contracts are not offered for these commodities by regulated
commodity exchanges. Inventories and purchase contracts for those commodities
are hedged with forward sales contracts to the extent practical so as to arrive
at a net commodity position within the formal position limits set by the Company
and deemed prudent for each of those commodities. Commodities for which future
contracts and options are
47
available are also typically hedged first in this manner, with futures and
options used to hedge within position limits that portion not covered by forward
contracts.
Unrealized gains and losses on futures contracts and options used to hedge
grain and oilseed inventories and fixed priced contracts are recognized for
financial reporting, and the inventories and fixed priced contracts are marked
to market so that gains or losses on the derivative contracts are offset by
gains or losses on inventories and fixed priced contracts during the same
accounting period.
Unrealized gains and losses on futures contracts and options used to hedge
energy inventories and fixed priced contracts are deferred until such future
contracts and options are closed. The inventories hedged with these derivatives
are valued at lower of cost or market. Open hedge positions and deferred gains
and losses for futures and option contracts were not significant as of August
31, 1999, and a change in market price producing additional gain or loss on
these derivative contracts would be offset partially or entirely with an
offsetting gain or loss on inventories and fixed priced contracts.
The Company manages interest expense using a mix of fixed and floating rate
debt. These debt instruments are carried at amounts approximating estimated fair
value. Short term debt used to finance inventories and receivables is
represented by notes payable within thirty days or less so that the blended
interest rate to the Company for all such notes approximates current market
rates. Long-term debt used to finance non-current assets carries various fixed
interest rates and is payable at various dates so as to minimize the effect of
market interest rate changes. The effective interest rate to the Company on
fixed rate debt outstanding on August 31, 1999 was approximately 7.3%; a 10%
adverse change in market rates would not materially effect the Company's results
of operations, financial position or liquidity.
The Company conducts essentially all of its business in U.S. dollars and
has no mark to market risk regarding foreign currency fluctuations on August 31,
1999. Foreign currency fluctuations do, however, impact the ability of foreign
buyers to purchase U.S. agricultural products and the competitiveness of U.S.
agricultural products compared to the same products offered by alternative
sources of world supply.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in 14(a)(1) follow the signatures.
Registrant is not required to provide the supplementary financial information
required by Item 302. Financial statement schedules are omitted because they are
not applicable or the required information is shown in the financial statements
or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The table below lists the directors of the Company as of August 31, 1999.
These were the initial directors of Cenex Harvest States Cooperatives and
consisted of the 14 incumbent directors of Harvest States Cooperatives and the
13 incumbent directors of Cenex, Inc. as of May 31, 1998.
DIRECTOR
NAME AND ADDRESS AGE DISTRICT SINCE
---------------- --- -------- -----
Bruce Anderson 47 3 1995
13500 42nd St NE
Glenburn, ND 58740-9564
Robert Bass 45 5 1994
S 2276 Highway K
Reedsburg WI 53959
Steven Burnet 59 6 1983
94699 Monkland Lane
Moro, OR 97039-9705
Steve Carney 48 2 1988
P.O. Box 1122
Scobey, MT 59263-1122
Curt Eischens 47 1 1990
RR 1 Box 59
Minneota, MN 56264
Robert Elliott 49 8 1996
324 Hillcrest
Alliance NE 69301
Edward Ellison 64 1 1978
401 Hamburg Ave.,
P.O. Box 8
Herman, MN 56248-0008
Sheldon Haaland 61 1 1984
RR 2, Box 55
Hanley Falls, MN 56245-9731
Fred Harris 65 6 1991
1004 Powell Street
Grandview WA 98930
Jerry Hasnedl 53 1 1995
RR 1, Box 39
St. Hilaire, MN 56754
Edward Hereford 60 6 1983
1902 Cashup Flat Road
Thornton, WA 99176-9710
Douglas Johnson 56 2 1989
HC 89, Box 5240
Sidney MT 59270
James Kile 51 6 1992
508 W Bell Lane
St John WA 99171
49
DIRECTOR
NAME AND ADDRESS AGE DISTRICT SINCE
---------------- --- -------- -----
Gerald Kuster 64 3 1979
780 First Ave. N.E.
Reynolds, ND 58275-9742
Leonard Larsen 63 3 1993
5128-11th Ave. N.
Granville, ND 58741-9595
Tyrone Moos 63 4 1991
HCR 1, Box 1
Philip, SD 57567-9601
Gaylord Olson 66 3 1985
RR 1
Buxton ND 58218
Duane Risan 63 3 1989
7452-37th Street N.W.
Parshall, ND 58770-9403
Denis Schilmoeller 64 7 1992
4758 450th Street
Granville IA 51022
Duane Stenzel 53 1 1993
RR 2, Box 173
Wells, MN 56097
Michael Toelle 37 1 1992
RR 1 Box 190
Browns Valley MN 56219
Richard Traphagen 54 4 1983
39555 124th Street
Columbia SD 57433
Russell Twedt 50 2 1993
P.O. Box 296
Rudyard, MT 59540-0296
Merlin Van Walleghen 63 4 1993
24106-408th Avenue
Letcher, SD 57359-6021
Elroy Webster 66 1 1982
Route 2 Box 123
Nicollet MN 56074
Arnold Weisenbeck 64 5 1976
6602 Highway 25
Durand WI 54736
William Zarak, Jr. 64 3 1983
3711 124th Ave. S.W.
South Heart, ND 58655-9767
BRUCE ANDERSON was elected to the board in 1995. He has held positions with
North Dakota Farmers Union, Farmers Union Mutual Insurance Co. and has served a
four-year term in the North Dakota House of Representatives. He is a member of
the North Dakota Agricultural Products Utilization Commission. Bruce and his
wife Pam raise small grains on their farm near Glenburn, North Dakota.
ROBERT BASS, elected to the board in 1994, operates a 500-acre dairy and
feed grain farm with his brother near Reedsburg, Wisconsin. Bob currently serves
as president of the board of Co-op Country Partners in Baraboo, Wisconsin, an
affiliate with 1998-99 sales of $43 million. He holds a B.S. degree from the
University of Wisconsin in agricultural education and is a former vo-ag teacher.
50
STEVEN BURNET has been a board member since 1983 and has served as past
Chairman of Harvest States Cooperatives. He is a member of the Oregon Wheat
Growers League and the Oregon Cattlemen's Association. Steve is a past president
of Mid-Columbia Grain Growers and past vice president of North Pacific Grain
Growers. He serves as a director on the Agricultural Co-op Council of Oregon and
is a former board member of the Oregon State University Alumni Association.
Steve and his wife, Patty, grow dryland wheat and barley, and support a cow/calf
and yearling operation with irrigated hay and pasture.
STEVE CARNEY has been a board member since 1988. He is a patron of Farmers
Elevator Company at Scobey and Peerless, Montana, a division of Cenex Harvest
States, PRO Co-op at Peerless, Grain Growers Oil Company in Scobey and Prairie
States Terminal at Zahl, North Dakota. Steve is a member of Montana Grain
Growers Association; Montana Stock Growers Association; Montana Farmers Union;
PRO Co-op at Peerless and Grain Growers Oil Co. in Scobey, Montana. He raises
spring wheat and durum with his wife, Diana, and his brother Jack.
CURT EISCHENS was elected to the board in 1990. He has been a director for
Farmers Co-op Association in Canby for nine years, eight as chairman. He is
director of the Minnesota Association of Cooperatives, and a member of the
Minnesota Soybean Association and Minnesota Farmers Union. Curt and his wife,
Wendy, operate a corn and soybean farm near Canby, Minnesota.
ROBERT ELLIOTT, elected to the board in 1996, is the first director for the
region consisting of Nebraska, Kansas, Oklahoma, Colorado and Texas. He and his
wife, Jayne, operate a 5,000-acre farm near Alliance, Nebraska. Bob is president
of the Hemingford Scholarship Foundation. He is past president of the Nebraska
Wheat Growers Association and served on the boards of Western Cooperative
Alliance (Westco) and New Alliance Bean & Grain Company.
EDWARD ELLISON was elected to the board in 1978. He is a member of
Herman-Norcross Ag Center and Farmers Co-op Oil, Elbow Lake, and is also a past
director/chairman of Herman Market Co. Ed serves on the boards of the
Agricultural Utilization Research Institute (AURI), and Farmland Insurance. He
also is a former board member of Agricultural Cooperative Development
International (ACDI). Ed and his wife, Barbara, have three sons and a daughter.
With two of their sons, they raise soybeans, corn and wheat on their Grant
County farm.
SHELDON J. HAALAND was elected to the board in 1984. He is a member of
several cooperatives, including Minnesota Corn Processors in Marshall, Tri-Line
Co-op in Clarkfield, and Cenex Harvest States' Marshall Agri-Service Center. He
has previously served on the boards of Cottonwood Co-op Oil Co. and Western
Transport Co-op, and has been an advisory board member of the Southwest State
University Co-op Program. Sheldon, his wife, Margery, and family raise corn,
soybeans and wheat.
FRED HARRIS was elected to the board in 1991. He and his wife, Ruth,
operate a 36-acre apple and cherry orchard near Grandview, Washington. He
retired in 1991 as manager of Bleyhl Farm Service at Grandview after serving 27
years. Besides his involvement in cooperatives, he has been active in many
facets of civic, community and church life.
JERRY HASNEDL was elected to the board in 1995. He is a member and past
director of Northwest Grain, a Cenex Harvest States regionalization; a member of
Farmers Union Oil Co. in Thief River Falls; Garden Valley Telephone Co-op in
Erskine; Red Lake Electric Co-op in Red Lake Falls; Minnesota Wheat Growers; and
Minnesota Barley Growers. He is currently serving on the interim board for
Minnesota Marketplace. Jerry and his wife, Ruth, raise wheat, barley, corn,
soybeans, sunflowers and alfalfa on their northern Minnesota farm.
EDWARD HEREFORD has been a board member since 1983. Ed serves on the boards
of the Idaho Co-op Council and ACDI/VOCA. He is a patron of Whitman County
Growers, where he served as a director and board president; Colfax Grange
Supply; and Grange Supply in Pullman. He is a member of Thornton Grange, the
Washington Association of Wheat Growers, and the Washington Assn. of Peas and
Lentils Growers. Ed, his wife, Diane, and their two sons, produce wheat, barley,
peas and lentils on their dryland farm.
51
DOUGLAS JOHNSON joined the board in 1989. Johnson served on the Montana
Farmers Union board for eight years. He spent 13 years on the board of Richland
Homes Nursing Home and currently serves as President of the board of Trinity
Lutheran Church. He and his wife, Pamela, and a son, farm 4,000 acres near
Sidney in northeastern Montana.
JAMES KILE, the first graduate of Young Producer Institute to join the
board, was elected in 1992. He served 18 years, 10 as chairman, on the board of
his local St. John Grange Supply, and represents Cenex Harvest States on the
Washington State Council of Farmer Cooperatives and is a member of Grange and
Washington Association of Wheat Growers. He and his wife, Barb, operate a
1,300-acre dryland wheat, barley and pea operation near St. John, Washington.
GERALD KUSTER was elected to the board in 1979 and became chairman in 1997.
Kuster's more than three decades of involvement in co-ops include serving as a
member and president of the board of Agri-City Cooperative Service in Grand
Forks, and vice president of the Burdick Center for Cooperatives, North Dakota
State University. He is a member of the Americus Township board and a deacon on
the Trinity Free Lutheran Church board. Gerald and his wife, Arla Mae, operate a
4,000-acre farm with their son, Loren.
LEONARD LARSEN has been a board member since 1993. He is a member of the
Farmers Union Oil Companies in Minot and Velva, Cenex Harvest States Sunprairie
Grain, and Dakota Growers Pasta Company. Starting as a board member of the
Simcoe Elevator in 1970, Leonard served through the unification with the Minot
Farmers Union Elevator, where he was a board member for 11 years and chairman
for six. He has served on the Hendrickson Township board, the First Lutheran
Church council, and the Granville Economic Development Corporation. He is a
member of the North Dakota Farmers Union and a 34-year member of the American
Legion. Leonard, his wife, Marlene, and a son, farm a grain, sunflower, canola
and flax operation.
TYRONE MOOS has been a board member since 1991. He is a member of South
Dakota Farmers Union, South Dakota Farm Bureau, and First Lutheran Church. He is
a past chairman of the local co-op elevator board, a former FmHA County
committee member and a former member of the Philip School Board. Tyrone and his
wife, Elvera, along with their son and two daughters, operate a combination farm
and ranch partnership. They raise winter wheat, millet and corn, also managing
cow/calf and hog finishing operations.
GAYLORD OLSON became a member of the board in 1985. He has served on the
local Farmers Union Oil and Elevator Company boards at Buxton, North Dakota, for
over 30 years. Prior to 1985, he had served as vice president of North Dakota
Farmers Union and North Dakota Farmers Union Mutual Insurance Company and North
Dakota Farmers Union Service Association. With two of their five children,
Gaylord and his wife, Gayle, operate a 1,500-acre, third-generation, centennial
farm near Buxton.
DUANE RISAN has been a member of board since 1989 and currently serves as
chairman of the Wheat Milling Defined Member Board. A former educator, he has a
degree in mathematics and education from Jamestown College. He is a member of
Dakota Growers Pasta Co. and a patron of Dakota Quality Grain Co-op. Duane
raises durum, spring wheat and barley with his wife, Joyce, and a son.
DENIS SCHILMOELLER was elected to the board in 1992 as Iowa's first
director. He has served on the board of Farmers Cooperatives of Paullina and
Granville, Iowa, since 1985, with five of those years as chairman of the board.
He represents the regional with the Iowa Institute for Cooperatives and has
served as a director of Remsen Mutual Insurance Association since 1978. He with
his wife, RoseMary, and a son operate a corn, soybean and livestock farm near
Granville in northwest Iowa.
DUANE STENZEL was elected to the board in 1993 and currently serves as
chairman of the Oilseed Processing & Refining defined member board. He is a
member of Watonwan Farm Service; Wells Farmers Elevator, where he served as
board president and secretary. He raises 665 acres of soybeans, sweet corn and
corn on his farm in south central Minnesota, acreage that also includes land
homesteaded by his great-grandfather more than 100 years ago.
52
MICHAEL TOELLE was elected to the board in 1992. He has been serving on the
board of Country Partners Cooperative of Browns Valley for 11 years and as
chairman for the past 7 years. He also is actively involved in National FFA
Organization, Ag Council of America, Minnesota Wheat Growers, Minnesota Corn
Growers and Minnesota Soybean Growers associations. He currently serves as
chairman of the Finance & Investment Committee for the Cenex Harvest States
Foundation. He and his wife, Sue, operate a grain, hog and beef farm with his
brother and parents near Browns Valley.
RICHARD TRAPHAGEN was elected to the board in 1983 and currently serves as
the second vice chairman of the Cenex Harvest States board. He is past chairman
of the board of Centrol, Inc., of South Dakota and of the board of the Farmers
Union Cooperative Association of Brown County in Columbia, South Dakota. He has
served on a number of other boards. Richard and his wife, Cindy, operate a
1,600-acre corn, soybean and wheat farm.
RUSSELL TWEDT has been a board member since 1993. Russ is a member of
Farmers Union Oil Co. of Great Falls and Farmers Union Oil Co. of Rudyard, where
he served as chairman. He is a member of the Co-op Curriculum Executive
Committee for Montana State University and a member of other industry and
community organizations. He is former chair of the local Water Users Association
and a former ASCS County committeeman. Russ is a third-generation Hill County
farmer and rancher. Russ, his wife, Diana, and family raise winter wheat, spring
wheat, barley, oats and hay, and have a cow/calf operation.
MERLIN VAN WALLEGHEN has been a board member since 1993. He is a former
director of Farmers Co-op Elevator Association of Mitchell, Letcher and
Alexandria, serving as board president for 10 years. Merlin also served nine
years on the South Dakota Association of Cooperatives board of directors, seven
as president. A former FmHA committee member, he is currently chairman of the
Sanborn County Development board and also a member of Heartland Consumer Power
District board. Merlin and his wife, Patricia, and a son, operate a grain farm
producing corn and soybeans.
ELROY WEBSTER was elected to the board in 1982 and became its chairman in
1988. His leadership record includes service as a director for the Minnesota
Association of Cooperatives, Western Co-op Transport Association and Agland
Cooperative. Webster is past chairman of the Agricultural Council of America and
is chairman of the Board of Trustees for the Cenex Harvest States Foundation. He
also works with Southwest State University as an advisor for its Cooperative
Studies program. Webster is an active farmer with a corn and soybean operation
near Nicollet, Minnesota.
ARNOLD WEISENBECK was elected to the board in 1976. He recently retired
from his board position for the Durand Cooperatives where he had served for 20
years, 13 as chairman. He serves as stockholder representative on the board of
Universal Cooperatives, Minneapolis, Minnesota. Arnie and his wife, Edie, and
their two sons, operate a 2,000-acre farm near Durand, Wisconsin, which has been
in the family since the late 1800's.
WILLIAM ZARAK, JR. has been a member of the board since 1983. Bill is a
member of Dakota Growers Pasta Co. and Southwest Grain Cooperative, a Cenex
Harvest States regionalization. He owns and operates a 2,000-acre family farm
with his wife, Darlene, and two of their sons. On this southwestern North
Dakota acreage, they raise small grains, corn, beef cows and hogs, and also
backgrounds calves.
At the December 1999 annual meeting, the Board will decrease from 27 to 17,
consisting of five directors from Region 1 (comprised of the state of
Minnesota), one director from Region 2 (comprised of the states of Montana and
Wyoming), three directors from Region 3 (comprised of the state of North
Dakota), two directors from Region 4 (comprised of the state of South Dakota),
two directors from Region 5 (comprised of the states of Wisconsin, Michigan and
Illinois), two directors from Region 6 (comprised of the states of Alaska,
Arizona, California, Idaho, Oregon, Washington and Utah), one director from
Region 7 (comprised of the states of Iowa and Missouri) and one director from
Region 8 (comprised of the states of Colorado, Nebraska, Kansas, Oklahoma and
Texas. (In addition to the states referenced above, the Board of Directors has
temporarily assigned the states of Connecticut, Indiana, Kentucky and Ohio to
Region 5, the states of Alabama, Arkansas, Florida, Louisiana and Mississippi to
Region 7 and the state of New Mexico to Region 8.) Downsizing will be achieved
by early retirement. Ten directors have accepted an early retirement option that
will be effective December 1999. The plan
53
developed by the Board for staggered terms designated terms for each director
based upon their last election date. The plan calls for the election in 1999 of
directors in each of the following Regions:
Region 1 (Minnesota) (two seats) Incumbent Curt Eischens
Incumbent Jerry Hasnedl
Region 2 (Montana, Wyoming) No Incumbent
Region 3 (North Dakota) Incumbent Bruce Anderson
Region 5 (Wisconsin, Michigan, Illinois) No Incumbent
Region 6 (Alaska, Arizona, California, Incumbent Steve Burnet
Idaho, Oregon, Washington, Utah)
Region 7 (Iowa, Missouri) Incumbent Denis Schilmoeller
All these elections will be for three-year terms and are open to any
eligible candidate. To be eligible, a candidate must meet the following
qualifications:
o At the time of the election, the individual must be less than the age
of 68.
o The individual must be a member of this cooperative or a member of a
Cooperative Association Member.
o The individual must reside in the Region from which he or she is to be
elected.
o The individual must be an active farmer or rancher. "Active farmer or
rancher" means an individual whose primary occupation is that of a
farmer or rancher.
o The definition of "farmer or rancher" shall not include anyone who is
a full-time employee of this cooperative, or of a Cooperative
Association Member.
o The individual must currently be serving or shall have served at least
one full term as a director of a Cooperative Association Member of
this cooperative.
