-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JqI2mcJ10gtnk2jNg9r3Af782Jc7o5vsqhLg2D9Y3IUH3NyfZKDZKLp2qojQX3DQ zsXeihj4/I1efD71LWDgdQ== 0000897101-96-001074.txt : 19970311 0000897101-96-001074.hdr.sgml : 19970311 ACCESSION NUMBER: 0000897101-96-001074 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19961213 DATE AS OF CHANGE: 19961213 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARVEST STATES COOPERATIVES CENTRAL INDEX KEY: 0000823277 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 410251095 STATE OF INCORPORATION: MN FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-17865 FILM NUMBER: 96680744 BUSINESS ADDRESS: STREET 1: 1667 NORTH SNELLING P O BOX 64595 CITY: ST PAUL STATE: MN ZIP: 55164 MAIL ADDRESS: STREET 1: 1667 NORTH SNEFLLING P O BOX 64595 CITY: ST PAUL STATE: MN ZIP: 55164 S-1 1 Registration No. 333-_____ =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-1 REGISTRATION STATEMENT under The Securities Act of 1933 HARVEST STATES COOPERATIVES (Exact name of registrant as specified in charter) ------------- Minnesota 5150 41-0251095 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.) 1667 North Snelling P.O. Box 64594 St. Paul, Minnesota 55164 (612) 646-9433 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Thomas F. Baker Group Vice President--Finance Harvest States Cooperatives 1667 North Snelling P.O. Box 64594 St. Paul, Minnesota 55164 (612) 641-3736 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------- Copy To William B. Payne Dorsey & Whitney LLP 220 South Sixth Street Minneapolis, Minnesota 55402-1498 (612) 340-2722 ------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [x] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE(1) ====================================================================== Proposed Maximum Aggregate Title of Each Aggregate Amount of Class of Securities Offering Registration to be Registered Price (1) Fee - - - - ---------------------------------------------------------------------- Equity Participation ) Units (Milling) ) Equity Participation ) $100,000,000 $30,303.04 Units (Processing ) and Refining) ) ======================================================================
(1) In accordance with Rule 457(o) under the Securities Act of 1933. ------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ===============================================================================
HARVEST STATES COOPERATIVES CROSS REFERENCE SHEET Item Number and Heading Location in Prospectus - - - - ----------------------- ---------------------- 1. Forepart of the Registration Statement Outside Front Cover Page and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Inside Front Cover Page; Pages of Prospectus Additional Information 3. Summary Information, Risk Factors and Cover Page; Prospectus Summary; Ratio of Earnings to Fixed Charges Risk Factors 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Equity Participation Units 6. Dilution Not Applicable 7. Selling Security Holders Not Applicable 8. Plan of Distribution Cover Page 9. Description of Securities to be Equity Participation Units; Registered Dividend Policy; Membership in the Company and Authorized Capital 10. Interests of Named Experts and Counsel Not Applicable 11. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Capitalization; Business; Management; Certain Transactions; Financial Statements 12. Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 13, 1996 HARVEST STATES COOPERATIVES Equity Participation Units ____ Units (Milling) ____ Units (Processing and Refining) Harvest States Cooperatives (the "Company") is offering Equity Participation Units ("Units") in its Wheat Milling Defined Business Unit ("Milling Business Unit") and its Oilseed Processing and Refining Defined Business Unit ("Processing and Refining Business Unit"), each of which has been designated as a Defined Business Unit by the Company's Board of Directors. Each subscriber for Units in a Business Unit is required to also enter into a Member Marketing Agreement ("Agreement") by which such holder has the right and obligation to deliver annually the number of bushels of wheat or soybeans equal to the number of Units held. Pursuant to the Agreement and the Company's Articles of Incorporation and Bylaws, subscribers for Units will participate in the net patronage sourced income from operations of the applicable Business Unit as patronage refunds. Net patronage sourced income from a Business Unit will be allocated on the basis of wheat or soybeans delivered pursuant to the Agreement. The Units in the Milling Business Unit are expected to represent 50% of the milling capacity if all are sold (giving effect to construction of additional capacity now in process and anticipated). The Units in the Processing and Refining Business Unit are expected to represent 50% of the soybean crushing capacity if all are sold. Any person wishing to purchase Units must execute a Subscription Agreement in the form of Exhibit A and an Agreement in the form of Exhibit B and send them, accompanied by payment, to the Company at 1667 North Snelling, P.O. Box 64594, St. Paul, Minnesota 55164. Such Subscription Agreement and Agreement are subject to acceptance by the Company in its sole discretion. The Subscription Agreement and the Agreement must both be accepted if either is accepted. Pending acceptance, all payments will be deposited in a segregated bank account. A subscriber will receive interest income at the rate borne by the segregated account if the subscriber's subscription is not accepted. The offering of Units pertaining to a particular Business Unit will continue through May 31, 1997, unless earlier terminated by the Company, which may occur when all such Units have been sold by the Company or for any other reason without the sale of any Units. If by the close of business on May 31, 1997, all Units pertaining to a particular Business Unit have not been subscribed for, the Company may (i) terminate the offering as to those Units, (ii) accept subscriptions submitted for those Units and terminate the offering for the remaining Units or (iii) accept subscriptions submitted for those Units and continue the offering for the remaining Units. Upon acceptance, Agreements will become effective as of June 1, 1997. The Company reserves the right to offer Units where the subscriber has defaulted in payment. No producer may subscribe for Units representing more than anticipated 1997 production. No subscription for less than $6,000 will be accepted (except to the extent prorated, as described in the next paragraph). No one Defined Member may own more than 1% of the outstanding capacity of any one Business Unit. If on ___________, 1997, the Units of either Business Unit have been oversubscribed, subscriptions will be accepted, subject to approval of the Board of Directors, on a prorata basis, based on subscriptions actually received by the Company through the close of business on that date. A member may elect to use outstanding Capital Equity Certificates for the payment of up to one-sixth of the purchase price. In addition, patrons of Affiliated Associations who wish to subscribe may, if authorized by an Affiliated Association, elect to use outstanding patrons' equities of such Affiliated Association for the payment of up to one-sixth the purchase price if the Affiliated Association agrees that such patrons' equities will be redeemed simultaneously with Capital Equity Certificates of the Company held by such Affiliated Association. SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE UNITS OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Discounts and Proceeds to the Price Commissions(1) Company (2) ------------- --------------- ---------------- Milling Per Unit ..................... $ $ -- $ Total ........................$ $ -- $ Processing and Refining Per Unit ..................... $ $ -- $ Total ........................$ $ -- $
- - - - --------------- (1) Units are being offered by the Company, and no discounts or commissions will be paid. (2) Before deduction of expenses estimated to be $________. The date of this Prospectus is ______________, 1997. No person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or an offer to sell or a solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date. ------------- Page Prospectus Summary 3 Risk Factors 5 Equity Participation Units Trading of Units Use of Proceeds Dividend Policy Capitalization Business Management Certain Transactions Membership in the Company and Authorized Capital Validity of Units Experts Additional Information Index to Financial Statements ...................... F-1 Exhibits Subscription Agreement........................... Exhibit A Member Marketing Agreement....................... Exhibit B ------------- Until ________, 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the Units offered hereby, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. The Company intends to furnish holders of the Units with annual reports containing financial statements audited by its independent public accountants, but does not intend to furnish interim reports. -2- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and related notes included elsewhere in this Prospectus. The Company Harvest States Cooperatives (the "Company") is an agricultural cooperative. Its primary business is merchandising grain, which involves purchase of various grains from its Individual Members, Affiliated Associations and others, sale of the grain to users, exporters and other intermediaries and arranging for transportation and storage of purchased grain for delivery to buyers. The Company also sells feed and other farm supplies to its Individual Members and others, offers services to its Individual Members and Affiliated Associations, crushes and refines soybeans, through a joint venture participates in the food processing and packaging business and mills wheat. The Processing and Refining Division; the Milling Division Through this Prospectus, the Company is offering an opportunity to participate in the patronage sourced income from soybeans from its Oilseed Processing and Refining Division (also known as Honeymead Products Company) ("Processing and Refining Division") and the patronage sourced income from its Wheat Milling Division (also known as Amber Milling Company) ("Milling Division"). While the Processing and Refining Division and the Milling Division will remain part of the Company, patronage earnings from the businesses operated by those Divisions will inure in part to the purchasers of the Units. At its integrated crushing and refining facility in Mankato, Minnesota, the Processing and Refining Division processes soybeans into soybean meal, soyflour and crude soybean oil. The crude soybean oil, with additional purchased crude oil, is refined. The Milling Division mills durum wheat into flour and semolina and, to a lesser extent, mills spring and winter (hard) wheats into bread flour. While the Milling Division had historically concentrated on durum wheat milling and is the largest miller of durum wheat in the United States, with the opening of a new mill in 1995 and the scheduled opening of another mill in February 1997, the Division has broadened its markets to include bakery flour and significantly increased its capacity. The Offering The Company is offering Equity Participation Units in its Wheat Milling Business Unit and its Oilseed Processing and Refining Business Unit, each of which has been designated as a Defined Business Unit by the Company's Board of Directors. Each subscriber for Units in a Business Unit is required to also enter into an a Member Marketing Agreement ("Agreement") by which such holder has the right and obligation to deliver annually the number of bushels of wheat or soybeans equal to the number of Units held. Pursuant to the Agreement, subscribers for Units will participate in the net patronage sourced income from operations of the applicable Business Unit as patronage refunds. Net patronage sourced income from a Business Unit will be allocated on the basis of wheat or soybeans delivered pursuant to the Agreement. Risk Factors Certain material factors should be considered in connection with an investment in the Units offered hereby. See "Risk Factors." Summary Consolidated Financial Data
Income Statement Data: Three Months Ended Years Ended May 31, August 31, -------------------------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- ---- ---- Revenues Sales: Grain .............. $2,858,358,055 $2,793,407,187 $3,086,531,429 $4,191,665,535 $7,127,223,407 $1,341,016,649 $1,875,912,189 Processed grain ............. 460,088,193 501,297,427 593,116,553 708,219,307 819,863,541 187,687,561 234,548,425 Feed and farm supplies .......... 118,788,291 138,103,158 165,925,459 156,699,068 207,252,696 43,124,346 61,003,251 -------------- -------------- -------------- -------------- -------------- -------------- -------------- 3,437,234,539 3,432,807,772 3,845,573,441 5,056,583,910 8,154,339,644 1,571,828,556 2,171,463,865 Patronage dividends .......... 4,476,323 7,781,622 6,609,602 6,512,481 13,278,997 1,801,005 4,504,239 Other revenues ...... 39,803,692 41,671,562 45,895,922 57,556,984 68,339,523 16,782,771 14,839,801 -------------- -------------- -------------- -------------- -------------- -------------- -------------- 3,481,514,554 3,482,260,956 3,898,078,965 5,120,653,375 8,235,958,164 1,590,412,332 2,190,807,905 Costs and expenses: Cost of goods sold ............... 3,384,418,840 3,384,637,000 3,786,336,764 4,981,820,272 8,076,073,326 1,556,325,280 2,156,922,994 Marketing, general, and admin- istrative .......... 48,266,596 52,545,022 60,847,099 69,509,491 70,054,248 18,505,661 19,595,114 Interest ............ 12,842,991 8,964,230 10,250,765 19,268,575 31,921,936 6,511,366 4,621,786 -------------- -------------- -------------- -------------- -------------- -------------- -------------- 3,445,488,427 3,446,146,252 3,857,434,628 5,070,598,338 8,178,049,510 1,581,642,307 2,181,139,894 -------------- -------------- -------------- -------------- -------------- -------------- -------------- Earnings before income taxes ........ 36,026,127 36,114,704 40,644,337 50,055,037 57,908,654 8,770,025 9,668,011 Income taxes .......... 5,000,000 3,725,000 5,500,000 5,100,000 6,900,000 1,150,000 1,150,000 -------------- -------------- -------------- -------------- -------------- -------------- -------------- Net earnings .......... $ 31,026,127 $ 32,389,704 $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 7,620,025 $ 8,518,011 ============== ============== ============== ============== ============== ============== ============== May 31, August 31, -------------------------------------------------------------------- -------------------------- 1992 1993 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- ---- ---- Balance Sheet Data (at end of period): Working capital ..... 66,880,378 69,550,702 69,409,621 66,904,085 95,874,938 64,971,312 98,393,079 Net property, plant and equipment ...... 137,919,139 146,223,870 156,311,551 205,837,690 232,145,401 216,001,148 208,605,760 Total assets ....... 523,018,883 612,261,778 734,655,223 924,533,569 1,228,772,684 1,122,040,355 983,806,311 Long-term debt, including current maturities ......... 49,196,060 44,479,207 39,135,097 84,816,525 132,629,176 97,566,932 129,012,393 Total equity ........ 222,126,239 246,797,147 270,761,017 299,487,893 337,252,119 307,961,026 346,382,651 ============== ============== ============== ============== ============== ============== ============
RISK FACTORS Supply and Demand. The Company may be adversely affected by supply and demand relationships, both domestic and international. Supply is affected by weather conditions, disease, insect damage, acreage planted, government regulation and policies and commodity price levels. The business is also affected by transportation conditions, including rail, vessel, barge and truck. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, by population growth and increased or decreased per capita consumption of some products. Recent Developments. Rising grain and oilseed prices in the 1995 growing and harvesting season, which continued into 1996, tended to reduce inventories of stored grain, but prompted producers in Europe, Canada, Argentina, Australia and other countries to plant additional grain. Prices for most grains have fallen substantially in recent months. Worldwide wheat production is reported to be up, and United States exports of wheat are expected to be down, in the year ending May 31, 1997. The Freedom to Farm Act of 1996, enacted in April 1996, removes a requirement that some land be idled from production as a consequence of receipt of federal farm subsidies. As a result, the amount of land planted in some types of crops is expected to increase in the future. The budget for the federal export subsidy program has decreased substantially from recent years, adversely affecting the ability of the United States to sell grain in world markets. Price Risk and Hedging. Upon purchase, the Company has risks of carrying grain, including price changes and performance risks (including delivery, quality, quantity and shipment period), depending upon the type of purchase contract entered into. The Company is exposed to risk of loss in the market value of positions held, consisting of grain inventory and purchase contracts at a fixed or partially fixed price, in the event market prices decrease. The Company is also exposed to risk of loss on its fixed price or partially fixed price sales contracts in the event market prices increase. To reduce the price change risks associated with holding fixed price positions, the Company generally takes opposite and offsetting positions by entering into grain commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. While hedging activities reduce the risk of loss from changing market values of grain, such activities also limit the gain potential which otherwise could result from changes in market prices of grain. Hedging arrangements do not protect against nonperformance of a contract. At any one time the Company's inventory and purchase contracts for delivery to the Company may be substantial. Processing and Refining Risks. Competition in the soybean processing and refining business is driven by price, transportation costs, service and product quality. The industry is highly competitive. Competitors are adding new plants and expanding capacity of existing plants. Unless exports increase or existing refineries are closed, this extra capacity is likely to put additional pressure on prices and erode margins. Several competitors operate over various market segments and may be suppliers to or customers of other competitors. Milling Risks. The Company's Wheat Milling Division has under construction a flour mill in Houston, Texas, which is not yet operational, and plans to construct semolina and flour and bread flour mills in Pocono, Pennsylvania, but final approvals by local and state authorities have not been received. There can be no assurance that these new mills, if completed, will be competitively or operationally successful. There can be no assurance that the necessary approvals for the Pocono facility will be obtained. Taxation. The Internal Revenue Service could take a position on patronage refunds adverse to the holders of the Units. Further, current income tax laws and regulations pertaining to the receipt of patronage refunds could be changed. USE OF PROCEEDS The net proceeds from the sale of the Units offered hereby are estimated to be $_________, assuming that each subscriber uses Capital Equity Certificates to the full extent allowed in payment of the purchase price, and after deducting the estimated offering expenses. The Company will use the net proceeds initially to repay outstanding balances under the Company's unsecured revolving credit facility. As of January 31, 1997, $_________ of borrowings were outstanding under this facility. The facility is used primarily to fund working capital needs. See "Capitalization." Upon a change in its redemption policy for Patrons' Equities by the Board of Directors (see "Membership in the Company and Authorized Capital--Debt and Equity Instruments--Redemption or Retirement of Patrons' Equities and Allocated Reserve"), a portion of the proceeds will be used for redemption of Patrons' Equities. Proceeds may also be used for construction of the proposed Pocono Mill (see "Business--Wheat Milling--Facilities") and for other capital purposes. DIVIDEND POLICY The Company distributes net patronage earnings on an annual basis in the form of patronage refunds which are distributed as a combination of cash and Patrons' Equities. Patrons' Equities are retired in accordance with policies established by the Board of Directors. Holders of the Units will not be entitled to the payment of dividends by virtue of holding such Units. However, holders of the Units will be entitled to receive patronage refunds attributable to the patronage sourced income from operations of the applicable Business Unit on the basis of wheat or soybeans delivered pursuant to the Agreement. The Board of Directors has not yet determined the proportion of such patronage refunds to be paid in cash and the portion to be paid as Patrons' Equities, nor has it set a policy for retirement of Patrons' Equities arising from Business Units. The Company expects that a high percentage of patronage refunds will be payable in cash and that non-cash patronage dividends from Business Units will be retired over a period not to exceed 10 years. The Company is not authorized to issue capital stock and accordingly does not pay dividends on capital stock. The Board of Directors is authorized to establish the rights, preferences and privileges of equity securities, which could include the payment of dividends, but no such equity securities are presently outstanding. CAPITALIZATION The following table sets forth the capitalization of the Company at November 30, 1996, as adjusted to give effect to the issuance and sale by the Company of the Units offered hereby and the application of the estimated net proceeds therefrom.
November 30, 1996 ----------------- Outstanding As Adjusted ------------------ ------------------- Short-term debt (1): ............................... $ (2) $ ================== =================== Long-term debt: St. Paul Bank for Cooperatives, with fixed and variable interest rates from 6.24% to 7.51%, due in installments through 2007 ....................... $ 69,675,333 $ National Bank for Cooperatives, with fixed and variable interest rates from 6.24% to 7.51%, due in installments through 2007..................................... 51,083,333 Industrial development revenues bonds, payable through July 2005, interest rate 7.4%....................................... 2,100,000 Capitalized lease obligations, with fixed and variable rates from 8.0% to 8.90%......................................... 5,979,743 Mortgages payable and other ....................... 1,736,579 ------------------ ------------------- 130,574,988 Equity Equity Participation Units....................... -- 100,000,000 Capital equity certificates...................... Non-patronage certificates....................... Capital reserve.................................. Patronage dividend payable in cash .............. Net earnings..................................... ------------------- ------------------ ------------------- Total capitalization.......................... $ ================== ===================
(1) The Company has a $550,000,000 Revolving Credit Facility provided by CoBank, ACB, St. Paul Bank for Cooperatives and other lenders which will remain in place until October 31, 1997, subject to extension. The Company may select a method of calculating interest based on a base rate, LIBOR or a bid rate. (2) As of January 31, 1997. BUSINESS Harvest States Cooperatives (the "Company") is an agricultural cooperative. Its primary business is merchandising grain, which involves purchase of various grains from its Individual Members, Affiliated Associations and others, sale of the grain to users, exporters and other intermediaries and arranging for transportation and storage of purchased grain for delivery to buyers. The Company also sells feed and other farm supplies to its Individual Members and others, offers services to its Individual Members and Affiliated Associations, crushes and refines soybeans, through a joint venture participates in the food processing and packaging business and mills wheat. Through this Prospectus, the Company is offering an opportunity to participate in the patronage sourced income from its Oilseed Processing and Refining Division (also known as Honeymead Products Company) ("Processing and Refining Division") and its Wheat Milling Division (also known as Amber Milling Company) ("Milling Division"). While the Processing and Refining Division and the Milling Division will remain part of the Company, the patronage earnings from the businesses operated by those Divisions will inure in part to the purchasers of the Units. Information is presented in this Prospectus on the historical operations of the Company, including the Processing and Refining Division and the Milling Division. In addition, certain historical and pro forma information is presented for the Processing and Refining Business Unit and the Milling Business Unit. The Company has authorized three classes of membership: Individual Members ("Individual Members"), Affiliated Associations ("Affiliated Associations") and Defined Members ("Defined Members"). Individual Members are producers of agricultural products who have done business with the Company during its last fiscal year and have consented to take patronage into account for tax purposes. Affiliated Associations are associations of producers of agricultural products complying with certain federal requirements which have done at least $100,000 of business with the Company during its last fiscal year and have consented to take patronage into account for tax purposes. Defined Members are persons otherwise eligible for membership who hold Equity Participation Units. Currently, there are no Defined Members. As of June 1, 1996, the Company had 35,915 Individual Members and 503 Affiliated Associations. The Company's principal executive offices are located at 1667 North Snelling Avenue, St. Paul, Minnesota 55108 (612-646-9433). As of November 30, 1996, the Company employed 1,954 full and part-time regular employees. Individual Members, Defined Members and Affiliated Associations who sell grain to the Company, and Individual Members, Defined Members, Affiliated Associations and consenting patrons who purchase goods and services from the Company are entitled to receive patronage refunds from the Company, which are declared on an annual basis. The Company may also allocate non-member-sourced income to its Members and Non-Member Consenting Patrons in proportion to patronage. See "Membership in the Company and Authorized Capital." Selected Consolidated Financial and Operating Data The selected financial information presented below has been derived from the Company's consolidated financial statements. The consolidated financial statements for the years ended May 31, 1992, 1993, 1994, 1995 and 1996, have been audited by Deloitte & Touche LLP, independent auditors. The consolidated financial statements for the three-month periods ended August 31, 1995 and 1996, are unaudited. In management's opinion, the unaudited financial statements for the three-month periods include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the Company's financial condition and results of operations for such periods. The results for the three-month period ended August 31, 1996, are not necessarily indicative of the results expected for the full year. The selected consolidated financial information should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this Prospectus.
Income Statement Data: Three Months Ended Years Ended May 31, August 31, -------------------------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- ---- ---- Revenues Sales: Grain ........ $2,858,358,055 $2,793,407,187 $3,086,531,429 $4,191,665,535 $7,127,223,407 $1,341,016,649 $1,875,912,189 Processed grain ........... 460,088,193 501,297,427 593,116,553 708,219,307 819,863,541 187,687,561 234,548,425 Feed and farm supplies ........ 118,788,291 138,103,158 165,925,459 156,699,068 207,252,696 43,124,346 61,003,251 -------------- -------------- -------------- -------------- -------------- -------------- -------------- ............... 3,437,234,539 3,432,807,772 3,845,573,441 5,056,583,910 8,154,339,644 1,571,828,556 2,171,463,865 Patronage dividends ........ 4,476,323 7,781,622 6,609,602 6,512,481 13,278,997 1,801,005 4,504,239 Other revenues .... 39,803,692 41,671,562 45,895,922 57,556,984 68,339,523 16,782,771 14,839,801 -------------- -------------- -------------- -------------- -------------- -------------- -------------- 3,481,514,554 3,482,260,956 3,898,078,965 5,120,653,375 8,235,958,164 1,590,412,332 2,190,807,905 Costs and expenses: Cost of goods sold ............. 3,384,418,840 3,384,637,000 3,786,336,764 4,981,820,272 8,076,073,326 1,556,325,280 2,156,922,994 Marketing, general, and admin- istrative ........ 48,266,596 52,545,022 60,847,099 69,509,491 70,054,248 18,505,661 19,595,114 Interest .......... 12,842,991 8,964,230 10,250,765 19,268,575 31,921,936 6,511,366 4,621,786 -------------- -------------- -------------- -------------- -------------- -------------- -------------- 3,445,488,427 3,446,146,252 3,857,434,628 5,070,598,338 8,178,049,510 1,581,642,307 2,181,139,894 -------------- -------------- -------------- -------------- -------------- -------------- -------------- Earnings before income taxes ...... 36,026,127 36,114,704 40,644,337 50,055,037 57,908,654 8,770,025 9,668,011 Income taxes ........ 5,000,000 3,725,000 5,500,000 5,100,000 6,900,000 1,150,000 1,150,000 -------------- -------------- -------------- -------------- -------------- -------------- -------------- Net earnings ........ $ 31,026,127 $ 32,389,704 $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 7,620,025 $ 8,518,011 ============== ============== ============== ============== ============== ============== ============== Balance Sheet Data (at end of period): May 31, August 31, -------------------------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- ---- ---- Working capital ... 66,880,378 69,550,702 69,409,621 66,904,085 95,874,938 64,971,312 98,393,079 Net property, plant and equipment ..... 137,919,139 146,223,870 156,311,551 205,837,690 232,145,401 216,001,148 208,605,760 Total assets ...... 523,018,883 612,261,778 734,655,223 924,533,569 1,228,772,684 1,122,040,355 983,806,311 Long-term debt, including current maturities ........ 49,196,060 44,479,207 39,135,097 84,816,525 132,629,176 97,566,932 129,012,393 Total equity ...... 222,126,239 246,797,147 270,761,017 299,487,893 337,252,119 307,961,026 346,382,651 ============== ============== ============== ============== ============== ============== ============
Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Comparison of Three Months Ended August 31, 1996, with 1995 The Company's consolidated net earnings for the three month period ended August 31, 1996 of $8,500,000 improved $900,000 over 1995 due to increased volumes and slightly higher gross margins per bushel within its Milling Division and increased patronage refunds received on purchases of wholesale crop inputs, partially offset by lower earnings in the Grain Marketing Division due to decreased volumes and gross margins per bushel. Consolidated net sales of $2,171,000,000 increased by $600,000,000 (38%) during the three months ended August 31, 1996 compared to the same period of 1995. This increase is primarily attributed to an increase in the weighted average of all commodities sold of $5.83 compared to $3.58 for 1995. Patronage dividends received increased $2,700,000 (150%) for the three month period ended August 31, 1996 versus 1995 as a result of higher patronage earnings distributed by cooperative customers and suppliers. Other revenues decreased $2,000,000 (12%) through August 31, 1996 versus 1995 primarily due to a decrease in interest income of $1,800,000, a decrease in joint venture income of $500,000, primarily from those joint ventures involved in the exporting of grain, and a decrease in storage and handling income of $400,000, partially offset by an increase in commission income of $700,000. Cost of goods sold of $2,157,000,000 for the three month period ended August 31, 1996 increased $601,000,000 (39%) from the same period of 1995. This increase is attributable primarily to an increase in the weighted average cost of commodities of $5.79 in 1996 from $3.54 in 1995. Marketing and administrative expenses increased $800,000 (4%) during the 1996 period from the 1995 period due to an increase in the relative size of the Company's operations. Interest expense decreased $1,900,000 (29%) for the 1996 period from 1995 attributable to a decline in working capital requirements. Tax expense for the three month period ended August 31, 1996 remained relatively unchanged from 1995 with effective tax rates of 11.9% and 13.1%, respectively. Comparison of Year Ended May 31, 1996 with 1995 Consolidated net earnings of approximately $51,000,000 for the year ended May 31, 1996 is a $6,100,000 increase from 1995. This increase is attributed primarily to increased volumes of grain handled and increased returns on investments. Consolidated net sales of $8,154,000,000 in 1996 increased by $3,097,000,000 (61%) in 1996. This increase was due principally to grain volume of 1.7 billion bushels in 1996, an increase of 550 million bushels over 1995 and an increase in grain price as a weighted average of all commodities sold which was $4.21 for 1996, 56 cents per bushel greater than 1995. Patronage dividends increased $6,800,000 (105%) in 1996 compared to 1995 resulting from higher patronage earnings distributed by cooperative customers and suppliers. Other revenues of $68,300,000 increased $10,700,000 (19%) in 1996. This net increase was due primarily to an increase of $4,600,000 in service revenues, from the Company's export facilities, and an increase in joint venture income of $8,500,000, primarily from those joint ventures involved in the exporting of grain, net of a $2,400,000 decrease in all other categories of other revenues, including the write-down of investments totaling $1,100,000. Cost of goods sold of $8,076,000,000 increased $3,094,000,000 (62%) in 1996. This increase is attributable primarily to an increase in the weighted average cost of commodities of $4.16 in 1996 from $3.59 in 1995. Marketing and administrative expenses were essentially flat compared to 1995. An expansion of the relative size of the Company's operations, which increased costs in certain areas, was offset by a decrease in pension costs of $4,000,000, principally caused by a settlement adjustment recognized in 1995. Interest expense of $31,900,000 increased $12,600,000 (65%) in 1996. This increase is substantially attributable to a $10,300,000 increase in interest on short-term debt incurred to finance increased volumes at higher prices and an increase of $3,200,000 in interest on long-term debt incurred primarily for the expansion of property, plant, and equipment. Income tax expense of $6,900,000 and $5,100,000 for 1996 and 1995, respectively, results in effective tax rates of 11.9% and 10.2%. The increase in the effective tax rate is primarily attributable to an increase in non-patronage income during 1996. Comparison of Year Ended May 31, 1995 with 1994 The Company's consolidated net earnings of approximately $45,000,000 for 1995 was a $9,900,000 increase from 1994 primarily attributed to increased grain handled at margins per bushel equal to that of the prior year, along with increased joint venture and export terminal service revenues. Consolidated net sales of $5,057,000,000 increased by $1,211,000,000 (31%) in 1995. This increase was due principally to grain volume of 1.15 billion bushels in 1995 compared to 816 million bushels in 1994, an increase of 334 million bushels (41%), offset by price as a weighted average of all commodities sold of $3.65 for 1995 compared to $3.78 for 1994, a decrease of 13 cents per bushel. Other revenues of $57,600,000 increased $11,700,000 (25%) from 1994. This net increase was due primarily to an increase of $2,200,000 in service revenues, for the most part at the Company's export facilities, an increase in joint venture income of $4,300,000, primarily from those joint ventures involved in the exporting of grain, and an increase of $3,500,000 in interest income primarily generated from short-term loans to local Affiliated Associations of the Company. Cost of goods sold of $4,982,000,000 increased $1,196,000,000 (32%). This increase is primarily attributed to higher volumes of grain handled offset to some extent by lower grain prices. The weighted average cost of commodities was $3.59 in 1995, down from $3.72 in 1994. Marketing and administrative expenses of $69,500,000 increased $8,700,000 (14%) in 1995. This increase was due to an expansion of the relative size of the Company's operations which increased costs in certain areas, and an increase in pension costs of $4,000,000 principally caused by a benefit plan settlement adjustment recognized in 1995. Interest expense of $19,300,000 increased $9,000,000 (87%) in 1995. This increase is substantially attributed to increased volumes of business and an increase of $3,000,000 in interest on long-term debt incurred primarily for the expansion of property, plant and equipment. Income tax expenses of $5,100,000 and $5,500,000 for 1995 and 1994, respectively, result in effective tax rates of 10.2% and 13.5%. Liquidity and Capital Resources Cash Flows from Operations Operating activities of the Company provided cash of $302,100,000 during the three months ended August 31, 1996, while operating activities used $18,700,000 of cash for the same period in 1995. Net cash provided and used for operations during these periods is primarily attributable to the changes in working capital requirements with such balance declining and therefore contributing working capital of $292,500,000 in 1996. Working capital requirements increased and therefore used cash in the net amount of $27,700,000 in 1995. Net cash used for the Company's operating activities totaled $105,700,000, $49,700,000 and $33,200,000, respectively, for the years ended 1996, 1995 and 1994. The increase in net cash used in operations in 1996, compared to 1995 and 1994, resulted primarily from increases in grain inventories and receivables due to higher volumes of grain processed. Cash Flows from Investing Net cash flows used in the Company's investing activities were $100,000 and $13,400,000 during the three months ended August 31, 1996 and 1995, respectively. Acquisitions of property, plant and equipment comprised the principal use of this cash in each of the periods. On August 31, 1996 the Company formed a joint venture with a regional food processing company, and contributed substantially all of the net assets of its Holsum Foods Division as its capital investment in the joint venture. In return for these net assets, the Company received a 40% interest in the joint venture and the joint venture assumed debt of $33,000,000. For the years ended 1996, 1995 and 1994, net cash flows used in the Company's investing activities totaled $37,600,000, $71,400,000 and $24,300,000, respectively. The acquisition of property, plant and equipment comprised the primary use of cash in each of these three years, totaling $40,500,000, $69,300,000 and $28,000,000 in 1996, 1995 and 1994, respectively. Cash Flows from Financing The Company finances its working capital needs through short-term lines of credit with the banks for cooperatives and commercial banks. As of May 31, 1996 the Company had short-term lines of credit totaling $570,000,000, of which $550,000,000 was committed and $324,000,000 was outstanding. The Company decreased its outstanding net short-term borrowings by $315,000,000 during the three months ended August 31, 1996 and increased such borrowings by $10,500,000 during that period in 1995. For the years ended May 31, 1996, 1995 and 1994, the Company increased its outstanding net short-term borrowings by $124,000,000, $87,000,000 and $79,500,000, respectively, in order to fund the working capital needs caused by the increase in grain volumes. The Company has financed its long-term capital needs, primarily the acquisition of property, plant, and equipment, with long-term agreements through the banks for cooperatives with maturities through the year 2007. Total indebtedness of these agreements totaled $120,700,000 and $70,300,000 on May 31, 1996 and 1995, respectively. The Company also had long-term debt in the form of capital leases, industrial development revenue bonds and miscellaneous notes payable totaling $11,900,000 and $14,500,000 on May 31, 1996 and 1995, respectively. The Company borrowed on a long-term basis $15,000,000 during the three months ended August 31, 1995 and repaid long-term debt in the amounts of $3,600,000 and $2,500,000 for the same period of 1996 and 1995. The Company borrowed on a long-term basis $58,000,000, $51,000,000 and $1,200,000 and repaid long-term debt in the amounts of $11,300,000, $5,900,000 and $6,500,000 in 1996, 1995 and 1994, respectively. The Company anticipates further short-term financing needs to fund increases in the volume of grain handled and further long-term needs to fund acquisitions of grain facilities and for expansion and development of existing value-added businesses. Management believes such needs can be financed with a combination of debt and the proceeds of this offering. In accordance with the bylaws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each year and are based on amounts reportable for federal income tax purposes as adjusted in accordance with the bylaws. The cash portion of this distribution, deemed by the Board of Directors to be 30% of such earnings for 1996, 1995 and 1994, respectively, totaled $11,000,000, $10,000,000 and $6,800,000. The Board of Directors authorized the redemption of patronage certificates held by patrons who were 72 years of age and those held by estates of deceased patrons during the three months ended August 31, 1996 and 1995. These amounts totaled $1,600,000 and $1,700,000, respectively. The Board of Directors authorized the redemption of patronage certificates held by patrons who were 72 years of age and those held by estates of deceased patrons during the years ended May 31, 1996, 1995 and 1994. These amounts totaled $6,600,000, $5,700,000 and $5,500,000, respectively. GRAIN MERCHANDISING Industry Overview Grain and oilseed merchandising involves the sale and distribution of grain and oilseeds from producer to processor, to be processed for human and animal consumption and other uses. These commodities are produced and consumed throughout the world. Increased worldwide demand is generated through population growth and, for certain regions, increased per capita food consumption supported by growing affluence. Demand for these commodities is satisfied by worldwide production, which is in part determined by prevailing prices. In recent years, a significant portion of high demand grains (wheat, corn and soybeans) grown domestically has been exported. United States production competes with production in numerous other countries to supply worldwide demand for these grains. A portion of domestic demand for other grains has been satisfied by imports, and United States producers compete against those imports. The ability of producers in particular countries to compete on a worldwide basis may be enhanced by governmental support and protection, which may vary from time to time. Demand for grain and perceptions about prevailing supplies and future production affect prices for grain, which can be erratic. In the United States, grain merchandising involves the purchase of grain, sale for export or further domestic use and storage and transportation to export facilities or to users. Grain merchandising may be adversely affected by supply and demand relationships, both domestic and international. Supply is affected by weather conditions, disease, insect damage, acreage planted, government regulation and policies and commodity price levels. The business is also affected by transportation conditions, including rail, vessel, barge and truck. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, by population growth and increased or decreased per capita consumption of some products. Recent Developments. Rising grain prices in the 1995 growing and harvesting season, which continued into 1996, tended to reduce inventories of stored grain, but prompted producers in Europe, Canada, Argentina, Australia and other countries to plant additional grain. Prices for most grains have fallen substantially in recent months. Worldwide wheat production is reported to be up, and United States exports of wheat are expected to be down, in the year ending May 31, 1997. Demand for corn has been supported domestically by its use in feeding cattle. United States exports of meat have continued to increase. The Freedom to Farm Act of 1996, enacted in April 1996, removes a requirement that some land be idled from production as a consequence of receipt of federal farm subsidies. As a result, the amount of land planted in some types of crops is expected to increase in the future. The budget for the federal export subsidy program has decreased substantially from recent years, adversely affecting the ability of the United States to sell grain in world markets. Introduction The Company buys grain through its Grain Marketing Division from Affiliated Associations (typically a cooperative organization of local producers), directly from Individual Members (to a limited extent) and from third parties (such as grain dealers, non-Member producers, marketing associations or marketing pools, elevators and other grain merchandising companies) and through its Agri-Service Centers, which are country elevators owned by the Company, directly from Individual Members. See "Farm Marketing and Supply." Grain purchased by Agri-Service Centers is usually sold to the Grain Marketing Division for resale. A small portion of grain is handled on a consignment basis. Grain is sold by the Company for future delivery at a specified location. Grain sold by a producer is typically trucked to a local elevator for sale. From local elevators, grain may be transported in a variety of ways to the purchaser. The Company arranges transportation to delivery locations using truck, rail and barge transportation. Grain intended for export may be shipped by rail to an export terminal or to a barge loading facility to be shipped by barge to an export terminal, where it is loaded on an ocean-going vessel. Grain intended for domestic use may be shipped by truck or rail to various locations throughout the United States. Because of its facilities (see "--Grain Handling and Transportation"), the Company has significant capacity to sell grain for export. Purchases. The number of bushels of grain purchased from Individual Members and Affiliated Associations, the total grain purchased and the percentage relationship for each of the years ended May 31 are set forth below:
Three Months Ended Years Ended May 31, August 31, ------------------- ----------- 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- Member purchases ... 525,715,235 720,024,458 959,166,596 228,722,782 162,520,929 Total purchases .... 816,421,362 1,148,952,019 1,692,438,700 364,896,189 312,493,669 Percentage ......... 64.4% 62.7% 56.7% 62.7% 52.0%
Substantially all of the grain purchased by the Company is grown in the Midwest, Great Plains and Pacific Northwest. The Company also purchases grain grown in other parts of the United States and other countries. Grains Handled. The primary grains merchandised by the Company are corn, wheat and soybeans. The Company also merchandises barley, milo, sunflowers and oats as well as smaller quantities of canola, flax, rye, millet and others. The number of bushels of grain purchased by the Company for the periods indicated is set forth below:
Three Months Ended Years Ended May 31, August 31, ------------------- ---------- 1994 1995 1996 1995 1996 ------------- ------------- ------------- ------------- ------------- Wheat....... 445,201,610 457,684,648 505,606,729 110,670,137 101,099,229 Corn ....... 185,121,268 342,832,256 777,631,466 181,706,545 138,390,104 Soybeans ... 68,325,522 172,025,373 234,930,247 39,029,209 46,548,038 Barley ..... 82,842,737 93,699,078 75,225,773 14,116,222 11,225,436 Milo ....... 5,953,433 36,663,822 48,199,610 13,074,774 10,621,758 Sunflowers.. 12,322,105 28,929,026 25,952,855 1,742,018 459,686 Oats ....... 14,097,310 13,423,696 20,008,442 4,187,136 3,545,572 All other... 2,557,377 3,694,120 4,883,578 370,149 603,846 ----------- ------------- ------------- ----------- ----------- 816,421,362 1,148,952,019 1,692,438,700 364,896,190 312,493,669 ============= ============= ============= ============= =============
The amounts above include grain sold to the Milling Division and the Processing and Refining Division and for use in feeds. Sales of grain by the Company for each of the years ended May 31 are set forth below: 1994 1995 1996 -------------- -------------- -------------- Wheat ............... $1,973,640,146 $1,890,923,540 $2,631,202,689 Corn ................ 488,542,201 954,570,208 2,518,939,007 Soybeans ............ 304,681,449 880,627,929 1,431,485,630 All other ........... 319,667,633 465,543,859 545,596,081 -------------- -------------- -------------- TOTAL ............... $3,086,531,429 $4,191,665,535 $7,127,223,407 ============== ============== ============== Recent Developments. In recent years, sales of grain have been substantially dependent on exports. During the year ended May 31, 1996, approximately 40% of the Company's grain sales were domestic and approximately 60% were exports. See Note 1 of Notes to Financial Statements. Because of a decline of grain prices and anticipation of increased worldwide supplies of grain, the Company expects that United States exports of grains will decline in the current year. It believes that many producers will store current production, allowing domestic supplies, which have been at historically low levels, to be replenished. As a result, the Company expects that its own grain sales in the current year will decline materially from the record level for the year ended May 31, 1996. Merchandising The Company buys and sells grain through offices of its Grain Marketing Division located in Portland, Oregon, Great Falls, Montana, Lincoln, Nebraska, Kansas City, Kansas, St. Paul, Minnesota, Winona, Minnesota, Davenport, Iowa, and Lewiston, Idaho, and at its Agri-Service Centers. Grain purchased through Agri-Service Centers is purchased on a cash and futures basis. Grain purchased through the Grain Marketing Division is usually purchased for future delivery. Grain is sold for future delivery at a specified location, with the Company usually responsible for arranging necessary transportation to that location. Purchasers include millers, malters, exporters and foreign buyers as well as the soybean, wheat and feed operations of the Company. The Company is not dependent on any one customer. The Company has supply relationships calling for delivery of grain at prevailing market prices. Grain users store varying amounts of grain for their own use. The Company's ability to arrange transportation is a significant part of the service it offers to its customers. The Company's loading capabilities onto unit trains, ocean going vessels and barges is a component of the selling price of grain handled by the Company Virtually all grain sold domestically is sold by employees while approximately half of grain exported is sold by brokers or agents and the balance by employees. The Company has a small ownership position in Intrade, a company which owns part of a German-based marketing organization involved in trading grain and feedstuffs in German and international markets. The Company also has relationships with agents, brokers and marketing companies in other countries to assist it in export sales. Competition The Company competes for both the purchase and sale of grain. Competition is intense and margins are low. Some of the Company's competitors are integrated food producers, which may also be customers. Many competitors have substantially greater financial resources than the Company. In the purchase of grain from producers, location of a delivery facility is a prime consideration but producers are willing to truck grain for sale over increasingly longer distances. Grain prices are affected by reported trading prices on national markets, shipping costs and storage capabilities. Price is affected by the capabilities of the facility. For example, if it is cheaper to deliver to a customer by unit train than by truck, a facility with unit train capability provides a price advantage. The Company believes that its relationship with Individual Members serviced by local Agri-Service Centers and with Affiliated Associations gives it a broad origination capability. The Company competes in the sale of grain based on price and its ability to provide quantity and quality of grains required and its ability to deliver. Location of facilities is a major factor in ability to compete. Major grain merchandising companies in addition to the Company include Archer-Daniels-Midland, Cargill, Continental, ConAgra, Bunge and Louis Dreyfus, each of which handles grain volumes of more than one billion bushels annually. The Company estimates it would be among the smaller merchandisers among these seven. The Company also competes with numerous other grain merchandisers with annual volumes of less than one billion bushels. Since the Company's facilities are located primarily in the Midwest, Great Plains and Pacific Northwest, with a terminal in the Gulf, the Company primarily competes with the companies whose facilities are in these areas. The Company's export facilities in three major areas allow it to ship to anyplace in the world. Grain Handling and Transportation The Company owns export terminals, river terminals and other elevators involved in the handling of grain. All such facilities can receive inbound truck and rail. Export facilities on river systems can receive grain by barge. In addition, the Company owns 144 Agri-Service Centers, which are country elevators which receive grain from producers. The Company operates river terminals at Kansas City, Missouri (two), St. Paul, Savage and Winona, Minnesota, and Davenport, Iowa (two), which are used to load grain onto barges for shipment to both domestic and export customers via the Mississippi River system, on trucks for domestic markets and on rail for both domestic and export markets. The Company owns and operates a terminal at Kennewick, Washington, on the Columbia River. The Company has interests in three river terminals located on the Snake River: Lewis and Clark Terminal Association's facility located at Lewiston, Idaho, Central Ferry Terminal Association's facility located at Central Ferry, Washington and Co-Grain Elevator Company's facilities located at Upper Monumental and Burbank, Washington. Much of the grain from these terminals is loaded onto barges for shipment to Pacific Northwest export terminals. The Company's export terminal at Superior, Wisconsin, provides access to the Great Lakes and St. Lawrence Seaway, and the Company's export terminal at Myrtle Grove, Louisiana, serves the Gulf market. An export terminal at Kalama, Washington, leased by the Company and an export terminal at Vancouver, Washington, owned by a joint venture partner, serve the Pacific market. A partnership between the Company and Continental Grain Company operates an export terminal at Tacoma, Washington, for feed grain and oil seed shipments to Pacific Rim customers. A facility in Spokane, Washington is used for storage and transloading. An elevator in Petersburg, North Dakota, is used to standardize barley for a particular customer. The Division leases a fleet of covered hopper cars and enters into various contracts for covered grain barges. In addition, at various times the Company may charter vessels. Price Risk and Hedging Upon purchase, the Company has risks of carrying grain, including price changes and performance risks (including delivery, quality, quantity and shipment period), depending upon the type of purchase contract entered into. These contracts include flat price, basis fixed, delayed price, deferred payment, hedge to arrive and futures fixed. The Company is exposed to risk of loss in the market value of positions held, consisting of grain inventory and purchase contracts at a fixed or partially fixed price, in the event market prices decrease. The Company is also exposed to risk of loss on its fixed price or partially fixed price sales contracts in the event market prices increase. To reduce the price change risks associated with holding fixed price positions, the Company generally takes opposite and offsetting positions by entering into grain commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. Most of the grain volume handled by the Company can be hedged. Some grains cannot be hedged because there are no futures for certain commodities. For those commodities, risk is managed through the use of forward sales and different pricing arrangements and to some extent cross-commodity futures hedging. While hedging activities reduce the risk of loss from changing market values of grain, such activities also limit the gain potential which otherwise could result from changes in market prices of grain. The Company's policy is to generally maintain hedged positions in grain which is hedgeable, but the Company can be long or short at any time. The Grain Marketing Division's profitability is primarily derived from margins on grain merchandised and revenues generated from other merchandising activities with its customers, not from hedging transactions. Hedging arrangements do not protect against nonperformance of a contract. When a futures contract is entered into, an initial margin deposit must be sent to the applicable exchange. The amount of the deposit is set by the exchange and varies by commodity. If the market price of a short futures contract increases, then an additional margin deposit (maintenance margin) would be required. Similarly, if the price of a long futures contract decreases, a maintenance margin deposit would be required to be sent to the applicable exchange. Subsequent price changes could require additional maintenance margins or could result in the return of maintenance margins. At any one time the Grain Marketing Division's inventory and purchase contracts for delivery to the Company may be substantial. The Grain Marketing Group has a risk management policy and procedures that includes net position limits. It is defined by commodity and includes both trader and management limits. This policy and computerized procedure triggers a review by management of the Grain Marketing Division when any trader is outside of position limits and also triggers review by management of the Company if the Grain Marketing Division is outside of its position limits. The position limits are reviewed at least annually with management of the Company. The Company monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, certain purchase and sale contracts are subject to credit approvals and appropriate terms and conditions. Seasonality Harvest for most crops occurs in the summer and fall, and the Company purchases more grain during that period. Because of the Company's geographic location and the fact that it is further from its export facilities, grain tends to be sold later than in other parts of the country. Because many producers have significant on-farm storage capacity and because of the Company's own storage capacity, grain is bought and moved throughout the year. Working Capital Due to the amount of grain purchased and held in inventory, the Company has significant working capital needs at various times of the year. The amount of borrowings for this purpose and the interest rate charged on such borrowings directly affect the profitability of the grain merchandising operations. See "Capitalization." Employees As of November 30, 1996, the Grain Marketing Division had 520 employees, of which 82 were traders, 300 production staff, 14 management and 124 support staff. See "Farm Marketing and Supply" with respect to employment by Agri-Service Centers. OILSEED PROCESSING AND REFINING Industry Overview The soybean crushing industry converts soybeans into meal used for feeding animals, soy flour used for specialty food and other purposes and crude soybean oil. The soybean refining industry refines the crude oil for use in processed foods, such as margarine, salad dressings and baked goods, and to a more limited extent industrial uses. Soybean production is concentrated in the central United States, Brazil, China and Argentina. Crushing plants are generally located in proximity to sources of soybeans and usage of meal often arises in proximity to crushing plants. Refineries are generally located next to the crushing plants. Oil is shipped throughout the United States and for export. Per capita domestic consumption of soybean oil has declined slightly in recent years. Exports of soybean oil are variable but generally a minor portion of total production. In recent years, exports have varied widely, which dramatically influenced margins in both crushing and refining. Usage of meal is dependent on the amount of livestock being raised, which has increased in recent years. While per capita domestic consumption of meat has been stable in recent years, demand for meal has increased due to an increase in the domestic consumption of white meat and in increase in meat exports. Soybean meal provides a ready source of protein with a 44% or higher protein content, compared to corn at 9%, wheat at 9.5% and barley at 11.5% Major competitors in the industry include the Company, Archer-Daniels-Midland (ADM), Cargill, Ag Processing, Inc. ("AGP"), Central Soya and Bunge. Competition is driven by price, transportation costs, service and product quality. The industry is highly competitive. These and other competitors are adding new plants and expanding capacity of existing plants. Unless exports increase or existing refineries are closed, this extra capacity is likely to put additional pressure on prices and erode margins. Several competitors operate over various market segments and may be suppliers to or customers of other competitors. Historically, in the Company's trade area there has been an adequate supply of soybeans, even in years when there has been a substantial amount of soybeans exported. While the price of soybeans has fluctuated substantially, the prices of meal and oil have followed, so that margins have been maintained. The amount of carryover soybeans domestically at the end of the 1996 harvest season was at the lowest level since the 1988/1989 crop year. Business At its integrated crushing and refining facility in Mankato, Minnesota, the Processing and Refining Division processes soybeans into soybean meal, soyflour and crude soybean oil. The crude soybean oil, with additional purchased crude oil, is refined. Selected Financial and Operating Data The selected financial information presented below has been derived from the Processing and Refining Division's financial statements. The financial statements for the years ended May 31, 1994, 1995 and 1996, were audited by Deloitte & Touche LLP. The financial statements for the three-month periods ended August 31, 1995 and 1996, are unaudited. In management's opinion, the unaudited financial statements for the three-month periods include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the Division's financial condition and results of operations for such periods. The results for the three-month period ended August 31, 1996, are not necessarily indicative of the results expected for the full year. The selected financial information should be read in conjunction with the Division's financial statements and notes thereto included elsewhere in this Prospectus.