EXECUTIVE OFFICERS
The table below lists the executive officers and other senior officers of
the Company as of August 31, 1999, none of whom holds any equity in the Company.
Officers are elected annually by the Board of Directors.
NAME AGE POSITION
- ---- --- -----------------------------------------------------------
Noel K. Estenson 60 Chief Executive Officer
John D. Johnson 51 President and General Manager
Michael H. Bergeland 55 Executive Vice President -- Grain & Agri Services
James D. Tibbetts 49 Executive Vice President -- Consumer Foods
Leon E. Westbrock 52 Executive Vice President -- Energy & Crop Inputs
Other senior officers:
Patrick Kluempke 51 Senior Vice President -- Corporate Planning
Tom Larson 51 Senior Vice President -- Public and Government Affairs
Maury Miller 54 Senior Vice President -- Financial/Member Services
Robert Oebser 59 Group Vice President -- Energy
Mark Palmquist 42 Senior Vice President -- Aligned Grain
John Schmitz 49 Senior Vice President and Chief Financial Officer
David Swenson 44 Senior Vice President -- Farm Marketing & Supply
Debra Thornton 48 Senior Vice President -- General Counsel and Administration
NOEL K. ESTENSON. Noel Estenson, Chief Executive Officer of Cenex Harvest
States, started his career at Cenex in 1963. He was appointed President and CEO
in 1987. On June 1, 1998, Cenex, Inc. and Harvest States Cooperatives merged to
form Cenex Harvest States Cooperatives and Mr. Estenson was named Chief
Executive Officer of the Company. In addition, Mr. Estenson is currently
Chairman of the boards of CF Industries, Inc. and National Council of Farmer
Cooperatives, based in Washington, D.C. Mr. Estenson was raised on his family's
potato and grain farm in Northwestern Minnesota's Red River Valley. He
graduated from North Dakota State University with a degree in agricultural
economics.
54
JOHN D. JOHNSON. John Johnson was born in Rhame, N.D., and grew up in
Spearfish, S.D. He earned a degree in business administration and a minor in
economics from Black Hills State University. In 1976, he joined Harvest States
Cooperatives as a feed consultant in the FTA Feeds Division, later becoming
regional sales manager, Director of Sales and Marketing and then General Manager
of GTA Feeds. In 1992, he was elected Group Vice President of Farm Marketing and
Supply for Harvest States Cooperatives and was selected President and CEO in
January 1995. Mr. Johnson became President and General Manager of Cenex Harvest
States upon its creation June 1, 1998. Mr. Johnson serves on Ventura Foods,
Sparta Foods and NCRA boards of directors.
MICHAEL H. BERGELAND. Michael Bergeland, Executive Vice President of Grain
and Agri-Services, is responsible for the Farm Marketing and Supply Division
and the Aligned Grain Division of Cenex Harvest States. Mr. Bergeland is a
native Minnesotan, and the son of a cooperative elevator manager. He attended
Moorhead State College before joining Harvest States Cooperatives in 1967. He
has held various positions in the Grain Marketing Division, which included
grain merchandising at the GTA marketing offices of Montevideo, MN; Great
Falls, MT; and Portland OR. He returned to the St. Paul office in 1978 as a
senior corn merchandiser. In 1982, Mr. Bergeland was named Director of Line
Elevator Operations, In May of 1987, he was named Senior Vice President and
Director of Country Services. In January 1995, he was appointed Group Vice
President of Grain and Agri Services.
JAMES D. TIBBETTS. James D. (Jim) Tibbetts, Executive Vice President --
Consumer Foods, manages the Company's current partnerships with Ventura Foods
and Sparta Foods. He also identifies further food processing and packaging
opportunities that help the Company deliver value to consumers. Mr. Tibbetts
joined Harvest States Cooperatives in November 1995. During the first year, he
managed the Holsum Foods Division. This food manufacturing operation was merged
with the food manufacturing operations of Mitsui of Japan to form Ventura
Foods, LLC., a major packager of agricultural-based vegetable oil products in
August, 1996. Prior to joining the Company, Mr. Tibbetts was a Senior Vice
President for Farm Credit Leasing in Minneapolis, Minnesota. Mr. Tibbetts is a
native of South Dakota and was raised on a Midwestern diversified farm. He
graduated from Northern State University in Aberdeen, S.D., with a degree in
Business Administration.
LEON E. WESTBROCK. Leon Westbrock is the Executive Vice President --
Energy and Crop Inputs for Cenex Harvest States. He joined the cooperative
system in 1976 in the Merchandising Department at Cenex. He then managed local
cooperatives in Michigan, North Dakota, Elbow Lake, MN and Alexandria MN. In
1998, he became co-president of Country Energy, LLC., an energy sales,
distribution and marketing alliance between Cenex Harvest States and Farmland
Industries. At the regional level, Mr. Westbrock has held numerous positions in
member services and petroleum. He serves as Chairman of Cooperative Refining,
LLC and as Vice Chairman of the Board of Directors of Universal Cooperatives.
He also serves on the Cenex/Land O'Lakes Agronomy Company Board and is the
Chairman of the National Cooperative Refinery Association Board. Mr. Westbrock
was born and raised on his family's 640-acre small grain and dairy farm near
Browns Valley, MN. Mr. Westbrock received a Bachelor's Degree from St. Cloud
State University and served a tour in the U.S. Army.
OTHER SENIOR OFFICERS:
PATRICK KLUEMPKE, Senior Vice President of Corporate Planning, was raised
on a family dairy farm in central Minnesota, and received a Bachelor of Science
degree in Finance and Accounting from St. Cloud University and the University of
Minnesota. Mr. Kluempke served in the United States Army in South Vietnam and
South Korea, as Aide to General J. Guthrie. He began his agribusiness career in
grain procurement and merchandising at General Mills and later with Louis
Dreyfus Corporation in export marketing. Mr. Kluempke joined the predecessor to
Cenex Harvest States when G.T.A. was being merged with North Pacific Grain
Growers, in 1983, to form Harvest States Cooperatives and has held various
positions in the commodity marketing division and at the corporate level. Mr.
Kluempke serves on the board of Ventura Foods, a joint venture company between
Cenex Harvest States and Mitsui & Company, Japan.
TOM LARSON is Sr. Vice President, Public and Government Affairs at Cenex
Harvest States. After growing up on a 480-acre crop and hog farm near Slayton,
Minnesota, he earned a Bachelor's degree in Agriculture Education from South
Dakota State University. After working as a vo-ag teacher, he took
55
an agronomy sales position with Cenex and later managed the local cooperative at
Hoffman, Minnesota, for two years. Mr. Larson returned to the regional
cooperative in 1978 and held positions in marketing and planning. He moved to
Agronomy in 1987 and became director of Agronomy Services for Cenex/Land O'Lakes
Agronomy Company in 1988. He was later named Vice President of Agronomy Services
until 1996 when he became Vice President of Cenex Supply and Marketing which
included overseeing the operation of more than two dozen Cenex-owned
agricultural supply outlets. Mr. Larson was named to his current position --
Senior Vice President, Public and Governmental Affairs -- in January 1999. He
oversees the public affairs area of the Company, which includes communications,
corporate giving, meetings and travel and governmental affairs, including the
Washington, D.C. office. He is active in the FFA organization and is a recipient
of its Honorary American Degree. Mr. Larson and his wife, Denice, have two
children and reside in Circle Pines, Minnesota.
MAURY MILLER, Senior Vice President of Financial/Member Services, grew up
on a farm in Clarkfield, MN. He is a graduate of Gustavus Adolphus College and
also served as an officer in the U.S. Navy. Mr. Miller joined Cenex in 1971 and
in 1978 was named Vice President of Planning. Since 1987 he has been Vice
President of Member Services and Marketing Communications for the Cenex Land
O'Lakes joint venture. In 1999, he became Senior Vice President of Financial/
Member Services.
ROBERT OEBSER, Group Vice President, Energy, is responsible for the
Company's refinery at Laurel, Montana, as well as pipeline and terminal
operations and crude oil supply. He joined Cenex in 1985 as General Manager,
Refining and Crude Supply, and was promoted to his present position in September
1987. Mr. Oebser was chairman of the National Cooperative Refinery Association
Board of Directors at August 31, 1999. Prior to joining Cenex, Bob spent twenty
years in the petroleum industry. A native of Chicago, Mr. Oebser grew up in Iowa
and prior to three-years in the Air Force, he graduated from the University of
Iowa with a degree in Business Administration.
MARK PALMQUIST is the Senior Vice President of the Aligned Grain Division.
He is responsible for all areas of Grain Marketing including terminal
operations, exports, logistics, transportation, and grain marketing joint
ventures. He is also responsible for the operations of wheat milling and oilseed
processing. Mr. Palmquist has worked for Cenex Harvest States in the Grain
Marketing Division for 19 years. Starting as a grain buyer and moving into
merchandising, Mark has traded many different commodities including corn,
soybeans and spring wheat. In 1990, he assumed the role of Vice President and
director of Grain Marketing and then, in 1993, was promoted to Senior Vice
President. Mr. Palmquist attended Gustavus Adolphus College in St. Peter, MN,
graduating in 1979. He also attended the Master of Business Administration
program at the University of Minnesota.
JOHN SCHMITZ is the Senior Vice President and Chief Financial Officer of
the Company. Mr. Schmitz joined Harvest States Cooperatives in 1974 as Corporate
Accountant and has held a number of accounting and finance positions within the
Company, including divisional controller positions in Country Services, Farm
Marketing & Supply and Grain Marketing. In 1986, he was named Vice President and
controller of Harvest States, and had served in that position up to the time of
the merger with Cenex when he became Vice President, Finance, of Cenex Harvest
States. In May 1999, Mr. Schmitz became Senior Vice President and Chief
Financial Officer. Mr. Schmitz earned a Bachelor of Science Degree in Accounting
from St. Cloud State University, and is a member of the American Institute of
Certified Public Accountants, the Minnesota Society of CPA's and the National
Society of Accountants for Cooperatives.
DAVID R. SWENSON, Senior Vice President of the Farm Marketing & Supply
Division, is responsible for all aspects of the division including Agri Service
Centers, Regionalizations, Feed Operations, Farm Supply, Fin-Ag and all Cenex
Supply and Marketing locations. Mr. Swenson grew up on a cash grain farm near
Elbow Lake, MN. He graduated from the University of Minnesota with an
agriculture business administration degree and began his career with the St.
Paul Bank for Cooperatives. He then joined the Company in 1979 as the director
of Financial and Field Services. He has also had the following responsibilities:
Vice President, director of Line Operations 1986-1990, Senior Vice President,
director of Country and Ag Marketing Services 1991-1992, Senior Vice President,
Corporate Planning and Business Development 1992-1993, and Senior Vice
President, Country and Marketing Services 1993-1994. In 1995 Mr. Swenson was
appointed to Senior Vice President, Farm Marketing & Supply and is also an
active member on various boards in the Ag Industry.
56
DEBRA THORNTON, Senior Vice President, General Counsel and Administration,
is responsible for the Company's legal, risk management, administration and
human resources operations. She was born in Sioux Falls, SD, but has spent most
of her life in the Twin Cities. She graduated from Mankato State College in 1973
with a Bachelor of Science Degree and worked as an insurance adjuster for a
couple of years before attending William Mitchell College of Law. While she
attended law school at night, Ms. Thornton worked as a law clerk for a
Minneapolis litigation firm, Hvass, Weisman & King. She graduated cum laude in
1979 with a Juris Doctorate degree. In 1979, Debra joined Harvest States as an
attorney and was named Vice President and Corporate Counsel in 1993. On June 1,
1998, following Harvest States Cooperatives merger with Cenex, Inc., Ms.
Thornton was named Senior Vice President and General Counsel of Cenex Harvest
States Cooperatives. On June 1, 1999, she was appointed to her current position
as Senior Vice President, General Counsel and Administration. Ms. Thornton is a
member of the Minnesota State Bar Association, the American Bar Association, the
American Corporate Counsel Association and the Legal, Tax and Accounting
Committee of the National Council of Farmer Cooperatives.
As of June 1, 1998, Noel Estenson, who was the President and Chief
Executive Officer of Cenex, became the Chief Executive Officer of Cenex Harvest
States to serve through no later than December 31, 2000. John D. Johnson, who
was the President and Chief Executive Officer of the Harvest States
Cooperatives, became the President and General Manager of Cenex Harvest States,
reporting to the Chief Executive Officer. Mr. Johnson will assume the position
of Chief Executive Officer of Cenex Harvest States upon Mr. Estenson's
retirement.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth the cash and noncash
compensation earned by the Chief Executive Officer and each of the 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 August 31, 1999, exceeded $100,000 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR ENDED SALARY(1) BONUS(1) COMPENSATION(2) COMPENSATION(3)
- -------------------------------- ------------ ----------- ---------- ----------------- ----------------
Noel K. Estenson 8/31/99 $543,333 $355,680 $20,000 $12,719
Chief Executive Officer 5/31/98 480,000 352,800 6,836 8,850
5/31/97 476,250 360,000 6,679 8,850
John D. Johnson 8/31/99 583,347 235,971 8,622 13,468
President and General Manager 5/31/98 550,000 350,000 6,699 11,600
5/31/97 500,000 150,000 7,172 7,186
Michael H. Bergeland 8/31/99 273,765 227,100 7,172 16,757
Executive Vice President -- 5/31/98 233,100 140,000 6,099 10,352
Grain and Agri-Services 5/31/97 224,000 120,000 7,048 7,890
James D. Tibbetts 8/31/99 257,500 55,200 3,665 10,226
Executive Vice President -- 5/31/98 180,000 108,000 2,489 5,266
Consumer Foods 5/31/97 160,000 80,000 5,699 2,882
Leon E. Westbrock 8/31/99 313,269 125,972 723 11,066
Executive Vice President -- 5/31/98 252,500 181,688 3,662 8,850
Energy and Crop Inputs 5/31/97 245,000 151,263 2,114 8,850
- ------------------
(1) Amounts shown include amounts deferred at the employee's election under the
Company's Deferred Compensation Program and amounts waived in exchange for
share options.
(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.
57
On June 1, 1999 the Company entered into an employment agreement with Noel
Estenson, the CEO. The employment agreement provides that Mr. Estenson will be
employed from June 1, 1999 through December 31, 2000. The agreement provides a
base salary of $520,000 per year with increases annually of not less than 4%. In
addition, Mr. Estenson would be entitled to receive annual variable and
long-term incentive compensation based on projected earnings in the long-range
business plan in effect on January 1, 1998. The agreement provides that if the
Company and Farmland Industries, Inc. complete the proposed consolidation prior
to December 31, 2000, and Mr. Estenson remains employed through December 31,
2000, he shall be entitled to an incentive payment of 2.99 times his average W-2
income for the five calendar years ending December 31, 1999. In the event that
he is terminated without cause or resigns for good reason as defined in the
agreement, he would receive severance pay based on the same formula; provided,
however, that in no event will Mr. Estenson be entitled to both severance pay
and a transaction incentive. The employment agreement also includes covenants by
Mr. Estenson not to compete with the Company for a period of two years after his
employment ends.
On June 16, 1999 the Company entered into an employment agreement with John
Johnson, the President and General Manager. The employment agreement provides
for a rolling three-year period of employment commencing on June 16, 1999 at an
initial base salary of at least $575,000, subject to annual review. Mr.
Johnson's employment may be terminated at any time by either party, subject to
the rights and obligations set forth in the employment agreement. The Company is
obligated to pay Mr. Johnson a severance allowance of 2.99 times his base salary
and target bonus in the event Mr. Johnson's employment is terminated for any
reason other than for cause (as such term is defined in the employment
agreement), death, disability or voluntary termination. The employment agreement
includes a provision to pay Mr. Johnson a transaction incentive in the amount of
his base salary plus target bonus for the calendar year 1999 if the Company and
Farmland Industries, Inc. complete the proposed consolidation prior to December
31, 2000 and Mr. Johnson has not by then resigned or been terminated for cause.
The employment agreement provides that if the consolidation with Farmland is
closed on or before December 31, 2000 and if Mr. Johnson is not offered the
position of CEO of the consolidated company on or before June 1, 2001 and he
thereafter resigns, he shall receive 1.99 times his base salary plus target
bonus. The agreement further provides that if the consolidation with Farmland is
not closed on or before December 31, 2000 and he is not offered the position of
CEO of Cenex Harvest States on or before December 31, 2000, he shall be entitled
to 2.99 times his base salary plus target bonus. The contract provides for a
gross-up for any possible excise tax. Mr. Johnson has also agreed to a
non-compete clause for one or two years, depending on the circumstances.
The Company has also entered into an employment agreement with Michael
Bergeland, an Executive Vice President dated May 1, 1999. This agreement is for
a term beginning on the effective date and continuing through August 31, 2001.
Base salary has been set at $300,000, subject to annual review, and the maximum
annual bonus under the variable pay plan. At expiration of the agreement, Mr.
Bergeland will be given five years credit on his non-qualified retirement plan.
Mr. Bergeland is also entitled to a transaction incentive of one times base pay
plus target bonus for 1999 if the consolidation with Farmland closes on or
before December 31, 2000. Mr. Bergeland has agreed to a three-year non-compete
clause.
Certain management employees are eligible to participate in a plan
providing an opportunity to receive a bonus based on Annual Compensation (base
and target bonus) if the unification of Cenex Harvest States and Farmland
Industries takes place prior to 12/31/00. The plan requires continued employment
through the date of unification. The plan also provides a severance arrangement
tied to Annual Compensation if employment is terminated under certain
circumstances, within two years after the unification.
THE FOLLOWING SUMMARIZES CERTAIN BENEFITS IN EFFECT AS OF 8/31/99 TO THE
NAMED EXECUTIVE OFFICERS.
MANAGEMENT COMPENSATION INCENTIVE PROGRAM
Each Named Executive Officer is eligible to participate in the Management
Compensation Incentive Program (the "Incentive Program") for the year ending
August 31, 1999. The Incentive Program is based on Company, group or division
performance and individual performance. These amounts were paid after August 31,
1999. The target incentive is 50% of base compensation.
58
RETIREMENT PLAN
Each of the Named Executive Officers is entitled to receive benefits under
the Company's Cash Balance Retirement Plan (the "Retirement Plan"). An
employee's benefit under the Retirement Plan depends on credits to the
employee's account, which are based on the employee's total salary each year the
employee works for the Company, the length of service with the Company and the
rate of interest credited to the employee's account balance each year. Credits
are made to the employee's account from Pay Credits, Special Career Credits and
Investment Credits.