Three Months Ended Years Ended May 31, August 31, ------------------- ----------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ Revenue: Processed Oilseed Sales............. $358,372,039 $398,095,108 $399,271,001 $ 93,227,683 $113,145,890 Other revenues ..................... 1,394,484 1,162,518 1,435,708 1,407,881 599,421 ------------ ------------ ------------ ------------ ------------ 359,721,523 399,257,626 400,706,709 94,635,564 113,745,311 Cost and expenses Costs of goods sold ................ 334,968,474 366,407,451 371,424,566 88,122,829 107,833,751 Marketing and administrative ................... 4,722,900 5,137,663 4,544,763 1,214,952 1,194,870 Interest ........................... 164,300 0 151,500 12,600 19,100 ------------ ------------ ------------ ------------ ------------ ............................ 339,855,674 371,545,114 376,120,829 89,350,381 109,047,721 ------------ ------------ ------------ ------------ ------------ Earnings before income taxes .............................. 19,865,849 27,712,512 24,585,880 5,285,183 4,697,590 Income taxes ......................... 1,650,000 1,500,000 1,600,000 375,000 350,000 ------------ ------------ ------------ ------------ ------------ Net earnings ......................... $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 4,910,183 $ 4,347,590 ============ ============ ============ ============ ============ Earnings per bushel: Pretax earnings .................... $ 19,865,849 $ 27,712,512 $ 24,585,880 $ 5,285,183 $ 4,697,590 Earnings from purchased oil ........ (4,511,979) (4,680,813) (3,557,406) (1,198,320) (1,239,925) Non-patronage joint venture income.. (1,300,427) (990,191) (1,353,708) (1,355,222) (567,093) Book to tax differences ............ 135,170 393,608 (71,485) ------------ ------------ ------------ ------------ ------------ Tax basis soybean earnings ......... $ 14,188,613 $ 22,435,116 $ 19,603,281 $ 2,731,641 $ 2,890,572 ============ ============ ============ ============ ============ Bushels processed .................. 22,630,472 30,807,933 30,466,475 6,579,233 8,237,817 Earnings per bushel ................ $ 0.63 $ 0.73 $ 0.64 $ 0.42 $ 0.35 Operating Data: Quantities processed Soybeans (bu.) ................... 24,136,364 30,807,933 30,446,475 6,585,202 8,237,817 Crude oil (lb.) .................. 860,221,089 894,970,248 920,492,402 222,386,518 241,044,985 Production Meal (tons) ...................... 588,873 741,190 728,435 147,723 189,913 Flour (tons) ..................... 31,614 40,614 39,914 10,198 7,794 Refined oil (lbs.) ............... 799,908,000 835,396,000 858,240,000 223,090,442 241,813,167 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ Balance Sheet Data (at end of period): Working capital .................... $ 33,813,064 $ 32,980,590 $ 28,619,585 $ 31,690,281 $ 26,317,895 Net property, plant and equipment .................... 19,577,934 20,410,408 24,771,413 21,700,717 27,073,103 Total assets ....................... 53,390,998 53,390,998 53,390,998 53,390,998 53,390,998 Long-term debt, including current maturities ............... -- -- -- -- -- Total equity ................ 53,390,998 53,390,998 53,390,998 53,390,998 53,390,998
Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Certain operating information pertaining to the Division is set forth below, as a percentage of sales, except processing margins. Three Months Ended Years Ended May 31, August 31, ------------------- ----------- 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- Gross margin percentage ..... 6.91% 8.25% 7.33% 6.99% 5.22% Marketing and administrative . 1.32% 1.29% 1.14% 1.30% 1.06% Interest ......... 0.05% -- 0.04% 0.01% 0.02% Processing margins Crushing/bu .... $ .50 $ .59 $ .60 $ .38 $ .32 Refining/lb .... $.0132 $.0149 $.0154 $.0116 $.0110 Because of the volatility of commodity prices, the Company believes that processing margins are a better measure of the Division's performance than gross margin percentages. Comparison of Three Months Ended August 31, 1996 with 1995 The Division's net earnings of $4,400,000 for the three months ended August 31, 1996 represent a $500,000 decrease compared to the same period in 1995. This decrease in net earnings is primarily attributable to income from an oilseed joint venture in 1995. Net sales of $113,100,000 for the three months ended August 31, 1996 increased by $19,900,000 (21%) compared to the same period in 1995. Volume increases of processed soybean products, primarily soymeal and soyflour, contributed $6,100,000 to sales and increased volumes of refined oil contributed $5,800,000. Increased sales prices for soymeal and soyflour contributed $15,500,000 in sales, offset by a decline in the average sales price for refined oils which reduced sales by $7,500,000. Other revenues of $600,000 decreased $800,000 (57%) from the 1995 period due primarily to income from an oilseed joint venture in 1995. Cost of goods sold for the 1996 period of $107,800,000 increased $19,700,000 (22%) from 1995. Of this increase, $9,600,000 is attributable to additional soybean processing volume (8,250,000 bushels in 1996 compared with 6,600,000 bushels in 1995). Additional requirements for crude soy oil in 1996 resulted in approximately $3,700,000 of increased costs over 1995. An increase in the per bushel cost of soybeans in 1996 resulted in $15,600,000 in additional costs compared to 1995. These costs were partially offset by a decline in the cost per pound of crude soybean oil, which reduced cost of sales by $9,200,000. Plant expenses were essentially unchanged in 1996. Marketing and administrative expenses were unchanged for the 1996 period compared to the 1995 period. Interest expense was unchanged for the three months ended August 31, 1996 compared with the same period in 1995. Income tax expense of $350,000 and $375,000 for the three months ended August 31, 1996 and 1995, respectively, results in effective tax rates of 7.5% and 7.1%. The increase in the effective tax rate is the result of a higher percentage of divisional nonpatronage income in 1996 to total divisional income, versus 1995. Comparison of Year Ended May 31, 1996 with 1995 The Division's net earnings of $23,000,000 for the year ended May 31, 1996 is a $3,200,000 decrease in net earnings from the prior year. This decrease in net earnings is attributable to an increase in cost of goods sold which could not entirely be passed on to the customer due to competitive industry conditions. Net sales of $399,300,000 increased by $1,200,000 in 1996 compared to 1995. Product volume increases, particularly refined oil, contributed $6,800,000 in additional sales, offset by a decline in overall average sale prices which decreased net sales by $5,600,000. Other revenues of $1,400,000 increased $200,000 (17%) compared to 1995. This net increase was primarily attributed to an increase in income from an oilseed joint venture. Cost of goods sold of $371,400,000 in 1996 increased $5,000,000 (1.4%) compared to 1995. Of this increase, $2,700,000 is due to increased volume of production and $2,500,000 is due to increased prices of soybeans and crude soybean oil. Plant expenses decreased by $200,000. While the cost of raw materials (soybeans and soybean crude oil) increased during the year on a per unit basis, the average sales price for products declined because of an overall increase in production in the industry. The increase in raw material costs could not be passed on in the form of higher sales prices because of this competitive environment and is the primary cause for the decline in gross margins and net earnings in 1996 when compared to 1995. Marketing and administrative expenses declined by $600,000 in 1996. This decrease largely results from additional pension expense of $600,000 in 1995 related to a benefit plan settlement adjustment which was allocated to all Harvest States divisions. The Division incurred interest expense of $152,000 in 1996 while in 1995 it incurred no such expense. This increase is attributable to increased working capital requirements caused primarily by comparatively higher inventory values caused by higher soybean and soybean oil prices and fixed asset additions of $6,000,000 in 1996 which were partially financed by borrowings. Income tax expense of $1,600,000 and $1,500,000 for 1996 and 1995, respectively, results in effective tax rates of 6.5% and 5.4%. The increase in the effective tax rate is the result of a higher percentage of divisional nonpatronage income in 1996. Comparison of Year Ended May 31, 1995 With 1994 The Division's net earnings of $26,200,000 for 1995 improved $8,000,000 over 1994 due primarily to increased unit sales of soybean meal and oil. Net sales of $398,100,000 increased by $39,700,000 (11%) over 1994. This increase was due primarily to expansion of the facility's soybean crushing capacity and production time lost in the 1994 season due to an extended construction project. Soybeans crushed totaled 30,808,000 bushels in 1995 compared to 24,136,000 bushels in 1994, an increase of 28%. This increase contributed approximately $41,000,000 in additional sales. A slight decline in the average sales price of products reduced sales by approximately $1,300,000. Other revenues of $1,200,000 decreased $200,000 (14%) compared to 1994. This net decrease was due primarily to a decrease in income from the supply contract assigned to another processor of $300,000, offset by an increase in interest income of $100,000. Cost of goods sold of $366,400,000 increased $31,400,000 (9.4%) from 1994. Increased volume, particularly soybeans purchased and crushed, produced approximately $49,400,000 in additional costs. This volume increase was partially offset by a decline in the per unit cost of soybeans and soybean oil, which produced a favorable variance compared to the prior year of approximately $18,700,000. Plant expense increased approximately $700,000 in 1995 due to the additional operating time related to the volume increases. Marketing and administrative expenses increased $400,000 (8.5%) over 1994 primarily attributed to an increase in pension costs arising from a benefit plan settlement adjustment recognized in 1995 partially offset with a decrease of $200,000 in other marketing and administrative expenses. The Division incurred no interest expense in 1995 compared with interest expense of $164,000 in 1994, primarily because of lower working capital requirements in 1995. Working capital requirements, primarily attributed to inventories, declined $16,900,000 between May 31, 1994 and May 31, 1995. Income tax expenses of $1,500,000 and $1,650,000 for 1995 and 1994, respectively, result in effective tax rates of 5.4% and 8.3%. This decrease was the result of a lower percentage of divisional nonpatronage income to total divisional pretax income in 1995 versus 1994. Liquidity and Capital Resources The Division's cash requirements result from capital improvements and from a need to finance additional inventories and receivables based on increased raw material costs or levels. These cash needs are expected to be fulfilled by the Company. Cash Flows from Operations Operating activities for the three months ended August 31, 1996 and 1995, respectively, provided cash of $15,300,000 and $7,300,000 due to net earnings contributions of $4,400,000 and $4,900,000, and a decrease in working capital requirements of $10,600,000 and $25,000,000. For the years ended May 31, 1996, 1995 and 1994, the Division's operating activities generated net cash of $14,400,000, $44,900,000 and $9,100,000. Net earnings of $23,000,000, $26,200,000 and $18,200,000 in 1996, 1995 and 1994, respectively, were offset by an increase in working capital requirements in 1996 of $10,200,000, in 1994 of $5,800,000, while a decrease in working capital requirements in 1995 added $16,900,000. Cash Flows Used for Investing The Division used $2,700,000 and $1,700,000 during the three months ended August 31, 1996 and 1995, respectively, for the purchase of property, plant and equipment. Net cash flows used in the Division's investing activities for the years ended 1996, 1995 and 1994 were $6,000,000, $2,600,000 and $6,300,000, respectively. Essentially all of these cash usages were for the acquisition of property, plant and equipment. Cash Flows from Financing Activities The Division's financing activities are coordinated through the Company's cash management department. Cash from all of the Company's operations is deposited with the Company's cash management department and disbursements are made centrally. As a result, the Division has a zero cash position. Financing is available from the Company to the extent of the Company's working capital position and corporate loan agreements with various banks, and cash requirements of all other Company operations. Working capital requirements for each Division of the Company are reviewed on a periodic basis, and could potentially be restricted based upon management's evaluation of the prevailing business conditions and availability of funds. The Division had debt of $1,200,000 on August 31, 1996, an increase of $400,000 over 1995 which reflects working capital and fixed asset financing requirements. Debt outstanding and payable to the Company as of May 31, 1996 and 1994 was $2,300,000 and $2,400,000, respectively, whereas the Division had a receivable from the Company of $1,900,000 on May 31, 1995. These interest bearing balances reflect working capital and fixed asset financing requirements of the respective years. Supply The Processing and Refining Division purchases virtually all of the soybeans processed by it from Members. The balance is purchased in the commercial marketplace. Because the Processing and Refining Division has not had long-term contracts with customers, it does not obligate itself to purchase soybeans based on orders received from customers but instead on its contemplation of future production. The Processing and Refining Division does not hold significant inventories of raw beans; capacity for raw bean storage is approximately three to four weeks of production. At any one time, inventories of beans and contracts for future delivery represent two to ten weeks of requirements. Inventories of raw beans and contracted purchases for future delivery are substantially hedged. The Processing and Refining Division also purchases crude soybean oil for processing at its refinery. Approximately 40% of the crude oil refined is produced by the Processing and Refining Division, and the balance is purchased. Major suppliers have been AGP and ADM. Because ADM is opening a refinery early in 1997 in Minnesota, it will no longer be a major supplier of crude oil. However, there are several producers of crude oil, and the Company believes it will be able to replace this supply source. The refining facility has storage capacity for approximately 10 days' supply of crude oil, so it depends on a steady supply of crude oil to supplement its own output of crude oil to maintain constant production. It typically commits for several months' supply, to be priced prior to delivery. As with other agricultural commodities, the availability and price of soybeans fluctuate with forces of supply and demand. The Processing and Refining Division has never experienced a supply shortage of soybeans. Customers Refined Oils. The Processing and Refining Division sells refined oil throughout most of the United States although it concentrates on customers located in Minnesota, Wisconsin, North and South Dakota, northern Iowa and northern Illinois, which can be reached by truck rather than rail and are therefore slightly more profitable. Customers in these states accounted for more than 50% of refined oil sales in the year ended May 31, 1996. The Company estimates that of oil sold, 25% is used for margarine, 15 to 20% for salad dressing and smaller percentages for snack foods, bakeries, imitation cheese manufacturers, processed potato manufacturers and others. Approximately 5% of oil sales are for industrial use. During the year ended May 31, 1996, the Processing and Refining Division had over 100 customers, the largest of which was Ventura Foods and its predecessor operations described in the next paragraph. One other customer was responsible for over 10% of refined oil sales by the Division. Sales of refined oil are made by Division employees and to a lesser extent by brokers. The Company has a long-term supply agreement with Ventura Foods, LLC. (see "--Ventura Foods") which commences January 1, 1997 and continues for 15 years or longer if the Company continues to hold at least a 25.5% interest in Ventura Foods. The Company has agreed to supply and Ventura has agreed to purchase a minimum quantity of soybean salad oil, hydrogenated soybean oil and other edible oils which the Company may refine during the term of the agreement. The Company has agreed to sell to Ventura Foods, and Ventura Foods has agreed to purchase from the Company, during each calendar year at least 430,000,000 pounds of products or 50% of its requirements if greater, but not more than 100% of its requirements. The price for the products sold to Ventura Foods is a formula adjusted annually to be competitive with alternative sources. Soybean Meal. Soybean meal sold by the Processing and Refining Division is used for feeding animals. During the year ended May 31, 1996, the Division sold meal to over 500 customers, primarily feed lots and feed mills. During the year ended May 31, 1996, ten customers accounted for approximately 55% of meal sold, and two customers, which would be difficult to replace, accounted for approximately 34% of meal sold. For the year ended May 31, 1996, 55% of meal was sold in Minnesota, 25% in Wisconsin, 13% in Canada and the balance in Iowa, the Dakotas and Montana. These sales could be adversely affected by a decline in the livestock or turkey industries in these areas. Substantially all meal sales are made directly by employees of the Division. Soyflour. Soyflour is used in the baking industry, as milk replacers in animal feed and in industrial applications. Sales of soyflour have not been significant relative to sales of meal. Competition The Company believes that the Processing and Refining Division has 6 to 8% of the refined soybean oil market and less than 3% of the soybean crushing capacity. See "Industry Overview." Processing Soybeans arriving by truck or rail are sampled, weighed, dumped and unloaded into bean storage. When brought out of storage, beans are cleaned, dehulled, cracked and conditioned and are compressed into flakes. Oil is removed from the flakes through a solvent process. Flakes are then further processed into soyflour or soymeal. Soymeal can be made into animal feed at various protein levels. Crude oil is filtered to remove remaining meal particles and centrifuged to separate out trace constituents. The oil can be sold as an industrial product used in plastics, inks and paints. Further processing prepares the oil for food use, by bleaching with a special clay to remove trace metals, chlorophyll and other impurities to make salad oil. By adding hydrogen under pressure to bleached oil, the Company makes partially hydrogenated soybean oil which may be used in products such as shortenings or margarines. To remove unwanted odors, flavors and mild color constituents, bleached or hydrogenated oil is heated under vacuum. The result is a product that is flavorless, odorless, tasteless and virtually clear. While the Processing and Refining Division runs at between 80 to 100% of capacity throughout the year, volume is typically higher at harvest time since soybean supplies are more abundant in the fall. Producer and cooperative elevator storage capabilities allow suppliers to sell for delivery throughout the year. Facilities The Division has one facility located in Mankato, Minnesota, comprised of a crushing plant, a refinery, a flour plant and self contained utilities. A quality control lab with technically sophisticated equipment assures high quality standards. The Division expects to expend approximately $26 to $36 million over the three years ending May 31, 1999, to expand the capacity of its crushing plant, to increase processing efficiency and to meet environmental requirements. Employees The Processing and Refining Division currently employs 202 employees, 34 in the office in administration, sales and support service and 168 in the plant. VENTURA FOODS On August 30, 1996, the Company and Wilsey Foods, Inc. combined the assets and certain liabilities of the Company's Holsum Foods consumer products packaging division with the assets and liabilities of Wilsey Foods, Inc. as Ventura Foods, LLC ("Ventura Foods"). A joint venture owned by Wilsey Foods, Inc. and the Company which operated a manufacturing facility in Chambersburg, Pennsylvania, was merged into Ventura Foods. The Company owns 40% and Wilsey Foods owns 60% of the equity and rights to distribution of profits of Ventura Foods. The Company's total net investment in Ventura Foods was $27,000,000 as of August 30, 1996. Sales by the Processing and Refining Division to Ventura Foods and its predecessors in interest are shown below:
Three Months Ended Years Ended May 31, August 31, ------------------- ---------- 1994 1995 1996 1995 1996 ----------- ----------- ------------ ----------- ----------- Sales ($) $80,425,000 $99,150,000 $111,650,000 $29,632,000 $30,322,000 Percentage of total refinery sales ........... 31% 35% 40% 41% 42%
Ventura Foods is in the business of manufacturing and/or packaging and selling food products, including salad dressings, mayonnaise, margarine, salad oils, jams, jellies, olives, syrups, soup bases and sauces. Its customers are national. Ventura Foods is governed by a committee, and each of the Company and Wilsey Foods appoints half the committee members. Neither the Company nor Wilsey Foods may transfer any part of its interest in Ventura Foods until September 1, 1999. Thereafter a transferring party must retain at least a 25.5% interest in Ventura Foods. Ventura Foods will be dissolved if it has cumulative losses in excess of $25 million or is unable to discharge its liabilities as they become due. WHEAT MILLING Industry Overview The Company's Milling Division mills durum wheat into flour and semolina and, to a lesser extent, mills spring and winter (hard) wheats into bread flour. The Milling Division is the largest miller of durum wheat in the United States. The Milling Division had historically concentrated on durum wheat milling at its Rush City and Huron facilities. With the opening of its Kenosha mill in late 1995, which can produce durum and bakery flours, and its Houston facility, scheduled to open in February 1997, which will produce primarily bakery flour, the Division has broadened its markets and significantly increased its capacity. Semolina and Durum Flour. Durum wheat millers process durum wheat into semolina and durum flours. Semolina and high grade durum flours are the chief ingredient in pasta; low grade durum flour is used for pet food. Durum is grown in arid regions of the United States, such as North Dakota and certain areas of the Southwest, as well as in other countries. Most of the quality durum is grown in the Midwest, particularly North Dakota. Durum milling plants are generally located in proximity to customers; wheat is shipped to the mill for milling. Sale of semolina and durum flour is entirely dependent on pasta production. Per capita consumption of pasta has continued to increase in recent years, and the number of consumers continues to grow with population growth. Pasta in its many forms is sold at retail, for restaurants and institutional use and for use in other processed food products. Imported pasta accounted for approximately 11% of the domestic market in the year ended May 31, 1996. The International Trade Commission in July 1996 determined that certain Italian and Turkish companies benefitted unfairly from subsidies and had sold product in the United States at less than fair value and imposed countervailing and anti-dumping duties. However, the Company does not believe the amount of imports has decreased significantly. Major competitors in the industry (and estimates by the Company of their respective market shares) include the Company (30%), Italgrani (20%) and Miller Milling (10%). Competition is driven by price, service and product quality. Some competitors have developed long-term relationships with customers by locating plants adjacent to pasta manufacturing plants. Bakery Flour. Bakery flour milled from spring and hard winter wheat is used in breads, cookies, pizza crusts, tortillas and other products. The baking industry is highly fragmented, with the largest participant being no more than four percent of the market. Demand for bakery flour has been stable, although per capita consumption fell slightly in the year ended May 31, 1996. New dietary guidelines established by the United States Department of Agriculture emphasize cereal grains in the food pyramid. The Company believes that demand for bakery flour will increase based on population growth. Imports and exports of bakery flour do not significantly affect the domestic business. Selected Financial and Operating Data The selected financial information presented below has been derived from the Milling Division's financial statements. The financial statements for the years ended May 31, 1994, 1995 and 1996, were audited by Deloitte & Touche LLP. The financial statements for the three-month periods ended August 31, 1995 and 1996, are unaudited. In management's opinion, the unaudited financial statements for the three-month periods include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the Division's financial condition and results of operations for such periods. The results for the three-month period ended August 31, 1996, are not necessarily indicative of the results expected for the full year. The selected financial information should be read in conjunction with the Division's financial statements and notes thereto included elsewhere in this Prospectus.
Three Months Ended Years Ended May 31, August 31, ------------------- ---------- 1994 1995 1996 1995 1996 ------------- ------------- ------------- ------------- ------------- Sales ................................ $ 103,716,012 $ 119,725,183 $ 173,315,613 $ 32,416,461 $ 55,647,949 Costs and expenses Cost of goods sold ................. 97,206,374 112,690,679 161,293,430 30,005,525 51,323,046 Marketing and administrative ................... 2,415,155 3,834,289 4,471,563 985,644 1,104,186 Interest ........................... 1,832,037 2,278,544 4,457,797 766,517 1,411,133 ------------- ------------- ------------- ------------- ------------- 101,453,566 118,803,512 170,222,790 31,757,686 53,838,365 Earnings before income: taxes .............................. 2,262,446 921,671 3,092,823 658,775 1,809,584 Income taxes ......................... 150,000 125,000 200,000 50,000 125,000 ------------- ------------- ------------- ------------- ------------- Net earnings ......................... $ 2,112,446 $ 796,671 $ 2,892,823 $ 608,775 $ 1,684,584 ============= ============= ============= ============= ============= Earnings per bushel: Pretax earnings .................... $ 2,262,446 $ 921,671 $ 3,092,823 $ 658,775 $ 1,809,584 Book to tax differences ............ (135,715) 123,844 (84,481) ------------- ------------- ------------- ------------- ------------- Tax basis earnings ................. $ 2,126,731 $ 1,045,515 $ 3,008,342 $ 658,775 $ 1,809,584 ============= ============= ============= ============= ============= Bushels milled ..................... 16,930,702 17,696,689 22,390,011 4,374,157 6,971,473 ============= ============= ============= ============= ============= Earnings per bushel ................ $ 0.13 $ 0.06 $ 0.13 $ 0.15 $ 0.26 Operating Data: Wheat used (bu.) Durum ............................ 15,763,000 16,058,000 19,376,000 4,055,528 5,405,721 Spring ........................... 1,167,000 1,638,000 3,013,000 318,629 1,565,752 Shipments (cwt) Semolina/flour ................... 8,088,000 8,718,000 10,085,000 2,149,063 2,849,659 Baking flour ..................... -- -- 634,000 -- 576,530 1994 1995 1996 1995 1996 ------------- ------------- ------------- ------------- ------------- Balance Sheet Data (at end of period): Working capital .................... $ (4,703,152) $ 1,604,146 $ 3,337,317 $ (11,244,789) $ 250,603 Net property and equipment ........................ 19,739,029 43,395,670 59,233,046 50,584,430 62,587,320 Total assets ....................... 55,031,562 82,606,055 125,321,564 92,360,887 133,899,743 Long-term debt, including current maturities ............... 19,000,000 33,750,000 54,000,000 45,500,000 54,000,000 Total equity ....................... 27,797,072 27,797,072 27,797,072 27,797,072 27,797,072
Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Certain operating information pertaining to the Division is set forth below, as a percentage of sales, except for margins/cwt.
Three Months Ended Years Ended May 31, August 31, ------------------- ---------- 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- Gross margin percentage ....... 6.28% 5.88% 6.94% 7.44% 7.77% Marketing and administrative ... 2.33% 3.20% 2.58% 3.04% 1.98% Interest ........... 1.80% 1.90% 2.57% 2.36% 2.54% Margins/cwt ........ $ .80 $ .81 $ 1.12 $ 1.33 $ 1.31
Because of the volatility of commodity prices, the Company believes that margins per hundred weight (manufacturing margins) are a better measure of the Division's performance than gross margin percentages. Comparison of Three Months Ended August 31, 1996 with 1995 The Division's net earnings of $1,700,000 for the three months ended August 31, 1996 represents a $1,100,000 increase from the same period in 1995 due to a modest increase in gross margins and the control of marketing and administrative expenses despite the substantial increase in sales. Net sales of $55,700,000 for the three months ended August 31, 1996, increased by $23,300,000 (72%) from the same period in 1995 due to an increase in shipments from 2,700,000 cwt to 4,400,000 cwt as the Division's Kenosha mill came on line in late 1995 and an increase in average price per cwt from $11.82 in 1995 to $12.67 in 1996. Cost of goods sold of $51,300,000 for the three months ended August 31, 1996 increased by $21,300,000 (71%) from the same period in 1995. Raw material costs increased $19,800,000 due to an average increase of 48 cents per bushel for durum and wheat and a 60% increase in bushels used (4.4 million bushels in the 1995 period and 7.0 million bushels in the 1996 period). Plant expenses increased by $1,500,000 in the 1996 period, of which $1,300,000 is attributable to the Kenosha mill, which was not in operation in fiscal year 1995. Marketing and administrative expenses were $1,100,000 for the three months ended August 31, 1996 compared with $1,000,000 for the same period in 1995. This increase is attributable to an increase in staff and system expansion to handle the additional volumes generated by the Kenosha mill. Interest expense of $1,400,000 for the 1996 period increased by $600,000 compared to the similar period of 1995. This increase is attributable to additional short-term borrowings necessary to carry increased inventories and receivables caused primarily by comparatively higher prices for durum and wheat and volume increases, primarily the result of production from the Kenosha mill, and additional interest expense on the debt used to finance the construction of the Kenosha mill. Comparison of Year Ended May 31, 1996 with 1995 The Division's net earnings of $2,900,000 for the year ended May 31, 1996 increased $2,100,000 over 1995. This increase in net earnings is attributable to higher volumes, largely the result of increased processing capacity generated by the opening of the Kenosha milling facility during the fiscal year 1996, and higher sales prices. Net sales of the Division of $173,300,000 increased by $53,600,000 (45%) from 1995, due to an increase in shipments of semolina and flour from 8,720,000 cwt to 10,720,000 cwt and an increase in the average price per cwt from $11.03 in 1995 to $12.64 in 1996. Cost of goods sold of $161,300,000 increased $48,600,000 (43%) from 1995. Raw material costs increased $46,000,000 due to an average increase of 83 cents per bushel for durum and wheat and a 38% increase in bushels sold of 6.7 million bushels, from 17.7 million bushels in 1995 to 24.4 million bushels in 1996. Plant expenses increased $2,600,000 in 1996, essentially all due to operations of the Kenosha mill, which did not begin milling until late 1995. Marketing and administrative expenses were $4,500,000 in 1996 and increase of $700,000 from 1995. This increase is attributable primarily to an increase of $900,000 due to staffing and system expansion to handle the additional volumes generated by the Kenosha mill, offset by a decrease of approximately $200,000 in pension expense related to a benefit plan settlement adjustment in 1995. The Division incurred interest expense of $4,500,000 in 1996 compared with $2,300,000 in 1995. This increase was attributable to increased short-term borrowings used to finance higher inventories and receivables primarily the result of production from the Kenosha mill and increased long-term debt used to finance construction of the Kenosha mill. Comparison of Year Ended May 31, 1995 with 1994 The Division's net earnings of $800,000 for the year ended May 31, 1995 decreased $1,300,000 from 1994. The decrease is attributable to increases in marketing and administrative expenses and interest expense which were only partially offset by a small increase in gross margins. Net sales of $119,700,000 increased $16,000,000 (15%) from 1994 despite a 6.4% increase in shipments, due primarily to an increase in average sales price from $10.18 per cwt in 1994 to $11.03 per cwt in 1995. Cost of goods sold of $112,700,000 in 1995 increased $15,500,000 (16%) from 1994. The primary cause for this increase was a 750,000 bushel increase in raw material input, from 16,950,000 bushels in 1994 to 17,700,000 bushels in 1995. Cost per bushel and plant expenses remained relatively unchanged between 1994 and 1995. Marketing and administrative expenses of $3,800,000 increased $1,400,000 (58%) from 1994. This increase was due partially to an increase in pension cost relative to a benefit plan settlement adjustment reflected in 1995 and an increase of $1,200,000 for all other marketing and administrative expenses, primarily for staffing and system expansion relative to the Kenosha mill which was under construction in 1995. The Division incurred interest expense of $2,300,000 in 1995 increased from $1,800,000 in 1994. Increased short-term borrowings to support higher inventory and receivable balances caused additional interest expense of $300,000 in 1995. Borrowings for additions to property, plant and equipment in 1995 contributed an increase in interest expense of $200,000 over 1994. Liquidity and Capital Resources The Division's cash needs are primarily the result of continued capital additions. The Division's Kenosha plant, which began operations in late 1995, represented an investment of $39,000,000. The Division's Houston plant, which is expected to begin operations in February 1997, is expected to represent an investment of $15,400,000. In addition, if the Pocono facility is constructed (see "--Facilities"), the Division expects capital additions of $38,800,000. The Division expects capital additions to all its facilities. Commencement of operations at a particular facility involves increased working capital to fund required inventories and receivables related to increased sales. In addition, increased carrying value of inventories and receivables because of higher prices, increased receivables because of slow collections or increased inventories above historical levels requires additional financing. All of the Division's financing needs are expected to be met by the Company. Cash Flows from Operations Operating activities for the three months ended August 31, 1996 and 1995, respectively, provided net cash of $4,600,000 and $3,400,000 due to net earnings contributions of $1,700,000 and $600,000, a decrease in working capital requirements of $1,900,000 and $2,200,000, and non-cash expenses such as depreciation and amortization of $1,000,000 and $600,000, respectively. Operating activities used net cash of $16,200,000 in the year ended May 31, 1996, provided $7,800,000 in 1995, and used $8,500,000 in 1994, generally attributable to working capital needs, namely an increase in working capital requirements in 1996 of $22,400,000, a decrease in working capital requirements of $4,500,000 in 1995, and an increase in working capital requirements in 1994 of $12,800,000. Cash requirements were offset by net earnings of $2,900,000, $800,000 and $2,100,000 in 1996, 1995 and 1994, respectively, and depreciation and amortization of $3,300,000, $2,500,000 and $2,200,000 in 1996, 1995 and 1994, respectively. Cash Flows Used from Investing Cash expended for the acquisition of property, plant and equipment during the three months ended August 31, 1996 and 1995 totaled $4,100,000 and $7,600,000, respectively. Net cash flows used in the Company's investing activities for the years ended 1996, 1995 and 1994 were $18,100,000, $25,100,000 and $800,000, respectively. All of these cash usages were for the acquisition of property, plant and equipment. The Division also acquired intangibles of $476,000 and $5,600,000 in 1996 and 1995, respectively, related to the elimination of a minority interest effective June 1, 1994. Cash Flows from Financing Activities The Division's financing activities are coordinated through the Company's cash management department. Cash from all of the Company's operations is deposited with the Company's cash management department and disbursements are made centrally. As a result, the Division has a zero cash position. Financing is available from the Company to the extent of the Company's working capital position and corporate loan agreements with various banks and cash requirements of all other Company operations. Working capital requirements for each division of the Company are reviewed on a periodic basis, and could potentially be restricted based upon management's evaluation of the prevailing business conditions and availability of funds. The Division had short-term debt of $32,200,000 on August 31, 1996, an increase of $5,200,000 over May 31, 1996, which reflects working capital and fixed asset financing requirements. Short-term debt outstanding and payable to the Company as of May 31, 1996 and 1995 was $27,000,000 and $9,750,000, respectively. These interest bearing balances reflect working capital and fixed asset financing requirements of the respective years. On May 31, 1996 and 1995 the Division's long-term debt was $54,000,000 and $33,750,000. This debt was incurred by the Division to retire debt assumed with the acquisition of the Huron facility in 1990, to expand the Huron facility in 1990 and 1991, and to construct Kenosha in the 1995 and 1996 fiscal years. Supply Most of the durum, spring and winter wheats processed by the Milling Division is purchased from Members. Some grain is purchased from Canada and a small percentage is purchased from the Southwest. Semolina and durum flour sales are hedged to a significant extent by buying durum at the time of pricing the semolina or flour. To minimize the price volatility for winter and spring wheats, the Milling Division usually hedges by purchasing wheat futures at the time of pricing the flour. There is no futures market for durum, and except for limited cross hedging using other commodities the Milling Division does not hedge durum. The availability, price and quality of durum and spring and winter wheat affect the operations and profitability of the Milling Division. The Milling Division has never experienced a supply shortage of durum, but shortages have affected prices. Customers Semolina & Durum Flour. The Milling Division sells semolina and durum flour to eight major customers and approximately 50 smaller customers, which are large and mid-size pasta manufacturers in the United States. In the year ended May 31, 1996, over 38% of the Milling Division's total production was sold to its two largest customers, Borden and Hershey, which are estimated by the Company to represent approximately 60% of the country's pasta production. The Milling Division would be adversely affected by the loss of either of these customers or a decline in the market share of either customer. The Milling Division would be adversely affected by a decline in pasta production in the United States. Most of the Milling Division's products are marketed by employees of the Milling Division. The Milling Division uses outside agents and distributors for the balance of its production. Bread Flour. The baking industry is composed of many companies. No one customer buys more than 10% of the Milling Division's bread flour production. The Company believes because of the large number of potential customers and the fact that the Milling Division is not dependent on any customer, it would not have substantial difficulty in replacing an existing customer. The Milling Division's first hard wheat milling unit (Kenosha) began production in late 1995. In October 1996, the Milling Division expanded hard wheat capacity with the addition of a swing mill at Kenosha capable of milling either durum or hard wheat flour. A plant in Houston, expected to open in February 1997, will add additional hard wheat capacity. The Company believes that there is a substantial customer base available in the Houston area. The area serves a sizeable population base and there are no other milling facilities within the area. Competition Durum Milling. The Milling Division's largest competitors in durum milling are Italgrani and Miller Milling Company. Dakota Growers has expanded its Carrington, North Dakota, milling facility and has begun expansion of its pasta production capacity. Philadelphia Macaroni has announced plans to build a semolina mill in Minot, North Dakota. General Mills has announced a plant expansion in Great Falls, Montana. Bread Flour. Competitors include ConAgra, ADM, Cargill, Bay State Milling, Cereal Foods and General Mills. All of these competitors have multiple milling facilities with larger bakery flour production capacity than the Milling Division. Capacity for hard wheat milling has been expanding faster than consumption. This additional capacity may put pressure on margins. Processing The Division mills wheat into flour using standard industry processes. More recently manufactured equipment has reduced the labor component of wheat milling. The Company believes that its facilities are, on average, newer than its competitors. Operations are somewhat seasonal in anticipation of reduced demand for pasta in summer months. Facilities The Milling Division has four milling facilities in operation; production in Houston is scheduled to begin in February 1997. Each facility includes a milling plant as well as an elevator to store grain. Information on the four mills is set forth below: Location Grain Milled Capacity -------- ------------ -------- Rush City, MN Primarily durum 10,000 cwts/day Huron, OH Primarily durum 14,500 cwts/day Kenosha, WI Durum 11,000 cwts/day Spring and winter wheat 10,000 cwts/day Houston, TX Spring and winter wheat 13,000 cwts/day The Rush City and Kenosha facilities are owned entirely by the Company. At Houston, the milling plant is constructed on property leased from the Port of Houston on a long-term basis and the elevator is owned by the Port of Houston, but is subject to a put through agreement with the Company. The Huron facility is leased on a long-term basis, but the equipment is owned. Because transportation costs for durum, spring and winter wheats are cheaper than for the milled products, it is a strategic advantage for a mill to be located close to a large customer base rather than close to the producer. Each of the Huron, Kenosha and Houston mills are in proximity to a large customer base. The Company's Rush City mill is in an area close to one customer that currently takes, under contract, most or all of the production. However, there is no large customer base in proximity to the Rush City Plant. Approximately 85% of the Milling Division's current milling capacity uses equipment that is less than 10 years old. This newer equipment generates cost advantages in labor, energy, improved yields and better and more consistent products. In the last few years, some competitors have closed less efficient mills in less strategic locations. The Milling Division plans to construct semolina and flour and bread flour mills in Pocono, Pennsylvania, but has not received final approval of the plans by the local and state authorities. If it is unable to secure necessary approvals, it intends to seek an alternative location. For the year ended May 31, 1996 the Milling Division facilities ran at 97% of capacity based upon a year of 307 operating days being 100%. Employees As of November 30, 1996 the Milling Division employed the following full time equivalents: production (97), plant management (15) and headquarters (20). FARM MARKETING AND SUPPLY The Farm Marketing and Supply Division owns and operates Agri-Service Centers at 144 locations in Minnesota, North Dakota, South Dakota, Montana, Idaho and Washington. Agri-Service Centers sell farm supplies, including fertilizer, feed, seed and crop protection products, and other related services and have grain elevator operations that buy grain. Some Centers have only grain operations or grain and feed operations, while some have only supply operations. Locations are grouped together into 47 units for operational purposes. A small number of Centers are grouped into seven regionalizations, which have their own producer board and participate in separate patronage pools. Agri-Service Centers purchase grain from member and nonmember producers and others, such as other elevators and grain dealers. Of these facilities, 55 have the capability of loading unit trains, while other facilities can load only single cars or are truck stations. Most of the grain purchased is sold through the Company's Grain Marketing division, with the balance going to local feed and grain processors. The supplies and services offered vary from location to location. Agronomy supplies and services are sold at approximately 70 locations to member and non-member producers. Feed is sold at approximately 75 locations. Agronomy and feed sales are considered district operations involving different expertise and sales forces. Most feed sold is purchased from the Feed Division. Fertilizer is obtained from co-op sources and other suppliers. Crop protection products are bought through co-op programs and directly from industry sources. Other goods are obtained through commercial channels. The Company has increased the number of Agri-Service Centers in recent years. The number, the number of bushels of grain purchased and sales of Centers for the years ended May 31 are shown below:
1992 1993 1994 1995 1996 -------------- -------------- -------------- -------------- -------------- No. of centers ..... 107 105 115 121 144 No. of op. units ... 42 42 43 43 47 Grain purchased (bu) 175,773,000 175,492,000 141,238,000 159,891,000 214,085,000 Sales .............. $ 636,266,516 $ 651,697,000 $ 613,151,000 $ 679,200,000 $1,126,600,000
Competitors for the purchase of grain include other elevators and large grain marketing companies. Competitors for the sale of agronomy supplies and feed include a variety of cooperative and privately owned facilities. The Company competes on the basis of service and patronage. On November 30, 1996, the Division had over 1,000 full time employees and over 300 temporary employees. Fin-Ag, Inc. Fin-Ag, Inc. is a wholly owned subsidiary of the Company located in Sioux Falls, South Dakota. It provides seasonal cattle feeding and swine financing loans, facility financing loans and crop production loans for producers. It also provides consulting services to member cooperatives. Its competitors are other financial institutions. Most whole loans are sold to the St. Paul Bank for Cooperatives, on which the Company bears a 15% residual exposure. The Company's exposure at November 30, 1996, was approximately $7,500,000. Under the Company's borrowing arrangements (see "Capitalization") the maximum amount of the loans outstanding at any one time may not exceed $35,000,000. FEED The Company manufactures and sells feed products and sells feed ingredients, supplements and animal health products under several brand names, including GTA Feeds(R), Norco Feeds, CC Bar Feeds, Let'er Buck Feeds(R) and Pantec(TM). In addition, it provides livestock production services, including customized ration planning, feedstuffs analysis, profit projections, livestock nutritional management, recordkeeping, animal health and environmental engineering and facility management. Sales are made at retail through five retail stores and through Agri-Service Centers and at wholesale to cooperatives (both Affiliated Associations and otherwise) and to other retail farm supply businesses located in Minnesota, North Dakota, South Dakota, Nebraska, Montana, Wyoming, Idaho, Washington and Oregon. Sales of feed for the years ended May 31 is set forth below:
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Manufactured feed (tons) . . 262,000 301,000 306,000 333,000 351,000
The Company has been able to increase sales and production capacity through several joint venture arrangements entered into in recent years. The Company owns nine manufacturing facilities located in Sioux Falls, South Dakota; Great Falls, Montana; Hardin, Montana; Dickinson, North Dakota; Minot, North Dakota; Edgeley, North Dakota; Willmar, Minnesota; Gettysburg, South Dakota; and Norfolk, Nebraska. The Company also has an interest in three joint ventures with facilities in Hermiston, Oregon; Tillamook, Oregon; and Owatonna, Minnesota. The administrative office for the feed business is located in Sioux Falls, South Dakota. The Feed Division's operations reflect the condition of the livestock business. Recent increases in poultry and swine production have been driven by increased exports. The transition from individual producers to more integrated producers has affected the demand for and composition of the Division's products. At November 30, 1996, the Division had 265 full time and 9 part time employees. Competitors in the feed business are other cooperatives and private companies. The Company is a part of the Cooperative Research Farms, a research partnership of 12 regional cooperatives in the United States, Canada and France. This partnership provides the Company with production research. SERVICES The Company's Country Services Division provides certain services to Individual Members and Affiliated Associations. Country Hedging, Inc. Country Hedging, Inc. offers full service commodity futures and options brokerage. For the year ended May 31, 1996, 60% of revenues were from Affiliated Associations, 30% from Individual Members and 10% from others. This separate subsidiary of the Company is a registered futures commission merchant and a clearing member of both the Minneapolis Grain Exchange and the Kansas City Board of Trade. On November 30, 1996, it had 38 employees operating primarily out of St. Paul, Minnesota. Competitors include international brokerage firms, national brokerage firms, regional brokerage firms (both co-op and non-co-op) as well as local introducing brokers. Competition is driven by price and service. Ag States Agency, LLC Ag States Agency, LLC, 50% owned by the Company, is an independent insurance agency which sells insurance primarily to local cooperatives, including group benefits, property and casualty, and bonding programs. For the year ended May 31, 1996, substantially all of its revenues were from local cooperatives. Ag States Agency, LLC competes with other insurance agencies. Financial Services Department The Financial Services Department provides business planning consulting and financing to Affiliated Associations. It offers open account financing, involving the discretionary extension of credit, and term and seasonal loans. Most of the term and seasonal loans are participated up to 90% to National Bank for Cooperatives (CoBank). Participation by CoBank is subject to credit approval on a loan-by-loan basis by CoBank subject to an overall limit of participation of $150,000,000. In addition to financing, the open account between the Company and an Affiliated Association is used as a clearing account for settlement of grain purchases and as a cash management tool. Open account financing has been provided to more than 200 Affiliated Associations in the past year. During the year ended May 31, 1996, average aggregate loan balances outstanding were $106,581,000 (of which CoBank's participation was $59,836,000) and the highest aggregate loan balance outstanding at any one time was $177,939,000 (of which CoBank's participation was $78,287,000). The Company's borrowing arrangements limit loan balances outstanding to not more than $150,000,000 at any one time. See "Capitalization." Pursuant to its agreement with CoBank, the Company has additional credit risk on CoBank participations to 10% of total loan commitments. A wholly owned subsidiary of the Company provides certain types of financing to members. See "Farm Marketing and Supply." Affiliated Accounting Department The Affiliated Accounting Department offers computerized country elevator accounting systems and a full complement of accounting support systems for local cooperatives, including tax and patronage allocation services, dividend ledger services and payroll services. For the year ended May 31, 1996, substantially all of its revenues were from local cooperatives. Field Services Department The Field Service Department acts as a liaison between Affiliated Associations and the Company, providing consulting services in marketing, management, operations, accounting, tax, finance and government regulations. Member Relations Department The Member Relations Department conducts cooperative education programs for Affiliated Associations and assists in planning meetings and organizing visits to Company facilities. MANAGEMENT Board of Directors The table below lists the current directors of the Company, consisting of four members from District One (comprised of the states of Minnesota, Illinois, Iowa and Wisconsin), four members from District Two (comprised of the state of North Dakota), two members from District Three (comprised of the states of South Dakota, Kansas and Nebraska), two members from District Four (comprised of the states of Montana and Wyoming) and two members from District Five (comprised of the states of Washington, Oregon, Utah and Idaho). Each director must be an agricultural producer and an active patron of the Company (either directly or through an Affiliated Association) for a period of five years at the time of the director's election, must be less than 68 years of age at the time of election and cannot be an employee of the Company or of an Affiliated Association. The directors have been elected for three-year terms, expiring in November of the years listed in the table below.