The amount of Pay Credits added to an employee's account each year is a
percentage of the employee's gross salary, including overtime pay, commissions,
severance pay, bonuses, any compensation reduction pursuant to the 401(k) Plan
and any pretax contribution to any of the Company's welfare benefit plans, paid
vacations, paid leaves of absence and pay received if away from work due to a
sickness or injury. The Pay Credits percentage received is determined on a
yearly basis, based on the years of Benefit Service completed as of January 1 of
each year. An employee receives one year of Benefit Service for every calendar
year of employment in which the employee completed at least 1,000 hours of
service.
Effective January 1, 1999, Pay Credits are earned according to the
following schedule:
PAY BELOW SOCIAL SECURITY PAY ABOVE SOCIAL SECURITY
YEARS OF BENEFIT SERVICE TAXABLE WAGE BASE TAXABLE WAGE BASE
- -------------------------- ------------------------- -------------------------
1 to 3 years ............. 3% 6%
4 to 7 years ............. 4% 8%
8 to 11 years ............ 5% 10%
12 to 15 years ........... 6% 12%
16 years and more ........ 7% 14%
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, 1998, the dollar value of the account of each of the
Named Executive Officers was:
Noel K. Estenson ............................................. $848,035
John D. Johnson .............................................. 215,310
Michael H. Bergeland ......................................... 453,294
Leon E. Westbrock ............................................ 276,457
James D. Tibbetts ............................................ 148,151
Mr. Estenson, Mr. Westbrock and Mr. Bergeland could be eligible for a
retirement benefit, under a grandfather provision of a prior provision of the
plan, or a predecessor plan, instead of the above amount. Such amount would be
affected by age at retirement and salary.
59
DEFERRED COMPENSATION PLAN
Effective April 1, 1994, the Company established a 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.
In October 1997, the Company adopted a share option plan, which allows
executive officers to waive bonuses and up to 30 percent of salary in exchange
for options to purchase at a discount, shares of selected mutual funds. The
Company has filed a Form S-8, dated December 12, 1997 on this program. This plan
allows officers to buy investments at a specific price. Some options have
vesting schedules.
401(k) PLAN
Each Named Executive Officer is eligible to participate in the Cenex
Harvest States Savings Plan (the "401(k) Plan"). All benefit-eligible employees
of the Company are eligible to participate in the 401(k) Plan. Effective January
1, 1999 participants may contribute between 1% and 16% (not to exceed 6% in the
case of "highly compensated" employees) of their pay on a pre-tax basis. Each of
the Named Executive Officers is a "highly compensated" employee. The Company
matches 50% of the first 6% of pay contributed each year. The Company's Board of
Directors may elect to reduce or eliminate matching contributions for any year
or any portion thereof. Participants are 100% vested in their own contributions
and in any Company matching contribution made on the participant's behalf.
DEFERRED COMPENSATION SUPPLEMENTAL RETIREMENT PLAN
Each of the Named Executive Officers may participate in the Company's
Deferred Compensation Supplemental Retirement Plan (the "Supplemental Plan").
Participants in the Supplemental Plan are select management or highly
compensated employees of the Company who have been designated as
60
eligible by the President of the Company to participate in such plan.
Compensation deferred under the Deferred Compensation Plan or waived under the
Share Option 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, 1998, the dollar value of the account of each of the
Named Executive Officers was approximately:
Noel K. Estenson .......................................... $3,962,808
John D. Johnson ........................................... 1,296,217
Michael H. Bergeland ...................................... 709,236
Leon E. Westbrock ......................................... 692,807
James D. Tibbetts ......................................... 70,887
DIRECTORS' COMPENSATION
The Board of Directors met monthly during the year ended August 31, 1999.
Through August 31, 1999 the Company provided its directors with compensation of
$42,000, paid in twelve monthly payments, with the two Co-Chairmen of the Board
receiving an additional annual compensation of $12,000, paid in twelve monthly
payments. The directors receive a per diem of $300 plus actual expenses and
travel allowance for each day spent on Company meetings (other than regular
Board meetings and the Annual Meeting), life insurance and health and dental
insurance. The directors have a retirement benefit of $125 per month per year of
service, with a maximum benefit of $1,875 per month, for life with a guarantee
of 120 months (paid to beneficiary in the event of death). This benefit
commences at age 60 or retirement, whichever is later. This retirement benefit
may be converted to a lump sum. The retired directors may also continue health
benefits until eligible for Medicare and thereafter pay at their own expense for
a Medicare supplemental policy.
The ten directors who volunteered to take the early retirement option
effective December, 1999 will receive $4,000 per month for 24 months, or the
equivalent lump sum using the GATT rate as the discount rate.
COMMITTEES OF THE BOARD OF DIRECTORS
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 salaries and incentive
compensation for the chief executive officer and for the president and general
manager using industry and compensation studies. The Board of Directors has a
standing committee to review the results and scope of the annual audit and other
services provided by the Company's independent auditors, and another standing
committee to review equity redemption policy and its application to situations
believed by the equity holder or patron's equity department to be unusual.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the Company's Board of Directors did not have a
Compensation Committee. The entire Board of Directors determined the
compensation of the Chief Executive Officer and the terms of the employment
agreement with the Chief Executive Officer. The Chief Executive Officer
determined the compensation for all other executive officers, other than the
president and himself.
61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial ownership of equity securities as of August 31, 1999, is shown
below:
AMOUNT AND
NATURE OF
BENEFICIAL
TITLE OF CLASS NAME OF BENEFICIAL OWNER(1) OWNERSHIP % OF CLASS
- -------------- --------------------------------------- ------------- ----------
Wheat Milling Equity
Participation Units: Directors:
Bruce Anderson ...................... --
Robert Bass ......................... --
Steven Burnet ....................... 30,000 units *
Steve Carney ........................ 27,000 units *
Curt Eischens ....................... --
Robert Elliott ...................... --
Edward Ellison ...................... 6,000 units *
Sheldon Haaland ..................... --
Fred Harris ......................... --
Jerry Hasnedl ....................... 10,000 units *
Edward Hereford ..................... --
Douglas Johnson ..................... --
James Kile .......................... --
Gerald Kuster ....................... 22,000 units *
Leonard Larsen ...................... 9,000 units *
Tyrone Moos ......................... 3,000 units *
Gaylord Olson ....................... --
Duane Risan ......................... 24,000 units *
Denis Schilmoeller .................. --
Duane Stenzel ....................... --
Michael Toelle ...................... --
Richard Traphagen ................... --
Russell Twedt ....................... 5,000 units *
Merlin Van Walleghen ................ --
Elroy Webster ....................... --
Arnold Weisenbeck ................... --
William Zarak, Jr. .................. 6,000 units *
Noel Estenson ....................... --
John D. Johnson ..................... --
Michael H. Bergeland ................ --
James Tibbetts ...................... --
Leon Westbrock ...................... --
Patrick Kluempke .................... --
Tom Larson .......................... --
Maury Miller ........................ --
Robert Oebser ....................... --
Mark Palmquist ...................... --
John Schmitz ........................ --
David Swenson ....................... --
Debra Thornton ...................... --
Directors and executive officers as a --------------- ----
group .............................. 142,000 units 3.07%
=============== ====
62
AMOUNT AND
NATURE OF
BENEFICIAL
TITLE OF CLASS NAME OF BENEFICIAL OWNER(1) OWNERSHIP % OF CLASS
- -------------- --------------------------------------- ------------- ----------
Oilseed Processing
and Refining Equity
Participation Units: Directors:
Bruce Anderson ...................... --
Robert Bass ......................... --
Steven Burnet ....................... --
Steve Carney ........................ --
Curt Eischens ....................... --
Robert Elliott ...................... --
Edward Ellison ...................... 12,000 units 1.15%
Sheldon Haaland ..................... 1,500 units *
Fred Harris ......................... --
Jerry Hasnedl ....................... 1,500 units *
Edward Hereford ..................... --
Douglas Johnson ..................... --
James Kile .......................... --
Gerald Kuster ....................... 5,000 units *
Leonard Larsen ...................... --
Tyrone Moos ......................... --
Gaylord Olson ....................... --
Duane Risan ......................... --
Denis Schilmoeller .................. --
Duane Stenzel ....................... 2,500 units *
Michael Toelle ...................... --
Richard Traphagen ................... --
Russell Twedt ....................... --
Merlin Van Walleghen ................ 6,000 units *
Elroy Webster ....................... --
Arnold Weisenbeck ................... --
William Zarak, Jr. .................. --
Noel Estenson ....................... --
John D. Johnson ..................... --
Michael H. Bergeland ................ --
James Tibbetts ...................... --
Leon Westbrock ...................... --
Patrick Kluempke .................... --
Tom Larson .......................... --
Maury Miller ........................ --
Robert Oebser ....................... --
Mark Palmquist ...................... --
John Schmitz ........................ --
David Swenson ....................... --
Debra Thornton ...................... --
Directors and executive officers as a --------------- ----
group .............................. 28,500 units 2.72%
=============== ====
- ------------------
(1) Includes units held by spouse.
* Less than 1%.
No director listed above has the right or option to acquire beneficial
ownership in additional securities other than by purchase on the open market
from current holders of such securities. Executive officers, as non-producers,
are ineligible to hold these securities.
63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Because directors must be active patrons of the Company or an Affiliated
Association, transactions between the Company and directors are customary and
expected. Transactions include the sale of commodities to the Company and the
purchase of products and services from the Company. During each of the periods
indicated the value of those transactions between a particular director (and
members of such directors' immediate family, which includes such director's
spouse; parents; children; siblings; mothers and fathers-in-law; sons and
daughters-in-law; and brothers and sisters-in-law) and the Company that exceeded
$60,000 are shown below.
YEAR ENDED
NAME AUGUST 31, 1999
- ---- ---------------
William Zarak ........................................... $ 80,415
Steve Carney ............................................ 318,571
Jerry Hasnedl ........................................... 187,151
Merlin Van Walleghen .................................... 165,041
Edward Ellison .......................................... 631,790
Gerald Kuster ........................................... 101,986
Arnold Weisenbeck ....................................... 295,112
64
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS FILED ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements and the Report of Independent
Accountants therein are filed as part of this Form 10-K.
PAGE NO.
--------
I. CENEX HARVEST STATES COOPERATIVES
Consolidated Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ................ F-1
Consolidated Statements of Operations for the year ended August 31, 1999, the three months
ended August 31, 1998 and the years ended May 31, 1998 and 1997 ............................ F-2
Consolidated Statements of Equities and Comprehensive Income for the year ended
August 31, 1999, the three months ended August 31, 1998 and the years ended May 31, 1998
and 1997 ................................................................................... F-3
Consolidated Statements of Cash Flows for the year ended August 31, 1999, the three months
ended August 31, 1998 and the years ended May 31, 1998 and 1997 ............................ F-5
Notes to Consolidated Financial Statements .................................................. F-6
Report of Independent Accountants ........................................................... F-25
II. OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ............................. F-26
Statements of Operations for the year ended August 31, 1999, the three months ended
August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-27
Statements of Defined Business Unit Equity and Comprehensive Income (Loss) for the year
ended August 31, 1999, the three months ended August 31, 1998 and the years ended
May 31, 1998 and 1997 ...................................................................... F-28
Statements of Cash Flows for the year ended August 31, 1999, the three months ended
August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-29
Notes to Financial Statements ............................................................... F-30
Report of Independent Accountants ........................................................... F-37
Independent Auditors' Report ................................................................ F-38
III. WHEAT MILLING DEFINED BUSINESS UNIT
Balance Sheets as of August 31, 1999 and 1998, and May 31, 1998 ............................. F-39
Statements of Operations for the year ended August 31, 1999, the three months ended
August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-40
Statements of Defined Business Unit Equity and Comprehensive Income (Loss) for the year
ended August 31, 1999, the three months ended August 31, 1998 and the years ended
May 31, 1998 and 1997 ...................................................................... F-41
Statements of Cash Flows for the year ended August 31, 1999, the three months ended
August 31, 1998 and the years ended May 31, 1998 and 1997 .................................. F-42
Notes to Financial Statements ............................................................... F-43
Report of Independent Accountants ........................................................... F-50
Independent Auditors' Report ................................................................ F-51
(a)(2) FINANCIAL STATEMENT SCHEDULES
None.
(a)(3) EXHIBITS
10.32 Benefit Plan dated June 9, 1999 incorporated by reference, exhibit
10.32 of registrant's 10-Q for the period ended May 31, 1999.
10.33 Tacoma Export Marketing Company Amended and Restated Partnership
Agreement between Cargill, Incorporated and Cenex Harvest States
Cooperatives dated as of July 12, 1999.
10.34 Cooperative Refining, LLC Limited Liability Company Agreement dated
September 1, 1999.
10.35 Transaction Agreement dated September 23, 1999 between Cenex Harvest
States and Farmland Industries, Inc.
10.36 Employment Agreement between Michael Bergeland and Cenex Harvest
States Cooperatives dated May 1, 1999.
65
23.1 Consent of Independent Accountants.
23.2 Independent Auditors' Consent.
24.1 Power of Attorney.
99.1 Cautionary Statement.
99.2 Independent Auditor's Report.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedules for the three months ended
August 31, 1998 due to reclassifications made to conform to current
presentation, and for the years ended May 31, 1998 and 1997 due to the
merger of Harvest States Cooperatives and Cenex, Inc. accounted for as
a pooling of interests.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the fourth
quarter of the year ended August 31, 1999.
(c) EXHIBITS
The exhibits shown in Item 14(a)(3) above are being filed herewith.
(d) SCHEDULES
None.
SUPPLEMENTAL INFORMATION
As a cooperative, the Company does not utilize proxy statements.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
November 22, 1999.
CENEX HARVEST STATES COOPERATIVES
By: /s/ NOEL K. ESTENSON
-------------------------
Noel K. Estenson
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on November 22, 1999:
SIGNATURE TITLE
- -------------------------------------------------------------- --------------------------------------------------
/s/ NOEL K. ESTENSON Chief Executive Officer
------------------------------------- (principal executive officer)
Noel K. Estenson
/s/ JOHN SCHMITZ Senior Vice President and Chief Financial Officer
------------------------------------- (principal financial officer)
John Schmitz
/s/ JODELL HELLER Vice President and Controller
------------------------------------- (principal accounting officer)
Jodell Heller
Gerald Kuster* Co-Chairman of the Board of Directors
Elroy Webster* Co-Chairman of the Board of Directors
Bruce Anderson* Director
Robert Bass* Director
Steven Burnet* Director
Steve Carney* Director
Curt Eischens* Director
Robert Elliott* Director
Edward Ellison* Director
Sheldon Haaland* Director
Fred Harris* Director
Jerry C. Hasnedl* Director
Edward Hereford* Director
Douglas Johnson* Director
James Kile* Director
Leonard D. Larsen* Director
Tyrone A. Moos* Director
Gaylord Olson* Director
Duane G. Risan* Director
Denis Schilmoeller* Director
Duane Stenzel* Director
Michael Toelle* Director
Richard Traphagen* Director
Russell Twedt* Director
Merlin Van Walleghen* Director
Arnold Weisenbeck* Director
William J. Zarak, Jr.* Director
* By: /s/ NOEL K. ESTENSON
--------------------
Noel K. Estenson
ATTORNEY-IN-FACT
67
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CENEX HARVEST STATE COOPERATIVES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
-------------- -------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 75,667 $ 120,008 $ 68,798
Receivables ................................................ 606,641 471,516 492,003
Inventories ................................................ 549,703 479,734 533,948
Other current assets ....................................... 39,414 37,707 57,757
----------- ----------- ----------
Total current assets ..................................... 1,271,425 1,108,965 1,152,506
Investments ................................................. 427,896 347,334 320,621
Property, plant and equipment ............................... 968,333 915,770 868,073
Other assets ................................................ 120,010 97,034 95,315
----------- ----------- ----------
TOTAL ASSETS ............................................. $ 2,787,664 $ 2,469,103 $2,436,515
=========== =========== ==========
LIABILITIES AND EQUITIES
CURRENT LIABILITIES:
Notes payable .............................................. $ 196,986 $ 475 $ 52,446
Current portion of long-term debt .......................... 21,562 13,855 29,743
Patrons' credit balances ................................... 44,970 41,324 40,182
Patrons' advance payments .................................. 127,755 148,021 112,348
Drafts outstanding ......................................... 30,654 26,367 33,569
Accounts payable ........................................... 449,774 383,161 447,756
Book cash overdraft ........................................ 17,951 28,375 19,257
Accrued expenses ........................................... 119,728 119,373 92,543
Patronage dividends and equity retirements payable ......... 43,000 63,562 88,942
----------- ----------- ----------
Total current liabilities ................................ 1,052,380 824,513 916,786
Long-term debt .............................................. 461,104 442,985 348,665
Other liabilities ........................................... 88,173 75,801 80,364
Minority interests in subsidiaries .......................... 68,371 59,927 60,727
Commitments and contingencies ............................... 1,117,636 1,065,877 1,029,973
----------- ----------- ----------
TOTAL LIABILITIES AND EQUITIES ........................... $ 2,787,664 $ 2,469,103 $2,436,515
=========== =========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-1
CENEX HARVEST STATE COOPERATIVES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
REVENUES:
Grain and oilseed ............................. $ 3,309,310 $ 810,723 $ 4,629,553 $ 6,036,503
Energy ........................................ 1,345,772 343,747 1,858,069 1,676,842
Agronomy ...................................... 593,927 91,231 696,441 683,429
Processed grain and oilseed ................... 531,877 145,645 615,049 730,101
Feed and farm supplies ........................ 547,732 126,907 546,063 531,177
----------- ---------- ----------- -----------
6,328,618 1,518,253 8,345,175 9,658,052
Patronage dividends ........................... 5,876 5,111 70,387 71,070
Other revenues ................................ 100,031 19,271 98,520 85,390
----------- ---------- ----------- -----------
6,434,525 1,542,635 8,514,082 9,814,512
----------- ---------- ----------- -----------
COST AND EXPENSES:
Cost of goods sold ............................ 6,140,580 1,473,243 8,149,605 9,475,682
Marketing, general and administrative ......... 148,510 34,998 126,061 126,297
Interest ...................................... 42,438 12,311 34,620 33,368
Minority interests ............................ 10,017 3,252 6,880 7,984
----------- ---------- ----------- -----------
6,341,545 1,523,804 8,317,166 9,643,331
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES ..................... 92,980 18,831 196,916 171,181
INCOME TAXES ................................... 6,980 2,895 19,615 19,280
----------- ---------- ----------- -----------
NET INCOME ..................................... $ 86,000 $ 15,936 $ 177,301 $ 151,901
=========== ========== =========== ===========
DISTRIBUTION OF NET INCOME:
Patronage refunds ............................. $ 57,500 $ 32,650 $ 144,578 $ 119,171
Nonpatronage refunds .......................... 8,609
Deferred patronage ............................ 21,773 (24,134) (2,482) 11,137
Unallocated capital reserve ................... 6,727 7,420 26,596 21,593
----------- ---------- ----------- -----------
Net income .................................. $ 86,000 $ 15,936 $ 177,301 $ 151,901
=========== ========== =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS ENDED AUGUST 31, 1998
AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
CAPITAL NONPATRONAGE
EQUITY EQUITY COMMON
CERTIFICATES CERTIFICATES STOCK
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
BALANCES, JUNE 1, 1996 ......................................... $ 241,516 $ 9,740 $ 21
Patronage determination
Patronage distribution ........................................ 30,877 6,115
Equity retirement determination ...............................