Term Director Expires Name and Address Age District Since in Nov. - - - - ---------------- --- -------- ----- ------- Steven Burnet 56 5 1983 1998 94699 Monkland Lane Moro, OR 97039-9705 Steve Carney 45 4 1988 1997 P.O. Box 1122 Scobey, MT 59263-1122 Edward Ellison 61 1 1978 1999 RR 1, Box 46 Elbow Lake, MN 56531-9740 Sheldon Haaland 58 1 1984 1997 RR 2, Box 55 Hanley Falls, MN 56245-9731 Jerry Hasnedl 50 1 1995 1998 RR 1, Box 39 St. Hilaire, MN 56754 Edward Hereford 57 5 1983 1997 RR 1, Box 53 Thornton, WA 99176-9710 Gerald Kuster 61 2 1979 1997 RR 1, Box 46 Reynolds, ND 58275-9742 Leonard Larsen 60 2 1993 1999 RR 1, Box 88 Granville, ND 58741 Tyrone Moos 58 3 1991 1997 HCR 1, Box 1 Phillip, SD 57567-9601 Duane Risan 60 2 1989 1998 RR 1, Box 4 Parshall, ND 58770-9703 Duane Stenzel 50 1 1993 1999 RR 2, Box 173 Wells, MN 56097 Russell Twedt 47 4 1993 1999 P.O. Box 296 Rudyard, MT 59540-0296 Merlin Van Walleghen 60 3 1993 1999 RR 1, Box 188 Letcher, SD 57359 William Zarak 61 2 1983 1998 3711 124th Ave. S.W. South Heart, ND 58655-9767
STEVEN BURNET. Mr. Burnet has been a director since 1983 and currently serves as Chairman of the Board. He grows dryland wheat and barley and supports a cow/calf and yearling operation. Mr. Burnet is a member of the Oregon Wheat Growers League and the Oregon Cattlemen's Association. He also serves as a director on the Agricultural Co-op Council of Oregon. STEVE CARNEY. Mr. Carney has been a director since 1988 and currently serves as Secretary Treasurer. Mr. Carney operates a spring wheat and durum farm with his wife and brother. He is a former president of Farmers Union Grain Company (Peerless) and Farmers Union Grain Terminal of Daniels County. He is also a member of several local cooperatives. EDWARD ELLISON. Mr. Ellison has been a director since 1978. Together with his sons, he raises wheat, soybeans and corn on his Grant County, Minnesota, farm. Mr. Ellison is on the board of the Minnesota Association for Cooperatives and an alternate to the Agricultural Cooperative Development International (ACDI) board of directors. He also serves as a member of the Farmland Insurance and the Ag Utilization Research Institute (AURI) boards of directors. SHELDON HAALAND. Mr. Haaland has been a director since 1984 and currently serves as Assistant Secretary and Treasurer. He and his family farm 550 acres of corn, soybeans and wheat. Mr. Haaland is a member of several cooperatives and has previously served on the boards of Cottonwood Co-op Oil Company and Western Transport Co-op and as an advisory board member of the Southwest State University Co-op Program. JERRY HASNEDL. Mr. Hasnedl has been a director since 1995. He farms wheat, barley, sunflowers, corn, alfalfa and registered seed for MCIA. Mr. Hasnedl is a member of several cooperatives as well as the Minnesota Crop Improvement Association and Minnesota Farmers Union. He also is a farmer/dealer for Northrup King Seeds. EDWARD HEREFORD. Mr. Hereford has been a director since 1983. He and his two sons produce wheat, barley, peas and lentils on his dryland farm. Mr. Hereford is a director of the Idaho Co-op Council, a board member of the ACDI and a member of the Thornton Grange, the Washington Association of Wheat Growers and the Washington Association of Peas and Lentils Growers. GERALD KUSTER. Mr. Kuster has been a director since 1979. He and his sons operate a 3,000-acre farm. Mr. Kuster is President of Agri City Cooperative Services in Grand Forks, North Dakota, and Central Valley Bean Cooperative in Buxton, North Dakota. He also serves as president of Reynolds United Cooperative. LEONARD LARSEN. Mr. Larsen has been a director since 1993. He farms a 1,440-acre grain and sunflower operation and is vice president of the Granville area Development Corp. Mr. Larsen is also a member of Dakota Growers Pasta Company. TYRONE MOOS. Mr. Moos has been a director since 1991 and currently serves as Second Vice Chairman. He and his wife, together with their son and son-in-law, operate a combination farm and ranch raising winter wheat, barley and millet as well as managing cow-calf and hog finishing operations. Mr. Moos is a former member of the local co-op elevator board. DUANE RISAN. Mr. Risan has been a director since 1989. He raises durum, spring wheat and barley and, as a former educator, has a degree in mathematics and education from Jamestown College. He is a member of Dakota Growers Pasta Company and a patron of Dakota Quality Grain Co-op. DUANE STENZEL. Mr. Stenzel has been a director since 1993. He raises 620 acres of sweet corn, corn and soybeans on his south central Minnesota farm. Mr. Stenzel is a board member of Grainland Cooperative and past president of the Wells Farmer Elevator. RUSSELL TWEDT. Mr. Twedt has been a director since 1993. He is a third-generation Hill County farmer and rancher, and he and his family raise wheat and barley, with a cow/calf operation. He is a member of the Montana Grain Growers Association and Montana Farmers Union. MERLIN VAN WALLEGHEN. Mr. Van Walleghen has been a director since 1993. He and his son raise corn and soybeans and operate a livestock finishing operation. He is a past Board president of the Mitchell Farmers Cooperative Elevator Association and past member of Mitchell Technical Institutes Agricultural Advisory Board. He is also Chairman of the Sanborn County Development Board. WILLIAM ZARAK. Mr. Zarak has been a director since 1983 and currently serves as First Vice Chairman. He owns and operates a 2,000-acre farm with his wife and two sons where they raise small grains, corn, beef cows and hogs and also backgrounds calves. Mr. Zarak is also a member of Dakota Growers Pasta Company. Directors' Compensation The Board of Directors meets monthly. The Company provides its directors with annual compensation of $24,000, paid in twelve monthly payments, with the Chairman of the Board receiving an additional annual compensation of $2,400, paid in twelve monthly payments, a per diem payment of $122.50 plus travel allowance for actual days away from home while attending Board Meetings, a per diem of $200 plus actual expenses and travel allowance for each day spent on other Company business, life insurance, and an annuity plan providing for benefits to become payable monthly when a director reaches age 62. Committees of the Board of Directors The Board of Directors does not have any standing committees. The Board appoints ad hoc committees from time to time to review certain matters and make reports and recommendations to the full Board of Directors for action. The entire Board of Directors determines the salary and incentive compensation of the Chief Executive Officer and reviews the results and scope of the audit and other services provided by the Company's independent auditors, as well as the Company's accounting principles and its system of internal controls. Compensation Committee Interlocks and Insider Participation As noted above, the Company's Board of Directors does not have a Compensation Committee. The entire Board of Directors determines the compensation of the Chief Executive Officer and the terms of the employment agreement with the Chief Executive Officer. The Chief Executive Officer determines the compensation for all other executive officers. Limitation of Liability and Indemnification The Company's Articles of Incorporation limit the liability of directors in their capacity as directors to the full extent permitted by Minnesota law. As permitted by Minnesota law, the Company's Articles of Incorporation provide that a director shall not be personally liable to the Company or its members for monetary damages for breach of fiduciary duty as a director, except for liability for a breach of the director's duty of loyalty to the Company or its members, for acts of omissions not in good faith or that involve intentional misconduct or a knowing violation of law, for a transaction from which the director derived an improper personal benefit or for an act or omission occurring prior to the date when such provisions became effective. The provision of the Articles of Incorporation limits only the liability of directors, not officers. These provisions do not affect the availability of equitable remedies, such as an action to enjoin or rescind a transaction involving a breach of fiduciary duty, although, as a practical matter, equitable relief may not be available. The above provisions also do not limit liability of the directors for violations of, or relieve them from the necessity of complying with, the federal securities laws. The Bylaws of the Company require the Company to indemnify each director, officer, manager, employee or agent of the Company, and any person serving at the request of the Company as a director, officer, manager, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred to the fullest extent permitted under the laws of Minnesota. Executive Officers The table below lists the executive officers of the Company, none of whom holds any equity in the Company. Officers are elected annually by the Board of Directors.
Name Age Position ---- --- -------- John D. Johnson 48 President and Chief Executive Officer T. F. Baker 54 Group Vice President - Finance Michael H. Bergeland 52 Group Vice President - Grain & Agri Services Garry A. Pistoria 55 Group Vice President - Wheat Milling James Tibbetts 46 Group Vice President - Oilseed Processing and Packaging
JOHN D. JOHNSON. Mr. Johnson was appointed President and Chief Executive Officer on January 1, 1995. Prior to his appointment to that position he held positions as Group Vice President of Farm Marketing & Supply, GTA Feeds Division General Manager, Director of Sales and Marketing for the GTA Feeds Division, Regional Sales Manager for GTA Feeds Division, and Feed Consultant GTA Feeds Division. He has 20 years total experience with the Company. Mr. Johnson graduated in 1970 from Black Hills State University at Spearfish, South Dakota, with a degree in Business Administration and Economics. He also serves on the Board of Directors of the National Council of Farmer Cooperatives (NCFC) and A. C. Toepfer Intrade Grain Companies, and is Chairman of the NCFC Agriculture, Trade & Credit Committee. Mr. Johnson also serves on the Management Committee for Ventura Foods, LLC. T. F. BAKER. Mr. Baker joined the Company in 1982 as Vice President of Finance. In 1992 he was appointed Group Vice President of Finance and holds that position at the present time. Mr. Baker obtained a Bachelor's Degree in accounting from the College of St. Thomas, did graduate work at the University of Minnesota, and obtained his CPA in the State of Minnesota. Mr. Baker serves on the Board of Governors for Ag States Agency, LLC and on the Management Committee for Ventura Foods, LLC. He is also a member of Minnesota Certified Public Accountants and Financial Executives Institute. MICHAEL H. BERGELAND. Mr. Bergeland, Group Vice President of Grain and Agri-Services, joined the Company in 1967. He is a native of Minnesota and attended Moorhead State College. Mr. Bergeland also serves as a board member of the Minneapolis Grain Exchange, Chairman of the Grain Committee for the National Council of Farmer Cooperatives, and a Committee Member and alternate director for A.C. Toepfer Intrade Grain. GARRY A. PISTORIA. Mr. Pistoria has been Group Vice President of Wheat Milling since 1985 has been with the Company since 1961. Mr. Pistoria attended Montana State University and the College of Great Falls. He is a member of the National Pasta Association, the American Bakers Association and the Minneapolis Grain Exchange. JAMES TIBBETTS. On January 1, 1997, Mr. Tibbetts was appointed to the position of Group Vice President of the Oilseed Processing and Packaging Division. From November of 1995 (when he joined the Company) through 1996, Mr. Tibbetts was Senior Vice President for the former Consumer Products Packaging Division (Holsum Foods Division). From 1977 to 1995, Mr. Tibbetts was a Senior Vice President for Farm Credit Leasing in Minneapolis, Minnesota. Mr. Tibbetts received a Bachelor of Science Degree in Business Administration in 1972 from Northern State University in Aberdeen, South Dakota. He serves on the Management Committee for Ventura Foods, LLC. Executive Compensation Summary Compensation. The following table sets forth the cash and noncash compensation earned by the Chief Executive Officer and each of the four most highly compensated executive officers of the Company (other than the Chief Executive Officer) whose total salary and bonus or similar incentive payment earned during the year ended May 31, 1996, exceeded $100,000 (the "Named Executive Officers"):
Summary Compensation Table Annual Compensation ------------------------------------------------------------- Year Ended Other Annual All Other May 31, Salary(1) Bonus(1) Compensation(2) Compensation(3) ------- --------- -------- --------------- --------------- John D. Johnson President and Chief Executive Officer........... 1996 $450,000 $162,500 $3,659 $7,508 Thomas F. Baker Group Vice President-- Finance..................... 1996 225,300 127,500 7,400 7,908 Michael H. Bergeland Group Vice President-- Grain and Agri- Services.................... 1996 215,000 129,000 3,970 9,216 Garry A. Pistoria Group Vice President-- Wheat Milling............... 1996 166,500 78,000 7,361 4,138 James Tibbetts(4) Group Vice President-- Oilseed Processing and Packaging Division.................... 1996 87,500 70,000 510 29
- - - - -------------------- (1) Amounts shown include amounts deferred at the employee's election under the Company's Deferred Compensation Program. (2) Amounts shown include personal use of a Company vehicle. (3) Other compensation includes the Company's matching contributions under the Company's 401(K) Plan and the portion of group term life insurance premiums paid by the Company. (4) Information for Mr. Tibbetts is from November 1, 1995, the beginning of his employment with the Company. Management Compensation Incentive Program Each Named Executive Officer is eligible to participate in the Management Compensation Incentive Program (the "Incentive Program") for the year ending May 31, 1997. The Incentive Program is based on Company and group or division performance. The criteria for measurement consists of Economic Value Added (EVA), earnings and Member Value Index; a subjective evaluation of value provided to members and customers. These amounts will be paid after May 31, 1997. The maximum incentive is 60% of base compensation. Retirement Plan Each of the Named Executive Officers is entitled to receive benefits under the Harvest States Cooperatives Cash Balance Retirement Plan (the "Retirement Plan"). An employee's benefit under the Retirement Plan depends on credits to the employee's account, which are based on the employee's total salary each year the employee works for the Company, the length of service with the Company and the rate of interest credited to the employee's account balance each year. Credits are made to the employee's account from Pay Credits, Special Career Credits and Investment Credits. The amount of Pay Credits added to an employee's account each year is a percentage of the employee's gross salary, including overtime pay, commissions, severance pay, bonuses, any compensation reduction pursuant to the 401(K) Plan and any pretax contribution to any of the Company's welfare benefit plan, paid vacations, paid leaves of absence and pay received if away from work due to a sickness or injury. The Pay Credits percentage received is determined on a yearly basis, based on the years of Benefit Service completed as of January 1 of each year. An employee receives one year of Benefit Service for every calendar year of employment in which the employee completed at least 1,000 hours of service. Effective January 1, 1997, Pay Credits are earned according to the following schedule: Years of Benefit Service: Pay Credit Equals: ------------------------- ------------------ 1 to 7 years 4% of total salary 8 to 11 years 5% of total salary 12 years and more 6% of total salary Special Career Credits were designed to supplement the benefits of mid-career employees affected by the change from the former plan to the current Retirement Plan. Employees qualify for Special Career Credits only if they were employed by the Company and met certain age and service requirements (as defined by the Retirement Plan) on January 1, 1988. The following table shows the credits for those who qualify: Total of Age and Benefit Service on January 1, 1988: Special Career Credits: --------------------------- ----------------------- 50 to 54 1% of total salary 55 to 59 2% of total salary 60 to 64 3% of total salary 65 to 69 4% of total salary 70 or more 5% of total salary Special Career Credits continue at the percentage rate determined from the employee's status on January 1, 1988, for as long as the employee is with the Company. The Company credits an employee's account at the end of the year with an Investment Credit based on the balance at the beginning of the year. The Investment Credit is based on the average return for one-year U.S. Treasury Bills for the preceding 12-month period. The maximum Investment Credit will not exceed 12% for any year. As of December 31, 1996, the dollar value of the account of each of the Named Executive Officers was: Balance ------- John D. Johnson .................................................. Thomas F. Baker ............................................................ Michael H. Bergeland ........................................................... Garry A. Pistoria ....................................................... James Tibbetts .......................................................... Deferred Compensation Plan Effective April 1, 1994, the Company established the Harvest Sates Cooperatives Deferred Compensation Plan (the "Deferred Compensation Plan"). Participants in the Deferred Compensation Plan are select management or highly compensated employees of the Company who have been designated as eligible by the President of the Company to participate in such plan. Under the Deferred Compensation Plan, a participant may elect to have an amount of deferred compensation credited to the participant's account for the applicable Plan Year (as defined in the Deferred Compensation Plan). The compensation actually earned during the Plan Year by a participant who elects deferred compensation is reduced by the percentage or amount so elected. A participant may elect to contribute no more than 30% of each payment of base compensation, provided that the percentage selected is expected to result in annual contributions totaling at least $1,000. Also, the participant may elect to contribute either a percentage or a specific dollar amount of any bonus or similar incentive payment that may become payable during the Plan Year, provided the contribution will not be less than the smaller of $1,000 or 100% of the bonus payable. The deferred compensation credited under the Deferred Compensation Plan is allocated to the account of the participant as of the date that the compensation would otherwise have been paid to the Participant in cash. Income is credited to each account each Plan Year at an annual rate equal to 1% over the five-year U.S. Treasury Bond rate as of October 1 of the year preceding the Plan Year, as adjusted as appropriate to reflect contributions to and distributions from the account during the Plan Year. A participant's credits to his or her account are unsecured obligations of the Company to pay the participant the actual amount of the credits upon distribution pursuant to the Deferred Compensation Plan. Each participant or beneficiary is only a general creditor of the Company with respect to his or her account. Accounts are maintained for recordkeeping purposes only. Obligations of the Company to pay benefits under the Deferred Compensation Plan may be satisfied by distributions from a grantor trust created by the Company in its sole discretion for such purpose. The Company has not created any such trust. Amounts credited to a participant's account are distributed on a predetermined date, such as the date of retirement or the date the participant attains a particular age, in either a lump sum or in installments pursuant to the participant's prior irrevocable election. The Deferred Compensation Plan also provides for distribution upon the participant's death or disability, for unforeseeable emergencies and upon termination of the plan. The President of the Company may at any time amend the Plan in whole or in part for any reason. No amendment may decrease the benefits under the Plan which have accrued prior to the date of such amendment, but any amendment may modify the interest rate to be used for future deferrals and for the balance in each account on the date the amendment was adopted. The Company, by action of the President, may at any time terminate the Plan. 401(k) Plan Each Named Executive Officer is eligible to participate in the Harvest States Cooperatives Savings Plan (the "401(k) Plan"). All employees of the Company who are eligible for the Retirement Plan and who are not production employees and who are not covered by a collective bargaining agreement are eligible to participate in the 401(k) Plan. Effective January 1, 1997 participants may contribute between 1% and 15% (not to exceed 8% in the case of "highly compensated" employees) of their pay on a pre-tax basis. Each of the Named Executive Officers is a "highly compensated" employee. The Company matches 50% of the first 6% of pay contributed each year. The Company's Board of Directors may elect to reduce or eliminate matching contributions for any year or any portion thereof. Participants are 100% vested in their own contributions and in any Company matching contribution made on the participant's behalf. Deferred Compensation Supplemental Retirement Plan Each of the Named Executive Officers may participate in the Harvest Sates Cooperatives Deferred Compensation Supplemental Retirement Plan (the "Supplemental Plan"). Participants in the Supplemental Plan are select management or highly compensated employees of the Company who have been designated as eligible by the President of the Company to participate in such plan. Compensation deferred under the Deferred Compensation Plan is not eligible for Pay Credits or Special Career Credits under the Cash Balance Retirement Plan or matching contributions under the 401(k) Plan. The Supplemental Plan is intended to replace the benefits lost under those plans due to Section 415 of the Internal Revenue Code of 1986, as amended (the "Code") which cannot be considered for purposes of benefits due to Section 401(a)(17) of the Code under the qualified plans that the Company offers. The Supplemental Plan is not funded or qualified for special tax treatment under the Code. As of December 31, 1996, the dollar value of the account of each of the Named Executive Officers will be approximately: Balance ------- John D. Johnson .................................................. Thomas F. Baker ............................................................ Michael H. Bergeland ........................................................... Garry A. Pistoria ...................................................... James Tibbetts .......................................................... CERTAIN TRANSACTIONS Because directors must be active patrons of the Company or an Affiliated Association, transactions between the Company and directors are customary and expected. Transactions include the sale of commodities to the Company and the purchase of products and services from the Company. During each of the three years ended May 31, 1996, the value of those transactions between a particular director (and members of such directors' immediate family) and the Company may have exceeded $60,000. MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL Introduction The Company is a membership cooperative organized to manufacture, process, market, purchase, handle, deal in and sell the agricultural products of its members, non-member patrons and others, including the processing and exporting of grain and other agricultural products; to procure supplies and equipment and to perform any and all services for its members, non-member patrons and others; and to engage in any other activity for which cooperative associations may be lawfully organized under Minnesota law. All net savings from member patronage of the Company shall be distributed to members on the basis of patronage. All net savings from non-member patronage of the purchasing operations and from "Non-Member Consenting Patron" patronage of marketing operations shall be distributed to such patrons on the basis of patronage. The determination of net savings may be made by divisions or units representing separate or different operations of the Company, as determined by the Board of Directors. Patronage refunds may be distributed in cash, written evidences of equity or book credits, or any combination thereof. Any non-cash allocations are redeemable only in the discretion of the Board of Directors. The net earnings (after provision for income taxes) of this Association, as reported in its financial statements for the year, less patronage dividends paid with respect to the fiscal year may be distributed in the discretion of the Board to member patrons and to non-member "consenting patrons" (defined as cooperative associations meeting all requirements for membership in this Association other than transacting the minimum amount of business) on the basis of their patronage. Distributions may be in cash, property, Non-Patronage Earnings Certificates, or any combination thereof designated by the Board of Directors. To date, the Board of Directors has always used Non-Patronage Earnings Certificates for distributions, and the current redemption policy is to redeem to estates. In making any such non-member/non-patronage distributions, the Board of Directors may use any method of allocating the earnings on the basis of patronage to member patrons and Non-Member Consenting Patrons as shall be reasonable and equitable in the judgment of the Board of Directors. The method of allocation for the non-member/non-patronage earnings of this Association for the fiscal year ended May 31, 1996 was based on bushels of the grain marketing/processing activity and dollars on the purchasing and other activity. This method is subject to change, in the discretion of the Board of Directors. Governance The business and affairs of the Company are managed by a Board of Directors of not less than 13 persons (currently set at 14), elected by the members at the Company's annual meeting. Various rights and obligations of members are contained in its articles of incorporation and bylaws (together, the "governing documents"), each of which was amended and restated in November 1996. The governing documents may only be amended upon approval of a majority of the votes cast at an annual or special meeting of the members, except for the higher vote described under "--Certain Antitakeover Effects." Membership Membership in the Company is limited to individuals or entities actually engaged in the production of agricultural products and associations of agricultural producers organized and operating under the provisions of the Agricultural Marketing Act and the Capper-Volstead Act. In addition, only those persons that are "currently active patrons" (defined as agricultural producers and associations of agricultural producers that have patronized the Company during the year for which such status is being determined in a minimum amount established by the Board of Directors) may be members of the Company. Under the Company's governing documents, the Company has several classes of membership and has authority to issue a variety of debt and equity instruments to members. The Company has no capital stock. Membership is transferable only with the consent and approval of the Board of Directors. The Company may issue equity or debt securities, on a patronage basis or otherwise, but unless otherwise authorized, such securities shall not entitle the holders thereof to any voting, membership or other rights to participate in the affairs of the Company and are not transferrable without the prior consent of the Board of Directors. The Company's governing documents establish three classes of membership: Individual Members are individuals or entities actually engaged in the production of agricultural products. Such Individual Members include both natural persons as well as any legal entity owned or controlled by individual farmers or their families, such as joint ventures, corporations, partnerships, limited liability companies and other entities. Affiliated Associations are associations of agricultural producers that have transacted at least $100,000 of business with the Company during the preceding fiscal year. Affiliated Associations must be cooperatives or other associations of agricultural producers organized and operating under the provisions of the Agricultural Marketing Act and the Capper-Volstead Act. Defined Members are either persons actually engaged in the production of agricultural products or associations of producers of agricultural products that are holders of Equity Participation Units. See "--Defined Members" below. Membership in the Company will be terminated by the Board of Directors if a member has become ineligible for membership (for example, by the cessation of agricultural production activities). The Board of Directors has the discretion to terminate membership for a variety of reasons, including repeated violations of the Company's Bylaws, failure to patronize the Company for a period of 12 consecutive months and breach of any contract with the Company. In addition, any member's membership in the Company is terminated when that member either dies or is legally dissolved. Upon termination of membership, a former member loses any and all voting rights in the Company. A former member has no right to require immediate repayment of patronage. Voting Rights Affiliated Associations are entitled to a number of delegates based on the dollar volume of business done with the Company during the last full fiscal year ending prior to the date of the meeting at which the voting power is to be exercised. The number of delegates ranges from one delegate for any Affiliated Association with business from $100,000 up to $1,500,000 during the prior year to 15 delegates for any Affiliated Association with business in excess of $45,000,000 during the prior year. Each delegate from an Affiliated Association is entitled to cast 200 votes on any matter presented to the members for a vote. The dollar volume of business delivered by a Defined Member to an Affiliated Association for handling on behalf of the Company and Defined Member will be included in calculating the dollar volume of an Affiliated Association for purposes of voting. Individual Members and Defined Members are entitled to one vote. Individual Members and Defined Members may directly cast their votes on matters presented to the members of the Company only if, for Defined Members, they have provided notice of such intention to the Company, and, for Individual Members, if they have obtained a certificate signed by a manager of the Company facility patronized by such Individual Member. Any such certificate or notice must be provided to the Company at least 10 days before the meeting at which the voting rights are to be exercised. Individual Members and Defined Members may exercise their voting power through the designation of a "patrons' association." A patrons' association is an association of the Individual Members associated with a grain elevator, feed mill, seed plant or any other Company facility or an association of Defined Members, as designated and recognized by the Board of Directors. The membership of a Patrons' Association may include both Individual Members and Defined Members. The Individual Members and Defined Members that are identified with a particular patrons' association may, at an annual meeting of the patrons' association, elect delegates and alternates for the patrons' association on the basis of one vote per member. Each patrons' association is entitled to a number of delegates based on the dollar volume of business activities of the patrons' association's currently active patrons and Defined Members with 200 votes per delegate, reduced by the number of individual votes personally voted. Members may cast their votes, if the Board of Directors so elects, by mail voting in certain situations. At least 50 members of the Company represented in person, by delegates or by mail votes constitutes a quorum for business at any meeting, unless the Company has fewer than 500 members, in which case a quorum is comprised of 10% of the total number of members. Defined Members Each Defined Member will be affiliated with a "Defined Business Unit" and will hold Equity Participation Units in that Defined Business Unit. Holders of Equity Participation Units will have delivery rights and obligations for farm products pursuant to a member marketing agreement between such Defined Member and the Company. Each Defined Business Unit will be represented by a Defined Member Board, comprised of between five and ten individuals. The members of a Defined Member Board must be either Defined Members or representatives of Defined Members and in good standing and in full compliance with all delivery obligations with respect to the applicable Defined Business Unit, provided, however, no employee of the Company may serve as a member of the Defined Member Board. The initial Defined Member Board of each Defined Business Unit will be elected by the Company's Board of Directors. Thereafter the Defined Member Board of a Defined Business Unit will be elected by the Defined Members associated with a particular Defined Business Unit on a one Defined Member/one vote basis. The Chairperson shall be selected by and from the Company's Board of Directors. Individuals serving on a Defined Member Board shall serve staggered three-year terms. Each Defined Member Board shall meet at least quarterly and shall be charged with reflecting Defined Member concerns and providing a direct communication mechanism to the Company's Board of Directors. The Company is authorized to retain a portion of the payments otherwise due to Defined Members for purchases of products from them. Such retention is referred to a "unit retain." The Company has the option to treat any such unit retains as taxable to the Company or to treat the unit retains as nontaxable by declaring the unit retains as "qualified." Qualified unit retains are taxable to the Defined Member in the tax year when the Defined Member receives notification that a unit retain has been established. When a qualified unit retain is reimbursed or redeemed, the Defined Member reports no additional income. Unit retains may be called for payout at the lesser of their stated or book value at the discretion of the Board of Directors. The Company intends to establish a redemption schedule if it authorizes unit retains. Debt and Equity Instruments The Company is authorized to issue a variety of debt and equity instruments to its current members, patrons and to persons who are neither members nor patrons. The Company's outstanding capital (see "Capitalization") is represented by Capital Equity Certificates, non-patronage certificates and certain capital reserves. The following securities may be issued to current or former members or patrons: Equity Participation Units. Equity Participation Units may be held only by Defined Members and have no voting rights. Capital Equity Certificates. Capital Equity Certificates may be issued by the Company in partial or complete distribution of patronage refunds. Capital Equity Certificates do not bear any interest or carry any dividends. They do not have a specified maturity date unless established by the Company's Board of Directors. Certificates of Indebtedness. The Board of Directors may issue Certificates of Indebtedness from time to time. Such Certificates will carry such terms and conditions as the Board of Directors establishes in its discretion. The Board may also establish the conditions upon which such Certificates of Indebtedness may be called for payment by the Company. Non-Patronage Earnings Certificates. The Board of Directors may issue Non-Patronage Earnings Certificates. Such certificates will not have a maturity date and will not bear interest or annual dividends. They will be issued and distributed only to member patrons and to Non-Member Consenting Patrons as part of a non-member/non-patronage distribution. (Non-Member Consenting Patrons include Affiliated Associations that meet all of the requirements of membership as an Affiliated Association except that they do not transact at least $100,000 of business with the Company during the preceding fiscal year.) Preferred Capital Certificates. The Board of Directors may establish and designate the designation, preferences and relative rights of one or more series of Preferred Capital Certificates. Preferred Capital Certificates will not carry any voting rights. Other. The Board of Directors may issue other debt or equity instruments. The Board of Directors may issue "Preferred Equities" and other debt or equity instruments to individuals who are not members or patrons of the Company. The Board of Directors has the discretion to establish and designate one or more series of Preferred Equities and to fix the relative rights, preferences and privileges of such preferred equities. Any Preferred Equities will not carry voting rights. Transfer of Patrons' Equities. Debt or equity instruments held by the Company's members and patrons, including Equity Participation Units, Capital Equity Certificates, Certificates of Indebtedness, Non-Patronage Earning Certificates and Preferred Capital Certificates, may be transferred only with the consent and approval of the Company's Board of Directors. The Company may require the execution of appropriate transfer documentation, as well as representations and warranties from the proposed transferee indicating that he or she is eligible to be the holder of the instrument proposed to be transferred. Redemption or Retirement of Patrons' Equities and Allocated Reserve. Redemption or retirement of Patrons' Equities is solely within the discretion of and on the terms as determined by the Board of Directors. The Board of Directors has authorized the redemption of Capital Equity Certificates held by patrons who are 72 years of age, as well as Capital Equity Certificates held by estates of deceased patrons. The Board of Directors intends to change its redemption policy following the completion of this offering. There can be no assurance that the Company's Board of Directors will not elect to modify its policy regarding the redemption of Capital Equity Certificates. The Board of Directors will establish a policy for Preferred Equity Certificates arising from Defined Business Units. Distribution of Assets Upon Dissolution Upon dissolution, liquidation or winding up of the Company, all debts and liabilities of the Company will be paid in accordance with their respective priorities. All equity capital will then be allocated among the various holders of the equity instruments in accordance with the following priorities: first, the assets held by any Defined Business Unit will be used to redeem the Equity Participation Units and Preferred Capital Certificates of such Defined Business Unit, on a pro rata basis; next, all Equity Participation Units and Preferred Capital Certificates will be paid to the extent of their face amount or par value; next all Capital Equity Certificates and other outstanding equities (other than Non-Patronage Earning Certificates) will be paid in the amount of the par value or face amount of such instruments; next, payment will be made in the face amount of any issued and outstanding Non-Patronage Earning Certificates. Any remaining assets of the Company will be distributed on an allocation unit basis among the members of the Company in proportion to their patronage. Certain Antitakeover Effects The governing documents may be amended upon the approval of a majority of the votes cast at an annual or special meeting. However, in the event that the Board of Directors by majority resolution has declared that the proposed amendment involves a resolution related to a hostile takeover, the proposed amendment must be adopted by the approval of 80% of the total voting power of the members of the Company. Tax Treatment Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives and applies to both cooperatives exempt from taxation under Section 521 of the Internal Revenue Code and to nonexempt corporations operating on a cooperative basis. The Company is a nonexempt cooperative. As a cooperative, the Company is not taxed on amounts withheld from its members in the form of qualified unit retains or patronage dividends, or in the amount distributed in the form of patronage payments. Consequently, such amounts are taxed only at the patron level. However, the amounts of any non-qualified unit retains or patronage dividends are taxable to the Company when allocated. Upon revolvement of any such non-qualified unit retains or patronage dividends, the amount is deductible to the Company and taxable at the member level. Income derived by the Company from non-patronage sources is not entitled to the "single tax" benefit of Subchapter T and is taxed to the Company at corporate income tax rates. EQUITY PARTICIPATION UNITS Equity Participation Units may be held only by Defined Members. Defined Members are either persons actually engaged in the production of agricultural products or associations of producers of agricultural products. Each Defined Member will be affiliated with a Defined Business Unit and will hold Equity Participation Units in that Defined Business Unit. Holders of Equity Participation Units will have delivery rights and obligations for farm products pursuant to the Agreements between such Defined Member and the Company. See "--Member Marketing Agreements" below. Certain rights and limitations pertaining to all Equity Participation Units, including those being offered by this Prospectus, are described in "Membership in the Company and Authorized Capital." Additional rights and limitations established by the Board of Directors in creating the Equity Participation Units offered hereby are described below. In determining the offering price of the Units, the Board of Directors has considered the historic and expected operations of, the risks associated with and an appropriate rate of return for each Business Unit. Milling Business Unit The Board of Directors has created the Milling Business Unit for the purpose of purchasing wheat (including durum) and the processing and sale thereof into flour and various byproducts, effective at the close of business on May 31, 1997, to carry on the operations of the Milling Division. On that date there will be allocated to the Milling Business Unit the assets and liabilities, including commitments, contingencies and obligations, appropriately belonging to the Division. In connection with the organization of the Milling Business Unit the Company will contribute an amount sufficient to bring its net worth to $__________, which is its net worth on May 31, 1996, plus additional capital so that the construction of the Pocono facility can be financed from equity capital. Holders of Equity Participation Units in the Milling Business Unit have a right to participate in the patronage sourced income from the operations of the Milling Business Unit. Prior to the sale of any Unit to any person, such person shall enter into an Agreement which gives the right and obligation to such person to deliver the number of bushels of wheat as shall equal the number of Units to be purchased by such Member. The delivery obligation and right under the Agreement for the Milling Business Unit will become fully effective for the fiscal year in which the Pocono facility begins operating. Defined Members will be notified. Initially and until the Agreement becomes fully effective, it will represent a right and obligation to deliver 78% of the wheat set forth therein. For information on earnings per bushel of the Milling Division, see "Business -- Wheat Milling -- Selected Financial and Operating Data." Allocations of overhead and interest expense to the Milling Business Unit by the Company will vary from the allocations to the Milling Division. See Note 15 to the Milling Division financial statements. Patronage sourced income from the operations of the Milling Business Unit will be allocated by the Company as patronage refunds based on the total amount of wheat processed. For example, if the Milling Business Unit were to process 50,000,000 bushels of wheat and holders of Equity Participation Units had delivered 20,000,000 bushels, 40% of the net income would be allocated to holders of Equity Participation Units. As between the holders of Equity Participation Units, patronage sourced income will be allocated to each Defined Member proportionate to the wheat delivered pursuant to the Agreement. While Defined Members will be entitled to the allocation of patronage refunds originating from the Milling Business Unit, they may also receive, upon allocation by the Board of Directors, nonpatronage income from operations of the Company, including operations of the Milling Business Unit generating nonpatronage income. The initial Defined Member Board of the Milling Business Unit shall be designated by the Board of Directors, to hold such office until their successors are duly elected and qualified, after the completion of the offering. See "Membership in the Company and Authorized Capital" with respect to the Defined Members to elect successor directors. Processing and Refining Business Unit The Board of Directors has created the Processing and Refining Business Unit for the purpose of purchasing soybeans and crude soybean oil and the processing and sale thereof into meal, flour, oil and various byproducts, effective at the close of business on May 31, 1997, to carry on the operations of the Processing and Refining Division. On that date there will be allocated to the Processing and Refining Business Unit the assets and liabilities, including commitments, contingencies and obligations, appropriately belonging to the Division. In connection with the organization of the Processing and Refining Business Unit, the Company will withdraw an amount sufficient to bring its net worth to $53,400,000, which was its net worth on May 31, 1996. Holders of Equity Participation Units in the Processing and Refining Business Unit have a right to participate in the patronage sourced income from the operations of the Processing and Refining Business Unit. Prior to the sale of any Unit to any person, such person shall enter into an Agreement which gives the right and obligation to such person to deliver the number of bushels of soybeans as shall equal the number of Units to be purchased by such Member. For information on earnings per bushel of the Processing and Refining Division, see "Business -- Processing and Refining -- Selected Financial and Operating Data." Allocations of overhead and interest income to the Processing and Refining Business Unit by the Company will vary from the allocations to the Processing and Refining Division. See Note 14 to the Processing and Refining Division financial statements. Patronage sourced income from the operations of the Processing and Refining Business Unit, excluding patronage sourced income from the refining of crude oil purchased from others and excluding patronage sourced income from Ventura Foods, will be allocated by the Company as patronage refunds based on the total amount of soybeans processed. For example, if the Processing and Refining Business Unit were to process 25,000,000 bushels of soybeans and holders of Equity Participation Units had delivered 10,000,000 bushels, 40% of the patronage sourced income would be allocated to holders of Equity Participation Units. As between the holders of Equity Participation Units, patronage sourced income will be allocated to each Defined Member proportionate to the soybeans delivered pursuant to the Agreement. While Defined Members will be entitled to the allocation of patronage refunds originating from the Processing and Refining Business Unit, they may also receive, upon allocation by the Board of Directors, nonpatronage income from operations of the Company, including operations of the Processing and Refining Business Unit generating nonpatronage income. The operations of Ventura Foods are not included in the Processing and Refining Division. Should the Company create an additional Business Unit pertaining to those operations, it may offer participation in that Business Unit to holders of Equity Participation Units in the Processings and Refining Business Unit. The initial Defined Member Board of the Processing and Refining Business Unit shall be designated by the Board of Directors, to hold such office until their successors are duly elected and qualified, after the completion of the offering. See "Membership in the Company and Authorized Capital" with respect to the Defined Members to elect successor directors. Allocations Relating to Business Units Revenues from the sale of products of a Business Unit shall be credited to the Business Unit, and all direct expenses incurred by a Business Unit shall be charged against the Business Unit. Corporate, general and administrative expenses of the Company shall be allocated to each Business Unit in a reasonable manner based on the utilization by such Business Unit. Intracompany accounts shall be established for the advancements to, and the loan of funds by, each Business Unit, with interest thereon imputed at prevailing rates. Income taxes shall be allocated to each Business Unit as if it were a separate taxpayer. Each Business Unit shall perform and be responsible for commitments, contingencies and obligations allocated to such Business Unit. With respect to each year, the total net income from a Business Unit will be withdrawn by the Company from the Business Unit, except to the extent that patronage dividends are not paid in cash and are retained in the Business Unit as equity. The Company will be responsible for the allocation of net income arising from operations of a Business Unit between Defined Members of any one or more Business Units and the remainder of the Company's operations. Upon the acquisition by the Company from a third party of any assets (whether by means of an acquisition of assets or stock, merger, consolidation or otherwise) reasonably related to a Business Unit, such assets and related liabilities, including commitments, contingencies and obligations, shall be allocated to that Business Unit and the aggregate cost or fair market value of such assets and liabilities shall be paid by the Business Unit. Such allocation and determination of fair market value may be made by the Board of Directors taking into account such matters as it and its advisers, if any, deem relevant, and any such allocation and determination of fair market value shall be final and binding for all purposes whatsoever. Upon any sale, transfer, assignment or other disposition by the Company of any or all assets of a Business Unit (whether by means of a disposition of assets, merger, consolidation, liquidation or otherwise), all proceeds (including non-cash consideration received) or the fair market value from such disposition shall be allocated to the Business Unit. If an asset is allocated to more than one Business Unit, the proceeds or the fair market value of the disposition shall be allocated among all Business Units, based upon their respective interests in such assets. Such allocation and determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant, and any such allocation and determination of fair market value shall be final and binding for all purposes whatsoever. The Board of Directors may from time to time reallocate any asset from one Business Unit to the Company or any other Business Unit of the Company. All such reallocations shall be done at fair market value as determined by the Board of Directors. Additional Equity Participation Units; Sale The Board of Directors from time to time may authorize the sale by the Company of Units deemed owned by the Company for the account of the Company provided that sales shall be at a price determined by the Board of Directors taking into account such matters as the Board of Directors and its financial advisers, if any, deem relevant. The Board of Directors may authorize the creation, issuance and sale of additional Equity Participation Units from time to time on such terms and for such consideration as it shall deem appropriate. Any proceeds from the sale of such additional Equity Participation Units shall be allocated to the applicable Division. Holders of Units shall have no preemptive rights to subscribe for or purchase additional Units or any other securities issued by a Business Unit or the Company. The Company intends to provide an opportunity for existing holders to subscribe for additional Equity Participation Units. The Company may, if authorized by the Board of Directors, purchase Units at such price as it shall determine from time to time for its own account, or for the account of a Division. Merger, Consolidation or Sale In connection with the merger, consolidation, liquidation or sale of all or substantially all of the assets of the Company substantially as an entirety or upon the sale of all or any substantial portion of the assets of a Business Unit, all, but not less than all, Units of such Business Unit may be redeemed at their face amount, provided that the Preferred Capital Certificates or unit retains of such Business Unit not previously paid are also redeemed in connection therewith, and that such payments include any prorata profit (or loss) associated with disposition of the assets of the Business Unit as though the assets, subject to the liabilities, of the Business Unit had been sold in connection with such event at their fair market value. Any determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant. Operations The operations of a Business Unit shall be carried out by the Company through the Board of Directors, officers and management of the Company. The capital assets of a Business Unit may be disposed of in the ordinary course of business and the disposition of any substantial portion of the assets of a Business Unit as an entirety may be authorized by the Board of Directors. The Board of Directors may determine to sell the assets and operations of a Business Unit or to abandon or shut down the operations of a Business Unit. Amendment of Board Resolutions The resolutions adopted by the Board of Directors establishing the Milling Division and Business Unit and the Processing and Refining Division and Business Unit may be amended from time to time by the Board of Directors of the Company, except for those matters described under "Allocations Relating to Each Division," which may be amended only with the approval of a majority of Defined Members owning Units not held or deemed held by the Company. Individual Member Marketing Agreement A Defined Member will be obligated to deliver during each delivery year one bushel of wheat or soybeans to the Company for each applicable Unit held, subject to adjustment as described below, at delivery points designated by the Company and of a quality specified by the Company. Wheat or soybeans that do not meet applicable standards may either be rejected or accepted with such discounts as may be established by the Company or agents. Deliveries may be made at any time from June 1 through May 31. The Company expects that certain Affiliated Associations will contract with the Company to act as an agent for handling required deliveries (and will receive funds for that service), and that the Company will designate some or all of its owned and operated elevators as delivery points. The Board of Directors may establish annual "tolerance ranges" allowing a Defined Member the option to deliver more or less wheat or soybeans in any given year. Upon transfer of Units, the remaining obligations under the Agreement must also be assumed by the transferee of the Units. The Agreement may be terminated by a Individual Member effective on May 31 of any year upon written notice of termination. In addition, the Agreement may be terminated following a breach of the Agreement by either party, upon thirty written notice from the party not in breach. The Agreement may be terminated by the Company in connection with termination of the business of the applicable Defined Business Unit. The Company is obligated to take and pay for deliveries in accordance with the Agreement. The price to be paid is based on the prevailing price posted at the point of delivery. The Company's obligation to take delivery may be excused due to events beyond the control of the Company. The Defined Member's obligation to deliver may be excused due to Acts of God as provided in the Agreement. The Company will pay to each Defined Member an annual patronage refund equal to the portion arising from the net savings of the applicable Business Unit attributable to such Defined Member's patronage of the Business Unit. Each Agreement is subject to amendment upon the approval of the Company and the majority vote of the voting power of the applicable Business Unit. As a result, in the event that Members holding the majority of the voting power of the applicable Business Unit approve an amendment to the Agreement which has been approved by the Company, those Defined Members who voted against or oppose the amendment will be bound to performance of the Agreement as amended. The Company is authorized to retain a portion of the payments otherwise due to Defined Members for purchases of products from them. Such retention is referred to a "unit retain." The Company has the option to treat any such unit retains as taxable to the Company or to treat the unit retains as nontaxable by declaring the unit retains as "qualified." Qualified unit retains are taxable to the Defined Member in the tax year when the Defined Member receives notification that a unit retain has been established. When a qualified unit retain is reimbursed or redeemed, the Defined Member reports no additional income. Unit retain may be called for payout at the lesser of their stated or book value at the discretion of the Board of Directors. TRADING OF UNITS The Company intends to create an electronic bulletin board to facilitate the purchase and sale of Units among Members, although Members are free to make other arrangements in the purchase and sale of Units. A seller may post the seller's name, telephone number, address, number of Units offered and the asking price per Unit. A buyer may post the buyer's name, telephone number, address, number of Units sought and the bid price per Unit. Any sale and purchase of Units will be subject to negotiation of price and other terms of purchase. The Company will not act as a broker or dealer in connection with any such sale and will not receive any commission or other fee. The Company also intends to publish information on transfers of Units, including date, the number of Units transferred and, in the case of a sale, the sale price per Unit. VALIDITY OF UNITS The validity of the securities offered hereby will be passed upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota. EXPERTS The consolidated financial statements of Harvest States Cooperatives and the financial statements of the Milling Division and the Processing and Refining Division as of May 31, 1995 and 1996, and for each of the three years in the period ended May 31, 1996, included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports thereon appearing herein and have been so included in reliance upon such reports given upon the authority of that firm as experts in accounting and auditing. ADDITIONAL INFORMATION A Registration Statement on Form S-1, including amendments thereto, relating to the Units offered hereby has been filed with the Securities and Exchange Commission (the "Commission"). This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or documents filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Units offered hereby, reference is made to the Registration Statement and the exhibits and schedules thereto. A copy of the Registration Statement, including exhibits and schedules thereto, may be inspected by anyone without charge at the Commission's principal office in Washington, D.C. and copies of all or any part thereof may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission.