Equities retired .............................................. (8,130) (74) (1)
Equities issued ............................................... 5,066
Other, net .................................................... 90 (637)
Comprehensive income:
Net income ...................................................
Other comprehensive income ...................................
Total comprehensive income ....................................
Initial investment offering, net .............................. (2,035)
Cash patronage refund provisions ..............................
Equity retirement provisions ..................................
--------- -------- ----------
BALANCES, MAY 31, 1997 ......................................... 267,384 15,144 20
Patronage determination .......................................
Patronage distribution ........................................ 31,258 6,863
Equity retirement determination ...............................
Equities retired .............................................. (9,542) (520)
Equities issued ............................................... 10,561
Other, net .................................................... 128 (178)
Comprehensive income:
Net income ................................................... 8,609
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. (13,329)
--------- -------- ----------
BALANCES, MAY 31, 1998 ......................................... 286,460 29,918 20
Results of operations of Cenex, Inc. for the eight
months May 31, 1998 .......................................... (21) (36)
Exchange of equities to effect pooling ........................ 540,058 (20)
Included with May 31, 1998 equity retirements payable ......... 4,429
Equities retired .............................................. (4,429) (13)
Equities issued ............................................... 911
Other, net .................................................... (64)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. 1,832
--------- -------- ----------
BALANCES, AUGUST 31, 1998 ...................................... 829,240 29,805 --
Patronage determination ....................................... 19,412
Patronage distribution ........................................ 99,052 (612)
Equities retired .............................................. (23,700) (97)
Equities issued ............................................... 14,714
Other, net .................................................... (674) (311)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. (25,750)
--------- -------- ----------
BALANCES, AUGUST 31, 1999 ...................................... $ 912,294 $ 28,785 $ --
========= ======== ==========
[WIDE TABLE CONTINUED FROM ABOVE
WHEAT OILSEED PROCESSING
PREFERRED MILLING & REFINING
STOCK EPUs EPUs
------------- -------------- -------------------
(DOLLARS IN THOUSANDS)
BALANCES, JUNE 1, 1996 ......................................... $ 456,618
Patronage determination .......................................
Patronage distribution ........................................ 42,014
Equity retirement determination ............................... 11,189
Equities retired .............................................. (11,107)
Equities issued ...............................................
Other, net .................................................... (2,060)
Comprehensive income:
Net income ...................................................
Other comprehensive income ...................................
Total comprehensive income ....................................
Initial investment offering, net .............................. $ 9,574 $ 4,296
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. (27,453)
---------- --------- -------
BALANCES, MAY 31, 1997 ......................................... 469,201 9,574 4,296
Patronage determination .......................................
Patronage distribution ........................................ 52,831
Equity retirement determination ............................... 27,453
Equities retired .............................................. (27,362)
Equities issued ...............................................
Other, net .................................................... (3,451) (96) (96)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions .................................. (31,273)
---------- --------- -------
BALANCES, MAY 31, 1998 ......................................... 487,399 9,478 4,200
Results of operations of Cenex, Inc. for the eight
months May 31, 1998 .......................................... 52,639
Exchange of equities to effect pooling ........................ (540,038)
Included with May 31, 1998 equity retirements payable .........
Equities retired ..............................................
Equities issued ...............................................
Other, net .................................................... (6) (6)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions ..................................
---------- --------- ---------
BALANCES, AUGUST 31, 1998 ...................................... -- 9,472 4,194
Patronage determination .......................................
Patronage distribution ........................................
Equities retired ..............................................
Equities issued ...............................................
Other, net .................................................... (214) (6)
Comprehensive income:
Net income ...................................................
Other comprehensive loss .....................................
Total comprehensive income ....................................
Cash patronage refund provisions ..............................
Equity retirement provisions ..................................
---------- --------- ---------
BALANCES, AUGUST 31, 1999 ...................................... $ -- $ 9,258 $ 4,188
========== ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS ENDED AUGUST 31, 1998
AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
UNALLOCATED ACCUMULATED OTHER ALLOCATED
PATRONAGE DEFERRED CAPITAL COMPREHENSIVE CAPITAL TOTAL
REFUNDS PATRONAGE RESERVE INCOME (LOSS) RESERVER EQUITIES
- ------------- -------------- ------------- ------------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
$ 72,370 $ (82,862) $ 143,641 $ 458 $ 8,200 $ 849,702
31,358 (357) 31,001
(103,728) (6,512) (31,234)
11,189
(19,312)
5,066
636 (1,971)
119,171 11,137 21,593 151,901
823 823
-----------
152,724
-----------
(998) 10,837
(35,751) (35,751)
(27,453)
---------- ---------- --------- --------- ------- -----------
83,420 (71,725) 158,003 1,281 8,200 944,798
36,061 (309) 35,752
(119,481) (7,511) (36,040)
27,453
(37,424)
10,561
299 (6) (3,400)
144,578 (2,482) 26,596 177,301
(86) (86)
-----------
177,215
-----------
(44,340) (44,340)
(44,602)
---------- ---------- --------- --------- ------- -----------
100,238 (74,207) 177,078 1,195 8,194 1,029,973
(23,310) (13,086) 13,401 29,587
--
4,429
(4,442)
911
(1,177) (2) (1,255)
32,650 (24,134) 7,420 15,936
(1,294) (1,294)
-----------
14,642
-----------
(9,800) (9,800)
1,832
---------- ---------- --------- --------- ------- -----------
99,778 (111,427) 196,722 (99) 8,192 1,065,877
44,150 63,562
(143,928) 1,738 (43,750)
(23,797)
14,714
350 (44) (899)
57,500 21,773 6,727 86,000
(1,071) (1,071)
-----------
84,929
-----------
(17,250) (17,250)
(25,750)
---------- ---------- --------- --------- ------- -----------
$ 40,250 $ (89,654) $ 205,537 $ (1,170) $ 8,148 $ 1,117,636
========== ========== ========= ========= ======== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ------------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 86,000 $ 15,936 $ 177,301 $ 151,901
---------- ---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................ 81,246 20,570 69,877 63,387
Noncash net (income) loss from joint ventures ............ (22,363) 9,142 (8,381) (7,635)
Adjustment of inventories to market value ................ (35,346) 12,108 10,153 (24,384)
Noncash portion of patronage dividends received .......... (4,847) (9,305) (61,732) (38,787)
Gain on sale of property, plant and equipment ............ (1,706) (458) (7,487) (3,125)
Other, net ............................................... 196 (978) (768)
Changes in operating assets and liabilities:
Receivables ............................................. (133,641) 92,897 63,221 52,143
Inventories ............................................. (34,623) 31,178 25,753 194,101
Other current assets and other assets ................... (29,483) (3,441) 2,929 (1,712)
Patrons' credit balances ................................ 3,646 (1,552) 10,594 (1,760)
Patrons' advance payments ............................... (20,266) 39,533 (45,531) (55,554)
Accounts payable and accrued expenses ................... 66,968 (89,932) (18,215) 68,839
Drafts outstanding and other liabilities ................ 16,670 (3,234) 6,066 11,508
---------- ---------- ---------- ----------
Total adjustments ........................................ (113,549) 97,506 46,269 256,253
---------- ---------- ---------- ----------
Net cash (used in) provided by continuing
operations ............................................ (27,549) 113,442 223,570 408,154
Net cash used in discontinued operations ................ -- -- -- (6,630)
---------- ---------- ---------- ----------
Net cash (used in) provided by operating activities ..... (27,549) 113,442 223,570 401,524
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment .............. (124,471) (41,152) (145,231) (200,275)
Proceeds from disposition of property, plant
and equipment ............................................ 6,785 824 21,877 28,447
Discontinued operations investing activities, net ......... 33,164
Investments ............................................... (54,358) (1,592) 1,566 12,686
Investments redeemed ...................................... 11,241 391 29,933 14,657
Changes in notes receivable ............................... 334 792 (5,036) 834
Other investing activities, net ........................... (278) 327 (3,033) (5,307)
---------- ---------- ---------- ----------
Net cash used in investing activities ................... (160,747) (40,410) (99,924) (115,794)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable .................................. 196,511 (53,025) (88,901) (224,831)
Long-term debt borrowings ................................. 40,000 359,078 83,916 74,905
Principal payments on long-term debt ...................... (14,585) (317,228) (42,171) (55,544)
Changes in book cash overdraft ............................ (10,424) (20,939) (8,418) (10,001)
Proceeds from sale of equity participation units, net ..... 10,837
Retirements of equity ..................................... (23,797) (4,442) (36,880) (18,576)
Cash patronage dividends paid ............................. (43,750) (35,898) (30,819)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities ..... 143,955 (36,556) (128,352) (254,029)
---------- ---------- ---------- ----------
NET CASH FLOWS OF CENEX, INC. FROM OCTOBER 1,
1997 THROUGH MAY 31, 1998 ................................. 14,734
---------- ---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................... (44,341) 51,210 (4,706) 31,701
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD .................................................... 120,008 68,798 73,504 41,803
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 75,667 $ 120,008 $ 68,798 $ 73,504
========== ========== ========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Cenex Harvest States Cooperatives (Cenex Harvest States) or
(the Company) is an agricultural cooperative organized for the mutual benefit of
its members. Members of the cooperative are located primarily throughout the
Midwest and Northwest regions of the United States. In addition to grain
marketing, milling and oilseed processing, the Company provides its patrons with
energy and agronomy products and other farm supplies. Sales are both domestic
and international.
In accordance with the By-Laws and by action of the Board of Directors,
annual net savings from patronage sources is distributed to consenting patrons
following the close of each year, and is based on amounts reportable for federal
income tax purposes as determined by the cooperative and further adjusted in
accordance with the By-Laws. The By-Laws provide that an amount of up to 10% of
the distributable annual net savings from patronage sources be added to the
unallocated reserve as determined by the Board of Directors.
BASIS OF PRESENTATION -- Pursuant to a Plan of Combination dated May 29,
1998 (the Plan of Combination), CENEX, Inc. (Cenex) and Harvest States
Cooperatives combined through merger on June 1, 1998 (the Combination), with
Harvest States Cooperatives the surviving corporation. In accordance with the
Plan of Combination, the Articles of Incorporation and By-Laws of Harvest States
Cooperatives were restated and the name was changed to Cenex Harvest States
Cooperatives.
As a result of the Combination, each holder of common stock of Cenex became
a member of Cenex Harvest States, to the extent eligible for membership, and all
equity interests of Cenex were determined and exchanged for equal equity
interests in Cenex Harvest States at its stated dollar amount on a
dollar-for-dollar basis as more thoroughly set forth in the Plan of Combination.
Prior to the Combination, Cenex's year end was September 30 and Harvest States
Cooperatives' year end was May 31. Subsequent to the Combination, the Company
changed its fiscal year end to August 31.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. The Company's consolidated financial statements
reflect the financial position and results of operations of the combined
companies as if the merger had occurred on June 1, 1996. The consolidated
statements of operations and cash flows for the years ended May 31, 1998 and
1997, reflect the results of operations and cash flows for Harvest States
Cooperatives for the years then ended combined with the results of operations
and cash flows of Cenex for the years ended September 30, 1997 and 1996,
respectively. The consolidated balance sheet as of May 31, 1998 reflects the
financial position of Harvest States Cooperatives on that date combined with the
financial position of Cenex as of September 30, 1997. The consolidated results
of operations of Cenex for the eight months ended May 31, 1998, have been
excluded from the reported results of operations and, therefore, have been
recorded as an adjustment to the Company's equities and cash flows in the
consolidated statements of equities and comprehensive income and cash flows
during the three months ended August 31, 1998.
All significant transactions between Harvest States Cooperatives and Cenex
prior to the Combination have been eliminated. Certain amounts previously
reported have been reclassified to conform to the current year presentation.
CONSOLIDATION -- The consolidated financial statements include the accounts
of Cenex Harvest States and all of its wholly-owned and majority-owned
subsidiaries, including National Cooperative Refinery Association (NCRA). The
effects of all significant intercompany transactions have been eliminated.
CASH EQUIVALENTS -- Cash equivalents include short-term highly liquid
investments with original maturities of three months or less at date of
acquisition.
INVENTORIES AND HEDGING -- Grain, processed grain, oilseed and processed
oilseed are stated at market values including appropriate adjustments for open
purchases, sales and futures contracts. All other inventories are stated at the
lower of cost or market. The cost of certain energy inventories
F-6
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(wholesale refined products, crude oil and asphalt) is determined on the
last-in, first-out (LIFO) method; all other inventories are valued on the
first-in, first-out (FIFO) and average cost methods.
The Company enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on energy, grain and
oilseed transactions to the extent considered practicable for minimizing risk
from market price fluctuations. Futures contracts used for hedging are purchased
and sold through regulated commodity exchanges. Inventories, however, may not be
completely hedged, due in part to the absence of satisfactory hedging facilities
for certain commodities and geographical areas and in part to the Company's
assessment of its exposure from expected price fluctuations. 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.
Commodity trading in futures and options contracts is a natural extension
of cash market trading. The commodity futures and options markets have
underlying principles of increased liquidity and longer trading periods than the
cash market, and hedging is one method of reducing exposure to price
fluctuations. The Company's use of futures and options contracts reduces the
effects of price volatility, thereby protecting against adverse short-term price
movements while somewhat limiting the benefits of short-term price movements.
Gains and losses on futures transactions related to energy inventories are
credited or charged to cost of goods sold. Energy related gains and losses on
hedge contracts not yet closed are accounted for as unrealized gains and losses
and, accordingly, are deferred in the consolidated balance sheets as part of
inventories. All other futures transactions are marked to market. Open hedge
positions and deferred gains and losses for futures and options contracts were
not significant as of August 31, 1999 and 1998, and May 31, 1998.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, a new standard
related to the accounting for derivative transactions and hedging activities. In
July 1999, the FASB issued SFAS No. 137 which defers the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. While management does not believe this standard will materially impact
financial results of the Company, it is currently evaluating the reporting
requirements under this new standard.
INVESTMENTS -- Investments in cooperatives are stated at cost, plus
patronage refunds received in the form of capital stock and other equities.
Patronage dividends are recorded at the time written notices of allocation are
received. Joint ventures and other investments in which the Company has
significant ownership and influence, but not control, are included in the
consolidated financial statements under the equity method of accounting.
Investments in other debt and equity securities are considered available for
sale and are stated at market value, with unrealized amounts included in
accumulated other comprehensive income (loss).
PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS -- Property,
plant and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on the straight-line
method by charges to operations at rates based upon the expected useful lives of
individual or groups of assets. Leasehold rights and other intangible assets are
amortized using the straight-line method over 3 to 40 years, primarily 15 to 20
years. The cost and related accumulated depreciation and amortization of assets
sold or otherwise disposed of are removed from the related accounts and
resulting gains or losses are reflected in operations. The Company periodically
reviews
F-7
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
property, plant and equipment and other long-lived assets in order to assess
recoverability based on projected income and related cash flows on an
undiscounted basis. Should the sum of the 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.
REVENUE RECOGNITION -- Grain and oilseed sales are recorded at time of
settlement, net of freight charges. All other sales are recognized upon shipment
to customers, net of freight charges.
ENVIRONMENTAL EXPENDITURES -- Liabilities related to remediation of
contaminated properties are recognized when the related costs are considered
probable and can be reasonably estimated. Estimates of these costs are based on
current available facts, existing technology, undiscounted site-specific costs
and currently enacted laws and regulations. In reporting environmental
liabilities, no offset is made for potential recoveries. All liabilities are
monitored and adjusted as new facts or changes in law or technology occur.
Environmental expenditures are capitalized when such costs provide future
economic benefits.
INCOME TAXES -- The Company is a nonexempt agricultural cooperative and
files a consolidated federal income tax return with its 80% or more owned
subsidiaries. The Company is subject to tax on net income from nonpatronage
sources and undistributed patronage-sourced income. Deferred income taxes
reflect the impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes, at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
COMPREHENSIVE INCOME -- As of June 1, 1998, the Company adopted SFAS
No.130, which established new rules for the reporting of comprehensive income
and its components. The adoption of SFAS No. 130 had no impact on the Company's
net income. SFAS No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities as well as the Company's charge to equity related
to its pension liability to be included as components of other comprehensive
income (loss) and accumulated other comprehensive income (loss) in the
consolidated statements of equities and comprehensive income.
SEGMENT INFORMATION -- Effective August 31, 1999 the Company adopted SFAS
No. 131, which requires the management approach in determining business
segments. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-8
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RECEIVABLES
Receivables as of August 31, 1999 and 1998, and May 31, 1998 are as
follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
Trade ......................................... $595,403 $474,454 $494,270
Other ......................................... 34,493 20,377 22,601
-------- -------- --------
629,896 494,831 516,871
Less allowances for doubtful accounts ......... 23,255 23,315 24,868
-------- -------- --------
$606,641 $471,516 $492,003
======== ======== ========
All export sales are denominated in U.S. dollars. Export sales for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997 are as follows:
FOR THE THREE FOR THE YEARS ENDED
FOR THE YEAR MONTHS ENDED -----------------------
ENDED AUGUST 31, MAY 31, MAY 31,
AUGUST 31, 1999 1998 1998 1997
----------------- -------------- --------- --------
(DOLLARS IN MILLIONS)
Africa ................ $158 $ 94 $ 280 $ 227
Asia .................. 310 149 1,217 2,318
Europe ................ 358 79 404 577
North America ......... 198 104 331 360
South America ......... 122 10 268 18
3. INVENTORIES
Inventories as of August 31, 1999 and 1998, and May 31, 1998 are as
follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
Energy .............................. $209,661 $170,544 $225,008
Grain and oilseed ................... 202,166 153,384 145,998
Agronomy ............................ 69,050 67,760 64,226
Processed grain and oilseed ......... 14,342 37,464 37,544
Feed and farm supplies .............. 50,908 47,842 58,876
Other ............................... 3,576 2,740 2,296
-------- -------- --------
$549,703 $479,734 $533,948
======== ======== ========
As of August 31, 1999, the Company valued approximately 29% of inventories,
primarily related to energy, using the lower of cost, determined on the LIFO
method, or market (22% and 25% as of August 31, 1998 and May 31, 1998,
respectively). As of August 31, 1999 and 1998, and May 31, 1998, reserves
amounting to $20.4 million, $61.7 million and $24.6 million, respectively, have
been established to reduce energy inventories to estimated market value.
F-9
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
Investments as of August 31, 1999 and 1998, and May 31, 1998 are as
follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
Cooperatives:
CF Industries, Inc. ............................. $152,996 $152,996 $136,125
National Bank for Cooperatives (CoBank) ......... 33,942 37,630 36,061
Ag Processing, Inc. ............................. 23,252 19,438 19,487
Land O'Lakes, Inc. .............................. 19,256 15,489 12,078
Joint Ventures:
Ventura Foods, LLC .............................. 55,562 41,666 40,954
Cenex/Land O'Lakes Agronomy Company ............. 36,933 34,068 29,202
Agro Distribution, LLC .......................... 45,741
Tacoma Export Marketing Company ................. 8,821 6,849 7,147
Other ............................................ 51,393 39,198 39,567
-------- -------- --------
$427,896 $347,334 $320,621
======== ======== ========
Effective July 1, 1999 St. Paul Bank for Cooperatives (St. Paul Bank)
merged with CoBank and, as a result, the existing investment in St. Paul Bank
was transferred to CoBank. The Company's investment in St. Paul Bank as of
August 31, 1998 and May 31, 1998 has been included with CoBank in the table
above.
On June 30, 1999, Agro Distribution, LLC and Agronomy Company of Canada,
Ltd., (the Entities) both companies owned 50/50 by the Company and Land O'Lakes,
Inc., purchased approximately 310 agronomy facilities from Terra International,
Inc., at a price of approximately $350.0 million. In conjunction with this
purchase transaction, the Company invested $51.5 million in the Entities and
issued a note receivable for $3.5 million to Agronomy Company of Canada, Ltd.
Financing arrangements of the Entities, to be managed by the Cenex/Land O'Lakes
Agronomy Company (of which Cenex Harvest States owns 50%), are without recourse
to the Company.
SFAS No. 107 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 there are no quoted market prices and, as such, it is
not practicable to estimate their fair value.
Various agreements with other owners of investee companies and a
majority-owned subsidiary set out parameters whereby Cenex Harvest States may
buy and sell additional interests in those companies, upon the occurrence of
certain events, at fair values determinable as set forth in the specific
agreements.
F-10
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment as of August 31, 1999 and
1998, and May 31, 1998 are as follows:
ESTIMATED
USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31,
IN YEARS 1999 1998 1998
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Energy refineries ............................. 3-40 $ 660,424 $ 633,149 $ 601,899
Distribution and general ...................... 3-40 298,931 283,773 233,891
Grain terminals and country elevators ......... 3-50 272,311 243,005 249,368
Energy pipelines and terminals ................ 3-40 220,367 211,781 211,207
Grain processing plants ....................... 3-40 208,210 164,026 187,316
Feed plants ................................... 3-40 27,216 27,081 27,060
Construction in progress ...................... 64,508 77,548 35,722
--------- --------- ---------
1,751,967 1,640,363 1,546,463
Less accumulated depreciation and
amortization ................................. 783,634 724,593 678,390
--------- --------- ---------
$ 968,333 $ 915,770 $ 868,073
========= ========= =========
In May 1995, the Cenex Board of Directors approved a plan to dispose of its
exploration and production (E&P) operations. A purchase and sale agreement was
signed, and the transaction recorded in early fiscal year 1996. The E&P
operations have been accounted for as discontinued operations.
6. OTHER ASSETS
Other assets as of August 31, 1999 and 1998, and May 31, 1998 are as
follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Intangible assets, less accumulated amortization of
$22,720, $20,886, and $18,241, respectively ........ $ 21,539 $22,888 $20,912
Notes receivable .................................... 4,547 6,172 11,836
Other assets ........................................ 93,924 67,974 62,567
-------- ------- -------
$120,010 $97,034 $95,315
======== ======= =======
F-11
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt as of August 31, 1999 and 1998, and May
31, 1998 consisted of the following:
INTEREST RATES
AT AUGUST 31, AUGUST 31, AUGUST 31, MAY 31,
1999 1999 1998 1998
------------------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Notes payable(a),(e) ................... 5.40% to 7.01% $196,986 $ 475 $ 52,446
======== ======== ========
Long-term debt:
Revolving term loans from
cooperative banks, payable in
installments through 2009, when the
balance is due(b),(e) ................ 6.48% to 14.32% $227,211 $192,005 $332,130
Private placement, payable in equal
installments beginning in 2008
through 2013(c),(e) .................. 6.81% 225,000 225,000
Industrial Revenue Bonds, payable in
installments through 2010(d) ......... 5.23% to 9.26% 27,045 36,155 42,665
Other notes and contracts ............. 4.00% to 12.00% 3,410 3,680 3,613
-------- -------- --------
Total long-term debt ................... 482,666 456,840 378,408
Less current portion .................. 21,562 13,855 29,743
-------- -------- --------
Long-term portion ...................... $461,104 $442,985 $348,665
======== ======== ========
- ------------------
(a) The Company finances its working capital needs through short-term lines of
credit with banks for cooperatives and commercial banks. In June 1998, the
Company established a 364-day credit facility of $400.0 million, which was
renewed in May 1999, and a five-year revolving credit facility of $200.0
million, all of which is committed. On August 31, 1999, $196.0 million was
outstanding on the 364-day credit facility, with no amounts outstanding on
the five-year revolving credit facility as of that date.
(b) In June 1998, the Company repaid certain of its existing debt and
established a new long-term credit agreement under which the term loan
balance outstanding as of May 31, 1998 was repaid and partially refinanced
through the new agreement. The new long-term agreement commits $200.0
million of long-term borrowing capacity to the Company through May 31,
1999, of which $164.0 million was drawn before the expiration date of that
commitment. NCRA term loans are collateralized by NCRA's investment in the
cooperative bank.
(c) In June 1998, as a part of the refinancing program for the merged
operations, the Company entered into a private placement with several
insurance companies for long-term debt in the amount of $225.0 million.
(d) Industrial Revenue Bonds are collateralized by property, plant and
equipment, primarily energy refinery equipment, with a cost of
approximately $155.9 million, $156.1 million and $156.3 million, less
accumulated depreciation of approximately $97.5 million, $91.3 million and
$85.7 million as of August 31, 1999 and 1998, and May 31, 1998,
respectively.
(e) Restrictive covenants under various note agreements have requirements for
maintenance of minimum working capital levels and other financial ratios.
Based on quoted market prices for the same or similar issues, the fair
value of long-term debt approximates book value as of August 31, 1999 and 1998,
and May 31, 1998.
F-12
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
For the year ended August 31, 1999, for the three months ended August 31,
1998, and for the years ended May 31, 1998, and 1997, the Company capitalized
interest of $1.7 million, $0.4 million, $1.8 million, and $3.7 million,
respectively.
The aggregate amount of long-term debt payable as of August 31, 1999, is as
follows (dollars in thousands):
2000 ................. $ 21,562
2001 ................. 29,087
2002 ................. 17,495
2003 ................. 13,524
2004 ................. 14,561
Thereafter ........... 386,437
8. INCOME TAXES
The provision for income taxes for the year ended August 31, 1999, for the
three months ended August 31, 1998, and for the years ended May 31, 1998 and
1997 is as follows:
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED -------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- --------- ----------
(DOLLARS IN THOUSANDS)
Current .............. $5,783 $ 5,189 $17,886 $ 21,129
Deferred ............. 1,197 (2,294) 1,729 (1,849)
------ -------- ------- --------
Income taxes ......... $6,980 $ 2,895 $19,615 $ 19,280
====== ======== ======= ========
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of August 31, 1999 and 1998,
and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Accrued expenses and valuation reserves .................... $10,741 $10,017 $14,435
Postretirement health care and pension liabilities ......... 3,665 3,137 3,982
Alternative minimum tax credit carryforward ................ 883 920 1,013
Other ...................................................... 5,880 6,340 4,915
------- ------- -------
Total deferred tax assets ................................. 21,169 20,414 24,345
------- ------- -------
Deferred tax liabilities:
Property, plant and equipment .............................. 3,185 3,169 8,335
Equity method investments .................................. 8,513 6,279 4,120
Other ...................................................... 3,165 3,505 6,769
------- ------- -------
Total deferred tax liabilities ............................ 14,863 12,953 19,224
------- ------- -------
Net deferred tax asset ...................................... $ 6,306 $ 7,461 $ 5,121
======= ======= =======
As of August 31, 1999, net deferred tax assets of approximately $1.6
million and $4.7 million are included in other current assets and other assets,
respectively ($3.5 million and $4.0 million, respectively, as of August 31,
1998, and $1.9 million and $3.3 million, respectively, as of May 31, 1998).
F-13
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The reconciliation of the statutory federal income tax rate to the
effective rate for the year ended August 31, 1999, for the three months ended
August 31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED -------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- --------- ----------
Statutory federal income tax rate ................... 35.0% 35.0% 35.0% 35.0%
State and local income taxes, net of federal
income tax benefit ................................. 3.9 4.1 4.2 4.2
Patronage earnings .................................. (24.1) (67.4) (29.1) (27.5)
Tax effect of changes in deferred patronage ......... ( 6.8) 51.3 0.5 ( 2.6)
Rate changes on deferred tax assets and
liabilities ........................................ 0.5 (11.2)
Other ............................................... ( 1.0) 3.6 ( 0.6) 2.2
----- ----- ----- -----
Effective tax rate .................................. 7.5% 15.4% 10.0% 11.3%
===== ===== ===== =====
The principal differences between financial statement income and taxable
income for the year ended August 31, 1999, for the three months ended August 31,
1998, and for the years ended May 31, 1998 and 1997 are as follows:
FOR THE YEAR FOR THE THREE FOR THE YEARS ENDED
ENDED MONTHS ENDED --------------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
-------------- -------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Income before income taxes ................ $ 92,980 $ 18,831 $ 196,916 $ 171,181
Financial reporting/tax differences:
Environmental reserves ................... 1,343 (563) 1,916 (776)
Oil and gas activities, net .............. 18,005 8,448 (405) (13,851)
Energy inventory market reserves ......... (48,445) 7,150 (9,279) (21,064)
Other, net ............................... 9,258 12,310 2,488 25,993
Patronage refund provisions .............. (57,500) (32,650) (144,578) (119,171)
--------- --------- ---------- ----------
Taxable income ............................ $ 15,641 $ 13,526 $ 47,058 $ 42,312
========= ========= ========== ==========
9. EQUITIES
PATRON'S EQUITY -- In accordance with the By-Laws and by action of the
Board of Directors, annual net savings from patronage sources is distributed to
consenting patrons following the close of each year and is based on amounts
reportable for federal income tax purposes as adjusted in accordance with the
By-Laws. The cash portion of this distribution is determined annually by the
Board of Directors, with the balance issued in the form of capital equity
certificates.
Annual net savings from sources other than patronage may be added to the
unallocated capital reserve or, upon action by the Board of Directors, allocated
to members in the form of non-patronage equity certificates.
Inactive direct members and patrons and active direct members and patrons
age 61 and older on June 1, 1998 are eligible for redemption of their capital
equity certificates at age 72 or death. For other
F-14
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EQUITIES (CONTINUED)
active direct members and patrons and member cooperatives, equities will be
redeemed annually as determined by the Board of Directors.
On May 31, 1997, the Company completed an offering for the sale of equity
participation units (EPUs) in its Wheat Milling Defined Business Unit and its
Oilseed Processing and Refining Defined Business Unit to qualified subscribers.
Qualified subscribers are identified as Defined Members or representatives of
Defined Members which are persons or associations of producers actually engaged
in the production of agricultural products. Subscribers were allowed to purchase
a portion of their EPUs by exchanging existing patronage certificates. The
purchasers of EPUs have the right and obligation to deliver annually the number
of bushels of wheat or soybeans equal to the number of units held. Unit holders
participate in the net patronage sourced income from operations of the
applicable defined business unit as patronage refunds. Retirement of patrons'
equities attributable to EPUs is at the discretion of the Board of Directors,
and it is the Board's goal to retire such equity on a revolving basis seven
years after declaration.
CENEX EQUITY PRIOR TO JUNE 1, 1998 -- In accordance with the Cenex By-Laws
and by action of the Cenex Board of Directors, annual net savings from patronage
sources was distributed to consenting patrons following the close of each year,
and was based on amounts reportable for federal income tax purposes as adjusted
in accordance with the Cenex By-Laws. A minimum of 20% of the patronage refund
was paid in cash with the balance distributed in the form of preferred stock.
The Cenex By-Laws required that annual net savings from sources other than
patronage be added to the unallocated capital reserve. The Cenex By-Laws also
provided that an amount equal to 10% of the distributable annual net savings
from patronage sources be added to the unallocated capital reserve, until the
total unallocated capital reserve reached 25% of total equities.
The authorized preferred stock consisted of 30,000,000 shares at a par
value of $25 each. The preferred stock was nonvoting and was not subject to the
payment of dividends. The Articles of Incorporation provided that the preferred
stock may be retired at par value at any time and in any order as determined by
the Cenex Board of Directors.
The authorized common stock consisted of 5,000 shares at a par value of $25
each. Common stock was not subject to the payment of dividends. Voting rights
were limited to holders of common stock, with cooperative associates entitled to
one vote for each of their registered producer members, plus one additional vote
for each $1,000, or major fraction thereof, of preferred stock or equity issued
as patronage.
F-15
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EQUITIES (CONTINUED)
The following is a summary of share activity for common and preferred stock
of Cenex for the eight months ended May 31, 1998 and for the years ended
September 30, 1997 and 1996:
COMMON PREFERRED
-------- ---------------
Shares outstanding, September 30, 1995 .......... 844 18,821,335
Patronage distribution .......................... 1,682,589
Equities retired, net ........................... (17) (419,485)
Other ........................................... (33,115)
--- ----------
Shares outstanding, September 30, 1996 .......... 827 20,051,324
Patronage distribution .......................... 2,115,756
Equities retired, net ........................... (13) (1,059,461)
Other ........................................... (107,515)
--- ----------
Shares outstanding, September 30, 1997 .......... 814 21,000,104
Patronage distribution .......................... 2,578,292
Equities retired, net ........................... (31) (1,254,979)
Other ........................................... (201,856)
--- ----------
Shares outstanding, May 31, 1998 ................ 783 22,121,561
=== ==========
HARVEST STATES COOPERATIVES EQUITY PRIOR TO JUNE 1, 1998 -- In accordance
with the Harvest States Cooperatives By-Laws and by action of the Harvest States
Cooperatives Board of Directors, annual net earnings from patronage sources were
distributed to consenting patrons following the close of each year and were
based on amounts reportable for federal income tax purposes as adjusted in
accordance with the Harvest States Cooperatives By-Laws. The cash portion of the
distribution was determined annually by the Harvest States Cooperatives Board of
Directors, with the balance issued in the form of capital equity certificates.
Annual net earnings from sources other than patronage were added to the
unallocated capital reserve or, upon action by the Harvest States Cooperatives
Board of Directors, allocated to members in the form of nonpatronage
certificates.
The Harvest States Cooperatives Board of Directors authorized the
redemption of capital equity certificates held by patrons who were 72 years of
age and those held by estates of deceased patrons. The Harvest States
Cooperatives Board of Directors also authorized the redemption of nonpatronage
certificates held by estates of deceased patrons.
DEFERRED PATRONAGE -- The Company follows the practice of accounting for
deferred patronage charges and credits in a separate equity account instead of
including such amounts in the unallocated capital reserve. Deferred patronage
results from the fact that patronage distributions are primarily determined on
the basis of taxable income rather than net income as reported in the
consolidated financial statements. Deferred patronage consists of items which
have been included in the computation of net income for financial statement
purposes, but not for income tax or patronage purposes. As the items reverse,
patronage refunds and deferred patronage are affected.
F-16
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Effective June 1, 1998, the Company adopted SFAS No. 132, a new standard on
disclosure requirements related to pension and other postretirement benefits.
Accordingly, disclosures related to all periods prior to the three months ended
August 31,1998, have been restated in accordance with this new standard.
PENSION BENEFITS OTHER BENEFITS
---------------------------------------- ----------------------------------------
FOR THE THREE
FOR THE MONTHS FOR THE FOR THE FOR THE THREE FOR THE
YEAR ENDED ENDED YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
AUGUST 31, AUGUST 31, MAY 31, AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998 1999 1998 1998
------------ -------------- ------------ ------------ --------------- -----------
(DOLLARS IN THOUSANDS)
Change in benefit obligation:
Benefit obligation at
beginning of period ........... $ 265,045 $ 245,444 $ 219,869 $ 23,474 $ 22,210 $ 21,298
Service cost ................... 8,733 5,212 7,046 1,421 387 727
Interest cost .................. 17,817 11,771 16,275 1,769 956 1,525
Plan participants'
contributions ................. 131
Plan amendments ................ 10,673 772 247 (630) --
Actuarial (gain) loss .......... (8,322) 6,021 18,275 3,993 517 (38)
Assumption change .............. (6,103) 5,348 (146) 326
Settlements .................... 275
Special termination
benefits ...................... 674
Benefits paid .................. (21,467) (10,197) (16,268) (1,338) (1,053) (1,302)
--------- --------- --------- --------- --------- ---------
Benefit obligation at end
of period ..................... $ 266,651 $ 265,045 $ 245,444 $ 28,543 $ 23,474 $ 22,210
========= ========= ========= ========= ========= =========
Change in plan assets:
Fair value of plan assets at
beginning of period ........... $ 241,949 $ 252,659 $ 211,845
Actual return on plan
assets ........................ 35,622 (6,263) 47,549
Company contributions .......... 3,256 5,750 9,419 $ 1,338 $ 922 $ 1,302
Participants' contributions .... 131
Net transfers .................. 114
Benefits paid .................. (21,467) (10,197) (16,268) (1,338) (1,053) (1,302)
--------- --------- --------- --------- --------- ---------
Fair value of plan assets at
end of period ................. $ 259,360 $ 241,949 $ 252,659 $ -- $ -- $ --
========= ========= ========= ========= ========= =========
F-17
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
PENSION BENEFITS OTHER BENEFITS
----------------------------------------- -------------------------------------------
AUGUST 31, AUGUST 31, MAY 31, AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998 1999 1998 1998
------------ ------------ ----------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
Funded status ...................... $ (7,291) $ (23,096) $ 7,215 $ (28,543) $ (23,474) $ (22,210)
Employer contributions after
measurement date .................. 5,331 3,336 200 97 102
Unrecognized actuarial loss
(gain) ............................ 27,869 59,511 27,746 (2,341) (6,372) (7,487)
Unrecognized transition (asset)
obligation ........................ (2,690) (3,938) (5,081) 13,004 13,941 14,444
Unrecognized prior service cost 10,386 524 (34) (592) 3 2
--------- --------- -------- --------- --------- ---------
Prepaid benefit (accrued) cost ..... $ 33,605 $ 33,001 $ 33,182 $ (18,272) $ (15,805) $ (15,149)
========= ========= ======== ========= ========= =========
Amounts recognized on balance
sheets consist of:
Prepaid benefit cost .............. $ 42,099 $ 41,554 $ 36,493
Accrued benefit liability ......... (13,158) (9,396) (4,609) $ (18,272) $ (15,805) $ (15,149)
Intangible asset .................. 3,272 350 816
Accumulated other
comprehensive loss ............... 1,392 493 482
--------- --------- -------- --------- --------- ---------
Net amount recognized ............. $ 33,605 $ 33,001 $ 33,182 $ (18,272) $ (15,805) $ (15,149)
========= ========= ======== ========= ========= =========
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the year ended August 31,
1999. The rate was assumed to decrease gradually to 6% for 2003 and remain at
that level thereafter.