INDEX TO FINANCIAL STATEMENTS PAGE Harvest States Cooperatives Independent Auditors' Report F-2 Financial Statements: Consolidated Balance Sheets as of May 31, 1995 and 1996 and August 31, 1996 (unaudited) F-3 Consolidated Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-4 Consolidated Statements of Capital for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1996 (unaudited) F-5 Consolidated Statements of Cash Flows for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-6 Notes to Consolidated Financial Statements for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-7 Wheat Milling Division (A Division of Harvest States Cooperatives) Independent Auditors' Report F-16 Financial Statements: Balance Sheets as of May 31, 1995 and 1996 and August 31, 1996 (unaudited) F-17 Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-18 Statements of Divisional Equity for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1996 (unaudited) F-19 Statements of Cash Flows for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-20 Notes to Financial Statements for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-21 Oilseed Processing And Refining Division (A Division of Harvest States Cooperatives) Independent Auditors' Report F-28 Financial Statements: Balance Sheets as of May 31, 1995 and 1996 and August 31, 1996 (unaudited) F-29 Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-30 Statements of Divisional Equity for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1996 (unaudited) F-31 Statements of Cash Flows for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-32 Notes to Financial Statements for the Years Ended May 31, 1994, 1995, and 1996 and the Three Months Ended August 31, 1995 and 1996 (unaudited) F-33
INDEPENDENT AUDITORS' REPORT Board of Directors Harvest States Cooperatives Saint Paul, Minnesota We have audited the consolidated balance sheets of Harvest States Cooperatives and subsidiaries (the Company) as of May 31, 1995 and 1996 and the related consolidated statements of earnings, capital, and cash flows for each of the three years in the period ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 31, 1995 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended May 31, 1996, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP August 19, 1996
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, -------------------------------- AUGUST 31, 1995 1996 1996 (UNAUDITED) ASSETS CURRENT ASSETS: Cash $ 11,656,677 $ 21,426,227 $ 3,213,034 Receivables (Note 2) 334,241,233 367,244,539 417,376,700 Inventories (Note 3) 247,538,620 434,507,118 173,296,763 Prepaid expenses and deposits 19,252,023 41,825,850 26,955,089 -------------- -------------- -------------- Total current assets 612,688,553 865,003,734 620,841,586 OTHER ASSETS: Investments (Note 4) 57,523,420 83,269,566 119,582,159 Other (Note 5) 48,483,906 48,353,983 34,776,806 -------------- -------------- -------------- Total other assets 106,007,326 131,623,549 154,358,965 PROPERTY, PLANT, AND EQUIPMENT (Notes 6 and 7) 205,837,690 232,145,401 208,605,760 -------------- -------------- -------------- $ 924,533,569 $1,228,772,684 $ 983,806,311 ============== ============== ============== LIABILITIES AND CAPITAL CURRENT LIABILITIES: Notes payable (Note 7) $ 200,000,000 $ 324,000,000 $ 9,000,000 Patron credit balances 59,490,643 29,007,419 80,004,593 Advances received on grain sales 123,421,988 201,825,190 226,044,833 Drafts outstanding 17,581,091 23,837,715 23,857,186 Accounts payable and accrued expenses 127,569,277 163,435,268 150,022,182 Patronage dividends payable 11,000,000 13,100,000 15,100,000 Current portion of long-term debt (Note 7) 6,721,469 13,923,204 18,419,713 -------------- -------------- -------------- Total current liabilities 545,784,468 769,128,796 522,448,507 LONG-TERM DEBT (Note 7) 78,095,056 118,705,972 110,592,680 OTHER LIABILITIES 1,166,152 3,685,797 4,382,473 COMMITMENTS AND CONTINGENCIES (Notes 8 and 13) CAPITAL (Note 8) 299,487,893 337,252,119 346,382,651 -------------- -------------- -------------- $ 924,533,569 $1,228,772,684 $ 983,806,311 ============== ============== ============== See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE MONTHS ENDED FOR THE YEARS ENDED AUGUST 31, ------------------------------------------------ ------------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) REVENUES: Sales: Grain and oilseed $3,086,531,429 $4,191,665,535 $7,127,223,407 $1,341,016,649 $1,875,912,189 Processed grain and oilseed 593,116,553 708,219,307 819,863,541 187,687,561 234,548,425 Feed and farm supplies 165,925,459 156,699,068 207,252,696 43,124,346 61,003,251 -------------- -------------- -------------- -------------- -------------- 3,845,573,441 5,056,583,910 8,154,339,644 1,571,828,556 2,171,463,865 Patronage dividends 6,609,602 6,512,481 13,278,997 1,801,005 4,504,239 Other revenues (Note 12) 45,895,922 57,556,984 68,339,523 16,782,771 14,839,801 -------------- -------------- -------------- -------------- -------------- 3,898,078,965 5,120,653,375 8,235,958,164 1,590,412,332 2,190,807,905 COSTS AND EXPENSES: Cost of goods sold 3,786,336,764 4,981,820,272 8,076,073,326 1,556,325,280 2,156,922,994 Marketing, general, and administrative 60,847,099 69,509,491 70,054,248 18,805,661 19,595,114 Interest 10,250,765 19,268,575 31,921,936 6,511,366 4,621,786 -------------- -------------- -------------- -------------- -------------- 3,857,434,628 5,070,598,338 8,178,049,510 1,581,642,307 2,181,139,894 -------------- -------------- -------------- -------------- -------------- EARNINGS BEFORE INCOME TAXES 40,644,337 50,055,037 57,908,654 8,770,025 9,668,011 INCOME TAXES (Note 11) 5,500,000 5,100,000 6,900,000 1,150,000 1,150,000 -------------- -------------- -------------- -------------- -------------- NET EARNINGS $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 7,620,025 $ 8,518,011 ============== ============== ============== ============== ============== See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITAL PATRONAGE NONPATRONAGE PATRONAGE CAPITAL TOTAL CERTIFICATES CERTIFICATES PAYABLE RESERVE BALANCE AT MAY 31, 1993: Stated as capital $ 246,797,147 $ 184,835,249 $ 16,100,000 $ 45,861,898 Stated as current liability 6,900,000 6,900,000 ------------- ------------- ------------- ------------- 253,697,147 184,835,249 23,000,000 45,861,898 Distribution of patronage dividends payable for preceding year, including cash payment of $6,833,455 (6,833,455) 15,819,222 (23,000,000) 347,323 Redemption of capital equity certificates (5,484,613) (5,484,613) Equities issued 3,249,624 3,249,624 Other 387,977 (262,036) 650,013 Net earnings 35,144,337 31,300,000 3,844,337 Patronage dividends payable in cash, stated as a current liability (9,400,000) (9,400,000) ------------- ------------- ------------- ------------- BALANCE AT MAY 31, 1994: Stated as capital 270,761,017 198,157,446 21,900,000 50,703,571 Stated as current liability 9,400,000 9,400,000 ------------- ------------- ------------- ------------- 280,161,017 198,157,446 31,300,000 50,703,571 Distribution of patronage dividends payable for preceding year, including cash payment of $9,945,967 (9,945,967) 23,187,069 $ 1,832,136 (31,300,000) (3,665,172) Redemption of capital equity certificates (5,728,997) (5,728,997) Other 1,046,803 150,004 896,799 Net earnings 44,955,037 36,700,000 8,255,037 Patronage dividends payable in cash, stated as a current liability (11,000,000) (11,000,000) ------------- ------------- ------------- ------------- ------------- BALANCE AT MAY 31, 1995: Stated as capital 299,487,893 215,765,522 1,832,136 25,700,000 56,190,235 Stated as current liability 11,000,000 11,000,000 ------------- ------------- ------------- ------------- ------------- 310,487,893 215,765,522 1,832,136 36,700,000 56,190,235 Distribution of patronage dividends payable for preceding year, including cash payment of $10,992,918 (10,992,918) 25,617,898 7,912,297 (36,700,000) (7,823,113) Redemption of capital equity certificates (6,554,160) (6,547,372) (6,788) Equities issued 8,721,542 8,721,542 Other (2,318,892) (2,041,438) 2,350 (279,804) Net earnings 51,008,654 43,700,000 7,308,654 Patronage dividends payable in cash, stated as a current liability (13,100,000) (13,100,000) ------------- ------------- ------------- ------------- ------------- BALANCE AT MAY 31, 1996 337,252,119 241,516,152 9,739,995 30,600,000 55,395,972 Stated as current liability (unaudited) 13,100,000 13,100,000 Redemption of capital equity certificates (unaudited) (1,612,773) (1,564,868) (47,905) Equities issued (unaudited) 4,193,985 4,193,985 Other (unaudited) 31,309 (7,500) (181) 38,990 Net earnings (unaudited) 8,518,011 6,700,000 1,818,011 Patronage dividends payable in cash, stated as a current liability (unaudited) (15,100,000) (15,100,000) ------------- ------------- ------------- ------------- ------------- BALANCE AT AUGUST 31, 1996 (UNAUDITED) $ 346,382,651 $ 244,137,769 $ 9,691,909 $ 35,300,000 $ 57,252,973 ============= ============= ============= ============= ============= See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED FOR THE YEARS ENDED AUGUST 31, ----------------------------------------- --------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 7,620,025 $ 8,518,011 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 17,705,185 18,907,903 20,421,425 4,991,428 5,713,837 Noncash loss (gain) on investment 277,340 (4,025,854) (12,517,993) (2,323,009) (1,753,575) Noncash portion of patronage dividends received (4,598,180) (4,622,221) (9,607,657) (1,376,946) (2,912,654) Loss (gain) on sale of property, plant, and equipment 273,843 (1,196,717) (853,024) 30,920 32,070 Change in assets and liabilities: Receivables (57,084,091) (103,580,123) (33,013,948) (137,406,104) (50,108,075) Inventories (36,647,598) (19,046,875) (186,968,498) (32,107,470) 261,210,354 Patron credit balances 8,493,415 23,282,391 (30,483,224) 6,043,774 50,997,174 Advances received on grain and oilseed sales (2,184,948) (1,264,842) 78,403,202 155,490,766 24,219,643 Accounts payable, accrued expenses, and drafts outstanding 16,534,719 4,852,493 43,477,378 2,748,704 (8,736,938) Prepaid expenses, deposits, and other (11,119,894) (7,973,268) (25,590,317) (22,461,103) 14,940,372 ------------- ------------- ------------- ------------ ------------- Total adjustments (68,350,209) (94,667,113) (156,732,656) (26,369,040) 293,602,208 ------------- ------------- ------------- ------------ ------------- Net cash (used in) provided by operating activities (33,205,872) (49,712,076) (105,724,002) (18,749,015) 302,120,219 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposition of property, plant, and equipment 1,174,196 3,351,119 3,729,810 48,791 89,216 Investments redeemed 7,028,580 3,662,026 2,518,863 712,160 1,522,295 Acquisition of property, plant, and equipment (28,035,021) (69,314,689) (40,501,980) (13,021,407) (11,407,775) Payments on notes receivable 682,313 391,412 398,851 214,688 200,095 Investments (2,008,822) (1,843,097) (1,274,069) Investments in joint ventures (6,650,000) (727,266) 8,515,059 Other (3,157,854) (1,004,755) (1,778,678) (1,343,039) 1,003,723 ------------- ------------- ------------- ------------ ------------- Net cash used in investing activities (24,316,608) (71,407,984) (37,634,469) (13,388,807) (77,387) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit agreements 79,500,000 87,000,000 124,000,000 10,500,000 (315,000,000) Long-term debt borrowings 1,160,000 51,000,000 57,961,058 15,000,000 Principal payments on long-term debt (5,869,940) (5,215,106) (10,546,075) (2,157,380) (3,081,864) Principal payments under capital lease obligations (634,170) (680,901) (739,884) (365,277) (534,917) Redemption of capital equity certificates (5,484,613) (5,728,997) (6,554,160) (1,732,344) (1,639,244) Cash patronage dividends paid (6,833,455) (9,945,967) (10,992,918) ------------- ------------- ------------- ------------ ------------- Net cash provided by (used in) financing activities 61,837,822 116,429,029 153,128,021 21,244,999 (320,256,025) ------------- ------------- ------------- ------------ ------------- INCREASE (DECREASE) IN CASH 4,315,342 (4,691,031) 9,769,550 (10,892,823) (18,213,193) CASH AT BEGINNING OF PERIOD 12,032,366 16,347,708 11,656,677 11,656,677 21,426,227 ------------- ------------- ------------- ------------ ------------- CASH AT END OF PERIOD $ 16,347,708 $ 11,656,677 $ 21,426,227 $ 763,854 $ 3,213,034 ============= ============= ============= ============ ============= See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND THREE MONTHS ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED) - - - - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS - Harvest States Cooperatives is a producer-owned agricultural cooperative organized for the mutual benefit of its members. Membership extends from the Midwest to the Pacific Northwest. The Cooperative's primary lines of business are grain marketing, milling, and oilseed processing. Members' grain is marketed through a network of inland and export elevators. Sales are both domestic and international. UNAUDITED INTERIM FINANCIAL STATEMENTS - Harvest States Cooperatives and its majority-owned subsidiaries' (the Company) consolidated balance sheet as of August 31, 1996, consolidated statements of earnings and cash flows for the three months ended August 31, 1995 and 1996, consolidated statement of capital for the three months ended August 31, 1996, and the interim information in the notes to consolidated financial statements as of August 31, 1996 and for the three months ended August 31, 1995 and 1996 are unaudited. In the opinion of management, such unaudited consolidated financial statements include all adjustments (consisting of only normal, recurring accruals) necessary for a fair presentation thereof. The results of operations for any interim period are not necessarily indicative of the results for the year. CONSOLIDATION - The consolidated financial statements include the accounts of Harvest States Cooperatives and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. INVENTORIES - Grain and oilseed and certain processed grain and oilseed products are stated at market, including appropriate adjustment of open purchase, sales, and futures contracts. Substantially all other inventories are priced at the lower of cost (first-in, first-out method) or market. The Company follows the general policy of hedging its grain and oilseed inventories and unfilled orders for grain and oilseed products to the extent considered practicable for minimizing risk from market price fluctuations. Futures contracts used for hedging are purchased and sold through regulated commodity exchanges. Inventories, however, are not completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and in part to the Company's appraisal of its exposure from expected price fluctuations. Noncommodity exchange purchase and sale contracts may expose the Company to risk in the event that a counterparty to a transaction is unable to fulfill its contractual obligation. The Company manages its risk by entering into purchase contracts with preapproved producers and establishing appropriate limits for individual suppliers. Sales contracts are entered into with organizations of acceptable creditworthiness, as internally evaluated. INVESTMENTS - Investments in cooperatives are stated at cost including allocated equity and retainings. Patronage dividends are recorded at the time written notices of allocation are received. Joint ventures and other significant equity investments are accounted for under the equity method. Under the equity method, the Company recognizes its proportionate share of earnings or loss of the investee. Investments in other debt and equity securities are considered available for sale and are stated at market value, with unrealized amounts included in other equity. PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. INTANGIBLE ASSETS - Leasehold rights and other intangible assets are amortized using the straight-line method over 3 to 40 years. GRAIN AND OILSEED SALES - Grain and oilseed sales are recorded at time of shipment. Export sales, including those through joint ventures, were approximately $.9, $1.6, and $3.1 billion of total grain sales for the years ended May 31, 1994, 1995, and 1996, respectively. INCOME TAXES - Deferred income taxes are provided on temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. Due to the high proportion of patronage earnings, deferred taxes resulting from temporary differences are not significant. ASSET IMPAIRMENT - In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement is effective for fiscal years beginning after December 15, 1995; however, earlier adoption is allowed. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS - Certain reclassifications have been made to the 1994 and 1995 consolidated financial statements to conform to the 1996 presentation. These reclassifications have no effect on the operating results of those years, as previously reported. 2. RECEIVABLES
May 31, ---------------------------------- August 31, 1995 1996 1996 Trade $ 222,522,967 $ 297,112,614 $ 330,061,790 Elevator accounts 100,849,459 59,163,181 65,044,922 Other 15,293,807 18,003,744 29,347,584 --------------- --------------- ---------------- 338,666,233 374,279,539 424,454,296 Less allowance for losses (4,425,000) (7,035,000) (7,077,596) --------------- --------------- ---------------- $ 334,241,233 $ 367,244,539 $ 417,376,700 =============== =============== ================
3. INVENTORIES
May 31, ---------------------------------- August 31, 1995 1996 1996 Grain and oilseed $ 166,797,308 $ 351,504,342 $ 135,519,919 Processed grain and oilseed products 42,294,295 52,555,945 27,531,605 Feed and farm supplies 38,447,017 30,446,831 10,245,239 --------------- --------------- ---------------- $ 247,538,620 $ 434,507,118 $ 173,296,763 =============== =============== ================ 4. INVESTMENTS May 31, ---------------------------------- August 31, 1995 1996 1996 Cooperatives: St. Paul Bank for Cooperatives $ 7,358,124 $ 8,180,068 $ 8,180,068 National Bank for Cooperatives 1,385,580 2,855,489 2,851,920 Cenex 8,534,259 12,361,642 12,958,616 Central Ferry Terminal Association 1,279,674 1,222,283 1,222,415 Pro Fac Cooperative 2,816,625 1,769,656 1,769,656 Land O' Lakes, Inc. 2,056,032 3,460,903 6,483,807 Ag Processing, Inc. 9,969,001 14,044,556 14,034,306 Intrade Corporation 886,543 1,869,073 1,869,073 Farmland Industries 628,500 891,625 891,268 Lewis-Clark Terminal, Inc. 484,027 1,003,433 1,003,433 Joint Ventures: HSPV, L.L.C. 2,341,263 6,408,265 6,463,766 Tacoma Export Marketing Company 2,583,904 9,330,337 10,540,717 Ventura Foods, L.L.C. 4,152,815 4,651,933 37,212,482 Harvest States - Farmland Specialty Feed 1,007,139 954,678 976,974 Ag States Agency, L.L.C. 3,925,310 4,963,174 3,860,205 Archer Daniels Midland Common Stock 5,213,400 5,770,031 5,770,031 International Malting Company 700,000 700,000 700,000 Other 2,201,224 2,832,420 2,793,422 --------------- --------------- ---------------- $ 57,523,420 $ 83,269,566 $ 119,582,159 =============== =============== ================
5. OTHER ASSETS
May 31, ---------------------------------- August 31, 1995 1996 1996 Leasehold rights and other intangibles, less accumulated amortization of $6,307,759, $7,145,101, and $6,207,027, respectively $ 26,770,619 $ 24,908,896 $16,032,709 Notes receivable 1,245,992 1,780,474 1,721,296 Prepaid expenses and other assets 20,467,295 21,664,613 17,022,801 --------------- -------------- ----------- $ 48,483,906 $ 48,353,983 $34,776,806 =============== ============== ===========
6. PROPERTY, PLANT, AND EQUIPMENT
Estimated May 31, Useful Life ---------------------------------- August 31, in Years 1995 1996 1996 Grain terminals and country elevators 3 to 50 $ 196,193,481 $ 210,151,675 $ 215,027,562 Grain and oilseed processing plants 3 to 40 171,909,217 199,403,336 153,580,008 Feed plants 3 to 40 24,930,654 23,137,566 23,806,898 Corporate office facilities 3 to 40 11,221,624 11,512,620 11,780,215 --------------- --------------- ---------------- 404,254,976 444,205,197 404,194,683 Less accumulated depreciation (198,417,286) (212,059,796) (195,588,923) --------------- --------------- ---------------- $ 205,837,690 $ 232,145,401 $ 208,605,760 =============== =============== ================
7. BORROWINGS NOTES PAYABLE: The Company had a seasonal loan agreement of $200,000,000 committed with St. Paul Bank for Cooperatives, $65,000,000 and $128,250,000 of which were outstanding on May 31, 1995 and 1996, respectively. The Company has a seasonal loan agreement of $200,000,000 committed with National Bank for Cooperatives, $55,000,000 and $95,750,000 of which were outstanding on May 31, 1995 and 1996, respectively. The Company also has seasonal loan agreements of $170,000,000 of which $150,000,000 is committed with commercial banks, $80,000,000 and $100,000,000 of which were outstanding on May 31, 1995 and 1996, respectively. The average weighted interest rates as of May 31, 1995 and 1996 were 6.07% and 6.05%, respectively. Major conditions of the loan agreements provide that (1) the aggregate principal outstanding under the agreements shall not exceed $650,000,000; (2) the Company will not change its patronage dividend payment policy or equity redemption policy without the consent of the banks; and (3) the Company will maintain working capital of $85,000,000. The total unused seasonal loan commitment at May 31, 1996 was $226,000,000. The Company has entered into a seasonal loan agreement of $550,000,000 that is effective as of November 11, 1996 which replaces the above agreements. The agreement is provided by the National Bank for Cooperatives, St. Paul Bank for Cooperatives, and a group of commercial banks, and is committed through October 31, 1997. This agreement can be extended in one year increments through October 29, 1999, if mutually agreed to. No amounts are outstanding as of November 30, 1996. Major financial covenants of the new seasonal loan agreement provide that (1) the Company will maintain a working capital amount of not less than $100,000,000; (2) the Company shall have consolidated members and patrons' equity of not less than $275,000,000; and (3) the Company shall not have consolidated funded debt to consolidated members and patrons' equity in excess of .80 to 1.00. LONG-TERM DEBT:
May 31, ---------------------------------- August 31, 1995 1996 1996 St. Paul Bank for Cooperatives, with fixed and variable interest rates from 6.24% to 8.50%, due in installments through 2007 $ 44,792,000 $ 68,192,000 $ 66,937,833 National Bank for Cooperatives, with fixed and variable interest rates from 6.24% to 7.51%, due in installments through 2007 25,500,000 52,500,000 52,145,833 Industrial Development Revenue Bonds, payable through July 2005, interest rate of 7.4% 4,750,000 3,300,000 2,100,000 Capitalized lease obligations with fixed and variable rates, 8.0% to 8.90% 7,262,508 6,522,624 5,987,707 Mortgages payable and other 2,512,017 2,114,552 1,841,020 ----------------- --------------- ---------------- 84,816,525 132,629,176 129,012,393 Less current portion (6,721,469) (13,923,204) (18,419,713) ----------------- --------------- ---------------- $ 78,095,056 $ 118,705,972 $ 110,592,680 ================= =============== ================
The principal maturities of outstanding long-term indebtedness outstanding at May 31, 1996 are as follows: Year ending May 31: 1997 $ 13,923,204 1998 19,385,645 1999 15,061,743 2000 15,981,172 2001 11,638,564 2002 and thereafter 56,638,848 8. PATRONS' EQUITY In accordance with the bylaws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each year and are based on amounts reportable for federal income tax purposes as adjusted in accordance with the bylaws. The cash portion of this distribution is determined annually by the Board of Directors, with the balance issued in the form of Patronage Certificates. Annual net earnings from sources other than patronage may be added to the Capital Reserve or, upon action by the Board of Directors, allocated to members in the form of Nonpatronage Certificates. The Board of Directors has authorized the redemption of Patronage Certificates held by patrons who are 72 years of age and those held by estates of deceased patrons. The Board of Directors has also authorized the redemption of Nonpatronage Certificates held by estates of deceased patrons. 9. RETIREMENT PLANS The Company has noncontributory defined benefit retirement plans covering substantially all salaried and full-time hourly employees. The retirement plan benefits for salaried employees are based on years of service and the participants' total compensation. Benefits for hourly employees are based on various monthly amounts for each year of credited service. The plans are funded by annual contributions to tax-exempt trusts in accordance with federal law and regulations. Plan assets consist principally of corporate obligations, U.S. Government bonds, money market funds, and immediate participation guarantee contracts. Net pension expense for the years ended May 31 consists of the following:
1994 1995 1996 Service cost - benefits earned during the period $ 2,334,299 $ 2,564,115 $ 2,496,711 Interest cost on projected benefit obligation 6,161,068 6,376,612 5,587,377 Actual return on plan assets (7,256,145) (7,329,046) (6,860,278) Net amortization and deferral 1,029,260 1,165,499 555,130 Benefit plan settlement adjustment 3,020,077 -------------- ------------- -------------- $ 2,268,482 $ 5,797,257 $ 1,778,940 ============== ============= ==============
The funded status of the plans and the amount recognized on the consolidated balance sheets as of May 31 are as follows:
1995 1996 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $67,539,069 and $74,406,137, respectively $ 69,898,635 $ 77,127,866 ============== =============== Projected benefit obligation for service rendered to date $ 73,686,670 $ 81,036,131 Plan assets at fair value 70,122,276 75,743,570 -------------- --------------- Plan assets less than projected benefit obligation (3,564,394) (5,292,561) Unrecognized net loss 19,551,900 25,449,810 Unrecognized transition gain at June 1, 1985 being recognized over 13 years (3,614,924) (2,517,627) Unrecognized prior service cost 1,606,315 1,520,901 Additional minimum liability (1,098,275) -------------- --------------- Prepaid pension cost $ 13,978,897 $ 18,062,248 ============== ===============
The determination of the actuarial present value of the projected benefit obligation was based on a weighted average discount rate of 8.25% in 1994 and 1995 and 7.75% in 1996 and a rate of increase in future compensation of 5% in 1994, 1995, and 1996. The expected long-term rate of return on plan assets was 8.5% in 1994 and 1995 and 8% in 1996. 10. POSTRETIREMENT MEDICAL AND OTHER BENEFITS The Company provides certain health care benefits for retired employees. Employees become eligible for these benefits if they meet minimum age and service requirements and are eligible for retirement benefits. The accrued postretirement medical and other benefits costs that are not funded were as follows at May 31:
1995 1996 Accumulated postretirement benefit obligation (APBO): Retirees $ 5,991,309 $ 2,993,307 Fully eligible active plan participants 1,041,742 1,019,071 Other active plan participants 2,730,508 3,624,620 ------------- -------------- Total APBO 9,763,559 7,636,998 Unrecognized transition obligation (9,984,815) (9,430,105) Unrecognized net gains 2,000,094 4,059,863 ------------- -------------- Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756 ============= ==============
The components of the net periodic cost are as follows for the years ended May 31:
1994 1995 1996 Service cost - benefits earned during the year $ 299,000 $ 312,814 $ 337,182 Interest cost on projected benefit obligation 866,000 739,055 548,997 Amortization of unrecognized gains (41,435) (228,025) Amortization of transition obligation 566,000 554,710 554,710 -------------- ------------- -------------- Net periodic postretirement cost $ 1,731,000 $ 1,565,144 $ 1,212,864 ============== ============= ==============
The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996 and a health care cost trend rate of 10% in 1996, declining to 6% in 2004. If the health care cost trend rate increased by 1%, the APBO would increase by 8.7% and the service cost and interest cost components would increase by 10%. 11. PROVISION FOR INCOME TAXES The provision for income taxes for each of the three years ended May 31 was as follows:
1994 1995 1996 Current provision $ 5,900,000 $ 5,400,000 $ 7,100,000 Deferred - principally federal (400,000) (300,000) (200,000) -------------- ------------- -------------- Total provision $ 5,500,000 $ 5,100,000 $ 6,900,000 ============== ============= ==============
Deferred income taxes, which are not significant, relate principally to allowances and accruals. A reconciliation of the statutory federal tax rate to the effective rate for each of the three years ended May 31 follows:
1994 1995 1996 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3 Patronage earnings (27.0) (27.6) (29.6) Other 2.9 .2 2.2 ------ ------ ------ Effective rate 13.5% 10.2% 11.9% ====== ====== ======
12. OTHER REVENUES
Three Months Ended For the Years Ended May 31, August 31, -------------------------------------------- ----------------------------- 1994 1995 1996 1995 1996 Storage and handling $ 8,665,157 $ 9,168,022 $ 8,722,537 $ 1,603,537 $ 1,229,497 Service revenues 13,695,050 15,942,394 20,572,679 5,599,794 5,383,704 Commission 8,023,254 6,722,261 6,837,272 1,568,684 2,273,715 Joint venture (loss) income (277,340) 4,025,854 12,517,993 2,323,009 1,753,579 (Loss) gain on sale of property, plant, and equipment (211,081) 1,196,717 853,024 (30,920) (32,070) Interest income 7,935,682 11,471,627 11,581,221 3,431,556 1,641,447 Other 8,065,200 9,030,109 7,254,797 2,287,111 2,589,929 -------------- ------------- ------------- -------------- ------------- $ 45,895,922 $ 57,556,984 $ 68,339,523 $ 16,782,771 $ 14,839,801 ============== ============= ============= ============== =============
13. COMMITMENTS AND CONTINGENCIES At May 31, 1995 and 1996, the Company stored grain and oilseed and processed grain and oilseed products for others totaling $30,700,000 and $37,900,000, respectively. The Company is a guarantor for lines of credit for related companies totaling $100,000,000, of which $30,300,000 was outstanding as of May 31, 1996. All outstanding loans are current with respective creditors as of May 31, 1996. The Company leases approximately 3,400 rail cars with remaining lease terms of one to ten years. In addition, the Company leases vehicles and various manufacturing equipment. Minimum rental payments due under these operating leases at May 31, 1996, are as follows:
Rail Cars Vehicles Other Total Years ending May 31: 1997 $ 17,940,667 $ 4,823,359 $ 2,128,587 $ 24,892,613 1998 17,450,431 3,795,690 1,753,844 22,999,965 1999 15,807,151 2,771,987 1,398,045 19,977,183 2000 11,938,430 1,675,650 1,056,157 14,670,237 2001 6,906,800 789,227 861,043 8,557,070 2002 and thereafter 13,599,870 648,190 4,186,672 18,434,732 ------------- ------------- -------------- ------------- $ 83,643,349 $ 14,504,103 $ 11,384,348 $ 109,531,800 ============= ============= ============== =============
Total rent expense, net of rail car mileage credits received from the railroad and subleases, was approximately $10,196,000, $11,378,000, and $12,454,000 for the years ended May 31, 1994, 1995, and 1996, respectively. Mileage credits and sublease income were $3,437,000, $5,126,000, and $7,257,000 for the years ended May 31, 1994, 1995, and 1996, respectively. The Company is a party to various lawsuits and administrative proceedings incidental to its business. It is impossible, at this time, to estimate what the ultimate legal and financial liability of the Company will be; nevertheless, management believes, based on the information available to date and the resolution of prior proceedings, that the ultimate liability of all litigation and proceedings will not have a material impact on the financial condition of the Company. 14. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION Additional information concerning supplemental disclosures of cash flow activities is as follows:
Three Months Ended For the Years Ended May 31, August 31, ------------------------------------------------- ------------------------------ 1994 1995 1996 1995 1996 Net cash paid for: Interest $ 10,149,452 $ 17,741,969 $ 31,836,722 $ 6,327,153 $ 6,533,042 Income taxes 5,610,503 7,054,563 3,934,688 597,299 115,805
Also, the Company issued capital equity certificates in transactions to acquire interest in elevator properties valued at $3,249,624 during the year ended May 31, 1994, $8,721,542 during the year ended May 31, 1996, and $4,467,230 during the three months ended August 31, 1995 and $4,193,983 during the three months ended August 31, 1996. No capital equity certificates to acquire interests in elevator properties were issued in 1995. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair value of all financial instruments to which the Company is a party. All financial instruments are carried at amounts that approximate estimated fair value, except for investments in cooperatives, for which it is not practicable to provide fair-value information. HARVEST STATES COOPERATIVES WHEAT MILLING DIVISION FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND THE THREE MONTHS ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED) INDEPENDENT AUDITORS' REPORT Board of Directors Harvest States Cooperatives Saint Paul, Minnesota We have audited the balance sheets of the Wheat Milling Division, formerly known as Amber Milling Company, a division of Harvest States Cooperatives (HSC), as of May 31, 1995 and 1996 and the related statements of earnings, divisional equity and cash flows for each of the three years in the period ended May 31, 1996. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Wheat Milling Division at May 31, 1995 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended May 31, 1996, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP December 11, 1996
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) BALANCE SHEETS MAY 31, ----------------------------- AUGUST 31, 1995 1996 1996 (UNAUDITED) ASSETS CURRENT ASSETS: Receivables (Note 2) $ 18,633,076 $ 43,749,134 $ 43,319,822 Inventories (Note 3) 7,006,187 9,308,275 15,117,452 Prepaid expenses and deposits 98,866 149,873 260,584 ------------ ------------ ------------ Total current assets 25,738,129 53,207,282 58,697,858 OTHER ASSETS (Note 4) 13,472,256 12,881,236 12,614,565 PROPERTY, PLANT, AND EQUIPMENT (Note 5) 43,395,670 59,233,046 62,587,320 ------------ ------------ ------------ $ 82,606,055 $125,321,564 $133,899,743 ============ ============ ============ LIABILITIES AND CAPITAL CURRENT LIABILITIES: Due to HSC (Note 6) $ 13,642,180 $ 31,044,150 $ 32,200,000 Accounts payable and accrued expenses 7,416,803 12,480,342 19,902,671 Current portion of long-term debt (Note 6) 3,075,000 6,344,584 6,344,584 ------------ ------------ ------------ Total current liabilities 24,133,983 49,869,076 58,447,255 LONG-TERM DEBT (Note 6) 30,675,000 47,655,416 47,655,416 COMMITMENTS AND CONTINGENCIES (Note 11) DIVISIONAL EQUITY (Note 7) 27,797,072 27,797,072 27,797,072 ------------ ------------ ------------ $ 82,606,055 $125,321,564 $133,899,743 ============ ============ ============ See notes to financial statements.
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF EARNINGS THREE MONTHS ENDED FOR THE YEARS ENDED AUGUST 31, -------------------------------------------- ---------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) REVENUES - Processed grain sales $ 103,716,012 $ 119,725,183 $ 173,315,613 $ 32,416,461 $ 55,647,949 COSTS AND EXPENSES: Cost of goods sold 97,206,374 112,690,679 161,293,430 30,005,525 51,323,046 Marketing, general, and administrative 2,415,155 3,834,289 4,471,563 985,644 1,104,186 Interest 1,832,037 2,278,544 4,457,797 766,517 1,411,133 ------------- -------------- ------------- ------------- -------------- 101,453,566 118,803,512 170,222,790 31,757,686 53,838,365 ------------- -------------- ------------- ------------- -------------- EARNINGS BEFORE INCOME TAXES 2,262,446 921,671 3,092,823 658,775 1,809,584 INCOME TAXES (Note 10) 150,000 125,000 200,000 50,000 125,000 ------------- -------------- ------------- ------------- -------------- NET EARNINGS $ 2,112,446 $ 796,671 $ 2,892,823 $ 608,775 $ 1,684,584 ============= ============== ============= ============= ============== See notes to financial statements.
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF DIVISIONAL EQUITY BALANCE AT MAY 31, 1993 $ 27,797,072 Net earnings 2,112,446 Divisional equity distributed (2,112,446) ------------ BALANCE AT MAY 31, 1994 27,797,072 Net earnings 796,671 Divisional equity distributed (796,671) ------------ BALANCE AT MAY 31, 1995 27,797,072 Net earnings 2,892,823 Divisional equity distributed (2,892,823) ------------ BALANCE AT MAY 31, 1996 27,797,072 Net earnings (unaudited) 1,684,584 Divisional equity distributed (unaudited) (1,684,584) ------------ BALANCE AT AUGUST 31, 1996 (UNAUDITED) $ 27,797,072 ============ See notes to financial statements.
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS THREE MONTHS ENDED FOR THE YEARS ENDED AUGUST 31, -------------------------------------------- ----------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 2,112,446 $ 796,671 $ 2,892,823 $ 608,775 $ 1,684,584 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 2,185,697 2,512,430 3,309,307 633,127 997,533 Change in assets and liabilities: Receivables (4,884,658) (3,781,655) (25,116,058) 660,342 429,312 Inventories (8,459,257) 4,387,100 (2,302,088) 366,806 (5,809,177) Prepaid expenses, deposits, and other 82,151 55,168 (51,007) (3,851,961) (110,711) Accounts payable and accrued expenses 443,220 3,854,638 5,063,539 4,990,928 7,422,329 ------------ ------------ ------------ ------------ ------------ Total adjustments (10,632,847) 7,027,681 (19,096,307) 2,799,242 2,929,286 ------------ ------------ ------------ ------------ ------------ Net cash (used in) provided by operating activities (8,520,401) 7,824,352 (16,203,484) 3,408,017 4,613,870 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of additional intangibles (5,624,405) (475,654) Acquisition of property, plant, and equipment (803,647) (25,123,131) (18,080,009) (7,563,146) (4,085,136) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities (803,647) (30,747,536) (18,555,663) (7,563,146) (4,085,136) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) HSC 12,136,494 8,969,855 17,401,970 (6,986,096) 1,155,850 Long-term debt borrowings 14,750,000 20,250,000 11,750,000 Principal payments on long-term debt (700,000) Divisional equity distributed (2,112,446) (796,671) (2,892,823) (608,775) (1,684,584) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 9,324,048 22,923,184 34,759,147 4,155,129 (528,734) ------------ ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN CASH -- -- -- -- -- CASH AT BEGINNING OF PERIOD -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ CASH AT END OF PERIOD $ -- $ -- $ -- $ -- $ -- ============ ============ ============ ============ ============ See notes to financial statements.
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND THREE MONTHS ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED) - - - - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS - Harvest States Cooperatives - Wheat Milling Division (the Division), formerly known as Amber Milling Company, is a division of Harvest States Cooperatives (HSC) and is not organized as a separate legal entity. In the year ended May 31, 1994, the Division was operated as a joint venture in which HSC owned a 70% interest. Effective June 1, 1994, HSC purchased the minority interest. The Division operates commercial bakery and semolina flour milling facilities in Rush City, Minnesota; Huron, Ohio; and Kenosha, Wisconsin. These mills produce semolina and durum flour, which are the primary ingredients in pasta products and wheat flour in the bakery industry. The Division serves customers throughout the United States. UNAUDITED INTERIM FINANCIAL STATEMENTS - The Division's balance sheet as of August 31, 1996, statements of earnings and cash flows for the three months ended August 31, 1995 and 1996, statement of divisional equity for the three months ended August 31, 1996, and the interim information in the notes to financial statements as of August 31, 1996 and for the three months ended August 31, 1995 and 1996 are unaudited. In the opinion of management, such unaudited financial statements include all adjustments (consisting of only normal, recurring accruals) necessary for a fair presentation thereof. The results of operations for any interim period are not necessarily indicative of the results for the year. SALES - Sales of Processed Grains are recongnized upon shipment to customers, net of freight charges. CASH MANAGEMENT - The Division draws all of its cash requirements from and deposits all cash generated with a centralized HSC cash management system. INVENTORIES - Grain and certain processed grain products are stated at market, including appropriate adjustment of open purchase, sales, and futures contracts and deferral of normal profit on processed grain products. The Division follows the general policy of hedging its grain inventories and unfilled orders for grain products to the extent considered practicable for minimizing risk from market price fluctuations. Futures contracts used for hedging are purchased and sold through regulated commodity exchanges. Inventories, purchase commitments, and sales commitments, however, are not completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and in part to the Division's appraisal of its exposure from expected price fluctuations. Noncommodity exchange purchase and sale contracts may expose the Division to risk in the event that a counterparty to a transaction is unable to fulfill its contractual obligation. The Division manages its risk by entering into purchase contracts with preapproved producers and companies and by establishing appropriate limits for individual suppliers. Sales contracts are entered into with organizations of acceptable creditworthiness, as internally evaluated. PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. OTHER ASSETS - Leasehold rights and other intangible assets are amortized using the straight-line method over 15 to 18 years. IMPAIRMENT OF LONG-LIVED ASSETS - Management periodically reviews the carrying value of property and equipment for potential impairment by comparing its carrying value to the estimated undiscounted future cash flows expected to result from the use of these assets. Should the sum of the related, expected future net cash flows be less than the carrying value, an impairment loss would be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. INCOME TAXES - Earnings generated on grain purchased by the Division from nonmembers is characterized as nonpatronage and taxable. Earnings generated on grain purchased from HSC are considered to be patronage to the extent of HSC's patronage purchase percentage of that particular commodity; the other portion of those earnings is considered taxable. Due to the high proportion of patronage earnings, deferred taxes resulting from temporary differences are not significant. REVENUE FROM SIGNIFICANT CUSTOMERS - Sales to individual customers in excess of 5% of total sales were approximately $68,800,000 to six customers, $90,500,000 to nine customers, and $116,200,000 to seven customers for the years ended May 31, 1994, 1995, and 1996. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. 2. RECEIVABLES
May 31, ------------------------------- August 31, 1995 1996 1996 Trade $ 18,504,796 $ 43,530,542 $ 43,199,805 Other 257,468 459,530 393,954 Less allowance for losses (129,188) (240,938) (273,937) --------------- -------------- --------------- $ 18,633,076 $ 43,749,134 $ 43,319,822 =============== ============== ===============
3. INVENTORIES
May 31, ------------------------------- August 31, 1995 1996 1996 Grain $ 6,799,010 $ 8,327,021 $ 11,450,458 Processed grain products (75,951) 629,647 3,259,686 Other 283,128 351,607 407,218 --------------- -------------- --------------- $ 7,006,187 $ 9,308,275 $ 15,117,452 =============== ============== ===============
4. OTHER ASSETS
May 31, ------------------------------- August 31, 1995 1996 1996 Goodwill, less accumulated amortization of $374,960, $781,635, and $883,305 respectively $ 5,249,445 $ 5,318,424 $ 5,216,754 Leasehold rights and other intangibles, less accumulated amortization of $3,788,723, $4,484,723, and $4,649,724 respectively 8,222,811 7,562,812 7,397,811 --------------- -------------- --------------- $ 13,472,256 $ 12,881,236 $ 12,614,565 =============== ============== ===============
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is as follows: Estimated May 31, Useful Life ---------------------------------- August 31, in Years 1995 1996 1996 Land $ 142,060 $ 181,420 $ 181,420 Grain processing plants 15 to 45 7,435,649 30,835,636 30,835,640 Machinery and equipment 5 to 20 23,431,415 35,520,073 35,520,071 --------------- --------------- ---------------- 31,009,124 66,537,129 66,537,131 Less accumulated depreciation (12,387,180) (14,677,871) (15,408,733) --------------- --------------- ----------------- 18,621,944 51,859,258 51,128,398 Construction-in-progress 24,773,726 7,373,788 11,458,922 --------------- --------------- ---------------- $ 43,395,670 $ 59,233,046 $ 62,587,320 =============== =============== ================
6. BORROWINGS DUE TO HSC: The Division satisfies its working capital needs through borrowings, both long and short term, from HSC to the extent HSC's borrowing capacity permits. Short-term borrowings of $9,750,000 and $27,000,000 were outstanding on May 31, 1995 and 1996, respectively. Interest on short-term borrowings from HSC is charged to the Division and all other HSC divisions based upon a ratable allocation of consolidated HSC interest expense related to short term borrowings based upon working capital employed by each division. This results in an effective borrowing rate that may be less than what the Division could obtain on an independent basis.