F-18
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
PENSION BENEFITS
-----------------------------------------------------
FOR THE
FOR THE THREE MONTHS FOR THE YEARS ENDED
YEAR ENDED ENDED -------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Components of net periodic
benefit cost:
Service cost ......................... $ 8,733 $ 5,212 $ 7,046 $ 7,474
Interest cost ........................ 17,817 11,771 16,275 16,209
Expected return on assets ............ (26,552) (14,809) (18,199) (17,788)
Prior service cost
amortization . ...................... 812 214 189 252
Actuarial loss (gain)
amortization ........................ 8,145 671 1,307 1,456
Transition amount
amortization ........................ (1,248) (1,143) (2,506) (2,507)
Special termination benefits ......... 674
------- ---------- ------- -------
Net periodic benefit cost ............ $ 7,707 $ 2,590 $ 4,112 $ 5,096
Additional expense due to
settlement of retiree
obligation .......................... 275 1,168
------- ---------- ------- -------
Net periodic benefit cost ............ $ 7,982 $ 2,590 $ 4,112 $ 6,264
======= ========== ======= =======
Weighted-average assumptions:
Discount rate ........................ 7.30% 6.83% 7.25% 7.65%
Expected return on plan assets ....... 8.50% 8.63% 8.40% 8.25%
Rate of compensation increase ........ 5.00% 5.02% 5.08% 5.17%
[WIDE TABLE CONTINUED FROM ABOVE]
OTHER BENEFITS
----------------------------------------------------
FOR THE
FOR THE THREE MONTHS FOR THE YEARS ENDED
YEAR ENDED ENDED ------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------- -------------- ------------ ----------
(DOLLARS IN THOUSANDS)
Components of net periodic
benefit cost:
Service cost ......................... $1,421 $ 387 $ 727 $ 598
Interest cost ........................ 1,769 956 1,525 1,620
Expected return on assets ............
Prior service cost
amortization . ...................... (38) (1) 1
Actuarial loss (gain)
amortization ........................ (82) (268) (354) (210)
Transition amount
amortization ........................ 936 503 937 936
Special termination benefits .........
------ ------- ------ ------
Net periodic benefit cost ............ $4,006 $ 1,577 $2,836 $2,944
Additional expense due to
settlement of retiree
obligation ..........................
------ ------- ------ ------
Net periodic benefit cost ............ $4,006 $ 1,577 $2,836 $2,944
====== ======= ====== ======
Weighted-average assumptions:
Discount rate ........................ 7.30% 6.85% 7.42% 7.75%
Expected return on plan assets ....... N/A N/A N/A N/A
Rate of compensation increase ........ 5.00% 4.90% 5.13% 5.25%
The aggregate projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for pension plans with accumulated benefit
obligations in excess of plan assets were as follows as of August 31, 1999 and
1998, and May 31, 1998.
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
Projected benefit obligation ........... $25,264 $22,268 $17,749
Accumulated benefit obligation ......... 19,746 17,002 13,387
Fair value of plan assets .............. 8,092 7,604 7,868
The Company provides defined life insurance and health care benefits for
certain retired employees. The plan is contributory based on years of service
and family status, with retiree contributions adjusted annually.
The Company has other contributory defined contribution plans covering
substantially all employees. Total contributions by the Company to these plans
were approximately $4.5 million, $1.1 million, $4.2 million and $3.9 million for
the year ended August 31, 1999, for the three months ended August 31, 1998, and
for the years ended May 31, 1998 and 1997, respectively.
F-19
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in the
assumed health care cost trend rates would have the following effects:
1% POINT 1% POINT
INCREASE DECREASE
---------- -----------
(DOLLARS IN THOUSANDS)
Effect on total of services and interest
cost components .................................... $ 327 $ (277)
Effect on postretirement benefit obligation ......... 2,111 (1,819)
11. SEGMENT REPORTING
The Company's businesses are organized, managed and internally reported as
four segments. These segments, which are based on products and services, include
agronomy, energy, grain marketing and farm marketing & supply and processed
grain and consumer products. Due to cost allocations and intersegment activity,
management does not represent that these segments, if operated independently,
would report the income before income taxes and other financial information
presented.
Segment information for the year ended August 31, 1999, for the three
months ended August 31, 1998, and for the years ended May 31, 1998 and 1997 is
as follows:
PROCESSED
GRAIN MARKETING GRAIN AND
AND FARM CONSUMER
AGRONOMY ENERGY MARKETING & SUPPLY PRODUCTS OTHER TOTAL
------------ -------------- -------------------- ------------ ------------- --------------
(DOLLARS IN THOUSANDS)
For the year ended August 31,
1999:
Net sales ............................. $ 593,927 $ 1,345,772 $ 3,857,042 $ 531,877 $ 6,328,618
Patronage dividends ................... 184 (1,236) 7,109 (492) $ 311 5,876
Other revenues ........................ (4,313) 924 72,506 12,197 18,717 100,031
--------- ----------- ----------- --------- --------- -----------
589,798 1,345,460 3,936,657 543,582 19,028 6,434,525
Cost of goods sold .................... 558,536 1,228,472 3,844,974 508,598 6,140,580
Marketing, general and
administrative ....................... 16,605 47,536 48,965 17,854 17,550 148,510
Interest .............................. 1,413 16,584 18,378 6,561 (498) 42,438
Minority interests .................... 9,889 128 10,017
--------- ----------- ----------- --------- --------- -----------
Income before income taxes ............ $ 13,244 $ 42,979 $ 24,340 $ 10,569 $ 1,848 $ 92,980
========= =========== =========== ========= ========= ===========
Total identifiable assets ............. $ 361,381 $ 1,112,127 $ 780,973 $ 293,499 $ 239,684 $ 2,787,664
========= =========== =========== ========= ========= ===========
For the three months ended
August 31, 1998:
Net sales ............................. $ 91,231 $ 343,747 $ 937,630 $ 145,645 $ 1,518,253
Patronage dividends ................... 51 4,913 $ 147 5,111
Other revenues ........................ 25 12,651 1,888 4,707 19,271
--------- ----------- ----------- --------- --------- -----------
91,231 343,823 955,194 147,533 4,854 1,542,635
Cost of goods sold .................... 86,377 306,768 941,380 138,718 1,473,243
Marketing, general and
administrative ....................... 3,813 12,340 10,633 3,937 4,275 34,998
Interest .............................. 78 4,389 6,193 1,208 443 12,311
Minority interests .................... 3,260 (72) 64 3,252
--------- ----------- ----------- --------- --------- -----------
Income (loss) before income taxes ..... $ 963 $ 17,066 $ (2,940) $ 3,670 $ 72 $ 18,831
========= =========== =========== ========= ========= ===========
Total identifiable assets ............. $ 314,469 $ 943,004 $ 693,567 $ 296,340 $ 221,723 $ 2,469,103
========= =========== =========== ========= ========= ===========
F-20
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT REPORTING (CONTINUED)
PROCESSED
GRAIN MARKETING GRAIN AND
AND FARM CONSUMER
AGRONOMY ENERGY MARKETING & SUPPLY PRODUCTS OTHER TOTAL
------------ ------------- -------------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS)
For the year ended May 31, 1998:
Net sales .......................... $ 696,441 $1,858,069 $ 5,175,616 $ 615,049 $8,345,175
Patronage dividends ................ 57,552 1,276 11,136 $ 423 70,387
Other revenues ..................... 434 71,767 10,284 16,035 98,520
--------- ---------- ----------- --------- --------- -----------
753,993 1,859,779 5,258,519 625,333 16,458 8,514,082
Cost of goods sold ................. 662,238 1,739,809 5,179,290 568,268 8,149,605
Marketing, general and
administrative ................... 14,637 42,637 39,265 13,830 15,692 126,061
Interest ........................... 43 15,163 15,741 4,143 (470) 34,620
Minority interests ................. 6,749 131 6,880
--------- ---------- ----------- --------- --------- -----------
Income before income taxes ......... $ 77,075 $ 55,421 $ 24,223 $ 39,092 $ 1,105 $ 196,916
========= ========== =========== ========= ========= ==========
Total identifiable assets .......... $ 319,217 $ 988,674 $ 643,044 $ 287,399 $ 198,181 $2,436,515
========= ========== =========== ========= ========= ===========
For the year ended May 31, 1997:
Net sales .......................... $ 683,429 $1,676,842 $ 6,567,680 $ 730,101 $9,658,052
Patronage dividends ................ 55,615 2,114 12,738 $ 603 71,070
Other revenues ..................... 751 1,709 64,256 1,019 17,655 85,390
--------- ---------- ----------- --------- --------- -----------
739,795 1,680,665 6,644,674 731,120 18,258 9,814,512
Cost of goods sold ................. 652,552 1,578,503 6,573,160 671,467 9,475,682
Marketing, general and
administrative ................... 13,082 43,206 36,881 13,704 19,424 126,297
Interest ........................... 14 11,814 16,423 6,453 (1,336) 33,368
Minority interests ................. 7,854 130 7,984
--------- ---------- ----------- --------- --------- -----------
Income before income taxes ......... $ 74,147 $ 39,288 $ 18,210 $ 39,496 $ 40 $ 171,181
========= ========== =========== ========= ========= ===========
Assets included in other primarily consisted of intercompany transactions
and corporate facilities.
12. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL -- The Company is required to comply with various
environmental laws and regulations incident to its normal business operations.
In order to meet its compliance requirements, the Company establishes reserves
for the future costs of remediation of identified issues, which are included in
cost of goods sold in the consolidated statements of operations. Additional
costs for matters which may be identified in the future cannot be presently
determined; while the resolution of any such matters may have an impact on the
Company's consolidated financial results for a particular reporting period,
management believes any such matters will not have a material adverse effect on
the consolidated financial position of the Company.
OTHER LITIGATION AND CLAIMS -- The Company is involved as a defendant in
various lawsuits, claims and disputes which are in the normal course of the
Company's business. The resolution of any such matters may have an impact on the
Company's consolidated financial results for a particular reporting period;
however, management believes any resulting liability will not have a material
adverse effect on the consolidated financial position of the Company.
INTERNAL REVENUE SERVICE -- Certain income tax returns have been reviewed
by the Internal Revenue Service and various state tax authorities. In connection
with these reviews, certain adjustments have been proposed which, if upheld,
could result in additional tax liability to the Company. While the
F-21
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
outcome of any proposed adjustments may have an impact on the Company's
consolidated financial results for a particular reporting period, management
believes that any tax assessment which may result from these adjustments will
not have a material adverse effect on the consolidated financial position of the
Company.
GRAIN STORAGE -- As of August 31, 1999 and 1998, and May 31, 1998, the
Company stored grain and processed grain products for others totaling $99.4
million, $111.5 million, and $81.6 million, respectively. Such stored
commodities and products are not the property of the Company and therefore are
not included in the Company's inventories.
LINES OF CREDIT -- The Company is a guarantor for lines of credit for
related companies totaling up to $28.1 million, of which $5.8 million was
outstanding as of August 31, 1999. All outstanding loans with respective
creditors are current as of August 31, 1999.
LEASE COMMITMENTS -- The Company leases approximately 4,200 rail cars with
remaining lease terms of one to 10 years. In addition, the Company has
commitments under other operating leases for various refinery, manufacturing and
transportation equipment, vehicles and office space. Some leases include
purchase options at not less than fair market value at the end of the leases.
Total rental expense for all operating leases, net of rail car mileage
credits received from the railroad and sublease income was approximately $29.8
million, $8.6 million, $30.5 million and $30.0 million for the year ended August
31, 1999, for the three months ended August 31, 1998, and for the years ended
May 31, 1998 and 1997, respectively. Mileage credits and sublease income were
approximately $12.8 million, $4.7 million, $14.2 million and $13.6 million for
the year ended August 31, 1999, for the three months ended August 31, 1998, and
for the years ended May 31, 1998 and 1997, respectively.
Minimum future lease payments required under noncancellable operating
leases as of August 31, 1999 are as follows:
EQUIPMENT
RAIL CARS VEHICLES AND OTHER TOTAL
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
2000 ........................................ $17,734 $ 8,723 $11,498 $ 37,955
2001 ........................................ 12,551 6,670 11,091 30,312
2002 ........................................ 10,182 4,552 10,652 25,386
2003 ........................................ 7,136 2,851 9,487 19,474
2004 ........................................ 3,233 1,050 8,090 12,373
Thereafter .................................. 7,157 271 7,846 15,274
------- ------- ------- --------
Total minimum future lease payments ......... $57,993 $24,117 $58,664 $140,774
======= ======= ======= ========
F-22
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities for the year ended August 31, 1999, for the three months ended August
31, 1998, and for the years ended May 31, 1998 and 1997 is as follows:
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Net cash paid during the period for:
Interest ........................................... $ 42,765 $ 10,851 $ 36,632 $ 36,283
Income taxes ....................................... 8,161 8,248 21,409 16,448
Significant noncash transactions:
Noncash patronage refunds issued from prior
year's earnings ................................... 99,052 84,089 72,891
Noncash nonpatronage certificates issued from
prior year's earnings ............................. 7,998 6,863 6,115
Capital equity certificates issued in exchange for
elevator properties ............................... 14,714 911 10,561 4,986
Capital equity certificates exchanged for EPUs ..... 2,035
Summarized financial information of Cenex for the period October 1, 1997
through May 31, 1998 is as follows (dollars in thousands):
Net sales ..................... $1,798,219
Net income .................... 62,776
Cash flows from:
Operating activities ......... 83,118
Investing activities ......... (49,666)
Financing activities ......... (18,718)
14. SUBSEQUENT EVENT
During September 1999, the Boards of Directors of Cenex Harvest States
Cooperatives and Farmland Industries, Inc. (Farmland) approved a Transaction
Agreement to unify the two cooperatives. The Transaction Agreement has not yet
been approved by the members of either cooperative.
On September 1, 1999, NCRA and Farmland formed Cooperative Refining, LLC,
(Cooperative Refining) a joint venture established to operate and manage the
refineries of NCRA and Farmland. In conjunction with the formation of
Cooperative Refining, NCRA contributed certain assets, primarily inventories, to
Cooperative Refining in exchange for its ownership interest and entered into
certain leases and product purchase agreements with Cooperative Refining.
F-23
CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. UNAUDITED INTERIM INFORMATION
As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives
merged with Cenex, Inc. to form Cenex Harvest States Cooperatives. Prior to the
merger, Harvest States Cooperatives' year end was May 31. Cenex's year end was
September 30 and subsequent to the merger, the Company changed its fiscal year
end to August 31. Therefore, the transition period for the three months ended
August 31, 1998 has been included in the financial statements. Comparable
information for the three months ended August 31, 1997 is as follows:
UNAUDITED
-----------------------
(DOLLARS IN THOUSANDS)
Revenues:
Grain and oilseed ................................ $1,030,047
Energy ........................................... 414,948
Processed grain and oilseed ...................... 130,770
Feed and farm supplies ........................... 126,568
Agronomy ......................................... 138,673
----------
$1,841,006
----------
Cost of goods sold ................................ $1,780,171
Income taxes ...................................... 8,865
Net income ........................................ 35,211
Net cash provided by operating activities ......... 126,038
Net cash used in investing activities ............. (24,507)
Net cash used in financing activities ............. (130,251)
F-24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members and Patrons of
Cenex Harvest States Cooperatives:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, equities and comprehensive income and cash flows present fairly,
in all material respects, the financial position of Cenex Harvest States
Cooperatives and subsidiaries as of August 31, 1999 and 1998, and May 31, 1998,
and the results of their operations and their cash flows for the year ended
August 31, 1999, for the three months ended August 31, 1998, and for the years
ended May 31, 1998 and 1997, in conformity with generally accepted accounting
principles. 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. The consolidated balance sheet as of May 31,
1998, and the consolidated statements of operations, equities and comprehensive
income and cash flows for the years ended May 31, 1998 and 1997, give
retroactive effect to the merger of Harvest States Cooperatives and CENEX, Inc.
on June 1, 1998, in a transaction accounted for as a pooling of interests, as
described in Note 1 to the consolidated financial statements. We did not audit
the financial statements of Harvest States Cooperatives, which statements
reflect approximately 38% of total assets as of May 31, 1998, and approximately
29% and 31% of net income for the years ended May 31, 1998 and 1997,
respectively. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Harvest States Cooperatives, is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 29, 1999
F-25
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
AUGUST 31
-----------------------
MAY 31,
1999 1998 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Receivables ...................................... $24,650 $28,703 $32,585
Inventories ...................................... 17,084 18,569 23,759
Other current assets ............................. 185
------- ------- -------
Total current assets ........................... 41,734 47,272 56,529
Property, plant and equipment ..................... 39,001 35,596 34,953
------- ------- -------
TOTAL ASSETS ................................... $80,735 $82,868 $91,482
======= ======= =======
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $ 9,546 $15,071 $22,891
Accounts payable ................................. 5,768 7,547 8,867
Accrued expenses ................................. 4,227 1,773 1,660
------- ------- -------
Total current liabilities ...................... 19,541 24,391 33,418
Commitments and contingencies
Defined business unit equity ...................... 61,194 58,477 58,064
------- ------- -------
TOTAL LIABILITIES AND DEFINED BUSINESS
UNIT EQUITY ................................... $80,735 $82,868 $91,482
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-26
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
REVENUES:
Processed oilseed sales ....................... $358,042 $ 98,919 $410,386 $441,738
Other revenue (expense) ....................... 30 1,115 1,746 (1,660)
-------- -------- -------- --------
358,072 100,034 412,132 440,078
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 338,386 95,304 379,272 405,791
Marketing, general and administrative ......... 5,095 1,257 4,730 4,342
Interest ...................................... 557 251 380 322
-------- -------- -------- --------
344,038 96,812 384,382 410,455
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES ..................... 14,034 3,222 27,750 29,623
PROVISIONS FOR INCOME TAXES .................... 800 525 1,825 2,100
-------- -------- -------- --------
NET INCOME ..................................... $ 13,234 $ 2,697 $ 25,925 $ 27,523
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-27
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF DEFINED BUSINESS UNIT
EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS
ENDED AUGUST 31, 1998 AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
BALANCE, MAY 31, 1996 ............................................ $ 53,391
Net and comprehensive income .................................... 27,523
Divisional equity distributed to the Company .................... (27,523)
---------
BALANCE, MAY 31, 1997 ............................................ 53,391
Net and comprehensive income .................................... 25,925
Defined Business Unit equity distributed to the Company ......... (21,252)
---------
BALANCE, MAY 31, 1998 ............................................ 58,064
Net and comprehensive income .................................... 2,697
Defined Business Unit equity distributed to the Company ......... (2,284)
---------
BALANCE, AUGUST 31, 1998 ......................................... 58,477
Net and comprehensive income .................................... 13,234
Defined Business Unit equity distributed to the Company ......... (10,517)
---------
BALANCE, AUGUST 31, 1999 ......................................... $ 61,194
=========
The accompanying notes are an integral part of the financial statements.