May 31, ------------------------------- August 31, 1995 1996 1996 Harvest States Cooperatives, with fixed and variable interest rates from 6.24% to 8.50%, due in installments through 2005 $ 31,250,000 $ 51,700,000 $ 51,700,000 Industrial Development and Public Grain Elevator Revenue Bonds, payable through July 2004, with an interest rate of 7.375% 2,500,000 2,300,000 2,300,000 --------------- -------------- --------------- 33,750,000 54,000,000 54,000,000 Less current portion (3,075,000) (6,344,584) (6,344,584) --------------- -------------- --------------- $ 30,675,000 $ 47,655,416 $ 47,655,416 =============== ============== ===============
The principal maturities of outstanding long-term indebtedness outstanding at May 13, 1996 are as follows: Year ending May 31: 1997 $ 6,344,584 1998 8,026,875 1999 8,026,875 2000 8,026,875 2001 6,151,875 2002 and thereafter 17,422,916 7. DIVISIONAL EQUITY The Division's earnings are distributed to HSC at the end of each quarter. All patronage-related liability and capital accounts are maintained at HSC's consolidated level. 8. RETIREMENT PLANS The Division, through HSC, has noncontributory defined benefit retirement plans covering substantially all salaried and full-time hourly employees. The retirement plan benefits for salaried employees are based on years of service and the participants' total compensation. Benefits for hourly employees are based on various monthly amounts for each year of credited service. The plans are funded by annual contributions to tax-exempt trusts in accordance with federal law and regulations. Plan assets consist principally of corporate obligations, U.S. Government bonds, money market funds, and immediate participation guarantee contracts. Pension costs billed to the Division for 1994, 1995, and 1996 were approximately $52,000, $101,000, and $46,000, respectively. The Division's portion of the actuarial present value or accumulated benefit obligations and net pension assets available for benefits has not been determined. Selected information at May 31 for HSC's plans are as follows:
1995 1996 Accumulated benefit obligation, including vested benefits of $67,539,069 and $74,406,137, respectively $ 69,898,635 $ 77,127,866 Projected benefit obligation for services rendered to date 73,686,670 81,036,131 Plan assets at fair value 70,122,276 75,743,570
The determination of the actuarial present value of the projected benefit obligation was based on a weighted average discount rate of 8.25% in 1994 and 1995 and 7.75% in 1996 and a rate of increase in future compensation of 5% in 1994, 1995, and 1996. The expected long-term rate of return on plan assets was 8.5% in 1994 and 1995 and 8% in 1996. 9. POSTRETIREMENT MEDICAL AND OTHER BENEFITS The Division, through HSC, provides certain health care benefits for retired employees. Employees become eligible for these benefits if they meet minimum age and service requirements and are eligible for retirement benefits. The accrued postretirement medical and other benefits costs of HSC that are not funded were as follows at May 31:
1995 1996 Accumulated postretirement benefit obligation (APBO): Retirees $ 5,991,309 $ 2,993,307 Fully eligible active plan participants 1,041,742 1,019,071 Other active plan participants 2,730,508 3,624,620 ------------- ------------- Total APBO 9,763,559 7,636,998 Unrecognized transition obligation (9,984,815) (9,430,105) Unrecognized net gains 2,000,094 4,059,863 ------------- ------------- Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756 ============= =============
The net periodic costs billed to the Division for 1994, 1995, and 1996 were approximately $30,000, $44,000, and $42,000, respectively. The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996 and a health care cost trend rate of 10% in 1996, declining to 6% in 2004. If the health care cost trend rate increased by 1%, the APBO would increase by 8.7% and the service cost and interest cost components would increase by 10%. 10. PROVISION FOR INCOME TAXES HSC and its divisions, including the Wheat Milling Division, file consolidated federal income tax returns. HSC has a policy that provides for the payment of taxes on an individual company basis for each of its divisions. No significant deferred income tax provision was recorded by the Division. A reconciliation of the statutory federal tax rate to the effective rate for the years ended May 31 follows:
1994 1995 1996 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3 Patronage earnings (33.9) (24.2) (31.9) Other 2.9 .2 2.2 ------ ------ ------ Effective rate 6.6% 13.6% 9.6% ====== ====== ======
11. COMMITMENTS AND CONTINGENCIES The Division leases approximately 242 rail cars with remaining lease terms of one to ten years. In addition, the Division leases a milling facility, vehicles, and various manufacturing equipment. Minimum rental payments due under these operating leases at May 31, 1996 are as follows:
Year ending May 31: Milling Rail Cars Facility Other Total 1997 $ 1,423,200 $ 399,996 $ 5,844 $ 1,829,040 1998 1,001,475 426,668 5,844 1,433,987 1999 825,125 440,004 2,435 1,267,564 2000 815,630 440,004 1,255,634 2001 610,300 440,004 1,050,304 2002 and thereafter 52,850 2,986,672 3,039,522 ------------- -------------- ------------- --------------- $ 4,728,580 $ 5,133,348 $ 14,123 $ 9,876,051 ============= ============== ============= ===============
Total rent expense, net of rail car mileage credits received from the railroad and subleases, was approximately $1,190,606, $1,180,836, and $1,624,576 for the years ended May 31, 1994, 1995, and 1996, respectively. Mileage credits and sublease income were $273,384, $321,909, and $338,700 for the years ended May 31, 1994, 1995, and 1996, respectively. The Division is a party to various lawsuits and administrative proceedings incidental to its business. It is impossible, at this time, to estimate what the ultimate legal and financial liability of the Division will be; nevertheless, management believes, based on the information available to date and the resolution of prior proceedings, that the ultimate liability of all litigation and proceedings will not have a material impact on the financial condition of the Division. At May 31, 1996, the Division had outstanding grain purchase contracts of approximately 7,800,000 bushels at prices for durum ranging from $5.93 per bushel to $7.50 per bushel and prices for spring wheat ranging from $5.03 per bushel to $7.54 per bushel. In addition, the Division had outstanding sales contracts of both semolina and commercial baking flour totaling approximately $59,800,000. 12. RELATED-PARTY TRANSACTIONS Net sales for the year ended May 31, 1994, 1995, and 1996 included $870,000, $321,768, and $647,416, respectively, to related parties. The Division purchases substantially all of its durum and wheat from HSC, a related party. Included in cost of goods sold for the years ended May 31, 1994, 1995, and 1996 were $58,900,000, $69,900,000, and $122,900,000, respectively, of these purchases. Additionally, HSC performs various direct management services and incurs certain costs for its operating divisions. Such costs, including data processing, office services, and insurance, are charged directly to the divisions. Indirect expenses, such as publications, board expense, executive management, legal, finance, and human resources, are allocated to the divisions based on approximate usage. 13. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION Additional information concerning supplemental disclosures of cash flow activities for the years ended May 31 is as follows:
1994 1995 1996 Net cash paid during year for: Interest $ 1,832,037 $ 2,278,544 $ 4,457,797 Income taxes 350,000 150,000 125,000
14. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair value of all financial instruments to which the Division is a party. All financial instruments are carried at amounts that approximate estimated fair value. 15. SUBSEQUENT EVENT HSC has announced a plan to offer Equity Participation Units (EPUs) to its members. Each EPU will represent the rights and obligation to deliver a specified quantity of wheat to HSC. Holders of EPUs will be entitled to receive patronage earnings related to the Division's milling of wheat delivered by the holder to HSC, as well as a ratable share of consolidated HSC non-patronage earnings based upon total member deliveries to HSC by members of all commodities. EPU's will represent an equity interest in HSC and will not represent an ownership interest in any assets of the Division. In conjunction with the offering of EPUs, HSC announced its intention to begin charging the Division interest on its daily average of short-term borrowings at a rate equivalent to the weighted average interest rate on short-term borrowings of HSC. On May 31,1996, the weighted average borrowing rate of EPUs short-term borrowings was 6.05%. Amounts due from HSC will accrue interest in the same manner at the same rate. OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND THE THREE MONTHS ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED) INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT Board of Directors Harvest States Cooperatives Saint Paul, Minnesota We have audited the balance sheets of the Oilseed Processing and Refining Division, formerly known as Honeymead Products Company, a division of Harvest States Cooperatives (HSC) as of May 31, 1995 and 1996 and the related statements of earnings, divisional equity, and cash flows for each of the three years in the period ended May 31, 1996. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Oilseed Processing and Refining Division at May 31, 1995 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended May 31, 1996, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP December 10, 1996
OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) BALANCE SHEETS MAY 31, --------------------------- AUGUST 31, 1995 1996 1996 (UNAUDITED) ASSETS CURRENT ASSETS: Receivables (Note 2) $20,387,921 $22,795,612 $25,219,890 Inventories (Note 3) 17,255,215 26,235,220 12,414,154 Prepaid expenses and deposits 524,151 310,692 1,685,087 Due from HSC 5,095,299 ----------- ----------- ----------- Total current assets 43,262,586 49,341,524 39,319,131 PROPERTY, PLANT, AND EQUIPMENT (Note 4) 20,410,408 24,771,413 27,073,103 ----------- ----------- ----------- $63,672,994 $74,112,937 $66,392,234 =========== =========== =========== LIABILITIES AND DIVISIONAL EQUITY CURRENT LIABILITIES: Due to HSC (Note 5) $ 9,482,351 $ 1,200,000 Accounts payable and accrued expenses $10,281,996 11,239,588 11,801,236 ----------- ----------- ----------- Total current liabilities 10,281,996 20,721,939 13,001,236 COMMITMENTS AND CONTINGENCIES (Note 10) DIVISIONAL EQUITY (Note 6) 53,390,998 53,390,998 53,390,998 ----------- ----------- ----------- $63,672,994 $74,112,937 $66,392,234 =========== =========== =========== See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF EARNINGS THREE MONTHS ENDED FOR THE YEARS ENDED AUGUST 31, -------------------------------------------- ----------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) REVENUES: Processed oilseed sales $ 358,372,039 $ 398,095,108 $ 399,271,001 $ 93,227,683 $ 113,145,890 Other revenue 1,349,484 1,162,518 1,435,708 1,407,881 599,421 ------------- -------------- ------------- ------------- -------------- 359,721,523 399,257,626 400,706,709 94,635,564 113,745,311 COSTS AND EXPENSES: Cost of goods sold 334,968,474 366,407,451 371,424,566 88,122,829 107,833,751 Marketing, general, and administrative 4,722,900 5,137,663 4,544,763 1,214,952 1,194,870 Interest 164,300 151,500 12,600 19,100 ------------- -------------- ------------- ------------- -------------- 339,855,674 371,545,114 376,120,829 89,350,381 109,047,721 ------------- -------------- ------------- ------------- -------------- EARNINGS BEFORE INCOME TAXES 19,865,849 27,712,512 24,585,880 5,285,183 4,697,590 INCOME TAXES (Note 9) 1,650,000 1,500,000 1,600,000 375,000 350,000 ------------- -------------- ------------- ------------- -------------- NET EARNINGS $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 4,910,183 $ 4,347,590 ============= ============== ============= ============= ============== See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF DIVISIONAL EQUITY BALANCE AT MAY 31, 1993 $ 53,390,998 Net earnings 18,215,849 Divisional equity distributed (18,215,849) BALANCE AT MAY 31, 1994 53,390,998 Net earnings 26,212,512 Divisional equity distributed (26,212,512) BALANCE AT MAY 31, 1995 53,390,998 Net earnings 22,985,880 Divisional equity distributed (22,985,880) BALANCE AT MAY 31, 1996 53,390,998 Net earnings (unaudited) 4,347,590 Divisional equity distributed (unaudited) (4,347,590) BALANCE AT AUGUST 31, 1996 (UNAUDITED) $ 53,390,998 ============ See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS THREE MONTHS ENDED FOR THE YEARS ENDED AUGUST 31, ---------------------------------------------- ----------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 4,910,183 $ 4,347,590 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 1,940,793 1,724,844 1,598,965 378,976 412,040 Gain (loss) on sale of property, plant, and equipment 40,721 (431) 31,765 Change in assets and liabilities: Receivables (116,143) (568,635) (2,407,691) (2,102,406) (2,424,278) Inventories (8,481,765) 16,861,993 (8,980,005) 1,074,792 13,821,066 Prepaid expenses and deposits 303,248 152,531 213,459 (700,872) (1,374,395) Accounts payable and accrued expenses (2,821,112) 482,095 957,592 3,756,061 561,648 ------------ ------------ ------------ ------------ ------------ Total adjustments (9,134,258) 18,652,397 (8,585,915) 2,406,551 10,996,081 ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities 9,081,591 44,864,909 14,399,965 7,316,734 15,343,671 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposition of property, plant, and equipment 1,000 Acquisition of property, plant, and equipment (6,293,164) (2,557,886) (5,991,735) (1,669,286) (2,713,730) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities (6,293,164) (2,556,886) (5,991,735) (1,669,286) (2,713,730) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) HSC 15,427,422 (16,095,511) 14,577,650 (737,265) (8,282,351) Divisional equity distributed (18,215,849) (26,212,512) (22,985,880) (4,910,183) (4,347,590) ------------ ------------ ------------ ------------ ------------ Net cash used in financing activities (2,788,427) (42,308,023) (8,408,230) (5,647,448) (12,629,941) ------------ ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN CASH -- -- -- -- -- CASH AT BEGINNING OF PERIOD -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ CASH AT END OF PERIOD $ -- $ -- $ -- $ -- $ -- ============ ============ ============ ============ ============ See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND THREE MONTHS ENDED AUGUST 31, 1995 AND 1996 (UNAUDITED) - - - - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS - Harvest States Cooperatives - Oilseed Processing and Refining Division (the Division), formerly known as Honeymead Products Company, is a division of Harvest States Cooperatives (HSC) and is not organized as a separate legal entity. The Division operates a single soybean crushing and oil refining plant in Mankato, Minnesota and serves customers throughout the United States. UNAUDITED INTERIM FINANCIAL STATEMENTS - The Division's balance sheet as of August 31, 1996, statements of earnings and cash flows for the three months ended August 31, 1995 and 1996, statement of divisional equity for the three months ended August 31, 1996, and the interim information in the notes to the financial statements as of August 31, 1996 and for the three months ended August 31, 1995 and 1996 are unaudited. In the opinion of management, such unaudited financial statements include all adjustments (consisting of only normal, recurring accruals) necessary for a fair presentation thereof. The results of operations for any interim period are not necessarily indicative of the results for the year. SALES - Sales of processed oilseeds are recognized upon shipment to customers, net of freight charges. CASH MANAGEMENT - The Division draws all of its cash requirements from and deposits all cash generated with a centralized HSC cash management system. INVENTORIES - Oilseed and certain processed oilseed products are stated at market, including appropriate adjustment of open purchase, sales, and futures contracts and deferral of profit on processed oilseed products. The Division follows the general policy of hedging its oilseed inventories and unfilled orders for oilseed products to the extent considered practicable for minimizing risk from market price fluctuations. Futures contracts used for hedging are purchased and sold through regulated commodity exchanges. However, inventories, purchase commitments, and sales commitments are not completely hedged, due in part to the Division's appraisal of its exposure from expected price fluctuations. Noncommodity exchange purchase and sale contracts may expose the Division to risk in the event that a counterparty to a transaction is unable to fulfill its contractual obligation. The Division manages its risk by entering into purchase contracts with preapproved producers and companies and by establishing appropriate limits for individual suppliers. Sales contracts are entered into with organizations of acceptable creditworthiness, as internally evaluated. PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. INCOME TAXES - Earnings generated on oilseed purchased by the Division from nonmembers is characterized as nonpatronage and taxable. Earnings generated on oilseed purchased from HSC are considered to be patronage to the extent of HSC's patronage purchase percentage of that particular commodity; the other portion of those earnings is considered taxable. Due to the high proportion of patronage earnings, deferred taxes resulting from temporary differences are not significant. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. REVENUE FROM SIGNIFICANT CUSTOMERS - Sales to individual customers in excess of 5% of total sales were approximately $103,700,000 to two customers, $132,500,000 to three customers, and $152,500,000 to three customers for the years ended May 31, 1994, 1995, and 1996. 2. RECEIVABLES
May 31, ------------------------------- August 31, 1995 1996 1996 Trade $ 20,782,921 $ 23,190,612 $ 25,614,890 Less allowance for losses (395,000) (395,000) (395,000) --------------- -------------- --------------- $ 20,387,921 $ 22,795,612 $ 25,219,890 =============== ============== ===============
3. INVENTORIES
May 31, ------------------------------- August 31, 1995 1996 1996 Oilseed $ 8,369,881 $ 17,141,111 $ 4,567,147 Processed oilseed products 8,885,334 9,094,109 7,847,007 --------------- -------------- --------------- $ 17,255,215 $ 26,235,220 $ 12,414,154 =============== ============== ===============
4. PROPERTY, PLANT, AND EQUIPMENT
Estimated Useful Life May 31, ------------------------------- August 31, in Years 1995 1996 1996 Land $ 630,043 $ 630,043 $ 630,043 Elevators, crushing plant, and refinery 15 to 20 19,743,982 21,268,532 21,268,532 Machinery and equipment 5 to 18 37,924,258 41,077,104 41,077,104 Furniture and fixtures 3 to 12 357,263 379,363 379,363 Other 5 to 12 99,112 99,112 99,112 --------------- -------------- ---------------- 58,754,658 63,454,154 63,454,154 Less accumulated depreciation (40,532,200) (42,310,640) (42,722,680) --------------- -------------- ----------------- 18,222,458 21,143,514 20,731,474 Construction-in-progress 2,187,950 3,627,899 6,341,629 --------------- -------------- ---------------- $ 20,410,408 $ 24,771,413 $ 27,073,103 =============== ============== ================
5. DUE TO HSC The Division satisfies its working capital needs through borrowings, both long and short term, from HSC to the extent HSC's borrowing capacity permits. Short-term borrowings of $2,300,000 were outstanding on May 31, 1996. No balance was outstanding on May 31, 1995. Interest on short-term borrowings from HSC is charged to the Division and all other HSC divisions based upon a ratable allocation of consolidated HSC interest expense related to short term borrowings based upon working capital employed by each division. This results in an effective borrowing rate that may be less than what the Division could obtain on an independent basis. 6. DIVISIONAL EQUITY The Division's earnings are distributed to HSC at the end of each quarter. All patronage-related liability and capital accounts are maintained at HSC's consolidated level. 7. RETIREMENT PLANS The Division, through HSC, has noncontributory defined benefit retirement plans covering substantially all salaried and full-time hourly employees. The retirement plan benefits for salaried employees are based on years of service and the participants' total compensation. Benefits for hourly employees are based on various monthly amounts for each year of credited service. The plans are funded by annual contributions to tax-exempt trusts in accordance with federal law and regulations. Plan assets consist principally of corporate obligations, U.S. Government bonds, money market funds, and immediate participation guarantee contracts. Pension costs billed to the Division for the years ended May 31, 1994, 1995, and 1996 were approximately $166,000, $264,000, and $169,000, respectively. The Division's portion of the actuarial present value or accumulated benefit obligations and net pension assets available for benefits has not been determined. Selected information at May 31 for HSC's plans are as follows:
1995 1996 Accumulated benefit obligation, including vested benefits of $67,539,069 and $74,406,137, respectively $ 69,898,635 $ 77,127,866 Projected benefit obligation for service rendered to date 73,686,670 81,036,131 Plan assets at fair value 70,122,276 75,743,570
The determination of the actuarial present value of the projected benefit obligation was based on a weighted average discount rate of 8.25% in 1994 and 1995 and 7.75% in 1996 and a rate of increase in future compensation of 5% in 1994, 1995, and 1996. The expected long-term rate of return on plan assets was 8.5% in 1994 and 1995 and 8% in 1996. 8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS The Division, through HSC, provides certain health care benefits for retired employees. Employees become eligible for these benefits if they meet minimum age and service requirements and are eligible for retirement benefits. The accrued postretirement medical and other benefits costs of HSC that are not funded were as follows at May 31:
1995 1996 Accumulated postretirement benefit obligation (APBO): Retirees $ 5,991,309 $ 2,993,307 Fully eligible active plan participants 1,041,742 1,019,071 Other active plan participants 2,730,508 3,624,620 ------------- ------------- Total APBO 9,763,559 7,636,998 Unrecognized transition obligation (9,984,815) (9,430,105) Unrecognized net gains 2,000,094 4,059,863 ------------- ------------- Accrued postretirement medical and other benefits cost $ 1,778,838 $ 2,266,756 ============= =============
The net periodic costs billed to the Division for the years ended May 31, 1994, 1995, and 1996 were approximately $301,000, $238,000, and $197,000, respectively. The calculations assumed a discount rate of 8% in 1995 and 7.75% in 1996 and a health care cost trend rate of 10% in 1996, declining to 6% in 2004. If the health care cost trend rate increased by 1%, the APBO would increase by 8.7% and the service cost and interest cost components would increase by 10%. 9. PROVISION FOR INCOME TAXES HSC and its divisions, including the Oilseed Processing and Refining Division, file consolidated federal income tax returns. HSC has a policy that provides for the payment of taxes on an individual company basis for each of its divisions. No significant deferred income tax provision was recorded by the Division. A reconciliation of the statutory federal tax rate to the effective rate for the years ended May 31 follows:
1994 1995 1996 Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 2.6 2.6 4.3 Patronage earnings (32.2) (32.4) (35.0) Other 2.9 .2 2.2 ------ ------ ------ Effective rate 8.3% 5.4% 6.5% ====== ====== ======
10. COMMITMENTS AND CONTINGENCIES The Division leases approximately 347 rail cars with remaining lease terms of one to ten years. Minimum rental payments due under these operating leases at May 31, 1996 are as follows: Year ending May 31: 1997 $ 1,983,390 1998 1,669,740 1999 1,494,810 2000 1,219,640 2001 1,002,660 2002 and thereafter 1,905,600 -------------- $ 9,275,840 ============== Total rent expense, net of rail car mileage credits received from the railroad and subleases, was approximately $1,634,253, $1,771,790, and $1,832,413 for the years ended May 31, 1994, 1995, and 1996, respectively. The Division is a party to various lawsuits and administrative proceedings incidental to its business. It is impossible, at this time, to estimate what the ultimate legal and financial liability of the Division will be; nevertheless, management believes, based on the information available to date and the resolution of prior proceedings, that the ultimate liability of all litigation and proceedings will not have a material impact on the financial condition of the Division. At May 31, 1996, the Division had outstanding oilseed purchase contracts of 3,401,670 bushels at prices ranging from $6.27 per bushel to $8.23 per bushel, and outstanding oil purchase contracts of 284,958,713 pounds at prices ranging from $0.2505 per pound to $0.2930 per pound. In addition, the Division had outstanding sales contracts totaling $36,953,870. 11. RELATED-PARTY TRANSACTIONS Net sales for the years ended May 31, 1994, 1995, and 1996 included $22,354,368, $79,133,437, and $124,299,369, respectively, to related parties. The Division purchases substantially all of it soybeans from HSC, a related party. Included in cost of goods sold for the years ended May 31, 1994, 1995, and 1996 were $11,468,610, $5,502,705, and $3,772,327, respectively, of these purchases. Additionally, HSC performs various direct management services and incurs certain costs for its operating divisions. Such costs, including data processing, office services, and insurance, are charged directly to the divisions. Indirect expenses, such as publications, board expense, executive management, legal, finance, and human resources, are allocated to the divisions based on approximate usage. 12. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION Additional information concerning supplemental disclosures of cash flow activities for the years ended May 31 is as follows:
1994 1995 1996 Net cash paid to HSC during year for: Interest $ 164,300 $ - $ 151,500 Income taxes 1,900,000 1,650,000 1,500,000
13. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair value of all financial instruments to which the Division is a party. All financial instruments are carried at amounts that approximate estimated fair value. 14. SUBSEQUENT EVENT HSC has announced a plan to offer Equity Participation Units (EPUs) to its members. Each EPU will represent the rights and obligation to deliver a specified quantity of soybeans to HSC. Holders of EPUs will be entitled to receive patronage earnings related to the Division's crushing and refining of soybeans delivered by the holder to HSC, as well as a ratable share of consolidated HSC non-patronage earnings based upon total member deliveries to HSC by members of all commodities. EPUs will represent an equity interest in HSC and will not represent an ownership interest in any assets of the Division. In conjunction with the offering of EPUs, HSC announced its intention to begin charging the Division interest on its daily average of short-term borrowings at a rate equivalent to the weighted average interest rate on short-term borrowings of HSC. On May 31,1996, the weighted average borrowing rate of HSC's short-term borrowings was 6.05%. Amounts due from HSC will receive interest in the same manner at the same rate. Exhibit A Exhibit A SUBSCRIPTION AGREEMENT HARVEST STATES COOPERATIVES The undersigned ("Subscriber") subscribes and agrees to purchase: * _______ Equity Participation Units (Milling) at a price of $_______ per unit. * _______ Equity Participation Units (Processing and Refining) at a price of $_______ per unit. Subscriber certifies that: * Subscriber has received and carefully reviewed a copy of the Company's Prospectus dated _______________, 1997. * Subscriber is [check one]: [ ] an agricultural producer actually engaged in the production of agricultural products, or [ ] an agricultural cooperative (an association of producers of agricultural products organized and operating so as to adhere to the provisions of the Agricultural Marketing Act, 12 U.S.C.ss.1141(j)(a), as amended, and the Capper-Volstead Act, 7 U.S.C.ss.ss.291-292, as amended). * Subscriber (if a producer) is capable of producing in the 1997 growing season the number of bushels of wheat or soybeans covered by the Member Marketing Agreement. This Subscription Agreement is accompanied by: * A Member Marketing Agreement signed by the Subscriber. * A check for the purchase price. The Units shall be registered (please print or type): _________________________________ Name of Subscriber _________________________________ Social Security Number or Taxpayer I.D. Number Mailing Address: _________________________________ _________________________________ _________________________________ Signatures Date: ____________________ ______________________________________ Signature of Subscriber or Subscriber's authorized representative If Subscriber is an association of producers (please print or type): _________________________________ Name of Subscriber's authorized representative _________________________________ Position of Subscriber's authorized representative Accepted: HARVEST STATES COOPERATIVES By ________________________________ Its ______________________________ Exhibit B HARVEST STATES COOPERATIVES MEMBER MARKETING AGREEMENT THIS AGREEMENT is made and entered into as of this _______ day of ___________________, 199__, by and between HARVEST STATES COOPERATIVES, a Minnesota cooperative corporation (the "Association"), and __________________, a ____________________ ("Member"). In consideration of the mutual terms and conditions contained in this agreement (including the Standard Terms and Conditions attached hereto, as in force from time to time) (this "Agreement"), the Association and Member agree that Member shall deliver grain to the Association, and the Association shall accept grain from member, as further provided in this Agreement. This Agreement contains the entire agreement, and supersedes and replaces any prior agreements (either written or oral), between the parties with respect to the subject matter hereof. This Agreement may be modified only as provided in Section 9 hereof. IN WITNESS WHEREOF, the Association and Member have executed this Agreement as of the date first above written. HARVEST STATES COOPERATIVES ______________________________ MEMBER By: _____________________________ Its: ____________________________ Address: ________________________ Address: ________________________ ________________________ ________________________ ________________________ ________________________ HARVEST STATES COOPERATIVES MEMBER MARKETING AGREEMENT (STANDARD TERMS AND CONDITIONS) 1. Obligation to Deliver Grain. During each processing year of the term of this Agreement, Member shall deliver to the Association, and the Association shall accept from Member, a base amount of one bushel of _______________ (the "Grain") for each equity participation unit held by Member, subject to tolerance ranges for deliveries of the Grain that may be established each year by the Board of Directors of the Association. For purposes of this Agreement, a processing year shall begin on June 1 of each year and end on May 31 of the following year. Member understands and agrees that its obligation to deliver Grain hereunder is unconditional, except as provided in Paragraph 7.2 of this Agreement. If the undersigned is a producer, rather than a cooperative, Member warrants that the Grain delivered will be produced by Member. 2. Price and Payment. The Association (directly or through its agent) shall pay Member the price for Grain delivered, received, accepted and processed as provided hereunder. The price shall be based on the prevailing price posted at the authorized local elevator, Association's elevator, plant or receiving station. In addition, any and all distributions, per-unit retains and patronage payments relating to the Defined Business Unit of which Member is a Defined Member (as such terms are defined in the Association's Bylaws) (including, without limitation, any patronage payments to which Member is entitled pursuant to the Association's Bylaws), subject to necessary or appropriate accounting adjustments, shall be paid by the Association to Member. 3. Delivery of Grain. The full legal title of and to Grain received by the Association shall pass to and vest in the Association contemporaneously with its delivery to the Association or to its authorized agent. The Association shall take and hold the full and absolute title of and to all Grain, including any product or by-products made therefrom; and the Association shall have and may exercise all of the rights of an absolute owner in respect of said Grain, except those in express violation of its obligations hereunder. The Association may reject and refuse to accept delivery of any and all Grain which in its judgment does not conform to the Association's standards. Member shall receive credit for the quantity of Grain accepted for delivery. 4. Product Quality Standards. The Member warrants that the Grain sold under this Agreement shall be merchantable and shall not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as amended, and regulations, or include any article or commodity that may not, under the provisions of such Act, be introduced in interstate commerce. All Grain delivered on behalf of Member to the Association shall meet such specifications, and be subject to such allowances, deductions and premiums, as may from time to time be determined by the Association. Grain of substandard quality, as determined by the Association, shall be either (a) rejected and returned to Member with all costs relating to the rejection and return charged to Member; or (b) accepted with deductions and allowances made and charged against Member because of the inferior quality or condition at the time of delivery. The Association may credit Member for certain premiums to be paid on the basis of quality standards which may from time to time be established by the Association. The Association shall use accepted standards to assess the quality of Grain delivered by Member. Member agrees to observe and accept any rules and regulations established by the Association. 5. Security Interests. The Member warrants that the Grain sold under this Agreement shall be free and clear of any security interest, lien, penalty, charge, or encumbrance, governmental or otherwise. If Member grants a security interest in any of the Grain delivered, Member shall inform the Association, in writing, of any security interest it has granted in such Grain prior to delivery. The Association shall have the right, but not the obligation, after acceptance of the Grain, to name the lienholder as a payee on the payment for the Grain. 6. Consequences of Failure to Deliver. If during any processing year Member fails to deliver the quantity of Grain required by Section 1 of this Agreement, (i) Member shall forfeit patronage payments to the extent of such nondelivery, and (ii) in the event of a loss by the Defined Business Unit of which Member is a Defined Member, each equity participation unit held by Member shall be charged, on a pro rata basis, with the amount of such loss, as liquidated damages for such nondelivery. 7. Force Majeure. 7.1 In case of fire, explosions, interruption of power, strikes or other labor disturbances, lack of transportation facilities, shortage of labor or supplies, floods, action of the elements, riot, interference of civil or military authorities, enactment of legislation or any unavoidable casualty or cause beyond the control of the Association affecting the conduct of the Association's business to the extent of preventing or unreasonably restricting the receiving, handling, production, marketing, or other operations, the Association shall be excused from performance during the period that the Association's business or operations are so affected. The Association in its judgment may, during such period, accept such portion of the Grain as the Association has informed Member it can economically handle. The Association shall give written notice to Member of its inability to perform and the specific cause or causes for the nonperformance. In any event, the Association shall pay, pursuant to this Agreement, for all the Grain it accepts. 7.2 The Member shall not be liable for failure or delay in performance of this Agreement to the extent such failure or delay is caused by a crop failure due to an Act of God, such as drought or flood. If Member's performance is excused pursuant to this paragraph, Member shall give written notice to the Association of Member's inability to perform, and shall forfeit patronage payments to the extent of any resulting nondelivery of Grain, unless Member elects to buy-in in accordance with policies and procedures established by Association. 8. Term and Termination. This Agreement shall enter into force as of the date hereof and shall continue in force indefinitely unless earlier terminated as follows: (i) This Agreement may be terminated at any time by written agreement of Member and the Association as an incident to Member's transfer of equity participation Units in the Association, which transfer must be approved by the Board of Directors of the Association as provided in the Bylaws; or (ii) This Agreement shall terminate within 180 days of the death of Member, unless within such time period the estate of Member has entered into a definitive binding arrangement to transfer Member's equity participation Units in the Association and such transfer has been approved by the Board of Directors of the Association as provided in the Bylaws; or (iii) The nonbreaching party may terminate this Agreement in the event of a breach hereof, if the breach continues for thirty (30) days after the nonbreaching party provides notice of the breach to the breaching party; or (iv) Member may terminate this Agreement upon written notice to the Association. Such termination shall be effective at the end of the processing year in which the notice was given. (v) The Association may terminate this Agreement upon termination of the business of the Defined Business Unit. Upon termination of this Agreement, the rights and obligations of each party with respect to utilization of, marketing of and payment for Grain previously delivered by Member to the Association hereunder shall continue in force until such Grain has been utilized or marketed by the Association, and paid for by the Association. Termination of this Agreement shall not release either party from liabilities accrued prior to such termination; provided, however, that a terminating Member shall not be entitled to receive patronage or other distributions with respect to equity participation units held by Member. 9. Modification. This Agreement shall at all times remain subject to modification by the Association upon written notice to Member, provided that such modification is first approved by Defined Members of the Association holding a majority of the voting power of the Defined Business Unit of which Member is a Defined Member who are present and voting at a regular or special meeting of such Defined Members, where notice of such meeting includes a statement of the proposed modification. 10. Miscellaneous. 10.1 Assignment. Member may not assign this Agreement or delegate performance of its obligations without the written consent of the Board of Directors of the Association. Consent may be granted or denied as the Association shall determine in the exercise of business judgment, and with due consideration to related provisions of the Bylaws. This restriction on assignment shall not be construed to limit Member's right to grant to a third party a security interest in growing crops or proceeds, subject to Section 6 hereof, and provided that any such security agreement shall not empower either Member or any secured party other than the Association to avoid Member's obligations to deliver Grain in performance of this Agreement. Subject to the foregoing, all of the terms, covenants and conditions of this Agreement shall inure to the benefit of and shall bind the parties hereto and their successors, heirs and permitted assigns. 10.2 Waiver of Breach. No waiver of a breach of any of the agreements or provisions contained in this Agreement shall be construed to be a waiver of any subsequent breach of the same or of any other provision of this Agreement. 10.3 Notices. Whenever notice is required by the terms hereof, it shall be given in writing by delivery or by certified or registered mail addressed to the other party at the address appearing below such party's signature above or such other address as such party shall designate by appropriate notice. If notice is given by mail, it shall be effective three (3) days after mailing. 10.4 Construction of Terms of Agreement. The language in all parts of this Agreement shall be constructed as a whole according to its fair meaning and not strictly for or against any party hereto. Headings in this Agreement are for convenience only and are not construed as a part of this Agreement or in any way defining, limiting or amplifying the provisions hereof. In the event any term, covenant or condition herein contained is held to be invalid or void by any court of competent jurisdiction, the invalidity of any such term, covenant or condition shall in no way affect any other term, covenant or condition herein contained. 10.5 Marketing Commitments; Indemnifications. Member represents and warrants that it is not under contract or obligation to sell, market, consign or deliver any of the Grain committed to the Association under this Agreement to any other person, firm, association, corporation or other entity. Further, Member shall defend and hold harmless the Association from any costs, claims, liabilities, suits or other proceedings or actions of any nature or kind whatsoever arising from or connected with any such prior agreement, contract or arrangement or the termination or cancellation of any prior agreements, contracts or arrangements. 10.6 Choice of Law; Dispute Resolution. This Agreement shall be governed in all respects by the laws of the State of Minnesota, excluding its conflict of laws rules. All disputes arising under this Agreement which cannot be amicably resolved between the parties shall be settled exclusively in state or federal court in the State of Minnesota, and the parties specifically consent to personal jurisdiction in any such court. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following fees and expenses will be paid by the Company in connection with the issuance and distribution of the securities registered hereby. All such expenses, except for the SEC fee are estimated. SEC registration fee .......................... $30,304 Legal fees and expenses ........................ Accounting fees and expenses .................. Blue Sky fees and expenses ..................... Transfer Agent's and Registrar's fees .......... Printing and engraving expenses ................ Miscellaneous .................................. ---------- Total ................................ $ ========== ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The statutes of the State of Minnesota give the Company the power to indemnify any director, officer, manager, employee or agent, who was or is a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, against certain liabilities and expenses incurred in connection with the action, suit or proceeding. Article VII of the Bylaws of the Company provides that the Company shall indemnify each director, officer, manager, employee, or agent of the Company, and any person serving at the request of the Company as a director, officer, manager, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred to he fullest extent to which such directors, officers, managers, employee or agents of an association may be indemnified under the law of the State of Minnesota or any amendments thereto or substitutions therefor. Article VII provides that the Company shall have power to purchase and maintain insurance against any liability asserted against such persons and incurred by such persons in any such capacity. Article X of the Company's Amended and Restated Articles of Incorporation provides that a director shall not be personally liable to the Company or its members for monetary damages for breach of fiduciary duty as a director, except for liability: (i) for a breach of the director's duty of loyalty to the Company or its members; (ii) for acts of omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) for a transaction from which the director derived an improper personal benefit; or (iv) for an act or omission occurring prior to the date when the provisions of such Article (or predecessor thereto) became effective. It is the stated intention of the members of the Company to eliminate or limit the personal liability of the directors of the Company to the greatest extent permitted under Minnesota law. Such Article X provides that if amendments to the Minnesota Statues are passed after the effective date of such Article X which authorize associations to act to further eliminate or limit the personal liability of directors, then the liability of the directors of the Company shall be eliminated or limited to the greatest extent permitted by the Minnesota Statues, as so amended. The Company maintains a standard policy of officers' and directors' liability insurance. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. 4.1* Resolutions of the Board of Directors creating the Equity Participation Units (Processing and Refining). 4.2* Resolutions of the Board of Directors creating the Equity Participation Units (Milling). 5.1* Opinion of Dorsey & Whitney LLP. 10.1+ Lease Agreement between Peavey Company and Amber Milling Company, a division of Harvest States Cooperatives, effective as of August 31, 1994. 10.2 Lease between the Port of Kalama and North Pacific Grain Growers, Inc., dated November 22, 1960. 10.3 Limited Liability Company Agreement for the Wilsey-Holsum Foods, LLC dated July 24, 1996. 10.4+ Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and Harvest States Cooperatives dated August 30, 1996. 10.5 Partnership Agreement between Continental Grain Company and Harvest States Cooperatives dated September 28, 1992. 10.6 Harvest States Cooperatives Deferred Compensation Plan. 10.7 Harvest States Cooperatives Deferred Compensation Supplemental Retirement Plan. 10.8 Harvest States Cooperatives Management Compensation Program. 10.9 Revolving Credit Agreement by and among Harvest States Cooperatives, Banque Nationale de Paris et al., the St. Paul Bank for Cooperatives and CoBank, ACB dated November 1, 1996. 10.10 Amended and Restated Master Syndicated Loan Agreement by and among Harvest States Cooperatives, CoBank, ACB (successor to the National Bank for Cooperatives) and the St. Paul Bank for Cooperatives dated October 28, 1996. 10.11 Fourth Supplement to the August 30, 1994 Master Syndicated Loan Agreement by and among Harvest States Cooperatives, CoBank, ACB (successor to the National Bank for Cooperatives) and the St. Paul Bank for Cooperatives dated October 28, 1996. 10.11(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for Cooperatives for $25,000,000 dated October 28, 1996. 10.11(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB for $25,000,000 dated October 28, 1996. 10.12 Third Supplement to the August 30, 1994 Master Syndicated Loan Agreement by and among Harvest States Cooperatives, CoBank, ACB (successor to the National Bank for Cooperatives) and the St. Paul Bank for Cooperatives dated December 15, 1995. 10.12(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for Cooperatives for $10,000,000 dated December 15, 1995. 10.12(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB for $10,000,000 dated December 15, 1995. 10.13 First Supplement to the August 30, 1994 Master Syndicated Loan Agreement by and among Harvest States Cooperatives, the National Bank for Cooperatives and the St. Paul Bank for Cooperatives dated August 30, 1994. 10.13(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for Cooperatives for $42,500,000 dated August 30, 1994. 10.13(b) Promissory Note of Harvest States Cooperatives to the National Bank for Cooperatives for $42,500,000 dated August 30, 1994. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Deloitte & Touche LLP. 23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1 to this Registration Statement). 24 Power of Attorney. ---------------------------- * To be filed by amendment. + Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential portions of Exhibits 10.1 and 10.4 have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. Pursuant to Instruction 4(iii) of Item 601(b) of Regulation S-K, copies of certain instruments defining the rights of holders of certain long-term debt of the Company and its subsidiaries are not filed and, in lieu thereof, the Company agrees to furnish copies thereof to the Securities Exchange Commission upon request. (b) Financial Statement Schedules None ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change to such information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 320% change in the "maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change in the information set forth in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Falcon Heights, State of Minnesota, on December 13, 1996. HARVEST STATES COOPERATIVES By: /s/John D. Johnson ------------------------------------- John D. Johnson President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on December 13, 1996. Signature Title - - - - --------- ----- /s/John D. Johnson President and Chief Executive Officer - - - - ----------------------------------- (principal executive officer) John D. Johnson /s/T. F. Baker Group Vice President--Finance - - - - ----------------------------------- (principal financial officer) T. F. Baker /s/John Schmitz Vice President--Corporate Accounting - - - - ----------------------------------- (principal accounting officer) John Schmitz Steven Burnet* Chairman of the Board of Directors Steve Carney* Director Sheldon Haaland* Director Jerry C. Hasnedl* Director Edward Hereford* Director Gerald Kuster* Director Tyrone A. Moos* Director Duane G. Risan* Director William J. Zarak, Jr.* Director Edward Ellison* Director Leonard D. Larsen* Director Duane Stenzel* Director Russell W. Twedt* Director Merlin Van Walleghen* Director *By /s/John D. Johnson - - - - ----------------------------------- John D. Johnson Attorney-in-fact EXHIBIT INDEX Number Description Page - - - - ------ ----------- ---- 3.1 Amended and Restated Articles of Incorporation of the Company. 3.2 Amended and Restated Bylaws of the Company. 10.1+ Lease Agreement between Peavey Company and Amber Milling Company, a division of Harvest States Cooperatives, effective as of August 31, 1994. 10.2 Lease between the Port of Kalama and North Pacific Grain Growers, Inc., dated November 22, 1960. 10.3 Limited Liability Company Agreement for the Wilsey-Holsum Foods, LLC dated July 24, 1996. 10.4+ Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and Harvest States Cooperatives dated August 30, 1996. 10.5 Partnership Agreement between Continental Grain Company and Harvest States Cooperatives dated September 28, 1992. 10.6 Harvest States Cooperatives Deferred Compensation Plan. 10.7 Harvest States Cooperatives Deferred Compensation Supplemental Retirement Plan. 10.8 Harvest States Cooperatives Management Compensation Program. 10.9 Revolving Credit Agreement by and among Harvest States Cooperatives, Banque Nationale de Paris et al., the St. Paul Bank for Cooperatives and CoBank, ACB dated November 1, 1996. 10.10 Amended and Restated Master Syndicated Loan Agreement by and among Harvest States Cooperatives, CoBank, ACB (successor to the National Bank for Cooperatives) and the St. Paul Bank for Cooperatives dated October 28, 1996. 10.11 Fourth Supplement to the August 30, 1994 Master Syndicated Loan Agreement by and among Harvest States Cooperatives, CoBank, ACB (successor to the National Bank for Cooperatives) and the St. Paul Bank for Cooperatives dated October 28, 1996. 10.11(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for Cooperatives for $25,000,000 dated October 28, 1996. 10.11(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB for $25,000,000 dated October 28, 1996. 10.12 Third Supplement to the August 30, 1994 Master Syndicated Loan Agreement by and among Harvest States Cooperatives, CoBank, ACB (successor to the National Bank for Cooperatives) and the St. Paul Bank for Cooperatives dated December 15, 1995. 10.12(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for Cooperatives for $10,000,000 dated December 15, 1995. 10.12(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB for $10,000,000 dated December 15, 1995. 10.13 First Supplement to the August 30, 1994 Master Syndicated Loan Agreement by and among Harvest States Cooperatives, the National Bank for Cooperatives and the St. Paul Bank for Cooperatives dated August 30, 1994. 10.13(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for Cooperatives for $42,500,000 dated August 30, 1994. 10.13(b) Promissory Note of Harvest States Cooperatives to the National Bank for Cooperatives for $42,500,000 dated August 30, 1994. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Deloitte & Touche LLP. 24 Power of Attorney. - - - - ------------------------- + Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential portions of Exhibits 10.1 and 10.4 have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HARVEST STATES COOPERATIVES ARTICLE I. NAME AND PRINCIPAL PLACE OF BUSINESS The name of this Association is Harvest States Cooperatives and its principal place of business is in the City of Falcon Heights, County of Ramsey, State of Minnesota. The registered office of this Association is 1667 North Snelling Avenue, St. Paul, Minnesota 55108. ARTICLE II. DURATION This Association shall have perpetual existence. ARTICLE III. PURPOSE This Association is organized for the following purposes: (a) To manufacture, process, market, purchase, handle, deal in and sell the agricultural products of its members, non-member patrons and others, including, without limitation, the processing and exporting of grain and other agricultural products. (b) To procure supplies and equipment and to perform any and all services for its members, non-member patrons and others. (c) To engage in any other activity, including performance of related services for its members, for which cooperative associations may be lawfully organized under the Minnesota Cooperative Law, Minnesota Statutes Chapter 308A. ARTICLE IV. POWERS SECTION 1 - POWERS. This Association shall have all powers, privileges and rights conferred on cooperative associations by the laws of the State of Minnesota or the United States of America. The foregoing powers, privileges and rights shall include, without limitation, the following: (a) To receive, purchase, store, handle, grade, process, manufacture, ship, sell and otherwise deal in and act as a commission merchant with respect to grain and any other farm products offered by its members, non-member patrons and others, and to purchase, manufacture, process, sell, store, handle, ship, distribute and otherwise deal in and procure for its members, non-member patrons and others any and all kinds of supplies and equipment, and to perform any and all services to and for its members, non-member patrons and others. (b) To lend money and receive the obligations of others therefor, and to purchase the obligations of others, whether such loans or purchased obligations are secured or unsecured. (c) To purchase, acquire, own, mortgage, pledge, sell, assign, transfer or otherwise dispose of, equity or debt securities created by any other corporation or other legal entity wherever organized, with all the rights, powers and privileges of ownership thereof. (d) To borrow money, to incur obligations and to assume obligations of any other person, individual, corporation or other legal entity, in any amount; and to make contracts of hire. (e) To issue equity or debt securities, whether certificated or uncertificated. (f) To have one or more offices, and to conduct any or all of its operations and business, and promote its purposes within and without the state of Minnesota without restriction as to places or amounts. (g) To carry on any other business in connection with the foregoing and to engage in any of said activities on its own account or as agent for others, or alone or in association with others; and to employ agents, consultants and nominees to perform any or all of the powers herein enumerated. (h) To engage in any other activity for which cooperative associations may lawfully be organized under the Minnesota Cooperative Law, Minnesota Statutes Chapter 308A. (i) Generally to enjoy all the rights, privileges, and powers incidental or convenient to the operation and conduct of its business. The powers, privileges and rights specified herein shall, except where otherwise expressed, be in no way limited or restricted by reference to or inference from the terms of any other provision of these Articles of Incorporation. The enumeration of powers, privileges and rights herein shall not be held to limit or restrict in any manner the general powers, privileges and rights conferred upon this Association by the laws of the State of Minnesota. SECTION 2 - LIMITATION. This Association shall not at any time market products of non-members in an amount greater in value than the amount in value in which it handles products of its members, and shall not purchase supplies and equipment or furnish services for non-members in an amount the value of which exceeds the value of the supplies and equipment purchased for members and the services provided to members. All business transacted by this Association for or on behalf of the United States or any agency of instrumentality thereof shall be disregarded in determining the volume of member and non-member business transacted by this Association. ARTICLE V. MEMBERSHIP; VOTING; DEBT AND EQUITY SECURITIES SECTION 1 - MEMBERSHIP. This Association shall admit members upon such terms and conditions as are prescribed in the Bylaws. Membership in this Association shall be restricted to the following: (a) Persons (including individuals and joint ventures, corporations, partnerships, limited liability companies, limited liability partnerships, unincorporated associations or other legal entities owned or controlled by individual farmers or their family groups) that are actually engaged in the production of agricultural products, including tenants of land used for the production of such products and lessors of such land that receive as rent therefor any part of the product of such land; and (b) Associations of producers of agricultural products organized and operating so as to adhere to the provisions of the Agricultural Marketing Act, 12 U.S.C. ss 1141(j)(a), as amended, and the Capper-Volstead Act, 7 U.S.C. ss 291-292, as amended. Additional qualifications, duties, rights and privileges of members of this Association shall be as provided in, or authorized by the Board of Directors pursuant to, the Bylaws. The Bylaws (or the Board of Directors acting pursuant to the Bylaws) may further restrict membership in this Association to persons or associations that transact a minimum amount of business with or through this Association. Notwithstanding anything to the contrary herein, this Association may refuse membership or provide conditional membership to an applicant based on its findings, determined on reasonable grounds, that the applicant's admission to membership would prejudice, hinder or otherwise obstruct the interests or purposes of this Association. A membership in this Association is transferable only with the consent and approval of the Board of Directors. SECTION 2 - VOTING. Each member shall have a minimum of one (1) vote in the affairs of the Association, and may otherwise be entitled to additional votes as further authorized in the Bylaws. This Association is a cooperative that is described in Section 308A.641, Subdivision 2, of the Minnesota Cooperative Law, Minnesota Statutes Chapter 308A. SECTION 3 - NONSTOCK COOPERATIVE. This Association shall not have capital stock. This Association 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 Bylaws, no such securities shall entitle the holders thereof to any voting, membership or other rights to participate in the affairs of this Association. Unless authorized in, or by the Board of Directors pursuant to, the Bylaws, such equity or debt securities shall not be transferrable without the prior consent of the Board of Directors. SECTION 4 - APPROVAL OF CERTAIN CORPORATE ACTION. A merger, consolidation, liquidation or dissolution involving this Association, or the sale of all or substantially all of the assets and property of this Association, may be authorized by the members in accordance with the Minnesota Cooperative Law, Minnesota Statutes Chapter 308A, upon the approval of two-thirds (2/3) of the votes cast in person or by mail vote at an annual or special meeting of the members called for such purpose; provided, however, in the event the Board of Directors of this Association declares, by resolution adopted by a majority of the Board of Directors present and voting, that the action involves or is related to a hostile takeover, then the action may be adopted only upon the approval of eighty percent (80%) of the total voting power of the members of this Association, whether or not present and/or voting on the action. Notwithstanding Article XI of these Articles of Incorporation, this Section 4 may be amended only upon the approval of eighty percent (80%) of the total voting power of the members of this Association, whether or not present and/or voting on the amendment. ARTICLE VI. PATRONAGE REFUNDS All net savings of this Association (in excess of dividends declared by the Board of Directors on outstanding equity securities from time to time and additions to reserves) shall be distributed to members annually or more often on the basis of patronage, as more particularly provided for in the Bylaws, and the records of this Association may show the interest of members and equity holders in the reserves. The determination of net savings may be made by divisions or units representing separate or different operations of this Association, upon such basis as shall be determined to be equitable by the Board of Directors. Patronage refunds may be distributed in cash, written evidences of equity or book credits, or any combination thereof, as more particularly provided for in the Bylaws. Any such allocated capital equity shall be redeemable only at the option of the Board of Directors. ARTICLE VII. FIRST LIEN This Association shall have a first lien on all certificates of equity, patronage capital and other equity interests standing on its books (including any earned but not allocated capital equity issued to members as patronage refunds), for all indebtedness of the respective holders or owners thereof to this Association. This Association shall also have the right, exercisable at the option of the Board of Directors, to set off such indebtedness against the face amount of such equity interests; provided, however, that nothing contained herein shall give the holder of such equity interests any right to have such set off made. ARTICLE VIII. DISSOLUTION In the event of any dissolution, liquidation or winding up of this Association, whether voluntary or involuntary, all debts and liabilities of this Association shall be paid first according to their respective priorities. All equity capital shall then be paid to the holders of such equity capital in accordance with the terms and priorities provided in the Bylaws. Any remaining assets of this Association shall be distributed on an allocation unit basis among the members of this Association in proportion to their patronage. ARTICLE IX. BOARD OF DIRECTORS The business and affairs of this Association shall be managed by a Board of Directors of not less than thirteen (13) persons as set by the Bylaws. Directors shall be elected by the members at the annual meeting of this Association in such manner and for such terms as the Bylaws may prescribe. ARTICLE X. DIRECTOR LIABILITY No director of this Association shall be personally liable to this Association or its members for monetary damages for breach of fiduciary duty as a director, except for liability: (a) for a breach of the director's duty of loyalty to this Association or its members; (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (c) for a transaction from which the director derived an improper personal benefit; or (d) for an act or omission occurring prior to the date when the provisions of this Article (or predecessor thereto) became effective. It is the intention of the members of this Association to eliminate or limit the personal liability of the directors of this Association to the greatest extent permitted under Minnesota law. If amendments to the Minnesota Statutes are passed after the effective date of this Article X which authorize cooperatives to act to further eliminate or limit the personal liability of directors, then the liability of the directors of this Association shall be eliminated or limited to the greatest extent permitted by the Minnesota Statutes, as so amended. Any repeal or modification of this Article X by the members of this Association shall not adversely affect any right of or any protection available to a director of this Association which is in existence at the time of such repeal or modification. ARTICLE XI. AMENDMENT These Articles of Incorporation may be amended in accordance with the Minnesota Cooperative Law, Minnesota Statutes Chapter 308A, upon the approval of a majority of the votes cast in person or by mail vote at an annual or special meeting of the members called for such purpose; provided, however, in the event the Board of Directors of this Association 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, then the amendment may be adopted only upon the approval of eighty percent (80%) of the total voting power of the members of this Association, whether or not present and/or voting on the amendment. EX-3.2 3 AMENDED AND RESTATED BYLAWS AMENDED AND RESTATED BYLAWS OF HARVEST STATES COOPERATIVES ARTICLE I. MEMBERSHIP; PATRONS' EQUITIES SECTION 1 - QUALIFICATIONS. Membership in this Association shall be restricted to those persons and associations which are described in Section 1 of Article V of the Articles of Incorporation of this Association and who are Currently Active Patrons (as herein defined) of this Association. SECTION 2 - INDIVIDUAL MEMBERS. There is hereby established a class of membership of this Association the members of which shall be known as "Individual Members." The duties, rights and privileges of Individual Members shall include the following: MEMBERSHIP. Individual Members shall be those members who are persons described in Section 1(a) of Article V of the Articles of Incorporation and who are Currently Active Patrons of this Association. SECTION 3 - DEFINED MEMBERS. There is hereby established a class of membership of this Association the members of which shall be known as "Defined Members." The duties, rights and privileges of Defined Members shall include the following: (a) MEMBERSHIP. Defined Members shall be those members who are persons described in Section 1(a) or Section 1(b) of Article V of the Articles of Incorporation and who are holders of Equity Participation Units as further described in these Bylaws. (b) DELIVERY RIGHTS AND OBLIGATIONS. The delivery rights and obligations of each Defined Member shall be as specified in the member marketing agreement between such Defined Member and this Association. Each such member marketing agreement shall at all times be subject to modification by this Association upon written notice to the Defined Member in question, provided that such modification is first approved by Defined Members holding a majority of the voting power of the Defined Business Unit in question who are present and voting at a meeting of Defined Members holding Equity Participation Units in such Defined Business Unit, where the notice of such meeting contains a statement of the proposed modification. (c) DEFINED BUSINESS UNITS. The Board of Directors may, from time to time and at its sole discretion, organize Defined Business Units. Each Defined Member holding Equity Participation Units in a Defined Business Unit shall be eligible to receive patronage distributions from the Defined Business Unit as a separate allocation unit. The Board of Directors may, from time to time and at its sole discretion, sell, liquidate, dissolve or wind up any Defined Business Unit, in which event the assets of such Defined Business Unit shall be used first to redeem the Equity Participation Units and Preferred Capital Certificates of the Defined Business Unit on a pro rata basis. (d) DEFINED MEMBER BOARDS. Each Defined Business Unit shall be represented by a Defined Member Board. The initial members of each Defined Member Board shall be selected by the Board of Directors of this Association. Subsequently, the members of the Defined Business Unit in question shall be entitled to elect, on a one Defined Member/one vote basis, the members of the Defined Member Board. Each Defined Member Board shall be made up of at least five (5) but not more than ten (10) individuals. Each member of a Defined Member Board must be (i) either a Defined Member or a representative of a Defined Member, and (ii) in good standing as a Defined Member and in full compliance with delivery obligations in and to such member's Defined Business Unit; provided, however, that no employee of this Association may serve as a member of any Defined Member Board. Each Defined Member Board shall be headed by a Chairperson selected by and from the Board of Directors of this Association. Each Defined Member Board shall meet at least quarterly (one of which meetings may be its annual meeting), and shall be charged with reflecting Defined Member concerns and providing a direct communication mechanism to the Board of Directors of this Association. Individuals serving on a Defined Member Board shall serve for staggered terms of three (3) years and until their successors are elected and have qualified. SECTION 4 - AFFILIATED ASSOCIATIONS. There is hereby established a class of membership of this Association the members of which shall be known as "Affiliated Associations." The duties, rights and privileges of Affiliated Associations shall include the following: MEMBERSHIP. Affiliated Associations shall be those members that are associations described in Section 1(b) of Article V of the Articles of Incorporation, that are Currently Active Patrons and that have transacted at least $100,000 of business with this Association during the preceding fiscal year. Associations described in Section 1(b) of Article V of the Articles of Incorporation that meet all of the requirements for Affiliated Association membership except for the volume-of-business-transacted requirement shall not be eligible for such membership, but rather shall be referred to in these Bylaws as "Non-Member Consenting Patrons." SECTION 5 - TERMINATION OF MEMBERSHIP. Membership in this Association shall be terminated by the Board of Directors if a member has become ineligible for membership or may, at the discretion of the Board of Directors, be terminated whenever the Board of Directors by resolution finds that a member has: (a) intentionally or repeatedly violated any Bylaw of this Association, or (b) failed to patronize this Association for a period of twelve (12) consecutive months, or (c) breached any contract with this Association, or (d) willfully obstructed any lawful purpose or activity of this Association, or (e) remained indebted to this Association for ninety (90) days after such indebtedness becomes payable, or (f) died or legally dissolved; provided, however, that termination of any member as a result of any of the circumstances listed in paragraphs (a) through (f) above shall not be deemed to revoke such member's consent contained in Article IX hereof but rather such member may only revoke such consent in writing. Upon termination of membership said member shall thereafter have no voting rights in this Association. A terminated member's patronage credits shall be revolved or retired in the same manner as the patronage credits of active members. No action taken hereunder shall impair the obligations or liabilities of either party under any contract with the Association which may be terminated only as provided therein. SECTION 6 - INSTRUMENTS AUTHORIZED. At the sole discretion of the Board of Directors, this Association may issue debt or equity instruments to its current or former members or its patrons including, without limitation, the following: (a) EQUITY PARTICIPATION UNITS. Equity Participation Units may be issued to and held only by Defined Members. Equity Participation Units shall have no voting rights. Holders of Equity Participation Units shall have the right to deliver to this Association for processing in accordance with the Articles of Incorporation, these Bylaws and a member marketing agreement, product corresponding to such Equity Participation Units. (b) CAPITAL EQUITY CERTIFICATES. Capital Equity Certificates, in denominations fixed by the Board of Directors, with either no maturity date or such maturity date as may be fixed by the Board of Directors, and bearing no interest, dividend or other annual payment, may be issued from time to time in the discretion of the Board of Directors. They may be issued in partial or complete distribution of patronage refunds. (c) CERTIFICATES OF INDEBTEDNESS. Certificates of Indebtedness may be issued from time to time in the discretion of the Board of Directors. Such certificates shall be in such denominations, shall bear such maturity and rate of interest, if any, as the Board of Directors may determine and such certificates shall state. Such certificates shall be callable for payment in cash or other assets at such times as may be determined by the Board of Directors. (d) NON-PATRONAGE EARNINGS CERTIFICATES. Non-Patronage Earnings Certificates, in denominations fixed by the Board of Directors, with no maturity date, and bearing no interest, dividend or other annual payment, may be issued from time to time in the discretion of the Board of Directors. They may be issued and distributed only to member patrons and to Non-Member Consenting Patrons (as herein defined) as part of a non-member/non-patronage distribution. Such certificates shall be callable for payment in cash or other assets at such times as may be determined by the Board of Directors. (e) PREFERRED CAPITAL CERTIFICATES. Preferred Capital Certificates may be issued from time to time in one or more series, the units of each series to have such designations, preferences and relative participating, optional or other special rights, and qualifications, privileges, limitations or restrictions thereof, as shall be stated and expressed herein and in a resolution or resolutions providing for the issue of such series adopted by the Board. The Board is hereby expressly authorized, subject to the limitations provided by law, to establish and designate series of the Preferred Capital Certificates, to fix the amount of each series and to fix the designations and the relative powers, rights, preferences, privileges and limitations of the units of each series and the variations of the relative powers, rights, preferences, privileges and limitations as between series, and to increase and to decrease the number of units constituting each series. Preferred Capital Certificates shall carry no voting rights. (f) OTHER. Such other debt or equity instruments may be issued to current or former members or patrons as may from time to time be authorized by the Board of Directors. Such debt or equity instruments (including, without limitation, Equity Participation Units, Capital Equity Certificates, Certificates of Indebtedness, Non-Patronage Earnings Certificates and Preferred Capital Certificates) are collectively referred to herein as "Patrons' Equities." SECTION 7 - TRANSFER OF PATRONS' EQUITIES. Patrons' Equities held by any person may be transferred only with the consent and approval of the Board of Directors, and by such instrument of transfer as may be required or approved by this Association. The Board of Directors of this Association shall also have the authority to allow conversion of Patrons' Equities into Equity Participation Units or Preferred Capital Certificates on such terms as shall be established by the Board of Directors. SECTION 8 - REDEMPTION OR RETIREMENT OF PATRONS' EQUITIES AND ALLOCATED RESERVE. No person shall have any right whatsoever to require the retirement or redemption of any Patrons' Equities except in accordance with their term, or of any allocated capital reserve. Such redemption or retirement is solely within the discretion and on such terms as determined from time to time by the Board of Directors of this Association. ARTICLE II. DEBT AND EQUITY INSTRUMENTS At the sole discretion of the Board of Directors, this Association may issue debt or equity instruments to any person whatsoever including, without limitation, the following: (a) PREFERRED EQUITIES. Preferred Equities may be issued from time to time in one or more series, the units of each series to have such designations, preferences and relative participating, optional or other special rights, and qualifications, privileges, limitations or restrictions thereof, as shall be stated and expressed herein and in a resolution or resolutions providing for the issue of such series adopted by the Board. The Board is hereby expressly authorized, subject to the limitations provided by law, to establish and designate series of the Preferred Equities, to fix the amount of each series, and to fix the designations and the relative powers, rights, preferences, privileges and limitations of the units of each series and the variations of the relative powers, rights, preferences, privileges and limitations as between series, and to increase and decrease the number of units constituting each series. Preferred Equities shall carry no voting rights. (b) OTHER. Such other debt or equity instruments may be issued to non-members and non-patrons as well as to members and patrons as may from time to time be authorized by the Board of Directors. ARTICLE III. MEETINGS OF MEMBERS SECTION 1 - ANNUAL AND SPECIAL MEETINGS. The annual meeting of the members of the Association shall be held at a time and place fixed by the Board of Directors falling within six (6) months following the close of the fiscal year. Special meetings of the members of this Association shall be held at a time and place specified in the notice of the meeting. A special meeting may be called by the Board of Directors or upon the written petition of twenty percent (20%) of the members. No business shall be considered at the special meeting except as mentioned in the notice of the meeting. Any amendment to the Articles of Incorporation or Bylaws of this Association shall be considered and voted upon only at an annual meeting, unless the Board of Directors determines by resolution that a compelling business reason exists for calling a special meeting for such purpose. SECTION 2 - NOTICE OF MEETINGS. Notice of any meeting shall be published in two succeeding issues of this Association's magazine, periodical or house organ, with the last issue mailed at least two (2) weeks before the meeting date; provided that if publication of this Association's magazine, periodical or house organ occurs less frequently than monthly, such notice may be published in a single issue, mailed at least thirty (30) days before the meeting date. In lieu of publication in this Association's magazine, periodical or house organ, written notice of a meeting of the members may be given by preparing and mailing such notice by first class mail to the last known post office address of each and every member personally or, in the case of an Affiliated Association, to the secretary thereof, not less than fifteen (15) days prior to the date of the meeting. The notice shall state the date, time, and place of the meeting, and in the case of a special meeting, the purposes for which the meeting is called. The Secretary shall execute a certificate which contains a copy of the notice, shows the date of mailing or publication (as the case may be), and states the notice was mailed or published (as the case may be) within the time prescribed by these Bylaws. The certificate shall be made a part of the meeting. The failure of any member to receive notice shall not invalidate any action which may be taken by the members at a meeting. SECTION 3 - VOTING POWER. The voting power of the members of this Association shall be exercised as follows. (a) AFFILIATED ASSOCIATIONS. Each Affiliated Association shall be entitled to delegates based on the following formula: DOLLAR VOLUME OF SALES TO AND/OR PURCHASES FROM THIS ASSOCIATION DURING THIS ASSOCIATION'S FISCAL NUMBER OF YEAR LAST ENDED PRIOR TO THE MEETING PERMITTED DELEGATES ------------------------------------ ------------------- $ 100,000 - $ 1,500,000 1 1,500,001 - 3,500,000 2 3,500,001 - 6,000,000 3 6,000,001 - 9,000,000 4 9,000,001 - 12,000,000 5 12,000,001 - 15,000,000 6 15,000,001 - 18,000,000 7 18,000,001 - 21,000,000 8 21,000,001 - 24,000,000 9 24,000,001 - 27,000,000 10 27,000,001 - 31,000,000 11 31,000,001 - 35,000,000 12 35,000,001 - 40,000,000 13 40,000,001 - 45,000,000 14 45,000,001 - 15 provided, however, that in any event each such Affiliated Association shall be entitled to a minimum of two hundred (200) votes and a maximum of three thousand (3,000) votes on the basis of two hundred (200) votes for each permitted delegate as set forth above. For the purpose of determining the number of permitted delegates from an Affiliated Association, the dollar value of commodities delivered by a Defined Member to the Affiliated Association for handling by and on behalf of the Association and the Defined Member shall be included in the Affiliated Association calculation. All votes shall be cast by each Affiliated Association's delegates, as hereinafter provided. (b) INDIVIDUAL MEMBERS AND DEFINED MEMBERS. Each Individual Member who patronizes this Association through a line elevator, a feed mill, or any other facility owned or leased by this Association, and each Defined Member, shall have one (1) vote; provided, however, that except as such Individual Member or such Defined Member shall cast a vote individually in person at an annual or special meeting (as hereinafter provided), or by mail when a mail ballot has been provided for, and except for votes of Defined Members for elections to Defined Member Boards, such Individual Member or Defined Member may be grouped with other Individual Members and Defined Members in local units ("Patrons' Associations", as hereinafter further defined) as established from time to time by the Board of Directors of this Association. An Individual Member who intends to exercise such Individual Member's vote individually hereunder shall be entitled to do so only after obtaining a certificate on a form provided by this Association and signed by the manager of the line elevator, feed mill or other facility patronized by such Individual Member, certifying that such Individual Member is a member of this Association. A Defined Member who intends to exercise such Defined Member's vote individually hereunder shall be entitled to do so after giving notice of such intent to this Association on a form provided by this Association. Such certificate or notice (as the case may be) shall be sent to this Association by such member or manager no less than ten (10) days or more before the annual or special meeting concerned, provided that in the discretion of the Credentials Committee, any certificates or notices (as the case may be) sent thereafter may also be honored. Each Patrons' Association shall be entitled to be represented at any and all members' meetings of this Association by delegates of its own choosing. Such delegates and their alternates shall be elected on a one member/one vote basis by the Individual Members and the Defined Members identified with the Patrons' Association at an annual meeting of such Patrons' Association held following reasonable notice; and in no instance shall managers or other employees of this Association appoint such delegates or alternates. Such delegates shall exercise the same powers at such members' meetings as the delegates of Affiliated Associations may exercise. Each Patrons' Association shall be entitled to a number of delegates based on the activities of its Currently Active Patrons (as hereinafter defined) and of its Defined Members based on the following formula, minus one vote for any Currently Active Patron or any Defined Member who chooses to cast a vote personally (as hereinbefore provided): DOLLAR VOLUME OF SALES TO AND/OR PURCHASES FROM THIS ASSOCIATION DURING THIS ASSOCIATION'S FISCAL NUMBER OF YEAR LAST ENDED PRIOR TO THE MEETING PERMITTED DELEGATES ------------------------------------ ------------------- $ 100,000 - $ 1,500,000 1 1,500,001 - 3,500,000 2 3,500,001 - 6,000,000 3 6,000,001 - 9,000,000 4 9,000,001 - 12,000,000 5 12,000,001 - 15,000,000 6 15,000,001 - 18,000,000 7 18,000,001 - 21,000,000 8 21,000,001 - 24,000,000 9 24,000,001 - 27,000,000 10 27,000,001 - 31,000,000 11 31,000,001 - 35,000,000 12 35,000,001 - 40,000,000 13 40,000,001 - 45,000,000 14 45,000,001 - 15 provided, however, that in any event each such Patrons' Association shall be entitled to a minimum of two hundred (200) votes less the number of individual votes (if any) cast by Currently Active Patrons and Defined Members of such Patrons' Association, and a maximum of three thousand (3,000) votes. All votes shall be cast by each Patrons' Association's delegates, as hereinafter provided. A Patrons' Association shall not be entitled to more than one delegate for each two hundred (200) votes (calculated after subtracting the number of individual votes cast by Individual Members and Defined Members of such Patrons' Association). (c) DEFINITIONS. As used in these Bylaws, the following terms shall have the meanings indicated: (i) AGRICULTURAL PRODUCERS: Persons who are actually engaged in the production of agricultural products, including tenants of land used for the production of any such product, and lessors of such land who receive as rent therefor a part of the product of such land. (ii) CURRENTLY ACTIVE PATRONS: Consenting Agricultural Producers or associations of Agricultural Producers that have patronized this Association during the year for which Currently Active Patron status is being determined. The Board of Directors of this Association may, from time to time, establish minimum volumes of patronage required of Agricultural Producers and associations of Agricultural Producers in order to qualify for Currently Active Patron status. (iii) PATRONS' ASSOCIATION: An association of the Individual Members who are Currently Active Patrons of a grain elevator, a feed mill or a seed plant or any other facility (including related operations, as designated by this Association) owned or leased by this Association, or an association of Defined Members, which shall be so designated by this Association. The membership of a Patrons' Association may include both Individual Members and Defined Members assigned to the Patrons' Association. SECTION 4 - MANNER OF VOTING. At annual and special meetings of members of this Association, the votes hereinabove provided for shall be cast in the following manner: (a) Each Individual Member and each Defined Member shall be entitled to cast such Member's own vote in person. (b) Each Affiliated Association and each Patrons' Association shall be entitled to cast its votes only through its duly selected delegates (or their duly selected alternates), except as otherwise herein provided in the case of mail votes; and it shall be entitled to have present and voting up to a total number of delegates (or their alternates) equal to one delegate for each two hundred (200) votes it holds, calculated as hereinabove provided. Each delegate (or alternate) of an Affiliated Association or a Patron's Association shall be entitled to cast only two hundred (200) votes in the affairs of any such annual or special meeting (other than items where a mail vote has been provided for), unless the Affiliated Association or Patrons' Association certifies to this Association, in the form and in the manner prescribed by this Association, that it wishes to register less than the permitted number of delegates. In that event, the total number of authorized votes of such Affiliated Association or Patrons' Association shall be divided in multiples of two hundred (200) among its certified and registered delegates in the manner prescribed by this Association; provided that in no event shall the number of votes a delegate may cast exceed six hundred (600) votes per delegate. There shall be subtracted from the said votes cast by the delegates of Patrons' Associations the votes of those Individual Members and Defined Members registered in person, in all proceedings of said meeting; provided further, that no individual shall serve as a delegate or alternate for more than one Affiliated Association or Patrons' Association. (c) There shall be no mail voting except in cases where, in the notice of the meeting, the Board of Directors of this Association shall have submitted a specific issue or issues for a mail vote. In such case, the said notice may provide that the mail vote as cast by each Affiliated Association or Patrons' Association shall be binding upon the Association so voting as to the issue or issues so submitted, and in such case the vote cast by any association voting by mail shall be binding upon it and its delegates (if any) and alternates (if any) attending the said meeting; delegates (or alternates) of Affiliated Associations and Patrons' Associations which have not cast a vote by mail upon said issue or issues shall cast the vote or votes of their respective associations upon said issue or issues in the manner prescribed by the chairman of said meeting. No combination of mail voting and voting in person by delegates of the same association upon an issue or issues submitted for mail vote shall be permitted, and an attempt by any association to do so shall be treated as having the effect of not voting. Nothing in this section shall, however, prevent an annual or special meeting of this Association from considering and acting upon issues in addition to those submitted for mail vote, to the extent permitted by law; and such issues shall be voted upon by delegates (and alternates) in the manner hereinabove provided for other than mail votes. (d) The mail vote cast by each Affiliated Association shall be determined by the Board of Directors of each said Affiliated Association, unless specified otherwise by the Board of Directors of this Association in the notice of the meeting of this Association which provides for said mail votes. Any mail ballot vote determined or cast by the Board of Directors of an Affiliated Association shall be proportionate to the affirmative and negative votes cast by members of that Board of Directors. The ballot used by each such association to cast its vote shall contain the certificate of the secretary or the president of said association (1) that the vote shown thereon is so cast by the direction of said association's Board of Directors, (2) the number of directors voting in the affirmative and the number of directors voting in the negative, and (3) stating the number of votes which said association is then entitled to cast, according to other provisions of this Article (with such supporting information therefor as may be prescribed by this Association). (e) The mail vote cast by each Patrons' Association shall be determined by the delegate or delegates last previously designated by each such association (and whose identity has been so previously stated in writing to this Association by such persons and in such manner as may be prescribed by this Association), including therein the alternate of any delegate who has since died or is unable to act at the time of such mail vote. The ballot used by each such association to cast its vote shall contain the certificate of the delegate or delegates (1) that the vote shown thereon is so cast, and (2) stating the number of votes which said association is then entitled to cast, according to other provisions of this Article (with such supporting information therefor as may be prescribed by this Association). (f) The mail vote cast by each Individual Member or Defined Member of this Association shall be on such form of ballot as may be prescribed by the Board of Directors of this Association, and shall include (i) in the case of Individual Members, the certificate that such member is a member of this Association; and (ii) in the case of a Defined Member, the notice of intent to vote individually, in either case as provided for in Section 3(b) of this Article. (g) There shall be no voting by proxy or under power of attorney at any annual or special meeting of this Association. SECTION 5 - QUORUM AND REGISTRATION. (a) A quorum necessary to the transaction of business at any annual or special meeting of this Association shall be at least ten percent (10%) of the total number of members in this Association represented in person by delegates (or alternates) or by mail votes when the members do not exceed five hundred (500) in number. If the members of this Association exceed five hundred (500) in number, fifty (50) members of this Association represented in person by delegates (or alternates) or by mail votes shall constitute a quorum. In determining a quorum at any meeting, on a question submitted to a vote by mail, as hereinabove provided, members represented in person by delegates (or alternates) or represented by mail vote shall be counted. The fact of the attendance of a sufficient number of members to constitute a quorum shall be established by a registration of the members of this Association present at such meeting, which registration shall be verified by the Chairman, President and Secretary of this Association and shall be reported in the minutes of the meeting. (b) Registration of Individual Members and Defined Members and of delegates (and/or alternates) of Affiliated Associations and Patrons' Associations shall close at such hour on the day for which an annual or special meeting is called (or in case it is called for a series of days, at such hour on the first day thereof) as the Board shall determine and specify in the Notice of Meeting, or at such later time to which the close of registration may be extended by majority vote of those registered before said initial time for closing of registration. Persons otherwise eligible to vote, either as Individual Members, Defined Members or as delegates or alternates, but not registered as in attendance at or before said time (original or as extended), shall have no right to vote in any of the affairs of the meeting (including, but not limited to, election of Directors). (c) Each Affiliated Association and Patrons' Association shall certify its delegates and alternates to this Association, in the manner prescribed by this Association, at least thirty (30) days before each annual meeting of this Association, and at least three (3) days before each special meeting; provided that in the discretion of the Credentials Committee such certificates received thereafter may also be honored. The delegates and alternates so certified, and found by this Association to be eligible to be seated at the meeting or meetings of this Association, shall represent their Affiliated Associations or Patrons' Associations, as the case may be, to the extent and in the manner provided in this Article. In matters of which advance notice has been given, such delegates and alternates shall endeavor to inform themselves as to the views of the membership of the association which they represent. (d) A delegate (or alternate) elected or appointed as above provided, and certified to this Association in the manner prescribed by this Association, shall hold office and shall represent such delegate's (or alternate's) association at meetings of this Association to the extent and in the manner prescribed in this Article until such delegate's (or alternate's) successor is elected and qualified, but in any event no such certificate of election as delegate shall be valid for more than two years; provided, further, that any delegate (or alternate) shall cease to be such if such delegate (or alternate) ceases to be an Agricultural Producer doing business with such delegate's (or alternate's) Affiliated Association (or in the case of delegates or alternates of Patrons' Associations, if such delegate (or alternate) ceases to be an Agricultural Producer doing business with this Association). (e) No employee of an Affiliated Association, nor any employee of this Association, shall serve as a delegate or alternate to any meeting of this Association; if any such person shall be certified as such a delegate or alternate, such person shall nevertheless not be seated as such. (f) A cooperative association which has business transactions with this Association but which does not qualify as an Affiliated Association shall not be entitled to have a voting delegate or alternate at any meeting of this Association, but it may have present a "non-voting delegate", who shall be entitled to be present at the meetings, but not to vote, and shall only be recognized to speak at the discretion of the Chairman of the meeting. (g) Nothing herein shall prevent Individual Members or Defined Members of this Association or of Affiliated Associations, who are not delegates to the annual meetings or special meetings of this Association from serving as chairperson of a district meeting or as chairperson or member of a committee. (h) Each member of the Board of Directors of this Association shall have the right to speak on any subject during annual or special meetings of this Association. (i) A minimum of one-half (1/2) hour shall be allotted at the annual meeting during the regular business session for the purpose of entertaining members' questions. ARTICLE IV. DIRECTORS SECTION 1 - BOARD OF DIRECTORS. The members of this Association shall elect a Board of Directors of this Association, as more fully provided herein. Each member of the Board of Directors must be an Agricultural Producer and an active patron of this Association (either directly or through an Affiliated Association) for a period of not less than five (5) years at the time of his or her election, must be less than sixty-eight (68) years of age at the time of such election, and shall not be an employee of this Association or of an Affiliated Association. SECTION 2 - ELECTION OF DIRECTORS. (a) At each annual meeting of members, directors shall be elected to fill vacancies created by expired terms; such directors shall be elected for terms of three (3) years and until their respective successors are elected and qualified. (b) The Board of Directors shall be composed of four (4) persons who must be residents of District Number 1, which shall include the States of Minnesota, Illinois, Iowa and Wisconsin; four (4) persons who must be residents of District Number 2, which shall include the State of North Dakota; two (2) persons who must be residents of District Number 3, which shall include the States of South Dakota, Kansas and Nebraska; two (2) persons who must be residents of District Number 4, which shall include the States of Montana and Wyoming; and two (2) persons who must be residents of District Number 5, which shall include the States of Washington, Oregon, Utah and Idaho. (c) Nominations for the election of directors shall be made by the members of this Association and may be made by balloting, nominating committee, petition of members or from the floor, provided that nominations from the floor shall be requested in addition to nominations made by petition or nominating committee. Before each annual meeting of members the Board of Directors shall appoint a nominating committee to supervise the nominating procedure for election of directors, which procedure shall be prescribed by the Board of Directors. (d) At each annual meeting of members, the directors of this Association to be elected shall be elected in the following manner: Individual Members, Defined Members, delegates and alternates from each District shall meet separately, and at each such District meeting the director or directors of this Association then to be elected shall be elected by the majority of the votes then entitled to be cast. The Board of Directors shall have the power and authority to adopt a policy and procedure for assigning to an existing district those members who are not residents of any district established in Section 2(b) above. Such policy and procedure may be amended from time to time at the discretion of the Board of Directors. Each such District election shall be binding upon the annual meeting and upon this Association, without any ratification or right of rescission or veto by Individual Members or Defined Members or delegates or alternates, or any combination thereof, of other districts. A temporary Chairman of each such District meeting shall be selected by the Chairman of this Association. Election of directors shall be by balloting when there are two or more nominees for a position to be filled, or when there are more nominees than there are positions to be filled. SECTION 3 - VACANCIES. Each vacancy occurring on the Board of Directors may be filled by the remaining directors until the next annual meeting of the members when the members shall elect a director to serve for the unexpired term, provided that vacancies on the Board created by any amendment of the Articles of Incorporation or Bylaws shall first be filled at the annual meeting of the members next following the adoption of such amendment unless otherwise provided in the amendment. SECTION 4 - MEETINGS. The Board of Directors shall meet regularly at such times and places as the Board may determine. Special meetings may be called by the Chairman or any three directors. All meetings shall be held on such notice as the Board may prescribe provided that any business may be transacted at any meeting without specification of such business in the notice of such meeting. Directors may participate in any such meeting by means of a conference telephone conversation or other comparable method of communication by which all persons participating in the meeting can hear and communicate with each other; and for purposes of taking any action at the meeting, any such directors shall be deemed present in person at the meeting. SECTION 5 - QUORUM AND VOTING. A quorum shall consist of a majority of the directors. A majority vote of the directors present shall decide all questions except where a greater vote is required by the Articles of Incorporation, by these Bylaws or by law. SECTION 6 - ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if all directors consent thereto in writing and the writing or writings are held with the minutes or proceedings of the Board of Directors. SECTION 7 - BORROWINGS. The Board of Directors shall have power to authorize and approve the borrowing of money and the pledging and mortgaging of any or all of the assets of this Association as security for the sums so borrowed. ARTICLE V. DUTIES OF DIRECTORS SECTION 1 - GENERAL POWERS. The Board of Directors shall manage the business and affairs of this Association, and shall exercise all of the powers of this Association except such as are by law, the Articles of Incorporation, or these Bylaws conferred upon or reserved to the members. The Board of Directors shall adopt such policies, rules, regulations, and actions not inconsistent with law, the Articles of Incorporation, or these Bylaws, as it may deem advisable. SECTION 2 - BONDS AND INSURANCE. The Board of Directors shall require all officers, agents, and employees charged by this Association with responsibility for the custody of any of its funds or property to give adequate bonds. Such bonds, unless cash security is given, shall be furnished by a responsible bonding company and approved by the Board of Directors and the cost thereof shall be paid by this Association. The Board of Directors shall provide for the adequate insurance of the property of