F-28
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED -----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 13,234 $ 2,697 $ 25,925 $ 27,523
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ..................................... 2,330 551 2,021 1,777
Loss (gain) on sale of property, plant and
equipment ....................................... 204 (658) 2,045
Changes in operating assets and liabilities:
Receivables ...................................... 4,053 3,882 1,584 (11,374)
Inventories ...................................... 1,485 5,190 (908) 3,385
Other current assets ............................. 185 2,125 (1,999)
Accounts payable and accrued expenses ............ 675 (1,207) (2,913) 2,201
--------- --------- --------- ---------
Net cash provided by operating activities ........ 21,981 11,298 27,176 23,558
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant
and equipment ..................................... 10,723
Acquisition of property, plant and
equipment ......................................... (5,939) (1,195) (13,953) (12,137)
--------- --------- --------- ---------
Net cash used in investing activities ............ (5,939) (1,195) (3,230) (12,137)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to Cenex Harvest States
Cooperatives ...................................... (5,525) (7,819) (2,694) 16,102
Defined Business Unit equity distributed to
the Company ....................................... (10,517) (2,284) (21,252) (27,523)
--------- --------- --------- ---------
Net cash used in financing activities ............ (16,042) (10,103) (23,946) (11,421)
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ......................... -- -- -- --
CASH AT BEGINNING OF PERIOD ......................... -- -- -- --
--------- --------- --------- ---------
CASH AT END OF PERIOD ............................... -- -- -- --
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-29
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS -- Cenex Harvest States Cooperatives'
Oilseed Processing and Refining Defined Business Unit (the Defined Business
Unit) is a defined business unit of Cenex Harvest States Cooperatives (the
Company) and is not organized as a separate legal entity. The purpose of the
Defined Business Unit is to carry on the operations of the Oilseed Processing
and Refining Division. The assets and liabilities of the Defined Business Unit
continue to be 100% owned by the Company. The Defined Business Unit operates a
single soybean crushing and oil refining plant in Mankato, Minnesota and serves
customers throughout the United States.
Effective June 1, 1998, Harvest States Cooperatives merged with CENEX, Inc.
to form Cenex Harvest States Cooperatives. As a result of the merger, the
Defined Business Unit became a defined business unit of Cenex Harvest States
Cooperatives at that date.
CASH MANAGEMENT -- The Defined Business Unit draws all of its cash
requirements from and deposits all cash generated with the Company's centralized
cash management system.
INVENTORIES AND HEDGING -- Oilseed and processed oilseed products are
stated at market, including adjustments for open purchase, sales and futures
contracts and deferral of profit on processed oilseed products.
The Defined Business Unit follows the general policy of hedging its oilseed
inventories and unfilled orders for oilseed products to the extent considered
practicable to minimize 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, may not be
completely hedged due, in part, to the absence of satisfactory hedging
facilities for certain commodities and geographical areas and, in part, to the
Defined Business Unit's assessment of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may expose the
Defined Business Unit to risk in the event that a counterparty to a transaction
is unable to fulfill its contractual obligation. The Defined Business Unit
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 applicable
creditworthiness, as internally evaluated.
In June 1998, Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, a new standard related to the
accounting for derivative transactions and hedging activities. In July 1999, the
FASB issued SFAS No. 137 which defers the effective date of SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. While
management does not believe this standard will materially impact the financial
results of the Defined Business Unit, it is currently evaluating the reporting
requirements under this new standard.
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. The cost and
related accumulated depreciation of assets sold or otherwise disposed of are
removed from the related accounts and resulting gains or losses are reflected in
operations.
Management periodically reviews the carrying value of property, plant 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 -- Net income generated on oilseed purchased by the Defined
Business Unit from nonmembers is characterized as nonpatronage income and is,
therefore, taxable. Net income generated on oilseed purchased from the Company
and holders of Equity Participation Units (EPUs) is considered
F-30
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to be patronage to the extent of the Company's patronage purchase percentage of
that particular commodity; the other portion of such income is considered
nonpatronage and is, therefore, taxable.
Results of operations of the Defined Business Unit are included in the
consolidated federal income tax return of the Company. The Company has a policy
that provides for the payment of taxes as calculated on an individual company
basis for each of its defined business units and divisions.
REVENUE RECOGNITION -- Sales of processed oilseeds are recognized upon
shipment to customers, net of freight charges.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. RECEIVABLES
Receivables at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Trade ........................................ $25,045 $29,098 $32,980
Less allowance for doubtful accounts ......... 395 395 395
------- ------- -------
$24,650 $28,703 $32,585
======= ======= =======
Sales to one customer accounted for 25% of total sales for the year ended
August 31, 1999. Sales to two customers accounted for 25% and 10% of total sales
for the three months ended August 31, 1998 and for the year ended May 31, 1998,
and 25% and 11% of total sales for the year ended May 31, 1997.
3. INVENTORIES
Inventories at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Processed oilseed products ......... $11,918 $17,857 $16,833
Oilseed ............................ 5,166 712 6,926
------- ------- -------
$17,084 $18,569 $23,759
======= ======= =======
F-31
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment at August 31, 1999 and 1998,
and May 31, 1998 are as follows:
ESTIMATED
USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31,
IN YEARS 1999 1998 1998
------------- ------------ ------------ ----------
Land ........................................... $ 2,096 $ 763 $ 763
Elevators, crushing plant and refinery ......... 15 to 20 23,270 22,103 22,103
Machinery and equipment ........................ 5 to 18 56,266 51,565 51,565
Furniture and fixtures ......................... 3 to 12 424 379 379
Other .......................................... 5 to 12 71 103 103
Construction in progress ....................... 3,741 5,626 4,432
------- ------- -------
85,868 80,539 79,345
Less accumulated depreciation .................. 46,867 44,943 44,392
------- ------- -------
$39,001 $35,596 $34,953
======= ======= =======
5. DUE TO CENEX HARVEST STATES COOPERATIVES
The Defined Business Unit satisfies its working capital needs through
borrowings, both long- and short-term, from the Company to the extent the
Company's borrowing capacity permits. Amounts outstanding under this arrangement
at August 31, 1999 and 1998, and May 31, 1998 totaled $9,546, $15,071 and
$22,891, respectively.
The Company charges the Defined Business Unit interest on its daily average
of short-term borrowings at a rate equivalent to the weighted average interest
rate on short-term borrowings of the Company. The weighted average borrowing
rate of the Company's short-term borrowings was 5.8% for the year ended August
31, 1999, for the three months ended August 31, 1998, and for each of the years
ended May 31, 1998 and 1997. Amounts due from the Company receive interest in
the same manner at the same rate.
Long-term borrowings, if needed, could be obtained at the Company's
long-term borrowing rate. No long-term borrowings were outstanding at August 31,
1999 and 1998, and at May 31, 1998.
6. DEFINED BUSINESS UNIT EQUITY
On May 31, 1997, the Company completed an offering for the sale of EPUs in
its Oilseed Processing and Refining Defined Business Unit to qualified
subscribers. Qualified subscribers are identified as Defined Members or
representatives of Defined Members which are persons or associations of
producers engaged in the production of agricultural products. The purchasers of
EPUs have the right and obligation to deliver annually the number of bushels of
soybeans equal to the number of units held. Unit holders participate in the net
patronage sourced income from operations of the Oilseed Processing and Refining
Defined Business Unit as patronage refunds distributed by the Company. EPUs
represent an ownership interest in the Company, not the Defined Business Unit.
7. RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all salaried and full-time hourly employees of the Defined
Business Unit. 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
F-32
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
7. RETIREMENT PLANS (CONTINUED)
assets consist principally of corporate obligations, U.S. government bonds,
money market funds and immediate participation guarantee contracts. Pension
costs billed to the Defined Business Unit for the year ended August 31, 1999,
for the three months ended August 31, 1998, and for the years ended May 31, 1998
and 1997, were approximately $538, $135, $120 and $147, respectively.
The Defined Business Unit's portion of the actuarial present value of
accumulated benefit obligations and net pension assets available for benefits
has not been determined. Selected information at August 31, 1999 and 1998, and
May 31, 1998 for the Company's plan is as follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Projected benefit obligation for service rendered to date ......... $196,034 $92,854 $94,075
Plan assets at fair value ......................................... 175,376 84,961 86,889
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.0% and a rate of
increase in future compensation of 5% for all periods. The expected long-term
rate of return on plan assets was 9.0% for the year ended August 31, 1999, and
8.5% for all other periods.
8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Company provides certain health care benefits for retired employees of
the Defined Business Unit. 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 the
Company that are not funded were as follows at August 31, 1999 and 1998, and May
31, 1998:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Total postretirement benefit obligation ........................ $ 23,290 $ 10,408 $ 10,261
Unrecognized transition obligation ............................. (10,158) (7,835) (7,970)
Unrecognized net gains ......................................... 2,026 1,864 1,850
--------- -------- --------
Accrued postretirement medical and other benefit costs ......... $ 15,158 $ 4,437 $ 4,141
========= ======== ========
The net periodic costs billed to the Defined Business Unit for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997 were approximately $258, $87, $246 and $229,
respectively.
The calculations assumed a discount rate of 7.0% for the year ended August
31, 1999, and for the three months ended August 31, 1998, and 7.75% for the year
ended May 31, 1998, and a health care cost trend rate of 8.0% for the year
ending August 31, 1999, declining to 6.0% for 2004 and remaining at that level
thereafter.
F-33
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
9. INCOME TAXES
A reconciliation of the statutory federal tax rate to the effective rate
for the year ended August31, 1999, for the three months ended August 31, 1998,
and for the years ended May 31, 1998 and 1997 is as follows:
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ ------------ --------- ----------
Statutory federal income tax rate ................. 35.0% 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ..................................... 4.1 4.1 5.0 4.9
Patronage earnings ................................ (33.4) (23.2) (32.7) (32.6)
Other, net ........................................ .4 ( .7) ( .2)
----- ----- ----- -----
Effective rate .................................... 5.7% 16.3% 6.6% 7.1%
===== ===== ===== =====
The Defined Business Unit has no significant deferred income tax assets or
liabilities.
10. COMMITMENTS AND CONTINGENCIES
Noncancellable operating leases for approximately 389 rail cars with
remaining lease terms of one to fifteen years are used by the Defined Business
Unit. In September 1997, the Defined Business Unit (the Lessee) entered into a
sales leaseback agreement. After 111 months, the Lessee has the option to: (i)
purchase the equipment at fair market value; (ii) continue the lease; or (iii)
return the equipment to the Lessor and pay a maximum termination fee of $719
contingent upon the Lessor's inability to recover the full value of the
equipment, as determined from the casualty loss value schedule in the lease
agreement. After 120months, the Lessee has the option to: (i) purchase the
equipment at fair market value, limited to 10% of the net equipment cost at
lease inception; (ii) renew the lease for a period of 36 months; or (iii) return
the equipment to the Lessor.
Total rent expense for all operating leases, net of rail car mileage
credits received from the railroad, was $3,326, $933, $2,717 and $1,945 for the
year ended August 31, 1999, for the three months ended August 31, 1998, and for
the years ended May 31, 1998 and 1997, respectively.
Minimum future rental payments due under noncancellable operating leases at
August 31, 1999 are as follows:
2000 .......................... $ 3,340
2001 .......................... 3,024
2002 .......................... 2,798
2003 .......................... 2,657
2004 .......................... 2,361
2005 and thereafter ........... 11,825
-------
$26,005
=======
There are various lawsuits and administrative proceedings incidental to the
business of the Defined Business Unit. It is impossible, at this time, to
estimate what the ultimate legal and financial liability of the Defined Business
Unit 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 statements of the Defined Business Unit taken as a whole.
At August 31, 1999, the operations of the Defined Business Unit had
outstanding oilseed purchase contracts of 686,563 bushels at prices ranging from
$4.39 per bushel to $5.63 per bushel, and outstanding
F-34
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
oil purchase contracts of 533,288,016 pounds at prices ranging from $0.1357per
pound to $0.2621 per pound. In addition, the operations of the Defined Business
Unit had outstanding sales contracts totaling approximately $125,369.
In connection with the Defined Business Unit's proposed construction of a
crushing plant in Fairmont, Minnesota, the City of Fairmont paid $897 to the
Defined Business Unit. The Defined Business Unit will have to repay this amount
to the City of Fairmont in the event it does not meet specified construction
target dates. Therefore, this payment has been included in accrued expenses on
the balance sheet at August 31, 1999.
11. RELATED PARTY TRANSACTIONS
Revenues for the year ended August 31, 1999, the three months ended August
31, 1998, and for the years ended May 31, 1998 and 1997, include $94,072,
$22,908, $101,440 and $110,679, respectively, to related parties, primarily the
Company.
The Defined Business Unit purchases a portion of its soybeans from the
Company. Included in cost of goods sold for the year ended August 31, 1999, for
the three months ended August 31, 1998, and for the years ended May 31, 1998 and
1997, were $18,180, $5,110, $19,875 and $5,726, respectively, of these
purchases.
Additionally, the Company performs various direct management services and
incurs certain costs for its defined business units and divisions. Such costs,
including data processing, office services and insurance, are charged directly
to the defined business units and divisions. Indirect expenses, such as
publications, board expense, executive management, legal, finance and human
resources, are allocated to the defined business units and divisions based on
approximate usage. Costs allocated to the Defined Business Unit for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997, were $900, $225, $900 and $825, respectively.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities are as follows for the year ended August 31, 1999, for the three
months ended August 31, 1998 and for the years ended May 31, 1998 and 1997:
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ ------------ --------- --------
Net cash paid to the Company during the
period for:
Interest ............................. $557 $251 $380 $ 322
Income taxes ......................... 790 2,300
13. UNAUDITED INTERIM FINANCIAL INFORMATION
As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives
merged with CENEX, Inc. to form Cenex Harvest States Cooperatives. Prior to the
merger, Harvest States Cooperatives' and the Defined Business Unit's year end
was May 31 and Cenex's year end was September 30. Subsequent to the merger, the
Company and the Defined Business Unit changed their fiscal year end to August
31.
F-35
OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AND PER POUND AMOUNTS) (CONTINUED)
13. UNAUDITED INTERIM FINANCIAL INFORMATION (CONTINUED)
The transition period for the three months ended August 31, 1998 has been
included in the financial statements. Comparable information for the three
months ended August 31, 1997 is as follows:
UNAUDITED
------------
Processed oilseed sales ............................ $ 86,349
Cost of goods sold ................................. 62,481
Provision for income taxes ......................... 675
Net income ......................................... 3,160
Net cash provided by operating activities .......... 21,200
Net cash used in investing activities .............. (7,771)
Net cash used in financing activities .............. (13,429)
14. SUBSEQUENT EVENT
During September 1999, the Boards of Directors of Cenex Harvest States
Cooperatives and Farmland Industries, Inc., approved a Transaction Agreement to
unify the two cooperatives. The Transaction Agreement has not yet been approved
by the members of either cooperative.
F-36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Cenex Harvest States Cooperatives:
In our opinion, the accompanying balance sheets and the related statements
of operations, defined business unit equity and comprehensive income and cash
flows present fairly, in all material respects, the financial position of
Oilseed Processing and Refining Defined Business Unit (a Defined Business Unit
of Cenex Harvest States Cooperatives) as of August 31, 1999 and 1998, and the
results of its operations and its cash flows for the year ended August 31, 1999,
and for the three months ended August 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Defined Business Unit's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 29, 1999
F-37
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cenex Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the balance sheet of the Oilseed Processing and Refining
Defined Business Unit (the Defined Business Unit), formerly known as Honeymead
Products Company, a defined business unit of Cenex Harvest States Cooperatives
as of May 31, 1998 and the related statements of operations, defined business
unit equity and comprehensive income, and cash flows for each of the two years
in the period ended May 31, 1998. These financial statements are the
responsibility of the Defined Business Unit'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 Defined
Business Unit at May 31, 1998 and the results of its operations and its cash
flows for each of the two years in the period ended May 31, 1998, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, MN
July 24, 1998
F-38
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
BALANCE SHEETS
AUGUST 31
-----------------------
MAY 31,
1999 1998 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Receivables ...................................... $ 30,960 $ 35,228 $ 35,758
Inventories ...................................... 14,339 18,895 13,785
Other current assets ............................. 210 429 393
-------- -------- --------
Total current assets ........................... 45,509 54,552 49,936
Property, plant and equipment ..................... 110,547 97,428 85,627
Intangible assets ................................. 9,415 10,481 10,748
-------- -------- --------
TOTAL ASSETS ................................... $165,471 $162,461 $146,311
======== ======== ========
LIABILITIES AND DEFINED BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Due to Cenex Harvest States Cooperatives ......... $ 48,938 $ 33,238 $ 16,739
Accounts payable ................................. 7,238 11,003 8,836
Accrued expenses ................................. 4,440 1,667 1,569
Current portion of long-term debt ................ 10,005 10,005 10,005
-------- -------- --------
Total current liabilities ...................... 70,621 55,913 37,149
Long-Term Debt .................................... 28,510 38,515 41,204
Commitments and contingencies
Defined business unit equity ...................... 66,340 68,033 67,958
-------- -------- --------
TOTAL LIABILITIES AND DEFINED BUSINESS
UNIT EQUITY ................................... $165,471 $162,461 $146,311
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-39
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF OPERATIONS
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
REVENUES:
Processed grain sales ......................... $ 174,133 $46,914 $205,282 $199,079
Other revenue ................................. 1,820
--------- ------- -------- --------
174,133 46,914 207,102 199,079
--------- ------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold ............................ 170,510 43,733 189,614 181,566
Marketing, general and administrative ......... 10,610 2,071 8,072 6,749
Interest ...................................... 5,184 843 3,122 5,230
Other ......................................... 826 162 2,000
--------- ------- -------- --------
187,130 46,647 200,970 195,545
--------- ------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES .............. (12,997) 267 6,132 3,534
PROVISION FOR INCOME TAXES ..................... (1,125) 25 475 300
--------- ------- -------- --------
NET (LOSS) INCOME .......................... $ (11,872) $ 242 $ 5,657 $ 3,234
========= ======= ======== ========
The accompanying notes are an integral part of the financial statements.