the Association, or property which may be in the possession of this Association, or stored by it, and not otherwise adequately insured, and in addition adequate insurance covering liability for accidents to all employees and the public. SECTION 3 - ACCOUNTING SYSTEM AND AUDIT. The Board of Directors shall install and maintain an adequate system of accounts and records. At least once in each year the books and accounts of this Association shall be audited and a review of such audit shall be published annually in this Association's magazine, periodical or house organ, and a report of such audit shall in addition be made at the next annual meeting of the members. SECTION 4 - DEPOSITORY. The Board of Directors shall have power to select one or more banks to act as depositories of the funds of this Association, and to determine the manner of receiving, depositing, and disbursing the funds of this Association, the form of checks, and the person or persons by whom they shall be signed, with the power to change such banks and the person or persons signing such checks and the form thereof at will. ARTICLE VI. OFFICERS SECTION 1 - ELECTION OF OFFICERS. Promptly following each annual meeting the Board of Directors shall elect from its membership a Chairman, one or more Vice Chairmen, a Secretary and a Treasurer; it shall also elect a President and one or more Group Vice Presidents, Senior Vice Presidents and Vice Presidents who may be, but need not be, members of the Board. The offices of Secretary and Treasurer may be held by the same person and, when so held, shall be termed Secretary-Treasurer. Nominations for election of officers shall be made by the Directors and may be made by balloting, nominating committee or from the floor, provided that nominations from the floor shall be requested in addition to nominations made by a nominating committee. Election of officers shall be by balloting when there are two or more nominees for a position to be filled, or when there are more nominees than there are positions to be filled. The Board of Directors may appoint such other officers as it shall deem necessary who shall have such titles, power, and duties as the Board may prescribe; this shall include, but not be limited to, Presidents and Vice Presidents of "divisions" of the Association. If any vacancy shall occur among the principal officers of this Association, it shall be filled by the Board of Directors at its next regular meeting following the vacancy. SECTION 2 - CHAIRMAN. The Chairman shall preside at all meetings of the members and the Board of Directors. Except where the signature of the President is required, the Chairman shall possess the same power as the President to sign all certificates, contracts and other instruments of the corporation which may be authorized by the Board of Directors. SECTION 3 - PRESIDENT. The President shall be the chief executive officer of this Association. The President shall have general supervision of the affairs of this Association, shall sign or countersign all certificates, contracts or other instruments of this Association as authorized by the Board of Directors, shall make reports to the Board of Directors and members and shall perform such other duties as are incident to the President's office or are properly required by the Board of Directors. SECTION 4 - VICE CHAIRMEN. In the absence or disability of the Chairman, the Vice Chairmen, in the order designated by the Board of Directors, shall perform the duties and exercise the powers of the Chairman. Each Vice Chairman shall have such other duties as are assigned to such Vice Chairman from time to time by the Board of Directors. SECTION 5 - GROUP VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. In the absence or disability of the President, the Group Vice Presidents, Senior Vice Presidents and Vice Presidents, in the order designated by the Board of Directors, shall perform the duties and exercise the powers of the President. Each Group Vice President, Senior Vice President and Vice President shall have such other duties as are assigned to such Vice President from time to time by the President. SECTION 6 - SECRETARY. The Secretary shall keep complete minutes of each meeting of the members and of the Board of Directors, and shall sign with Chairman or the President all notes, conveyances and encumbrances of real estate, capital securities and instruments requiring the corporate seal; provided that the Secretary, in writing, may authorize any other officer or employee to execute or sign the Secretary's name to any or all such instruments. The Secretary shall keep a record of all business of this Association, prepare and submit to the annual meeting of the members a report of the previous fiscal year's business, and give all notice as required by law. The Secretary shall perform such other duties as may be required by the Board of Directors. The Board of Directors may delegate, or authorize the Secretary to delegate, to any other officer or employee, under the supervision of the Secretary, all or any of the duties enumerated in this section. SECTION 7 - TREASURER. The Treasurer shall supervise the safekeeping of all funds and property of this Association, supervise the books and records of all financial transactions of this Association, and perform such other duties as may be required by the Board of Directors. The Board of Directors may delegate, or authorize the Treasurer to delegate, to any other officer or employee, under the supervision of the Treasurer, all or any of the duties enumerated in this section. SECTION 8 - ASSISTANT SECRETARY. The Assistant Secretary or Assistant Secretaries shall perform such duties as may be assigned by the Board of Directors, the Chairman, President or the Secretary. In the absence or disability of the Secretary, or in the event of a vacancy in that office, the Assistant Secretary shall perform the duties of the Secretary, or if there are two or more Assistant Secretaries, the Chairman shall designate the order in which they shall act in place of the Secretary. SECTION 9 - ASSISTANT TREASURER. The Assistant Treasurer or Assistant Treasurers shall perform such duties as may be assigned by the Board of Directors, the Chairman, the President, or the Treasurer. In the absence or disability of the Treasurer, or in the event of a vacancy in that office, the Assistant Treasurer shall perform the duties of the Treasurer; or if there are two or more Assistant Treasurers, the Chairman shall designate the order in which they shall act in place of the Treasurer. SECTION 10 - SPECIAL POWERS. Any officer may be vested by the Board of Directors with any power and charged with any duty not contrary to law or inconsistent with the Articles of Incorporation or these Bylaws. ARTICLE VII. INDEMNIFICATION AND INSURANCE SECTION 1 - INDEMNIFICATION. This Association shall indemnify each director, officer, manager, employee, or agent of this Association, and any person serving at the request of this Association as a director, officer, manager, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred to the fullest extent to which such directors, officers, managers, employees or agents of an association may be indemnified under the law of the State of Minnesota or any amendments thereto or substitutions therefor. SECTION 2 - INSURANCE. This Association shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, manager, employee, or agent of this Association, or is or was serving at the request of this Association as a director, officer, manager, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against that person and incurred by that person in any such capacity. ARTICLE VIII. METHOD OF OPERATION - PATRONAGE REFUNDS SECTION 1 - COOPERATIVE OPERATION. This Association shall be operated upon the cooperative basis in carrying out its business within the scope of the powers and purposes defined in the Articles of Incorporation. Each transaction between this Association and each member shall be subject to and shall include as a part of its terms each provision of the Articles of Incorporation and Bylaws of this Association, whether or not the same be expressly referred to in said transaction. Upon delivering or selling or contracting to deliver or sell, any agricultural products to this Association, or upon receiving, or buying, or contracting to receive or buy, any supplies or equipment or services from this Association, each member so delivering, selling, receiving, buying, or contracting, as the case may be, shall be entitled to any and all patronage refunds as defined in this Article VIII arising out of said patronage. SECTION 2 - MEMBER PATRONAGE. (a) GROSS RECEIPTS FROM MEMBER PATRONAGE. Gross receipts of the Association from member patronage shall be all proceeds (including patronage dividends received) from the sale of products marketed for member patrons, all sums received for supplies, equipment, commodities, and other property procured for member patrons, and all sums received (including patronage dividends received) for services performed for member patrons. Those gross receipts which by their nature reduce the cost and expenses incurred in connection with member patronage shall be used to reduce the deductions from gross receipts enumerated in Section 2(b) of this Article. (b) DEDUCTIONS FROM GROSS RECEIPTS FROM MEMBER PATRONAGE. The Association shall deduct from gross receipts from member patronage: (1) all amounts paid for products marketed, and all necessary manufacturing, processing and marketing expenses attributable to member patronage; (2) the actual cost of supplies, commodities, equipment and other property procured for member patrons; (3) the actual cost of services performed for member patrons; (4) taxes, other than taxes based on income, attributable to member patronage; (5) that portion attributable to member patronage of additions to reserves for depreciation and for other valuation reserves, all established and computed in accordance with the Internal Revenue Code of 1986, as amended, and all regulations promulgated thereunder (collectively, "U.S. Federal Tax Laws"); (6) all other necessary expenses attributable to member patronage, not including interest or dividends on Preferred Capital Certificates or other securities deemed to be capital rather than indebtedness, nor amounts set aside for promoting and encouraging cooperative organization; (7) to the extent that the amount available from receipts from non-member marketing patronage and sources other than patronage (as described in Section 4 of this Article), plus the amount available from receipts from non-member patronage of purchasing operations (as described in Section 3 of this Article), is not sufficient for payment of income taxes, then such additional sum as shall be necessary for payment of income tax obligations of the Association; and (8) a sum determined by the Board of Directors, but not to exceed five percent (5%) of the gross receipts from member patronage remaining after deduction of subparagraphs (1) through (7) of this subsection (b), to be used for the purpose of promoting and encouraging cooperative organization. (c) ANNUAL NET SAVINGS FROM MEMBER PATRONAGE. The amount remaining after reducing the gross receipts from member patronage by the deductions specified in Section 2(b) of this Article shall constitute the annual net savings (net income) from member patronage. SECTION 3 - NON-MEMBER PATRONAGE-PURCHASING. (a) GROSS RECEIPTS FROM NON-MEMBER PATRONAGE OF PURCHASING OPERATIONS AND FROM NON-MEMBER CONSENTING PATRON PATRONAGE OF MARKETING OPERATIONS. Gross receipts of the Association from patronage of Non-Member Consenting Patrons and from non-member patronage of purchasing operations shall be all proceeds (including patronage dividends received) from the sale of products marketed for Non-Member Consenting Patrons of marketing operations and all proceeds (including patronage dividends received) for supplies, equipment, commodities and other property procured for such non-member patrons, and all sums received (including patronage dividends received) for services performed for such non-member patrons. Those gross receipts which by their nature reduce the costs and expenses incurred in connection with such patronage shall be used to reduce the deductions from gross receipts enumerated in Section 3(b) of this Article. (b) DEDUCTIONS FROM GROSS RECEIPTS FROM NON-MEMBER PATRONAGEPURCHASING AND FROM NON-MEMBER CONSENTING PATRON PATRONAGE-MARKETING. The Association shall deduct from gross receipts from non-member patronage of purchasing operations and from Non-Member Consenting Patron patronage of marketing operations: (1) all amounts paid for products marketed, and the actual cost of supplies, commodities, equipment and other property procured for non-member patrons; (2) the actual cost of services performed for non-member patrons; (3) taxes, other than taxes based on income, attributable to non-member patronage of purchasing operations; (4) that portion attributable to non-member patronage of purchasing operations and to Non-Member Consenting Patron patronage of marketing operations of additions to reserves for depreciation and for other valuation reserves all established and computed in accordance with U.S. Federal Tax Laws; (5) all other necessary expenses attributable to non-member patronage of purchasing operations and Non-Member Consenting Patron patronage of marketing operations, not including interest or dividends on Preferred Capital Certificates or other securities deemed to be capital rather than indebtedness, nor amounts set aside for promoting and encouraging cooperative organization; (6) to the extent that the amount available from receipts from non-member marketing patronage and sources other than patronage (as described in Section 4 of this Article) is not sufficient for payment of income taxes then such additional sum as shall be necessary for payments of income tax obligations of the Association; and (7) a sum determined by the Board of Directors, but not to exceed five percent (5%) of the gross receipts from non-member patronage of purchasing operations and Non-Member Consenting Patron patronage of marketing operations remaining after deduction of subparagraphs (1) through (6) of this subsection (b), to be used for the purpose of promoting and encouraging cooperative organization. (c) ANNUAL NET SAVINGS FROM NON-MEMBER PATRONAGE OF PURCHASING OPERATIONS AND FROM NON-MEMBER CONSENTING PATRON PATRONAGE OF MARKETING OPERATIONS. The amount remaining after reducing the gross receipts from non-member patronage of purchasing operations and Non-Member Consenting Patron patronage of marketing operations by the deductions specified in Section 3(b) of this Article shall constitute the annual net savings (net income) from non-member patronage of purchasing operations and from Non-Member Consenting Patron patronage of marketing operations. SECTION 4 - NON-MEMBER PATRONAGE-MARKETING; NON-PATRONAGE SOURCES. (a) GROSS RECEIPTS FROM NON-MEMBER PATRONAGE OF MARKETING OPERATIONS AND FROM SOURCES OTHER THAN PATRONAGE. Gross receipts of the Association from non-member patronage of marketing operations other than patronage by Non-Member Consenting Patrons and from all sources other than those described in Sections 2(a) and 3(a) of this Article shall constitute gross receipts from non-member patronage of marketing operations and sources other than patronage. They shall be subject to the deductions therefrom hereinafter provided, and any net amount thereof shall be held or used for the purposes and in the manner hereinafter provided. Those gross receipts which by their nature reduce the costs and expenses incurred in connection with non-member patronage of marketing operations and business derived from all sources other than those described in Sections 2(a) and 3(a) of this Article shall be used to reduce the deductions from gross receipts enumerated in Section 4(b) of this Article. (b) DEDUCTIONS FROM GROSS RECEIPTS FROM NON-MEMBER PATRONAGE OF MARKETING OPERATIONS AND SOURCES OTHER THAN PATRONAGE. The Association shall deduct from gross receipts from non-member patronage of marketing operations and sources other than patronage: (1) all amounts paid for products marketed and all necessary manufacturing, processing and marketing expenses attributable to non-member patronage of marketing operations and sources other than patronage; (2) taxes, other than taxes based on income, attributable to non-member patronage of marketing operations and sources other than patronage; (3) that portion attributable to non-member patronage of marketing operations and sources other than patronage of additions to reserves for depreciation and for other valuation reserves, all established and computed in accordance with U.S. Federal Tax Laws; (4) all other necessary expenses attributable to non-member patronage of marketing operations and sources other than patronage, not including interest or dividends on Preferred Capital Certificates or other securities deemed to be capital rather than indebtedness, nor amounts set aside for promoting and encouraging cooperative organization; (5) income taxes, if any, regardless of the patronage to which they are attributable; and (6) a sum determined by the Board of Directors, but not to exceed five percent (5%) of the gross receipts from non-member patronage of marketing operations and sources other than patronage remaining after deduction of subparagraphs (1) through (5) of this subsection (b), to be used for the purpose of promoting and encouraging cooperative organization. (c) ANNUAL NET SAVINGS FROM NON-MEMBER PATRONAGE OF MARKETING OPERATIONS AND SOURCES OTHER THAN PATRONAGE. The amount remaining after reducing the gross receipts from non-member patronage of marketing operations and sources other than patronage by the deductions specified in Section 4(b) of this Article shall constitute the annual net savings (net income) from non-member patronage of marketing operations and sources other than patronage. SECTION 5 - TOTAL ANNUAL NET SAVINGS. The sum of annual net savings from member patronage (Section 2), annual net savings from non-member patronage of purchasing operations (Section 3), and annual net savings from non-member patronage of marketing operations and sources other than patronage (Section 4) shall be known as the total annual net savings. SECTION 6 - NET LOSSES. (a) NET LOSSES SUSTAINED BY ONE OR MORE DIVISIONS, FUNCTIONS, OR OPERATIONS WHEN OVERALL NET SAVINGS ARE REALIZED. If in any fiscal year the Association shall sustain a net loss or net losses from activities of one or more divisions, functions or operations but shall realize net savings from overall operations, the patronage dividends distributable to patrons of divisions, functions, or operations which realized net savings for that fiscal year shall, at the discretion of the Board of Directors, be reduced by the amount of such net loss or the aggregate amount of such net losses, and in an equitable manner; provided, however, that for purposes of determining net savings or net losses, gains or losses from Defined Business Units shall not be netted against gains or losses from other divisions, functions or operations of the Association, or against gains or losses of any other Defined Business Unit. The Board of Directors in its discretion exercised before the close of the fiscal year during which the loss is sustained and with due consideration of all the circumstances which caused the loss, may provide that future net savings of any such loss division(s), function(s), or operation(s) shall be reduced, for purposes of distributing patronage dividends for such future years, by all or any part of the net loss or net losses so applied in reduction of net savings of other divisions, functions, or operations, a like amount to be distributed as patronage dividends for the future fiscal year or years to the patrons of profitable divisions, functions, or operations whose patronage dividends were reduced in previous years. (b) NET SAVINGS REALIZED BY ONE OR MORE DIVISIONS, FUNCTIONS OR OPERATIONS WHEN OVERALL NET LOSS IS SUSTAINED. If in any fiscal year the Association shall sustain a net loss from overall operations but shall realize net savings from activities of one or more divisions, functions or operations, the Board of Directors may, in its discretion (exercised before the close of the fiscal year during which the loss is sustained and with due consideration of all the circumstances which caused the loss) provide for the reduction of future net savings of loss divisions, functions or operations by the aggregate amount of net savings realized during the year of loss by profitable divisions, functions, or operations, or any part thereof, for purposes of distributing future patronage dividends, a like amount to be distributed as patronage dividends for the future fiscal year or years to the patrons of profitable divisions, functions or operations whose patronage dividends were eliminated by the net losses in overall net loss years; provided, however, that gains and losses from Defined Business Units shall not be netted against each other or any other divisions, functions or operations. (c) OVERALL NET LOSSES. In the event this Association shall incur a net loss in any fiscal year, such net loss may be charged first against any earned surplus or paid-in surplus which is unallocated, or against any unallocated reserve other than valuation reserves. If such loss exceeds the total of said unallocated earned surplus and unallocated reserves or, in any event, if the Board of Directors so elects, the amount of such loss may be carried forward or back, or may be recovered from prior or subsequent years' net margins or savings. This section shall not be construed or administered in such a way as to deprive the Association of the right to carry back or carry forward net operating losses to past or future years, in accordance with the applicable provisions of the Internal Revenue Code or State Taxing statutes. (d) ASSESSMENTS AGAINST MEMBERS OR PATRONS. There shall be no right of assessment against members or patrons for the purpose of restoring impairments to capital caused by net losses. SECTION 7 - DISTRIBUTION. (a) PATRONAGE DIVIDENDS -- MEMBER-PATRONAGE. The annual net savings from member patronage shall be distributed annually or more often as patronage dividends to the member patrons on the basis of their respective patronage, and said member patrons shall be notified thereof; provided, however, that no distribution need be made where the amount otherwise to be distributed to a member patron is less than $10.00 or such lesser amount as shall be fixed by the Board of Directors. (b) PATRONAGE DIVIDENDS -- NON-MEMBER PATRONAGE. The annual net savings from non-member patronage of the purchasing operations, and from Non-Member Consenting Patron patronage of marketing operations, shall be distributed annually or more often as patronage dividends to such non-member patrons on the basis of their respective patronage, and said non-member patrons shall be notified thereof; provided, however, that no distribution need be made to non-consenting patrons, nor where the amount otherwise to be distributed to a non-member patron is less than $10.00, or such lesser amount as shall be fixed by the Board of Directors. (c) ESTABLISHMENT OF ALLOCATION UNITS FOR PATRONAGE DIVIDEND DISTRIBUTIONS. In making such patronage dividend distributions, due regard shall be given to the sources from which such savings accrue. The purchasing and marketing functions of the Association shall be accounted for as separate allocation units and within each such function, the Board of Directors may create such separate divisional, departmental, geographic or other allocation units as it deems to be reasonable and equitable; provided, that each Defined Business Unit shall be accounted for as a separate allocation unit. The Board of Directors shall adopt such reasonable and equitable cost accounting procedures as will, in the Board's judgment, equitably allocate among such allocation units the Association's revenues and expenses derived from or attributable to its patronage business. (d) FORMS OF PATRONAGE DIVIDENDS. Patronage dividends shall be distributed in cash, credits, revolving fund certificates, Capital Equity Certificates, Preferred Capital Certificates or Certificates of Indebtedness, or any combination thereof designated by the Board of Directors. By entering into a business transaction with this Association, each member patron, the non-member patron of purchasing operations and Non-Member Consenting Patron of marketing operations, agrees to accept a distribution of the patronage refund under these Bylaws, in such form or forms as are hereinabove provided in this Section, in satisfaction of the obligation of this Association to make the patronage refund; and the member-patron, the non-member patron of purchasing operations and Non-Member Consenting Patron of marketing operations shall be deemed to have received the amount of such patronage refund and reinvested the same in the capital securities, or credits in a patron's refund account, or in any combination thereof, as hereinabove provided. The books and records of this Association shall show the interest of each such patron, which shall be credited on this Association's books to the respective patron according to such patron's respective contributions. (e) NON-MEMBER/NON-PATRONAGE DISTRIBUTIONS -- NON-CONSENTING PATRONS; NON-MEMBER PATRONAGE, MARKETING; AND NON-PATRONAGE SOURCES. Annual net earnings attributable (i) to non-consenting non-member patrons of purchasing operations (i.e., those members or non-member patrons who have not consented to take patronage refunds into account in computing their net income, as provided in 26 U.S.C. ss 1385, as amended), (ii) from non-member patronage of marketing operations and (iii) from sources other than patronage may, at the discretion of the Board of Directors, be distributed annually or more often as non-member/non-patronage distributions to member patrons and to Non-Member Consenting Patrons on the basis of their respective patronage. The amount of such net earnings with respect to a fiscal year distributed hereunder shall not exceed the net earnings (after provision for income taxes) of the Association for the fiscal year, as reported in its financial statements for the year, less patronage dividends paid with respect to the year. Any such net earnings not so distributed shall be retained by the Association and placed in the capital reserve (as defined in Section 8 hereof). (f) NON-MEMBER/NON-PATRONAGE ALLOCATIONS. 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. (g) FORM OF NON-MEMBER/NON-PATRONAGE DISTRIBUTIONS. Non-Member/Non-Patronage distributions shall be in cash, property, Non-Patronage Earnings Certificates, or any combination thereof designated by the Board of Directors. SECTION 8 - CAPITAL RESERVE. The Board of Directors shall cause to be created a Capital Reserve, and shall annually add to such Capital Reserve the annual net savings attributable (i) to non-consenting, non-member patrons of purchasing operations, (ii) from non-member patronage of marketing operations, and (iii) from sources other than patronage which are not distributed to member patrons and Non-Member Consenting Patron as non-member/non-patronage distributions. Interest (dividends) paid by the Association on Preferred Capital Certificates shall be paid first from amounts in the Capital Reserve which accrued from such sources. SECTION 9 - DEFINED BUSINESS UNIT RETENTIONS. This Association may require from time to time, investment in its capital in addition to the investments from retained patronage and Equity Participation Units. These investments shall be direct capital investments from a retain on a per unit basis for the products received by the Association from its Defined Members, and the same may be determined on either a Qualified or a Nonqualified basis as defined in Subchapter T of the United States Internal Revenue Code. The per unit retention, if required, shall be made on products delivered, in the same amount per unit and shall not become a part of the net annual savings available for patronage. Each member, by continuing to be such, agrees to invest in the capital of this Association. Such investment shall be accounted for separately in a unit retention account set up on the books of the Association. All such amounts, from the moment of receipt by this Association, are received and retained with the understanding that they are furnished by members as capital. This Association is obligated to account to each member in such manner that the amount of per unit retains furnished by each member is annually credited to an appropriate record to the per unit retains capital account of each member. Within a reasonable time after the close of its fiscal year, this Association shall notify each member of the amount of capital retains and credit it to the member's account by reflection upon this Association's books. When the Board determines in its sole discretion that the Association has sufficient working capital in the applicable Defined Business Unit, unit retains may be called for payment at the lesser of their stated or book value. Unit retains may be paid, redeemed, or revolved in whole or in part at a time and manner determined by the Board. ARTICLE IX. CONSENT SECTION 1 - CONSENT. Each entity which hereafter applies for and is accepted to membership in this Association and each member of this Association as of the effective date of this bylaw who continues as a member after such date shall, by such act alone, consent that the amount of any distributions, with respect to its patronage which are made in written notices of allocation (as defined in 26 U.S.C. '1388), and which are received by the member from the Association, will be taken into account by the member at their stated dollar amounts in the manner provided in 26 U.S.C. '1385(a) in the taxable year in which such written notices of allocation are received by the member. SECTION 2 - CONSENT NOTIFICATION TO MEMBERS AND PROSPECTIVE MEMBERS. Written notification of the adoption of this Bylaw, a statement of its significance and a copy of the provision shall be given separately to each member and prospective member before becoming a member of the Association. ARTICLE X. DISSOLUTION Subject to the Articles of Incorporation, in the event of any liquidation, dissolution or winding up of the affairs of this Association, whether voluntary or involuntary, equity capital shall be distributed to the holders thereof as follows: first to payment of the face amount (par value) of all Equity Participation Units and all Preferred Capital Certificates, second to payment of the face amount (par value) of all Capital Equity Certificates and other outstanding equities (other than Non-Patronage Earnings Certificates), and third to payment of the face amount (par value) of Non-Patronage Earnings Certificates; provided, however, that assets held at such time by any Defined Business Unit shall first be used to redeem the Equity Participation Units and Preferred Capital Certificates of the Defined Business Unit on a pro rata basis. ARTICLE XI. FISCAL YEAR The fiscal year of this Association shall commence on the first day of June each year and shall end on the last day of May of the following year. ARTICLE XII. NO SEAL The Board of Directors may, by resolution, adopt, alter or abandon the use of a corporate seal. ARTICLE XIII. AMENDMENTS These Bylaws may be amended in accordance with the Minnesota Cooperative Law, Minnesota Statutes Chapter 308A; upon the approval of a majority of the votes cast in person or by mail vote at any annual or special meeting of the members called in accordance with Section 1 of Article III of these Bylaws; provided, however, in the event the Board of Directors of this Association 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 take over, then the amendment may be adopted only upon the approval of eighty percent (80%) of the total voting power of the members of this Association, whether or not present and/or voting on the amendment; and provided further that notice of such amendment shall have been given in accordance with Section 2 of Article II of these Bylaws to the members in or with the notice of such meeting. EX-10.1 4 LEASE AGREEMENT LEASE AGREEMENT THIS AGREEMENT, made effective as of August 31, 1994 by and between PEAVEY COMPANY, a division of ConAgra, Inc., a Delaware corporation ("Peavey") and AMBER MILLING COMPANY, a division of Harvest States Cooperative ("Amber"). WITNESSETH: WHEREAS, Peavey owns and operates a grain terminal facility at Huron, Ohio which includes a mill building not presently used by Peavey and which has heretofore been leased to Amber; WHEREAS, Amber desires to continue to lease the mill building portion of Peavey's facility for the operation of a durum flour mill and to continue receiving certain grain handling services from Peavey; WHEREAS, Peavey and Amber desire to consolidate various amendments to the prior lease, make certain modifications thereto and enter into this new lease agreement to supersede the prior lease and amendments relative to the foregoing; NOW, THEREFORE, in consideration of the mutual promises hereinafter contained and other good and valuable consideration, the parties hereby agree as follows: 1. LEASED PROPERTY. Peavey hereby leases to Amber and Amber hereby hires and takes from Peavey, upon all the terms and conditions herein contained, the real and personal property described in this section 1 (hereinafter collectively referred to as "Leased Property"), all of which is located at Peavey's grain terminal in Huron, Ohio (hereinafter the "Terminal"). The Terminal, including the leased Property hereinafter described, is located on the real estate legally described on Exhibit A attached hereto. The leased Property consists of the following: A. The exclusive use of the Mill Building, shown outlined in red on the drawing attached hereto as Exhibit B, together with all fixtures and improvements located thereon (hereinafter sometimes referred to as the "Mill Building"); and B. The exclusive use of approximately 2,000 square feet of office space (hereinafter "Office Space") designated by Peavey in the Office Building at the Terminal (hereinafter "Office Building"), shown outlined in green on the drawing attached hereto as Exhibit B, together with the non-exclusive right to shared use of the conference room in the Office Building at mutually convenient times. C. The non-exclusive use of driveways, parking areas and sidewalks at the Terminal designated by Peavey for vehicular and pedestrian access to and from the Mill Building and the Office Building; D. The exclusive use only of tracks numbered "1" through "6" shown in brown on Exhibit B attached hereto (hereinafter "Rail Tracks") and the non-exclusive use of all other rail tracks located at or upon the Terminal, together with the non-exclusive use of the dock, wharf and vessel loading facilities, provided that Amber's use thereof does not unreasonably interfere with Peavey's operations. E. The warehouse building, shown outlines in blue on Exhibit B attached hereto. F. The "Train Shed" for its full width and 200 feet into the shed. G. Non-exclusive use, on the basis of the first vessel to arrive is the first vessel to be unloaded, of the self-unloading vessel hopper and associated equipment. 2. USE. A. Amber. Amber's use of the Leased Property shall be limited to the milling of durum flour or other flour products produced and sold solely for use in the manufacture of pasta, noodles and macaroni products, and residual by-products, including uses incidental or related thereto (the "Permitted Uses"). Amber expressly acknowledges that milling of other flour products is prohibited hereby unless the express consent of Peavey is first obtained in writing, except that Amber shall have the option to produce a maximum of 5,000 cwt/day of hard flour for non-permitted uses on a per day basis (i.e., not computed on the basis of multiple day averages). Amber may exercise this option at any time during the term of this agreement upon giving Peavey not less than thirty (30) days prior written notice thereof, which notice shall be accompanied by a fee of $125,000 payable to Peavey, which fee shall be payable annually thereafter on each anniversary of the date of exercise of this option until the obligation to continue paying said fee ceases as provided in this paragraph. Peavey shall have the right to have as independent inspector, Buhler, Inc., confirm that Amber is not producing more than 5,000 cwt/day of hard flour for non-permitted uses from the Leased Property, and Amber shall give the independent inspector access on a confidential basis to the Leased Property and Amber's books and records in order to verify compliance with this paragraph. Amber's obligation to pay the annual $125,000 fee to produce hard flour for non-permitted uses shall cease upon the sooner to occur of the following: (i) Upon expiration of the initial lease term on September 30, 2007 (or the renewal terms, if any, which the parties may subsequently agree upon). (ii) Termination of the lease agreement as a result of Amber exercising its option to purchase the facility and closing on the purchase. (iii) Amber ceases production of hard flour for non-permitted uses. No prorations or rebates will be made of the annual $125,000 hard flour production fee paid to Peavey by Amber if any of the three events referenced immediately above occurs in mid-year, after the annual fee is due and payable. B. Peavey. Amber agrees that its use of the Leased Property shall not unreasonably interfere with Peavey's operations at the Terminal for purposes for which Peavey uses the Terminal as of the date hereof. Peavey agrees that it will not mill durum flour at the Terminal during the term hereof without Amber's express prior written consent. Peavey further agrees that any other expansions of its operations at the Terminal shall be implemented with due regard for Amber's operations and the rights and obligations of the parties hereunder. C. Common Areas. Peavey and Amber acknowledge that certain areas (hereinafter "Common Areas") of the Terminal will be used in common by Peavey and Amber. Peavey reserves that right to establish reasonable rules from time to time for shared use of such Common Areas and Amber agrees to comply with such rules. Both parties agree at all times to use the Common Areas cooperatively and with due regard for the operations of the other. 3. CONSTRUCTION. A. Improvements. At Amber's sole expense, Amber may from time to time erect, install and construct all improvements, alterations, fixtures and equipment needed at the Leased Property for the safe and effective operation of Amber's business thereon (hereinafter sometimes referred to as the "Amber Improvements"). Prior to commencement of any construction on the Leased Property, Amber shall submit final and complete plans and specifications for the Amber Improvements and all contracts for the labor and materials to be supplied to Amber at the Leased Property (hereinafter collectively referred to as the "Contract Documents") to Peavey for approval. Peavey agrees to state any objections to the Contract Documents in writing within fifteen (15) days after all Contract Documents have been received by Peavey, which objections shall be limited to matters which do or could adversely affect Peavey's operations at the Terminal or the value of Peavey's property at the Terminal. Construction shall not commence until all such objections are cured or waived and Peavey has given its written approval to the Contract Documents. B. Protection of Peavey. All Contract Documents shall contain a conspicuous statement, satisfactory to Peavey in form and substance, that Peavey shall have no liability to contractors, subcontractors or material suppliers and that Peavey's interest in the Leased Property shall not be subject to lien by unpaid labor or material suppliers. Peavey also reserves the right to post signs on or near the Leased Property giving notice that Peavey is the owner of some of the property under construction and that its interest therein is not subject to lien. Amber shall notify Peavey of all construction and permanent loans affecting the Leased Property or the Amber Improvements thereon and Peavey likewise shall have the right to notify such lenders that Peavey shall have no responsibility for payment of construction costs or loan repayments. Peavey reserves the right to require a payment bond or similar form of security that Amber shall fully pay all labor and material suppliers at the Leased Property. C. Contract Bids and Awards. Prior to awarding any prime contract for construction, Amber shall notify Peavey of the contractor to whom the contract will be awarded and shall allow Peavey at least five (5) business days prior to award to object to the contractor. If Peavey reasonably objects to the contractor's qualifications to perform the contract work in accordance with the Contract Documents, then that contract shall not be awarded until Peavey's objections are resolved. D. Construction Insurance. All contractors and subcontractors working at, upon or near the Leased Property shall be required by the Contract Documents to carry contractor's liability insurance and builder's risk in form and substance satisfactory to Peavy and issued by responsible insurance companies. All such policies shall name Peavy and Amber as additional insureds. The Contract Documents shall require all contractors and other labor and material suppliers to comply with Peavey's human safety rules and standards in the performance of all work at the Leased Property. 4. TERM. A. Initial Term. The Initial Term of this Agreement shall be three (3) years and one (1) month, commencing on the "effective date" as stated in the first paragraph of this Agreement and ending on September 30, 1997. B. Renewal Terms. At Amber's option, provided that Amber is not in default (subject to any rights to cure) hereunder during the six (6) months preceding the expiration of the then current term, this Agreement may be renewed for up to five (5) renewal terms of five (5) years each (each of which is referred to herein as a "Renewal Term") commencing upon the expiration of the Initial Term of the then current Renewal Term. Amber's renewal options shall be exercised by giving written notice thereof to Peavey at least six (6) months prior to commencement of the Renewal Term for which the option is being exercised, and shall only be exercisable if any and all options for preceding Renewal Terms have been exercised. Rent and other charges payable by Amber for the First, Second and Third Renewal Terms shall be as stated in Paragraph 6 and elsewhere in this Agreement. The Fourth and Fifth Renewal Terms shall be at such commercially reasonable rental and other charges as the parties shall negotiate in good faith and agree upon (which shall be computed in a manner consistent with, and shall in no event be less than, the rental and other charges payable hereunder during the Renewal Term immediately preceding the Renewal Term for which this option to renew is being exercised). 5. HANDLING AND STORAGE. A. Services. Peavy agrees to unload, store in upright bins and transfer to the Mill Building, as hereinafter provided, all inbound grain shipments for Amber. The parties contemplate that inbound grain shipments will arrive at the Terminal by rail; however, Peavy shall unload grain inbound by vessel or truck if Amber so requires. Amber agrees to give Peavey at least three (3) working days advance notice of inbound rail shipments and at least fourteen (14) working days advance notice of inbound vessel shipments. When vessels are loaded for Amber, Amber shall thereupon promptly notify Peavey of the vessel's estimated time of arrival at the Terminal. If Peavy receives such advance notice and if the inbound shipment actually arrives and is cleared for discharge as scheduled, Peavey agrees to unload the grain in a timely manner so as to avoid demurrage liability. In the event Peavey fails to unload any train in a timely manner, (26 cars per 24 hours after first 7:00 a.m., Saturdays, Sundays, Holidays excluded) and Amber is charged any demurrage costs, expenses, or penalties, at the published rate, then Peavey shall reimburse Amber in full for all such amounts. Peavey (or Amber during non-Peavey operating hours) shall continue to weigh all outbound trucks by Amber, at Amber's option. The cost for such service from the effective date hereof through September 30, 1995, shall be $5.00 per truck, Peavey shall not increase said rate in any year by more than the increase in the U.S. Consumer Price Index (the "CPI"). B. Storage. (i) All Amber grain stored at the Terminal by Peavey shall be stored on an identity-preserved basis. For purposes of handling and storage charges, all grain transfers into and out of storage shall be treated on a first-in, first-out basis. Peavey agrees to have available for Amber at all times during the term hereof sufficient space for storage of 300,000 bushels of grain. (ii) If Amber requires additional storage space at any time during the term hereof because of expansion of Amber's milling capacity, Peavey agrees to provide 50,000 bushels of dedicated identity-preserved storage for each addition of 1,000 cwt per 24 hours of milling capacity. Peavey Grain Company shall make this additional space available to Amber in four month periods. A 30 day notice must be given to Peavey prior to each four-month period for the use of the said space. A minimum rent of $4,250.00 per month for each 50,000 bushels of additional space will be paid on the first day of each month. This minimum rent shall be increased to $5,000.00 per month for the Renewal Terms. This minimum rent shall be credited against the handling charges under Paragraph 6.B, below. (iii) Peavey will store Amber wheat unloaded from rail cars or vessels in bins with a maximum capacity of 45,000 bushels for the first 300,000 bushels and will limit Amber wheat storage to the bins so specified by Peavey. Once Peavey has specified the bins to be used for storage of Amber wheat, Peavey will not change the specified storage spaces without reasonable cause and prior notice to Amber, and will give Amber storage bins of comparable size and condition. Peavey will transfer grain from storage to the mill from those bins specified (four maximum) by Amber and in the approximate mix percentages requested by Amber. (iv) Peavey further agrees to transfer grain from storage to the mill at Amber's request five times a week, Sundays and Holidays excluded. Amber will notify Peavey at least 24 hours prior to each required transfer with the quantities and specific storage bins where those quantities are stored. When the mill's capacity is expanded to 9,000 cwt/24 hours (or more), Peavey agrees to transfer additional grain (to the extent such grain is available from Amber's storage in Peavey's facility) so as not to cause Amber to run out of wheat and thus interrupt normal business operations. (v) If Peavey in good faith determines it has Storage Space available, over and above Amber's allocated space, and a self-unloading vessel arrives loaded with bushels over and above Amber's allocated space, then Peavey agrees to provide said additional space (up to a maximum of 200,000 bushels) to Amber to allow Amber adequate storage space to finish unloading. There shall be no charge for the additional storage space for a 24-hour period commencing after the vessel completes unloading. If after said 24-hour period Amber still has bushels stored in excess of its allocated space, then Amber agrees to pay Peavey one-tenth of a cent ($.001) per bushel per day on the bushels which exceed its allocated space, subject to periodic adjustment by Peavey to keep pace with inflation as indicated by the CPI. This charge is payable and not subject to credit or offset by or against any other charges. If Peavey does not have additional storage space over Amber's allocated space while the vessel is unloading, then the vessel must stop unloading while Peavey transfers grain to Amber's mill, and the additional lay time will be for the account of Amber. C. Outbound Shipments. Amber shall be solely responsible for shipment of outbound product, including designation of and contracting with carriers. Notwithstanding the foregoing, all outbound shipping shall be scheduled in coordination with Peavey's facility manager at the Terminal so as not unreasonably to interfere with Peavey's operations. D. Handling and Storage Restrictions. (i) Peavey shall be required to provide the aforesaid handling and storage services only for wheat to be milled into the products specified in Paragraph 2A above at the Leased Property and for no other or additional grain or grain products. (ii) All handling shrink shall be for the account of Amber, except that Peavey shall reimburse Amber for any shrink in excess of 1% of inbound weights taken by Peavey which occurs while grain lies within the exclusive custody and control of Peavey, at the market value thereof on the date such excess shrinkage is first identified and known to both parties. Peavey agrees that it shall use the same standard care when handling and storing Amber's grain as it uses when Peavey handles it own grain, including, without limitation, periodically monitoring the temperature of and (at Amber's request and expense) the turning of any stored product. Peavey agrees that any wheat of Amber's lost or damaged during the blending of Amber's grain shall not be deemed to be shrinkage and Peavey shall reimburse Amber for any such losses caused by Peavey. (iii) Peavey assumes no responsibility and shall have no liability to Amber hereunder if grain is received at the Terminal in condition or of a quality different from the condition or quality which Amber expects or is entitled to receive. Peavey agrees to give access to Amber and its agents for the purpose of making reasonable inspection of inbound grain shipments. (iv) Peavey agrees to give Amber monthly inventory reports which shall be conclusively deemed accurate unless a written objection is reasonably made by Amber. If Amber objects to any inventory report made by Peavey and the parties cannot resolve the differences, then the disputed quantities of grain shall be loaded out, weighed and replaced in storage. The scale weights thus taken shall be conclusive and the cost of the loading and weighing shall be borne equally by the parties hereto. Peavey shall provide Amber with house unload and house transfer weights of all grain handled by Peavey for Amber. All transfers and unload weights will be received in writing within 24 hours. Amber will accept batch weights for its accounting procedures. However, if a railroad shipper will not accept batch weights, Peavey will weigh the cars at a cost to Amber to be agreed upon. (v) Amber shall provide to Peavey the grade, quantity, quality and car number or vessel name at least three (3) working days prior to arrival of Amber's grain. Wheat designated for separate storage shall be limited to no more than eight (8) rail wheat grade classifications and no more than eight (8) vessel wheat grade classifications provided that no more than a total of eight (8) wheat grade classifications (whether rail or vessel) shall be subject to separate storage at any one time, provided Amber shall pay on demand by Peavey any demurrage resulting from requiring multiple separations. Procedures for handling multiple wheat grade separations shall be mutually determined by Peavey's and Amber's respective local managers at the Terminal. (vi) Peavey, when transferring Amber's wheat from its elevators to the mill, will, upon request of Amber, provide up to four (4) grades for blending and shall use reasonable care to provide a requested blend, but will not guarantee any specific percentage blend. Amber shall not request less than 30,000 bushels of a specified blend or mix at any one time. E. Vessel Discharge Rates; Holidays. Peavey will accomplish minimum vessel dishcarge rates per the following (provided, however, Peavey must use reasonable efforts to exceed said minimum):
OVERALL BEAM DEPTH HATCH SIZE MINIMUM DISCHARGE LENGTH L W RATE Canadian Ranger, 15,000/BU/HR. self-unloader or similar vessel WILLOWGLEN 5,500/BU/HR. less than 630' less than 60' less than 35' greater than 38' greater than 11' 5,300/BU/HR. less than 680' less than 67' less than 37' greater than 48' greater than 11' 4,600/BU/HR. less than 730' less than 75' less than 39' greater than 58' greater than 11' 4,200/BU/HR.