F-40
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF DEFINED BUSINESS UNIT
EQUITY AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED AUGUST 31, 1999, FOR THE THREE MONTHS
ENDED AUGUST 31, 1998, AND FOR THE YEARS ENDED MAY 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
BALANCE, MAY 31, 1996 ............................................ $ 27,797
Net and comprehensive income .................................... 3,234
Defined Business Unit equity distributed to the Company ......... (3,234)
---------
BALANCE, MAY 31, 1997 ............................................ 27,797
Capital contributed from Harvest States Cooperatives ............ 38,800
Net and comprehensive income .................................... 5,657
Defined Business Unit equity distributed to the Company ......... (4,296)
---------
BALANCE, MAY 31, 1998 ............................................ 67,958
Net and comprehensive income .................................... 242
Defined Business Unit equity distributed to the Company ......... (167)
---------
BALANCE, AUGUST 31, 1998 ......................................... 68,033
Net and comprehensive loss ...................................... (11,872)
Defined Business Unit equity distributed to the Company ......... 10,179
---------
BALANCE, AUGUST 31, 1999 ......................................... $ 66,340
=========
The accompanying notes are an integral part of the financial statements.
F-41
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
STATEMENTS OF CASH FLOWS
FOR THE FOR THE THREE FOR THE YEARS ENDED
YEAR ENDED MONTHS ENDED ----------------------------
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ............................ $ (11,872) $ 242 $ 5,656 $ 3,234
Adjustments to reconcile net (loss) income
to net cash provided by (used in)
operating activities:
Depreciation and amortization .............. 5,928 1,257 4,717 4,137
Provision for doubtful accounts ............
Loss on disposal of property, plant and
equipment ................................. 757 162 2,000
Changes in operating assets and
liabilities:
Receivables ............................. 4,268 530 (8,896) 16,889
Inventories ............................. 4,556 (5,109) (1,513) (2,963)
Other current assets .................... 219 (37) 448 (691)
Accounts payable and accrued
expenses ............................... (992) 2,265 911 (2,987)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities ..................... 2,864 (852) 1,485 19,619
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment ................................... (18,738) (12,791) (20,310) (14,968)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in due to Cenex Harvest States
Cooperatives ................................ 15,700 16,499 (5,674) (8,631)
Long-term debt borrowings .................... 15,000
Principal payments on long-term debt ......... (10,005) (2,689) (10,005) (7,786)
Capital contributed from Harvest States
Cooperatives ................................ 38,800
Defined Business Unit equity distributed
to the Company .............................. 10,179 (167) (4,296) (3,234)
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities .................................. 15,874 13,643 18,825 (4,651)
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH ................... -- -- -- --
CASH AT BEGINNING OF PERIOD ................... -- -- -- --
--------- --------- --------- ---------
CASH AT END OF PERIOD ......................... -- -- -- --
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-42
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS -- Cenex Harvest States Cooperatives'
Wheat Milling Defined Business Unit (the Defined Business Unit) is a defined
business unit of Cenex Harvest States Cooperatives (the Company) and is not
organized as a separate legal entity. The purpose of the Defined Business Unit
is to carry on the operations of the Wheat Milling Division. The assets and
liabilities of the Defined Business Unit continue to be 100% owned by the
Company. The Defined Business Unit operates commercial bakery and semolina flour
milling facilities in Mount Pocono, Pennsylvania; Rush City, Minnesota; Huron,
Ohio; Kenosha, Wisconsin; and Houston, Texas. These mills produce semolina and
durum flour, which are the primary ingredients in pasta products and wheat flour
in the bakery industry. The Defined Business Unit serves customers throughout
the United States.
Effective June 1, 1998, Harvest States Cooperatives merged with Cenex, Inc.
to form Cenex Harvest States Cooperatives. As a result of the merger, the
Defined Business Unit became a defined business unit of Cenex Harvest States
Cooperatives at that date.
CASH MANAGEMENT -- The Defined Business Unit draws all of its cash
requirements from and deposits all cash generated with the Company's centralized
cash management system.
INVENTORIES AND HEDGING -- Grain and processed grain products are stated at
market, including adjustments for open purchase, sales and futures contracts and
deferral of normal profit on processed grain products.
The Defined Business Unit follows the general policy of hedging its grain
inventories and unfilled orders for grain products to the extent considered
practicable to minimize 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, may not be
completely hedged due, in part, to the absence of satisfactory hedging
facilities for certain commodities and geographical areas and, in part, to the
Defined Business Unit's assessment of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may expose the
Defined Business Unit to risk in the event that a counterparty to a transaction
is unable to fulfill its contractual obligation. The Defined Business Unit
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.
In June 1998, Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No.133, a new standard related to the
accounting for derivative transactions and hedging activities. In July 1999, the
FASB issued SFAS No.137 which defers the effective date of SFAS No.133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. While
management does not believe this standard will materially impact the financial
results of the Defined Business Unit, it is currently evaluating the reporting
requirements under this new standard.
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. The cost and
related accumulated depreciation of assets sold or otherwise disposed of are
removed from the related accounts and resulting gains or losses are reflected in
operations.
INTANGIBLE ASSETS -- Intangible assets, consisting primarily of goodwill
and leasehold rights, 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, plant and equipment, and other long-lived assets,
for potential impairment by comparing their carrying value to the estimated
undiscounted future cash flows expected to result from the use of these assets.
F-43
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 -- Net income generated on grain purchased by the Defined
Business Unit from nonmembers is characterized as nonpatronage income and is,
therefore, taxable. Net income generated on grain purchased from the Company and
holders of Equity Participation Units (EPUs) are considered to be patronage to
the extent of the Company's patronage purchase percentage of that particular
commodity; the other portion of such income is considered nonpatronage and is,
therefore, taxable.
Results of operations of the Defined Business Unit are included in the
consolidated federal income tax return of the Company. The Company has a policy
that provides for the payment of taxes as calculated on an individual company
basis for each of its defined business units and divisions.
REVENUE RECOGNITION -- Sales of processed grains are recognized upon
shipment to customers, net of freight charges.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. RECEIVABLES
Receivables at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Trade ........................................ $32,274 $34,825 $35,703
Other ........................................ 454 1,074 738
------- ------- -------
32,728 35,899 36,441
Less allowance for doubtful accounts ......... 1,768 671 683
------- ------- -------
$30,960 $35,228 $35,758
======= ======= =======
Sales to two customers accounted for 23% of total sales for the three
months ended August 31, 1998, and the years ended May 31, 1998 and 1997,
respectively.
3. INVENTORIES
Inventories at August 31, 1999 and 1998, and May 31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Grain ............................ $11,915 $17,003 $11,618
Processed grain products ......... 1,815 1,270 1,395
Other ............................ 609 622 772
------- ------- -------
$14,339 $18,895 $13,785
======= ======= =======
F-44
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
4. LONG-LIVED ASSETS
PROPERTY, PLANT AND EQUIPMENT -- Major classes of property, plant and
equipment at August 31, 1999 and 1998, and May 31, 1998 are as follows:
ESTIMATED
USEFUL LIFE AUGUST 31, AUGUST 31, MAY 31,
IN YEARS 1999 1998 1998
------------- ------------ ------------ ----------
Land .................................. $ 398 $ 398 $ 398
Grain processing plants ............... 15 to 45 56,586 37,378 37,016
Machinery and equipment ............... 5 to 20 67,897 49,743 48,406
Construction in progress .............. 10,615 32,299 21,206
-------- -------- --------
135,496 119,818 107,026
Less accumulated depreciation ......... 24,949 22,390 21,399
-------- -------- --------
$110,547 $ 97,428 $ 85,627
======== ======== ========
During the year ended August 31, 1999, the three months ended August 31,
1998, and for the years ended May 31, 1998 and 1997, the Defined Business Unit
capitalized interest of $797, $337, $339 and $589, respectively.
INTANGIBLE ASSETS -- Intangible assets at August 31, 1999 and 1998, and May
31, 1998 are as follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Goodwill, less accumulated amortization of $2,103, $1,697,
$1,595 and $1,188, respectively ......................... $3,997 $ 4,403 $ 4,505
Leasehold rights and other intangibles, less accumulated
amortization of $6,496, $5,836, $5,671 and $5,145,
respectively ............................................ 5,418 6,078 6,243
------ ------- -------
$9,415 $10,481 $10,748
====== ======= =======
5. BORROWINGS
DUE TO CENEX HARVEST STATES COOPERATIVES -- The Defined Business Unit
satisfies its working capital needs through borrowings, both long-and
short-term, from the Company to the extent the Company's borrowing capacity
permits. Amounts outstanding under this arrangement at August 31, 1999 and 1998,
and May 31, 1998 totaled $48,938, $33,238 and $16,739, respectively.
The Company charges the Defined Business Unit interest on its daily average
of short-term borrowings at a rate equivalent to the weighted average interest
rate on short-term borrowings of the Company. The weighted average borrowing
rate of the Company's short-term borrowings was 5.8%, for the year ended August
31, 1999, for the three months ended August 31, 1998, and for the years ended
May 31, 1998 and 1997. Amounts due from the Company receive interest in the same
manner at the same rate.
F-45
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
5. BORROWINGS (CONTINUED)
LONG-TERM DEBT
Long-term debt consisted of the following at August 31, 1999 and 1998, and
May 31, 1998:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Cenex Harvest States Cooperatives, with fixed and variable
interest rates from 6.41% to 8.75%, due in installments
through 2005 ............................................ $37,165 $46,920 $49,359
Industrial Development and Public Grain Elevator
Revenue Bonds, payable through July 2004, with an
interest rate of 7.4% ................................... 1,350 1,600 1,850
------- ------- -------
38,515 48,520 51,209
Less current portion ..................................... 10,005 10,005 10,005
------- ------- -------
Long-term portion ........................................ $28,510 $38,515 $41,204
======= ======= =======
The principal maturities of long-term debt outstanding at August 31, 1999
are as follows:
2000 ........... $10,005
2001 ........... 7,410
2002 ........... 7,125
2003 ........... 7,125
2004 ........... 6,850
-------
$38,515
=======
6. DEFINED BUSINESS UNIT EQUITY
On May 31, 1997, the Company completed an offering for the sale of EPUs in
its Wheat Milling Defined Business Unit to qualified subscribers. Qualified
subscribers are identified as Defined Members or representatives of Defined
Members which have been defined as persons or associations of producers actually
engaged in the production of agricultural products. The purchasers of EPUs have
the right and obligation to deliver annually the number of bushels of wheat
equal to the number of units held. Unit holders participate in the net patronage
sourced income from operations of the Wheat Milling Defined Business Unit as
patronage refunds distributed by the Company. EPUs represent an ownership
interest in the Company, not the Defined Business Unit.
7. RETIREMENT PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all salaried and full-time hourly employees of the Defined
Business Unit. 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 Defined Business
Unit for the year ended August 31, 1999, for the three months ended August 31,
1998, and for the years ended May 31, 1998 and 1997 were approximately $247,
$88, $127 and $136, respectively.
F-46
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
7. RETIREMENT PLANS (CONTINUED)
The Defined Business Unit's portion of the actuarial present value of
accumulated benefit obligations and net pension assets available for benefits
has not been determined. Selected information at August 31, 1999 and 1998, and
May 31, 1998 for the Company's plan is as follows:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Projected benefit obligation for service rendered to date ......... $196,034 $92,854 $94,075
Plan assets at fair value ......................................... 175,376 84,961 86,889
The determination of the actuarial present value of the projected benefit
obligation was based on a weighted average discount rate of 7.0% and a rate of
increase in future compensation of 5% for all periods. The expected long-term
rate of return on plan assets was 9.0% for the year ended August 31, 1999, and
8.5% for all other periods.
8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS
The Company provides certain health care benefits for retired employees of
the Defined Business Unit. 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 the Company
that are not funded were as follows at August 31, 1999 and 1998, and May 31,
1998:
AUGUST 31, AUGUST 31, MAY 31,
1999 1998 1998
------------ ------------ ----------
Total postretirement benefit obligation ........................ $ 23,290 $ 10,408 $ 10,261
Unrecognized transition obligation ............................. (10,158) (7,835) (7,970)
Unrecognized net gains and other ............................... 2,026 1,864 1,850
--------- -------- --------
Accrued postretirement medical and other benefit costs ......... $ 15,158 $ 4,437 $ 4,141
========= ======== ========
The net periodic costs billed to the Defined Business Unit for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997 were approximately $78, $18, $72 and $65,
respectively.
The calculations assumed a discount rate of 7.0% for the year ended August
31, 1999 and for the three months ended August 31, 1998 and 7.75% for the year
ended May 31, 1998, and a health care cost trend rate of 8.0% for the year ended
August 31, 1999, declining to 6.0% for 2004 and remaining at that level
thereafter.
F-47
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
9. INCOME TAXES
A reconciliation of the statutory federal tax rate to the effective rate
for the year ended August 31, 1999, for the three months ended August 31, 1998,
and for the years ended May 31, 1998 and 1997 is as follows:
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ ------------ --------- ----------
Statutory federal income tax rate ................. 35.0% 35.0% 35.0% 35.0%
State and local income taxes, net of federal income
tax benefit ..................................... 4.1 4.1 5.0 4.9
Patronage earnings ................................ (30.4) (30.8) (36.5) (31.2)
Other, net ........................................ 1.1 4.2 ( 0.2)
----- ----- ----- -----
Effective rate .................................... 8.7% 9.4% 7.7% 8.5%
===== ===== ===== =====
The Defined Business Unit has no significant deferred income tax assets or
liabilities.
10. COMMITMENTS AND CONTINGENCIES
Noncancellable operating leases for approximately 301 rail cars with
remaining lease terms of one to ten years are used by the Defined Business Unit.
In addition, leases for a milling facility, grain elevator, certain vehicles and
various manufacturing equipment are used by the Defined Business Unit.
Total rent expense for all operating leases, net of rail car mileage
credits received from the railroad, was $2,261, $576, $2,108 and $2,145 for the
year ended August 31, 1999, for the three months ended August 31, 1998, and for
the years ended May 31, 1998 and 1997, respectively. Mileage credits were $226,
$22, $215 and $376 for the year ended August 31, 1999, for the three months
ended August 31, 1998, and for the years ended May 31, 1998 and 1997,
respectively. Minimum rental payments due under these noncancellable operating
leases at August 31, 1999 are as follows:
MILLING HOUSTON
RAIL CARS FACILITY ELEVATOR OTHER TOTAL
----------- ---------- ---------- ------- ---------
2000 ........................ $2,279 $ 440 $ 33 $33 $ 2,785
2001 ........................ 1,902 440 33 28 2,403
2002 ........................ 1,110 440 33 21 1,604
2003 ........................ 260 467 33 9 769
2004 ........................ 8 480 33 521
2005 and thereafter ......... 1,480 688 2,168
------ ------ ---- --- -------
$5,559 $3,747 $853 $91 $10,250
====== ====== ==== === =======
There are various lawsuits and administrative proceedings incidental to the
business of the Defined Business Unit. It is impossible, at this time, to
estimate what the ultimate legal and financial liability of the Defined Business
Unit 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 statements of the Defined Business Unit taken as a whole.
At August 31, 1999, the operations of the Defined Business Unit had
outstanding grain purchase contracts of 14,855,986 bushels at prices for durum
ranging from $3.75 per bushel to $4.55 per bushel and prices for spring wheat
ranging from $3.40 per bushel to $4.26per bushel and prices for winter wheat
ranging from $1.98 per bushel to $3.72 per bushel. In addition, the operations
of the Defined Business Unit had outstanding sales contracts of both semolina
and commercial baking flour totaling approximately $68,621.
F-48
WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER BUSHEL AMOUNTS)
11. RELATED PARTY TRANSACTIONS
Revenues for the year ended August 31, 1999, for the three months ended
August 31, 1998, and for the years ended May 31, 1998 and 1997, included $67,
$29, $99 and $754, respectively, to related parties, primarily the Company.
The Defined Business Unit purchases substantially all of its durum and
wheat from the Company. Included in cost of goods sold for the year ended August
31, 1999, for the three months ended August 31, 1998, and for the years ended
May 31, 1998 and 1997, were $115,571, $30,895, $141,454 and $138,000,
respectively, of these purchases.
Additionally, the Company performs various direct management services and
incurs certain costs for its defined business units and divisions. Such costs,
including data processing, office services and insurance, are charged directly
to the defined business units and divisions. Indirect expenses, such as
publications, board expense, executive management, legal, finance and human
resources, are allocated to the defined business units and divisions based on
approximate usage. Costs allocated to the Defined Business Unit for the year
ended August 31, 1999, for the three months ended August 31, 1998, and for the
years ended May 31, 1998 and 1997, were $1,020, $255, $1,020 and $1,000,
respectively.
On June 1, 1997, the Company contributed $38,800 in equity to the Defined
Business Unit for the purpose of constructing a mill at Mount Pocono,
Pennsylvania.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Additional information concerning supplemental disclosures of cash flow
activities are as follows for the year ended August 31, 1999, for the three
months ended August 31, 1998, and for the years ended May 31, 1998 and 1997:
AUGUST 31, AUGUST 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------ ------------ --------- --------
Net cash paid to the Company during the period for:
Interest ......................................... $5,184 $843 $3,122 $5,230
Income taxes ..................................... 475 300
13. UNAUDITED INTERIM INFORMATION
As discussed in Note 1, effective June 1, 1998, Harvest States Cooperatives
merged with CENEX, Inc. to form Cenex Harvest States Cooperatives. Prior to the
merger, Harvest States Cooperatives' and the Defined Business Unit's year end
was May 31 and Cenex's year end was September 30. Subsequent to the merger, the
Company and the Defined Business Unit changed their fiscal year end to August
31. The transition period for the three months ended August 31, 1998 has been
included in the financial statements. Comparable information for the three
months ended August 31, 1997 is as follows:
UNAUDITED
----------
Processed grain sales .............................. $ 44,420
Cost of goods sold ................................. 40,570
Provision for income taxes ......................... 125
Net income ......................................... 1,291
Net cash used in operating activities .............. (1,275)
Net cash used in investing activities .............. (2,293)
Net cash provided by financing activities .......... 3,568
14. SUBSEQUENT EVENT
During September 1999, the Boards of Directors of Cenex Harvest States
Cooperatives and Farmland Industries, Inc., approved a Transaction Agreement to
unify the two cooperatives. The Transaction Agreement has not yet been approved
by the members of either cooperatives.
F-49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Cenex Harvest States Cooperatives:
In our opinion, the accompanying balance sheets and the related statements
of operations, defined business unit equity and comprehensive income and cash
flows present fairly, in all material respects, the financial position of Wheat
Milling Defined Business Unit (a Defined Business Unit of Cenex Harvest States
Cooperatives) as of August 31, 1999 and 1998, and the results of its operations
and its cash flows for the year ended August 31, 1999 and for the three months
ended August 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Defined
Business Unit's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 29, 1999
F-50
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cenex Harvest States Cooperatives
Saint Paul, Minnesota
We have audited the balance sheet of the Wheat Milling Defined Business
Unit (the Defined Business Unit), formerly known as Amber Milling Company, a
defined business unit of Cenex Harvest States Cooperatives, as of May 31, 1998
and the related statements of operations, defined business unit equity and
comprehensive income, and cash flows for each of the two years in the period
ended May 31, 1998. These financial statements are the responsibility of the
Defined Business Unit'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 Defined Business Unit at
May 31, 1998 and the results of its operations and its cash flows for each of
the two years in the period ended May 31, 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, MN
July 24, 1998
F-51