The discharge time will be calculated from the time the vessel is along side Peavey's dock and ready to discharge until the vessel is completely unloaded and all equipment used for unloading purposes has been removed from the vessel. Peavey will unload bulk carrier vessels based on said rates everyday except holidays. Holidays shall be: New Year's Eve Day, New Year's Day, President's Day, Good Friday, Easter, Memorial Day, Independence Day (July 4th), Labor Day, Columbus Day, Thanksgiving Day, Friday after Thanksgiving Day, Christmas Eve Day, Christmas Day, International Longshoremen's Union Meeting Days, and any other days designated as holidays by the City of Huron, the State of Ohio, the International Longshoremen's Union, the United States Government or other governmental authority having lawful jurisdiction. Should any of the stipulated holidays fall on a Sunday, the following Monday will be deemed as that holiday. If they fall on Saturday, the preceding Friday will be deemed as that holiday. Peavey shall not be required to unload on holidays. Down-time during vessel discharge for reasons not under Peavey's control will not be calculated toward unload rate. Peavey shall not be liable to Amber for any loss, damage, delay or failure of performance resulting directly or indirectly from any cause beyond its reasonable control, including but not limited to force majeure. Peavey will unload self-unloading vessels based on said rates every day except holidays which are recognized by Peavey and provided to Peavey employees. As in the past, no vessels with side tanks, or multi-level decks will be unloaded. All vessels are subject to Peavey's approval. The draft of any vessel must be compatible with the depth of Peavey's slip. 6. RENT AND HANDLING CHARGES. A. Rent. Amber agrees to pay Peavey rent for rights and privileges granted herein in the amount of (***) for the Initial Term (which expires September 30, 1997), payable in monthly installments of (***) each commencing on the first day of the Initial Term and continuing on the first day of every calendar month thereafter during the Initial Term, subject to adjustment as hereinafter provided. Rent for the First Renewal Term (which expires on September 30, 2002) shall be (***), payable in monthly installments of (***) on the first day of each calendar month during said First Renewal Term, subject to adjustment as hereinafter provided. Rent for the Second Renewal Term (which expires on September 30, 2007) shall be (***), payable in monthly installments of (***) on the first day of each calendar month during said Second Renewal Term, subject to adjustment as hereinafter provided. Rent for the Third Renewal Term (which, if the purchase option in Paragraph 19C is not exercised, expires September 30, 2012) shall be (***), payable in monthly installments of (***) on the first day of each calendar month during said Third Renewal Term, subject to adjustment as hereinafter provided. B. Handling Charges. Amber agrees to pay Peavey for handling inbound grain unloaded by any mode by Peavey at the Terminal based upon the following rate schedules: (i) During the Initial Term - for the first 50,000,000 bu. $ (***) per bu. for the next 5,000,000 bu. (***) per bu. for bu. over 10,000,000 (***) per bu. (ii) During the First Renewal Term - for the first 5,000,000 bu. $ (***) per bu. for the next 5,000,000 bu. (***) per bu. for bu. over 10,000,000 (***) per bu. (iii) During the Second Renewal Term - for the first 5,000,000 bu. $ (***) per bu. for the next 5,000,000 bu. (***) per bu. for bu. over 10,000,000 (***) per bu. (iv) During the Third Renewal Term - for the first 5,000,000 bu. $ (***) per bu. for the next 5,000,000 bu. (***) per bu. for bu. over 10,000,000 (***) per bu. (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. The foregoing rates are based upon annual volumes of grain measured on October 1, 1995 and October 1, of each year thereafter during the initial and any Renewal Terms, provided the charges on the volumes put through from the Effective Date through September 30, 1994, shall be computed at the same rate as is used on the grain put through for the year ending October 1, 1995. Handling charges shall be computed and invoiced on an annual basis. The twelve monthly rental payments received by Peavey for each lease year under Paragraphs 5.B(ii) and 6.A above shall be credited against the annual invoice for handling charges payable under this Paragraph 6.B for each lease year. If the total annual handling charges exceed the total of such annual rental payments, then the amount of handling charges that exceed the rental charges for each lease year shall be paid to Peavey annually upon receipt of invoice. With the credit for rent exception set forth above, the handling charge is in addition to any other charges provided in this Lease. C. Storage Charges. Peavey agrees to store 300,000 bu. of Amber's grain for up to thirty (30) days at no additional charge. Storage of additional volumes, or for longer periods of time, shall be invoiced monthly by Peavey at its then current published rate for identity-preserved storage of wheat at the Terminal, except as otherwise specifically provided in this Lease. D. Unload Charges for Self-Unloading Vessels. Amber shall pay Peavey a surcharge of $0.0075 per bushel of grain unloaded from self-unloading vessels. If at any time in the future Peavey finds a way reasonably acceptable to it to dry grain or load out rail cars, or both, while a self-unloading vessel is unloading into the facility, the payment hereunder shall be reduced accordingly, provided Peavey shall not be required to make any substantial capital expenditure in order to accomplish the same. E. Unload Charges for Non-Self-Unloading Vessels. For all vessels other than self-unloading vessels, Amber agrees to pay Peavey an unload charge of six and one-half cents ($0.065) per bushel for a period of three (3) years from the date hereof. Every three (3) years during the ongoing term (including renewals) of this Lease, the unload charge will be reviewed and a new rate covering Peavey's increased or decreased cost will be established or, if there has been no change in Peavey's cost, the old rate continued. Any increase in the rate shall be limited to not more than ten percent (10%) of the previous rate. Any decrease shall not be limited. F. Dockage Charge. Peavey agrees to maintain its dockage rates at ten cents ($0.10) per gross registered ton of the docking vessel for two (2) years from August 14, 1992. At the end of each two (2) year period (including renewals) thereafter, Amber and Peavey will obtain information concerning the dockage fees charged by the six largest, by volume, loading and unloading grain facilities on the Great Lakes, and Peavey will charge a dockage rate at the average of said six dockage fee rates during each ensuing two (2) years. Peavey agrees to accordingly amend its tariff to allow for these rates. G. Train Shed Rent. Amber shall pay Peavey $10,000 per year rent for the Train Shed, which shall be payable on the first day of each calendar month during the term of this Agreement in installments of $833.34 each. H. Additional Rent. All other charges which are the responsibility of Amber hereunder (including without limitation real estate and personal property taxes, assessments, insurance, utilities and maintenance) shall be deemed additional rent hereunder, whether paid to Peavey or to third parties and whether Peavey is or is not directly or indirectly liable therefor. 7. INDEPENDENT OPERATIONS. It is understood and agreed by the parties that Amber is acting entirely as an independent contractor and not in any respect as an agent, employee, representative, partner or coventurer with Peavey. As such, Amber shall, without interference by or on behalf of Peavey, have full authority over the operation of its business on the Leased Property, including without limitation the authority to establish prices for its goods and services. 8. EXPENSES. A. Equipment and Supplies. Amber shall provide at its own expense all tools, machinery, equipment, supplies, fuel and utilities which are required for the operation of its business at the Leased Property. All such items shall be and remain the property of Amber, unless affixed to the real property which is owned by Peavey. Nothwithstanding anything to the contrary contained herein, Peavey shall not be required to supply any such items, even if necessary to replace obsolete parts of the Leased Property. If utilities supplied to the Mill Building are furnished through a common delivery system to the Terminal, then Amber shall, at Amber's expense, cause separate meters to be installed prior to commencing use of any such utilities for construction or mill operations. B. Maintenance. Amber agrees at its own expense to keep the Leased Property, the Rail Tracks and Amber's property at the Terminal in safe, sound and sanitary condition and to provide all repairs and maintenance required at the Leased Property, the Rail Tracks or to Amber's property, or any part thereof, including without limitation structural repairs and maintenance which would normally be classified as capital expenditures. Peavey shall have no liability for maintenance or repair to Amber's property at the Terminal, except with respect to any such matters required as a direct result of the negligence or recklessness of Peavey, its agents, employees or contractors. C. Shared Maintenance. Whenever repair or maintenance is required to areas of the Terminal used commonly by Peavey and Amber (but excluding the Rail Tracks or other shared items, such as the Train Shed and the truck scale, for which Amber pays a user fee designated for that item), the costs of such repair and maintenance shall be shared by the parties in proportion to their respective use of the items repaired or maintained. In the case of repair or maintenance of the Rail Tracks, Amber agrees to repair and maintain in a safe and serviceable condition, at Amber's sole expense, the Rail Tracks. Peavey agrees to repair and maintain in a safe and serviceable condition, at Peavey's sole expense, all of the other rail tracks at the Terminal which are in use by Peavey, Amber or both. D. Safety. Whenever in Peavey's reasonable judgment any condition exists at or upon the Leased Property which threatens the safety of Peavey's property or of persons at or near the Terminal, then Peavey shall so notify Amber and the unsafe condition shall be promptly corrected at Amber's expense. If Amber fails promptly to correct any such unsafe conditions, then Peavey may upon notice do so at its own expense and the actual cost thereof shall become additional rent immediately due and payable hereunder. Whenever in Amber's reasonable judgment any condition exists at or upon the Terminal (excluding the Leased Property) which threatens the safety or sanitation of the Leased Property, or of persons at the Leased Property, then Amber shall so notify Peavey and the unsafe or unsanitary condition shall be promptly corrected by Peavey and, if Peavey fails to do so, Amber may correct the condition and Peavey shall reimburse Amber for the actual cost thereof, on demand. E. Taxes and Assessments. Amber agrees to pay as the same become due all real property taxes, personal property taxes and special assessments which are assessed against the Mill Building and Amber's property and which are due and payable during any term of this Agreement. Peavey and Amber agree to cooperate to obtain a division of the Mill Building from the Terminal property for purposes of real estate and personal property tax assessments. 9. CONDITION OF LEASED PROPERTY. Amber acknowledges that it has had ample opportunity to inspect the Leased Property and is entering into this Agreement solely based upon its inspection thereof. Amber acknowledges that there are no representations or warranties other than those expressly set forth in this Agreement and further that Peavey makes no representations, warranties, affirmations or assurances as to the condition of Terminal or of the Leased Property, or its suitability for use as a durum mill or for any other purpose whatsoever. 10. IMPROVEMENTS. Except as required or permitted pursuant to Paragraphs 3 and 8 above, Amber shall make no permanent improvements or alterations to the Leased Property without the express prior written consent of Peavey in each instance. Unless Peavey otherwise agrees, all such improvements and alterations shall be removed by Amber at the Expiration of the term of this Agreement or, in the case of permanent improvements or alterations, shall become the property of Peavey upon the termination of this Agreement regardless of the time or cause of such termination. At the termination of the Lease Agreement, Amber shall be granted an additional sixty (60) days to remove all of its property and equipment at $5,000.00 a month rent. 11. INSURANCE. A. Property. Amber shall procure and maintain throughout all terms of this Agreement a policy or policies of "all-risk" property insurance, as that term is generally understood within the insurance industry at the time the policy or policies are procured, including boiler and machinery coverage, from insurance carriers approved by Peavey. The said policies shall insure, at full insurable replacement cost, all real and personal property of Peavey and Amber which is located at or upon the Leased Property. Peavey shall be named a loss payee on all such policies of property insurance, as its interest may appear, and such policies shall provide for continuation of rental income to Peavey in the event of any property loss or damage covered by the policy. B. Builder's Risk. If required by any of Amber's contractors providing labor or materials at or upon the Leased Property, at any time during any term of this Agreement, Amber shall procure Builder's Risk Insurance as so required, which insurance shall name Peavey as an additional insured. C. Liability. Amber shall procure and maintain throughout all terms of this Agreement a policy or policies of comprehensive general liability insurance with a combined single limit of coverage of not less than Ten Million Dollars ($10,000,000). Peavey shall be named as an additional insured on all such policies, and they shall be properly endorsed to include coverage for contractual liability of Amber pursuant to this Agreement. Amber shall either procure such coverage in behalf of its contractors providing labor and materials at or to the Leased Property or shall require that said contractors procure similar liability insurance, naming Amber and Peavey as additional insureds. Liability insurance coverage maintained by Amber's contractors shall not relieve Amber of its obligation to procure insurance or reduce the amount of coverage required hereunder. D. Worker's Compensation. Amber shall procure and maintain throughout all terms of this Agreement worker's compensation insurance in form and amount as required by applicable statute. E. Waiver of Subrogation. Amber agrees that each of its insurers providing coverage herein required shall waive all claims, causes of action and charges against Peavey for loss or damage to property or injury or death of persons at or upon the Leased Property, regardless of negligence or fault, and that such waiver of claims (by subrogation or otherwise) shall be written in the policy provisions. F. Evidence of Insurance. Amber shall provide, within five (5) business days after any request therefor made by Peavey, duly executed certificates of insurance establishing that the coverage herein required is fully paid and in full force and effect. The said certificates and underlying policies shall specifically provide that no change, modification or cancellation of coverage shall be effective until at least thirty (30) days after written notice thereof to Peavey, given as herein required. 12. INDEMNITY. Amber agrees to indemnify and hold Peavey harmless from and against any and all claims, costs, expenses, actions, causes, liens, liabilities, damages, judgments and attorneys fees arising from or connected with property damage or personal injury or death caused directly or indirectly by Amber's acts or omissions as lessee, occupant or operator of or at the Leased Property, except any such claims, costs, expenses, actions, causes, charges, liens, liabilities, damages, judgments or attorneys fees which arise from or are connected with any property damage or personal injury or death caused by Peavey's negligent acts or omissions. Peavey agrees to indemnify and hold Amber harmless from and against any and all claims, costs, expenses, actions, causes, charges, liens, liabilities, damages, judgments and attorney fees arising from or connected with property damage or personal injury or death caused by Peavey's operations at the Terminal, except any such claims, costs, expenses, actions, causes, charges, liens, liabilities, damages, judgment or attorneys fees which arise from or are connected with any property damage or personal injury or death caused by Amber's negligent acts or omissions. 13. DAMAGE TO LEASED PROPERTY. A. Insurance Proceeds. In the event of any loss or damage to the Leased Property, then Peavey and Amber shall jointly make, negotiate and resolve the claim arising therefrom against the applicable insurance policies, but each party alone has the right to resolve, settle or compromise the portions of such claim arising from loss or damage to that party's property. Insurance proceeds received shall be apportioned equitably by the parties in proportion to the value of their lost or damaged property for which proceeds are paid. Each party shall account to the other for application of insurance proceeds received consistent with requirements hereof. B. Reconstruction. Unless otherwise agreed by the parties, any loss or damage to the Leased Property shall be promptly repaired, restored or replaced to a condition at least equal to the condition of the Leased Property prior to the occurrence of the loss or damage. Notwithstanding the foregoing, however, neither party hereunder shall be required to spend more time than the amount of insurance proceeds actually received in effecting such repair, restoration or replacement. Prior to commencement of any repair, restoration or replacement of any lost or damaged part of the Leased Property, both parties shall review and approve the plans, specifications and contracts for the repair, restoration or replacement. C. Termination of Lease. If the parties agree that the lost or damaged part or parts of the Leased Property shall not be repaired, restored or replaced, and if the Leased Property thereafter is not suitable for operation of a durum flour mill, then this Lease shall be deemed terminated as of the date of the occurrence of the loss or damage. In such event, Amber shall assign and pay over to Peavey all insurance proceeds received by Amber for loss or damage to improvements at or upon the Leased Property which would have become Peavey's property upon termination hereof pursuant to section 18 below. 14. LIENS. Amber agrees that it shall neither cause nor permit mechanics' or materialmens' liens to be imposed upon the Leased Property at any time. If any such lien is placed against the Leased Property, Amber shall promptly cause the lien to be discharged or, if Amber wishes to defend the lien claim by proper legal proceedings, Amber shall establish such security as Peavey may require for the payment of the lien at the conclusion of such legal proceedings. Any sums which Peavey is required to spend in defense of any such lien shall be deemed additional rent immediately due and payable hereunder. 15. CONDEMNATION. If the Leased Property or any part thereof shall be taken by any authority under the power of eminent domain, Amber and Peavey shall each have claims for compensation for their own property located at or upon the Leased Property. In addition, each party shall have its claim for relocation or other allowable expenses in any condemnation proceedings. Such claims shall be jointly prosecuted if required by the condemning authority, but Peavey and Amber each shall pay their own expenses therein. If the Leased Property, after conveyance of the portion thereof taken for public use, is no longer operable for Amber's purposes hereunder, then this lease shall be terminated as of the date of the taking. 16. DEFAULT. Upon default by either party under the terms of this Agreement, the other party shall have all and cumulatively then rights and remedies provided by law and by this Agreement; provided, however, that prior to exercise of any such rights or remedies, notice of default shall be given to the defaulting party allowing such party ten (10) days following said notice to cure the default. In the event of a default which cannot reasonably be cured in ten (10) days, the said period for cure shall be extended only for so long as the defaulting party diligently and continuously works toward effecting such cure. In the event either party breaches any of the terms and conditions of this Lease Agreement and the injured party initiates either litigation or arbitration, then the losing party shall reimburse the prevailing party for any and all costs or expenses of such proceedings, including reasonable attorney's fees. 17. WAIVER. No waiver of any right or remedy by either party shall be construed to be a waiver of other rights or remedies of such party, or of the waived right or remedy for any future occurrence. 18. SURRENDER. Upon the effective date of termination of this Agreement, without regard to the cause or time of such termination, Amber shall cease its operations at the Leased Property and shall remove all of its property therefrom. The Leased Property shall be restored to its original condition, subject only to ordinary wear and tear and to modifications and substitutions permitted or accepted by Peavey. The parties understand and agree that improvements previously or hereafter made by Amber to the Leased Property include certain permanent fixtures and improvements which, upon the termination of this Agreement, shall become the property of Peavey without additional consideration therefor. Nothing herein shall be construed to permit Amber to remove from the Leased Property any structural modifications, permanent improvements, fixtures or other items which have become integral with Peavey's real or personal property at the Terminal. 19. RIGHT OF REFUSAL; OPTION TO PURCHASE. A. Right of First Refusal to Amber. Peavey hereby grants to Amber for the entire term of this Agreement a right of refusal to purchase the Terminal upon terms and conditions offered to and accepted by Peavey from any third party purchaser (excluding any related or affiliated corporation or other entity). If Peavey should receive any such acceptable offer, Peavey shall give Amber written notice thereof including all terms and conditions of the offer. Amber shall have thirty (30) days in which to exercise its right of refusal by giving written notice of acceptance to Peavey. If Amber should exercise its right of refusal, Amber shall become the purchaser of the Terminal upon terms and conditions identical to those contained in the written offer from the third party buyer to Peavey. This right of refusal applies only to a sale of the Terminal alone and not to a sale of the Terminal together with other substantial assets of Peavey's Grain Merchandising Division. B. Right of First Refusal to Peavey. Amber hereby grants to Peavey a right of refusal to purchase Amber's assets at the Leased Property upon terms and conditions offered to and accepted by Amber from any third party purchaser. If Amber receives any such acceptable offer, Amber will give Peavey written notice thereof including all terms and conditions of the offer. Peavey shall then have thirty (30) days in which to exercise its right of refusal by giving written notice of acceptance to Amber. If Peavey exercises its right of refusal hereunder, Peavey shall become the purchaser of Amber's assets at the Leased Property upon all of the terms and conditions contained in the offer from the third party purchaser. In the event Peavey fails to exercise its right of first refusal within thirty (30) days, then Amber shall be free to sell Amber's assets at the Leased Property to the third party offering to purchase, with the written consent of Peavey, so long as the sale is on the same terms and conditions offered to Peavey. The right of first refusal granted to Peavey pursuant to this Paragraph l9B shall not apply to the sale or lease by Amber of Amber's assets to any person or entity to whom Amber is permitted to assign its rights and obligations under this Agreement under the terms of Paragraph 21. C. Option to Purchase by Amber. Provided Amber has exercised all renewal options under this Lease and is not otherwise in default hereunder, Amber shall have the right and option to purchase the entire Terminal on October 1, 2007 (the "closing date"), for a cash purchase price of (***), subject to the terms and conditions stated herein, which option may only be exercised by Amber giving Peavey written notice of its election to exercise this option to purchase not more than two (2) years and not less than six (6) months prior to said date. Except for the obligations of repair and maintenance imposed upon Amber pursuant to the terms of this Agreement, from the date Amber properly exercises its option to purchase until the date of closing hereunder, Peavey shall keep and maintain the Terminal in substantially the same condition and repair, subject to normal wear and tear, as it is on the date Amber gives notice of exercise of this option. (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. On the closing date, Peavey shall cause good and marketable title to the Terminal to be conveyed to Amber by special warranty deed, subject to easements, covenants and restrictions of records, applicable zoning, building and use restrictions, rights and limitations applicable to riparian, filled and submerged lands, matters which would be shown by a good and sufficient "as-built" land survey, matters suffered or created by Amber and a lease or through put agreement in favor of Peavey as more particularly stated in this paragraph. The cost of title insurance, any land survey work, documentary or transfer tax and recording fees, shall be shared equally by Amber and Peavey. If a current title insurance commitment and/or land survey on the Terminal reveal any defects in title, other than the exceptions permitted above, then Peavey shall have a reasonable time, not to exceed two (2) months after the scheduled closing date, within which to cure such defects. If Peavey is unable to cure such title defects within that time, despite reasonable efforts to do so, then Amber shall either waive the defects and proceed with the closing or rescind its exercise of this option to purchase and neither party shall have any further liability to the other with respect thereto. Taxes on any portion of the Terminal not heretofore leased by Amber which first become delinquent in the year of closing shall be prorated as of the date of closing using the most current tax bills available, and there shall be no reproration subsequent to closing for any taxes payable in arrears, when the statements for such taxes are eventually issued by the local taxing authorities. Utilities and other charges and service contracts shall be determined and adjusted as of closing. After Amber exercises this option to purchase, but prior to closing hereunder, Peavey shall notify Amber if Peavey desires to have the right to put grain through and/or store grain at the Terminal following closing. Upon the giving of such notice, the parties shall promptly commence and diligently complete good faith negotiations for such through put and/or storage on such commercially reasonable terms and conditions as the parties may mutually agree and shall reduce the same to writing so the agreement will be executed and delivered at closing by Amber and Peavey. 20. NOTICES. Any notice required or permitted to be given hereunder shall be deemed given when mailed by prepaid registered or certified mail, or when delivered to a bonded courier service for prepaid delivery, to the party to whom such notice is directed at the following addresses (or at such other address as either party may designate by written notice from time to time): TO AMBER: Amber Milling Company c/o Harvest States Cooperatives 1667 North Snelling Avenue St. Paul, MN 55108 Attn: Legal Department TO PEAVEY: Peavey Company c/o ConAgra Grain Companies 730 Second Avenue South P.O. Box 2105 Minneapolis, MN 55402-0105 21. ASSIGNMENT. Neither party shall sell, assign or transfer this Agreement or any of the rights or obligations created hereby without the prior written consent of the other, which consent shall not be unreasonably withheld, except that such rights or obligations may at any time be assigned by Peavey without Amber's consent to a purchaser of substantially all of the assets of Peavey's Grain Merchandising Division or to an affiliated corporation or entity. Peavey agrees that it will consent to any assignment hereof by Amber which is solely for the purpose of securing repayment of indebtedness related to Amber's construction or operations at the Leased Property, provided that said indebtedness is otherwise consistent with requirements of the Agreement. Amber shall have the right to assign this Lease to a new entity in which it owns outright at least a 20% interest (with full voting and other rights relating thereto), provided that Amber shall nevertheless remain fully and primarily liable to Peavey for the timely and proper performance of Amber' s obligations under this lease and, provided further, the new entity does not include any members, partners or shareholders (other than Harvest States or other agricultural cooperatives) who are in direct competition with ConAgra, Inc., or its corporate affiliates in the grain milling business. This Agreement shall be binding upon and inure to the benefit of approved successors and assigns of the parties hereto. 22. MEMORANDUM. The parties agree that, upon request of either, a memorandum of this lease agreement shall be executed and delivered in recordable form. Said memorandum shall give notice of the possessory interests of the parties in and to the Terminal property and Leased Property and also of the mutual rights of refusal granted hereunder. 23. MODIFICATION. No amendment or other change or modification in the terms of this Agreement shall be effective unless it is made in writing and is duly executed on behalf of both parties hereto. 24. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one agreement. 25. ALARM SYSTEM. Peavey acknowledges that it has given Amber consent to utilize an alarm system installed at the Huron Terminal with direct communication to the local fire protection and emergency facilities, provided that Amber shall install and maintain its own telephone lines connected to said system. Nothing herein contained or implied from the shared use of the alarm system shall be construed as an obligation on the part of Peavey to maintain the alarm system or to incur any costs to connect Amber's telephones to the system. Amber hereby releases and waives any and all claims it may have arising out of the shared use of the alarm system, including claims based upon Peavey's failure to maintain the system in operative condition. 26. OPERATING PROCEDURES. Amber acknowledges that its operations at the Huron Mill may from time to time require its employees to perform activities or otherwise be present in the course of their employment on property owned, controlled or managed by Peavey. In every such instance, Amber agrees that its employees shall be subject to the safety rules and operating procedures established by Peavey for its own employees and Peavey is authorized to enforce such rules and procedures as to Amber employees. If Amber employees regularly fail to observe such rules and procedures, then Peavey may deny such employees access to its property and facilities, notwithstanding any other provisions to the contrary contained herein. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the day and year first above written. PEAVEY COMPANY, a division of CONAGRA, INC. By: /s/ T. M. Racciatti T. M. Racciatti Its: President AMBER MILLING COMPANY, a division of HARVEST STATES COOPERATIVES HARVEST STATES COOPERATIVES By: /s/ Garry A. Pistoria Garry A. Pistoria Its: Group Vice President STATE OF NEBRASKA) ) ss. COUNTY OF DOUGLAS) On this 30th day of August , 1994, before me, a Notary Public, within and for said County, personally appeared T. M. Racciatti, to me known to be the President of PEAVEY COMPANY, a division of CONAGRA, INC., the corporation named in the foregoing instrument, and which executed the foregoing instrument, and he acknowledged said instrument to be the free act and deed of said corporation. [STAMP: GENERAL NOTARY - STATE OF NEBRASKA MARY O. BOND MY COMM. EXP. FEB. 22, 1997] /s/ Mary O. Bond Notary Public STATE OF MINNESOTA) ) ss. COUNTY OF RAMSEY ) On this 25th day of August, 1994, before me, a Notary Public, within and for said County, personally appeared Garry A. Pistoria, to me known to be the Group Vice President of HARVEST STATES COOPERATIVES, the corporation named in the foregoing instrument, and which executed the foregoing instrument, and he acknowledged said instrument to be the free act and deed of said corporation. [STAMP: NANCI L. LILJA NOTARY PUBLIC - MINNESOTA DAKOTA COUNTY MY COMM. EXPIRES MAY 16, 1997] /s/ Nanci L. Lilja Notary Public Exhibit A Situated in the City of Huron, County of Erie and State of Ohio: Being a part of the Original Lot Thirty-one (31), in Section One (1) of Huron Township, and being designated as Parcel "A" as set forth on Exhibit "A", said exhibit attached to the deed recorded in Volume 162, Page 148, Erie County Deed Records and being the deed from the Wheeling and Lake Erie Railway Company to Eastern States Cooperative Milling Corporation, and more particularly described as follows: Beginning at a point on the monumented center line of the Huron Branch of The Wheeling and Lake Erie Railway South ten degrees, forty-two minutes, six seconds West (S10 degrees 42'06"W) one thousand ninety-three and sixty-four hundredths (1093.64) feet from an iron rail monument in the center line of said Huron Branch located at Standard Chainage Station six hundred fifty-seven plus seventy-six and six tenths (675 + 76.6) thereof, which point is the place of intersection of the northerly line of that portion of Van Rensselaer Street sixty-six (66) feet wide as now located and constructed and said monumented center line of said Huron Branch; thence North eighty-two degrees, thirty-three minutes, fifty-four seconds West (N82 degrees 33'54"W) three hundred ninety-eight (398) feet along the northerly line of said Van Rensselaer Street to an iron pin, the point proper of beginning, from which point another iron pin bears South fourteen degrees, thirty-six minutes, six second West (S14 degrees 36'06"W) twenty and fifty-one hundredths (20.51) feet; thence by the following twelve (12) courses: Course No. 1. North fourteen degrees, thirty-six minutes, six seconds East (N14 degrees 36'06"E) three hundred six and sixty-six hundredths (306.66) feet to an iron pin: Course No. 2. North fifty-five degrees, seventeen minutes, fifty-four seconds West (N55 degrees 17'54"W) two hundred twelve and forty-one hundredths (212.41) feet to an iron pin; Course No. 3. North twenty-one degrees, sixteen minutes, twenty-four seconds West (N21 degrees 16'24"W) ninety (90) feet to an iron pin; Course No. 4. North sixty-eight degrees, forty-three minutes, thirty-six seconds East (N68 degrees 43'36"E) one hundred fifty (150) feet to an iron pin; Course No. 5. North twenty-one degrees, sixteen minutes, twenty-four seconds West (N21 degrees 16'24"W) forty-five (45) feet to an iron pin; Course No. 6. South sixty-eight degrees, forty-three minutes, thirty-six seconds West (S68 degrees 43'36"W) sixty-six (66) feet to an iron pin which is two hundred (200) feet westerly from the westerly face line, prolonged southerly, of the concrete dock of The Wheeling and Lake Erie Railway Company on the easterly side of Slip No. 2, said iron pin being located from point "0" (so-called, cut in said concrete dock six and two-tenths (6.2) feet northerly from the southerly end of said dock) by the following two courses: (a) South twenty-one degrees, fifteen minutes, fifty-four seconds East (S21 degrees 15' 54" E) fifty-three and fifty-two hundredths (53.52) feet along the Government base line "L"-"O" prolonged southerly; and (b) South sixty-eight degrees, forty-three minutes, thirty-six seconds West (S68 degrees 43'36"W) two hundred one and ninety-four hundredths (201.94) feet; Course No. 7. North twenty-one degrees, sixteen minutes, twenty-four seconds West (N21 degrees 16'24"W) parallel with two hundred (200) feet westerly of said westerly face line of concrete dock eight hundred thirty-two and seven hundredths (832.07) feet; Course No. 8. South seventy-two degrees, twenty minutes, six seconds West (S72 degrees 20'06"W) four hundred eighty-seven (487) feet, more or less to the low water line upon the east bank of the Huron River; Course No. 9. Southerly along said low water line of the Huron River upon the east bank thereof approximately eleven hundred twenty (1120) feet to a point in the northerly line of that portion of Van Rensselaer Street sixty (60) feet wide as defined in Erie County Road Records, Volume 3, Pages 350 to 369 inclusive; Course No. 10. South eighty-two degrees, thirty-three minutes, fifty-four seconds East (S82 degrees 33'54"E) approximately four hundred ninety-seven (497) feet along the northerly line of said portion of Van Rensselaer Street (60) feet wide to the northeasterly corner of the parcel described in the above mentioned road record; Course No. 11. North twenty-five degrees, fifty-four minutes, fifty-four seconds West (N25 degrees 54'54"W) three and fifty-eight hundredths (3.58) feet to the northerly line of that portion of Van Rensselaer Street sixty-six (66) feet wide hereinabove mentioned; Course No. 12. South eighty-two degrees, thirty-three minutes, fifty-four seconds East (S32 degrees 33'54"E) two hundred fifty-three and twelve hundredths (253.12) feet along said northerly line of that portion of Van Renssalaer Street sixty-six (66) feet wide to the point proper of beginning: containing an area of twenty (20) acres, more or less, and Marked Exhibit "A" as set forth in Deed Volume 162, Page 148, together with: all riparian rights in the Huron River between the westerly ends of the 8th and 10th courses of the description of said Parcel "A" incident or appurtenant to said parcel along the 9th course of the description thereof: SECOND: Does hereby grant, remise, release and forever quit claim unto the said Grantee, its successors and assigns, forever, the following described property, rights and easements: 1. The property between low water line of the east bank of the Huron River and the center thereof and between the 8th and 10th courses of the description of Parcel "A" extended westerly to the center of said river; 2. The right and easement to use a partially submerged parcel of property sixty-six (66) feet wide and eight hundred thirty-two and seven hundredths (832.07) feet long lying immediately contiguous to the 6th and 7th courses of the description of Parcel "A" above, said parcel being designated on said print as Parcel "B" and outlined and attached to the deed recorded in Volume 162, Page 148, and the water thereon, solely for the purposes of navigating, loading, unloading and mooring thereon, all types of watercraft, together with the rights of ingress and egress for said watercraft to, from and between Parcel "A", and Parcel "B" and the center of the Huron River over (a) Slip No. 2 (other than Parcel "B"), said Slip No. 2 being shown on said print, and (b) the property between Parcel "C" (hereinafter mentioned), Slip No. 2 and the center of the Huron River, (said property being entirely submerged) at such time and to such extent as will not unreasonably interfere with the use of (a) and (b) by the former Grantor, The Wheeling and Lake Erie Railway Company and persons (other than the Grantee) lawfully using the same; the center of said river between Course No. 8 of the description of Parcel "A" extended westerly across said river and the east line of Slip No. 2 extended northerly across said river shall be understood to be approximately eighty-five (85) feet from the low water line along the westerly bank of said river; 3. The right and easement to use a partially submerged parcel of property lying northerly by Parcel "A" and bounded as follows: On the East by the westerly line of Parcel "B" extended northerly; on the South by said Course No. 8 and the same extended westerly to the center of the Huron River; on the West by the center of the Huron River; and on the North by a line fifty (50) feet from and parallel with said Course No. 8 and as so extended westerly, said parcel being designated on said print as Parcel "C" as set forth on the print attached to the recorded deed in Volume 162, Page 148, and the water thereon, solely for the purpose of navigating, loading, unloading and mooring thereon, all types of watercraft, together with the rights of ingress and egress for said watercraft to, from and between Parcel "A", Parcel "C" and the center. 4. The right and easement to use said property between Parcel "C", Slip No. 2 and the center of the Huron River (without prejudice, however to any rights hereinbefore granted, remised, released, and quitclaimed unto the Grantee, on, over and across said property) and the water thereon solely for the purpose of turning all types of watercraft thereon at such times and to such extent as will not unreasonably interfere with the use thereof by the former Grantor, The Wheeling and Lake Erie Railway Company and persons (other than the Grantee) lawfully using the same. 5. The right and easement to dredge and excavate Parcel "B", Parcel "C", Slip No. 2 (other than Parcel "B") and said property between Parcel "C", Slip No. 2 and the center of the Huron River and to maintain a depth of water thereon sufficient to accommodate watercraft of the deepest draught now or hereafter operating on the Great Lakes to whatever extent may be necessary to assure to the Grantee the full exercise of the rights and easements granted, remised, released and quitclaimed in subparagraphs 2, 3 and 4 of the Second paragraph of this deed, without however, any obligation on its part to do so; subject however, to the limitation that (with the exception of dredging or excavating in Parcel "B" and Parcel "C") such dredging or excavating shall be done at such times and to such extent as will not unreasonably interfere in any way with the use of Slip No. 2 (other than Parcel "B") and said property between Parcel "C", Slip No. 2 and the center of the Huron River by the former Grantor, The Wheeling and Lake Erie Railway Company and persons (other than the Grantee) lawfully using the same. Being the same premises as conveyed by CPC International Inc., formerly known as Corn Products Company to The Pillsbury Company by deed dated March 21, 1972 and received for record March 31, 1972 at 11:19 A.M., and recorded in Volume 415 of Deeds Page 450. [attached graphic: Exhibit B Site Plan Drawing, Huron, Ohio Facility] EX-10.2 5 LEASE L E A S E THIS AGREEMENT, made and entered into this 22nd day of November, 1960, by and between the PORT OF KALAMA, a municipal corporation organized under the laws of the State of Washington, hereinafter referred to as "The Port," and NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation, hereinafter referred to as "The Company," W I T N E S S E T H : The Port is the sole owner of and, in consideration of the premises and of the rental to be paid by the Company, hereby leases to the Company the following described property situated in the County of Cowlitz, State of Washington, to-wit: Beginning at a point that is North 292.42 ft. and West 1221.02 ft. from the corner that is common to Sections 20-21-28-29, Township 6 North, Range 1 West, W.M., said point being on the Northerly right of way line of the Toteff Road; thence North 27 deg. 38 min. West 1460.00 ft.; thence North 34 deg. 36 min. West 934.63 ft.; thence North 89 deg. 26 min. West 425 ft. more or less to the bank of the Columbia River; thence Southeasterly along said bank of the Columbia River to a point that is South 82 deg. 22 min. West 580 ft. more or less from the point of beginning; thence North 82 deg. 22 min. East 580 ft. more or less to the point of beginning. Containing 30 acres more or less, situate in Cowlitz County, Washington. ALSO second class tidelands abutting above described tract. RESERVING to the Port, its successors and assigns, the right and privilege to construct, maintain, repair, and use a public roadway over and across a strip of land along the westerly side of the above premises adjacent to the Columbia River and on top of the dike and extending from the North to the South boundary of said premises and being of the width required by Cowlitz County for road purposes. TOGETHER WITH that certain grain elevator, including the additions thereto erected in accordance with the plans and specifications prepared by Marshall, Barr & Associates, Port Engineers, approved by the Port and the Company, the location of said grain elevator being more particularly shown on the plat marked "Exhibit A," attached hereto and by reference made a part of said agreement, together with all appurtenances thereunto belonging, including all buildings, sheds, ramps, runways, marine leg, office buildings, shipping galleries, dock and other structures used exclusively or primarily in connection with the operation of said elevator, and all machinery, appliances and equipment then located therein, hereinafter sometimes called the Grain Elevator. IT IS AGREED BETWEEN THE PARTIES HERETO as follows: 1. Port to build: The Port agrees, with all due diligence, to proceed with and complete the work of constructing storage facilities for the storing and handling of approximately 3,000,000 bushels of grain on the parcel of land enclosed in red lines on the blueprint attached, marked Exhibit A, and the installation therein of the necessary machinery and equipment, all in accordance with the plans and specifications therefor prepared by Marshall, Barr & Associates, Port engineers, and approved by the parties hereto. The Port will require the contractor or contractors constructing the grain elevator to post performance bonds up to 100% of their respective contracts. This lease shall be binding upon the parties hereto and effective from the date of execution thereof. 2. Term of lease: The term of this lease shall commence on the "completion date" and shall terminate, unless the same shall be sooner terminated or extended pursuant to any provision hereof, thirty (30) years after the "completion date," which shall be the date on which the storage facilities to be erected and the equipment and machinery to be installed therein, as required by and in accordance with the plans and specifications hereinabove in Paragraph 1 referred to, are completed and the same shall be ready for use and operation, which date shall be fixed by a certificate from the Port engineers to the effect that the construction and installation thereof have been completed in accordance with the plans and specifications thereof, and are ready for use and operation. 3. Rental: The Company shall pay to the Port rental for the grain elevator at the times and in the amounts set forth in the payment schedule in Exhibit B which is attached hereto and made a part hereof, but the first payment of rental shall not be later than November 10, 1962. Any balance in the "Port of Kalama 1960 Construction Fund" transferred to the Bond Redemption Fund, shall be credited against the first rental payments due under Schedule B. IT IS AGREED that upon completion of the rental payments provided in Exhibit B no further rental shall be due or required to be paid by the Company during the original term of this lease. While there are revenue bonds outstanding for which payment has not been made to the County Treasurer of Cowlitz County, rental payments shall be made regardless of the extent, nature or scope of the use of the grain elevator during the term of the lease and regardless of any other happening or contingency whatsoever, including any default on the part of the Port, except as herein otherwise expressly provided in Sections 6 and 9, and such rental payments shall continue to be paid as provided in Exhibit B until the rental has been paid in full, except as otherwise expressly provided in Sections 6 and 9 hereof. Lessee's covenant to pay such rent shall be deemed for all purposes to be an independent covenant, provided, however, that if it shall be determined by a court of last resort having competent jurisdiction that the Company has been unlawfully or wrongfully evicted from the possession of the premises by the Port, or evicted by any other party having paramount title, the provisions of this paragraph shall not be applicable. The Port agrees, that upon the written request of the Company it will consider the issue of refunding bonds, and if the Port in the exercise of its sole discretion deems such action advisable it will take such action as may be necessary to authorize and issue refunding revenue bonds for the purpose of paying off the outstanding original revenue bonds, which were used to provide the funds for the construction of the Grain Elevator (hereinafter sometimes referred to as revenue bonds or outstanding revenue bonds), all in accordance with the laws of the State of Washington authorizing the issuance of refunding revenue bond issues. All expenses incurred by the Port shall be included as a part of the principal sum of the refunding issue. If, at the time refunding revenue bonds are issued and such issue involves different payments to service the same than the payments set forth in Exhibit B, such different schedule of payments shall constitute the rental which the Company agrees to pay for the use of the Grain Elevator and shall at such time be substituted for the payments set forth in Exhibit B attached hereto. 4. Maintenance: The Company further agrees that, as part of the consideration for this lease, it will, at its own cost and expense, maintain said elevator, its equipment and appurtenances, all buildings, docks, dolphins, ramps, railroads, runways, roads, water and electric systems, and all other structures used exclusively or primarily in connection with the operation of the elevator, in good operating condition and repair; provided, however, that if the Port or any tenants or licensee of the Port uses such roads, docks, ramps, railroad, runways, water or electric system or systems, the Port, its tenants and such licensee, as a condition of the use thereof, shall be required to pay its fair share of the maintenance thereof proportionate to use. The Company shall not be required to make any repairs or replacements made necessary by reason of defect in workmanship or material in the original construction of the Grain Elevator, and which is within the liability of the construction contract. It is the intention of these parties that, while it is the obligation of the Company to provide, at its expense, for all repair and maintenance of the Grain Elevator, the Company shall have the benefit of any right of action for defects in original construction which may accrue to the Port and, in the event of any disagreement between these parties as to whether the Port in fact has a cause of action against the contractor pursuant to the construction contract, then the Port shall, upon the demand of the Company, assign such alleged cause of action to the Company, or at the option of the Company make demand on the construction company to make the necessary repairs, or maintain such cause of action for the use and benefit of, and at the sole expense of the Company, and all attorneys' fees and costs shall be paid by the Company, the Company to be in charge of such litigation, if any. 5. Insurance: The Company agrees, from and after completion date until the termination of this lease, to keep all of the property herein leased insured against the following risks: (1) Loss or damage by fire, explosion, tornado, and other casualties usually insured against in the ordinary course of business, in an amount equal to not less than 90% of the full insurable value thereof; (2) Use and occupancy in amount of $250,000.00; (3) Public liability in amount of $100,000.00 - $300,000.00; (4) War risks to the extent such insurance is or becomes available at cost deemed reasonable by Company. All policies of insurance provided for in sub-paragraphs (1) and (4) hereof shall provide that any loss thereunder shall be payable to Cowlitz County Treasurer, Kelso, Washington, as Treasurer for the Port, for disposition as provided herein and shall contain such other and additional clauses as may be required under the terms of the loan made to the Port in connection with said revenue bond issue. The Company agrees to deliver to Cowlitz County Treasurer from time to time such policies of insurance, or certificates by the insurance company issuing the same, evidencing that such insurance is in effect, and renewal policies or certificates evidencing the renewal thereof shall be delivered to such Treasurer by the Company not less than twenty (20) days prior to the expiration of such policy or policies, so that such Treasurer may at all times be satisfied that such insurance is in full force and effect. In case of the failure of the Company, at any time, to procure and maintain such insurance, or to renew the same, the Port may obtain and maintain such insurance, and shall be entitled to such reimbursement of any premiums paid by it therefor from the Company. It is understood that after said revenue bond issue shall have been paid off the insurance policies shall provide for the loss thereunder to be payable to the Port, and said policies shall be held by the Port. The policy of insurance provided for in sub-paragraph (2) hereof shall be payable to the Company, provided, however, that the Company shall, at all times, keep on file and deposit with the Trustee a certificate of insurance certifying that such insurance is in fact in full force and effect. Should the Company exercise its option or options for an extension of the term of this lease from and after the first thirty-five (35) years as provided for hereinafter, the Port shall, during such extended term, provide, at its expense, the insurance described in sub-paragraphs (1) and (4) hereof; provided, however, that such obligation of the Port shall be limited to the extent that the Port receives rental payments during such extended period of this lease, and if such rental payments are not in fact received by the Port for the reason that the Company is entitled to an abatement of rental because of the repair or reconstruction of the facility or for an interest credit as provided for in this lease, then it shall be the obligation of the Company to provide such insurance at its expense. 6. Casualty: In case the entire grain elevator, or any part thereof, is at any time damaged or destroyed by fire, explosion, tornado, earthquake, flood, or other casualty, then the same shall be restored or rebuilt, or not restored, or rebuilt in accordance with the following provisions: (a) If the insurance proceeds payable as a result of loss or damage are sufficient for the purpose, the Port shall, at its own expense, and with due diligence, restore the said grain elevator to as good a condition as the same was in immediately prior to such injury or damage, or the Port shall, in lieu of such restoration, if requested in writing by the Company, rebuild a generally similar facility with like or additional capacity. (b) If the insurance proceeds are inadequate to cover the cost of restoration, or the rebuilding of a generally similar facility of at least equal capacity, then there shall be the following alternate elections: (1) The Company, may, within 60 days from the date of such damage or destruction, notify the Port of its election to pay a sum of money which, together with all available insurance proceeds, if any, and the deposit for the benefit of the bondholders, shall be sufficient to pay and discharge all outstanding revenue bonds with interest accrued thereon to earliest date of payment as provided in said bond issue, which payment shall be made within 90 days from the date of such damage or destruction, and upon the making of such payment by the Company, this lease shall cease and terminate. In the event of such election or the election provided in (b) (2) hereof the Port shall direct the County Treasurer of Cowlitz County to use so much as may be necessary of such insurance proceeds for redemption of such bonds. (2) The Company may within 60 days from the date of such damage or destruction, elect to continue to pay rental as provided in Paragraph 3 until the total of such rental payments plus the deposit made for the benefit of the holders of the revenue bonds, plus insurance proceeds, if any, is sufficient to retire all outstanding bonds and interest thereon according to their terms. When such bonds have been paid, then this lease shall terminate. (3) If the Company does not make either of the elections provided for in sub-paragraphs (1) or (2) hereof within 60 days of such damage or destruction, which election shall be made by giving notice as provided in Paragraph 14 hereof, then the Port shall, with due diligence, and at its own expense to the extent that insurance proceeds are available for such purpose, repair or restore said grain elevator so far as possible to the same condition as the same was in prior to such damage or destruction, or the Port shall, in lieu of such restoration or repair, and upon written request of the Company, rebuild or construct a workable facility for handling grain with such capacity as may be agreed upon by both parties. If the parties agree that there shall be expended on the cost of restoration or for rebuilding more than the insurance proceeds recovered, the Company shall then provide the necessary funds for such restoration or rebuilding, in which event it shall be reimbursed therefor as provided in sub-paragraph (c) (1), or by mutual agreement and subject to the terms of the original revenue bond issue, if there be bonds outstanding, the parties may agree to the Port refunding such issue, or if there be no bonds outstanding, the Port may provide for a new bond issue, and thus provide the necessary funds for such restoration or rebuilding, and in such case, the rental payments shall be made by the Company to service the refunding bond issue as provided in the last sub-paragraph of Paragraph 3, hereof, or to service a new bond issue as the case may be. (c) If the insurance proceeds exceed the cost of restoration or rebuilding, the excess shall be credited on rental which is payable hereunder in accordance with Paragraph 3, and if such rental has been paid in full, such excess shall be paid to the Company up to the fair market value of the unexpired portion of the 5 year term following the original 30 year term of this lease. (1) If the insurance proceeds are insufficient to pay the cost of such restoration or rebuilding, or if there are no insurance proceeds, and the Company advances the funds necessary therefor, it shall be entitled to a credit on future rental for the period after the first 35 years of the term of this lease, equal to the difference between the cost of restoration or rebuilding, and the insurance proceeds, if any, plus interest at the rate of 4% per annum on the amount of such difference from the date of payment thereof to completion of reimbursement. (2) In the event that it is determined not to restore or rebuild the grain elevator or a generally similar structure, then the Port shall direct the Cowlitz County Treasurer to use the insurance proceeds to pay and retire the outstanding revenue bonds, if any, in accordance with their terms and the excess, if any, of such insurance proceeds over the amount necessary to retire said outstanding revenue bonds or all of such proceeds if there be no such outstanding revenue bonds, shall be paid to the Company up to an amount equal to the fair market value of the unexpired 5 year term following the original 30 year term of this lease and the balance, if any, of such insurance proceeds shall be retained by the Port, and upon such payment this lease shall terminate. (3) The fair market value of the unexpired part of said five (5) year term shall be based upon an annual net rental equal to five (5%) per cent of the value of the land covered by this lease as of the date thereof plus the value of the improvements thereon at cost depreciated at the rate of two per cent (2%) per year to date of casualty, and the value of the dollar shall be adjusted to the value of the dollar as of the beginning of the calendar year in which the casualty took place as measured by the United States Bureau of Labor Index, or if there be no such index, then as measured by acceptable standards. (d) If the operation of the grain elevator is substantially interfered with during any period of repair or restoration by reason of any damage or injury, whether such repair or restoration be by the Port or the Company, the Company shall continue to pay the rental falling due during such period; however, in such case, the term of this lease shall be further extended by a period equal to the period during which the operation of the grain elevator is so substantially interfered with. During such extended period, the Company shall not be required to pay any rental. Such extension of the lease term due to substantial interference with the operation of the elevator plant shall be in addition to the extension provided for in case of advances by the Company and also in addition to any and all other extensions under or pursuant to any extension contained in this lease. Provided, however, that should the revenue bonds mentioned herein be paid and discharged in full prior to such period of substantial interference, then the rental shall be abated during such period of substantial interference and the term hereof shall be extended for a period of time equal in duration to such period of substantial interference and the Company shall pay during such extended period the rental which was abated during the period of substantial interference. (e) In the event the Port fails to commence restoration as required by sub-paragraph (2) within 60 days, the Company may proceed to restore or repair said grain elevator, or rebuild a grain handling facility, and in such event, shall be entitled to receive and the Cowlitz County Treasurer shall pay to the Company all insurance proceeds which are collected as a result of damage or destruction of all or part of the grain elevator, for use in such restoration, repair or rebuilding. (f) If the Company gives notice of the exercise of any of the options authorized in this section seeking to terminate the lease and if there be insufficient money to pay interest, premiums, if any, and principal of all the revenue bonds outstanding to the date when they may be first redeemed, the lease shall remain in effect and the Company shall continue to pay rental until such rental, plus other funds in the hands of the treasurer are sufficient to make up such deficiency. 7. Maximum term of lease: It is expressly understood and agreed that in no event shall the term of this lease be extended, under or pursuant to any provision of this lease and irrespective as to the number of such extensions or the number of provisions herein granting the same, to a date more than fifty (50) years from the commencement of the term of the lease, provided that, if there is a change in state law allowing a Port to make or extend a lease for more than fifty (50) years, upon such law becoming effective, the maximum term shall be as provided in such law. 8. Bond: The Port shall accept and the Company will furnish a bond within thirty days after the execution of this lease, but not later than the time the revenue bonds are delivered to the purchasers thereof, conditioned to perform the terms of the lease for five years from the commencement of the term hereof, and another like bond shall be delivered to the Port by the Company within two years and not less than one year prior to the expiration of the period covered by the existing bond, covering an additional five years and so on until the end of the term (unless the remainder of the unexpired term is less than five years, and in such case for the full remainder) so that there will always be in force a bond securing the performance of the lease. The penalty in the bonds to secure performance of the lease shall be the rental for one-half of the period covered by each such bond. No bond shall be construed to secure the furnishing of any other bond. The Company shall furnish the surety sufficient collateral for such bond and for all subsequent bonds to assure that the surety will issue subsequent lease performance bonds as required herein. The Company shall furnish the Port evidence of such collateral having been deposited with the surety. Collateral shall remain on deposit until the issuance of the last bond required under the provisions of this lease. 9. Provisions in event of seizure, eminent domain, et al.: (a) In the event that the leased property shall be seized, confiscated, or the evacuation thereof required by any civil or military authority of the United States, or if such property shall be seized or captured by any foreign power, or if the same be taken under the right of eminent domain, the rights of the parties shall be as follows: (1) If there are any revenue bonds outstanding for which payment has not been provided, this lease shall continue in effect and rental shall be paid as provided in Exhibit B until such bonds have been paid in full, provided that any compensation received by or paid to the Port by any government, federal, state or local, or any agency or subdivision thereof, or by any person, firm or corporation for or on account of any such seizure, confiscation, evacuation or for any taking by eminent domain, shall be applied by the Port to the payment of any such outstanding revenue bonds, and if such compensation exceeds the amount so required, such excess shall be paid by the Port to the Company to the extent of the fair market value of the rental for the unexpired 5 year term following the original 30 year term of this lease, as such fair market value is defined in Paragraph 6 of this lease. Upon payment of the balance of the outstanding revenue bonds, according to the terms of their issue, the payment to the Company of any prepaid rental and the fair market value of such 5 year term (only to the extent of funds available from such award), this lease and all future rights and obligations thereunder shall immediately cease and terminate except the right of reinstatement set forth below. (2) In the event payment has been provided for all revenue bonds outstanding, this lease and all future rights and obligations thereunder shall immediately cease and terminate, except the right of reinstatement set forth below, and except for the obligation of the Port to make payment to the Company as herein provided. If the Company shall have paid any rental for any period beyond such date of termination, the Port agrees to repay promptly to the Company the amount of such prepaid rental. Any compensation as described in sub-paragraph (1) above shall be the property of the Port provided that the Port shall pay the Company from the sum recovered an amount equal to the fair market value of the rental for the unexpired 5 year term following the original 30 year term of this lease, as such fair market value is defined in Paragraph 6 of this lease. (b) The Port will not agree to accept any award of compensation as the term is used in sub-paragraph (a) (1) above in an amount less than the amount it is obligated to pay the Company for the unexpired 5 year term heretofore referred to, prepaid rental, if any, and in the event revenue bonds are outstanding, the amount of such revenue bonds outstanding, without the consent in writing of the Company, and in the event litigation is required to obtain such compensation, the Company shall have the option to participate in such litigation at its own expense, such participation to be in the name of the Port if the Company so requests. (c) It is further agreed, however, that upon the return of such property to the Port in a usable condition, the Company shall have the right, at its option, to reinstate the lease for a period of time equal to the unexpired term of the lease at the time the leased property was seized, confiscated, evacuated, or taken by right of eminent domain, and if the Company has not received the fair market value of the 5 year term provided by Section 13 (a), then plus the option for such 5 year term and the right to options provided in 13 (b) or (c), subject to the terms and conditions as to rental or otherwise herein contained for such balance of the term, and for such optional periods. 10. Provision for payment in event insurance rate is increased because of erection of building by Port: The Port agrees that if, by reason of the erection of any building or improvement by the Port or any other tenant of the Port, or the use thereof, on any part of its property in proximity to the elevator plant, the insurance rate on the property herein leased, or the contents thereof, is increased, it will pay to the Company the amount of any additional premium caused by such increase in rate. 11. Additional installations: It is further understood and agreed that the Company shall have the right, at its own expense, and at such time as it may determine, to build one or more car dumps at or near the grain elevator, and in such case, it may at the termination of this lease remove the machinery thereof, provided it shall, if requested by the Port, restore the premises to substantially the condition in which they were prior thereto. The Company may also, at its own expense, at any time or from time to time, build additional storage space adjoining the grain elevator of such type and capacity as it may desire. The Company may also, at any time and from time to time, at its own expense, make or construct such other additions to or improvements in and about the grain elevator and its appurtenances, whether structural or otherwise, and install such additional machinery, equipment, and facilities therein as it may consider proper or advisable in and about the use and operation of said plant; provided, however, that nothing shall be done by the Company in any way affecting any structural part or portion of the improvements specifically provided to be made by the Port in paragraph 1 hereof without the written consent of the Port. It is understood that any structural improvements and additions shall become the property of the Port and shall not be removed at the termination of this lease. The company shall have the right to drill such well or wells upon the premises under lease, as it may require to supply water for its use at any time and from time to time during the period of this lease or any extension thereof, and may install such pumping or other equipment as it may deem advisable. The Company shall obtain permit for drilling such well or wells from the appropriate State authority for the protection of the parties to this lease, and at the end of the term and all extensions thereof shall assign its interest in such permit to the Port. It is further understood that the Company may, at the expiration of this lease or any extension or renewal hereof remove from said premises any fixtures and equipment, which were not installed as replacement fixtures and equipment for original fixtures and equipment, installed by the Company at its expense, and any structural damage to the grain elevator resulting from or connected with such removal shall be repaired by the Company at its expense. Provided, however, that the Port shall have the option, at its election, to purchase such fixtures and equipment at the fair market value thereof, less the cost of any structural repair which would be required if the same were removed from the premises by the Company. The Company shall notify the Port, in writing, of the installation of any such fixtures and equipment and the purchase price thereof, all within thirty (30) days of the date of installation thereof. The Company may, but shall not be required to maintain insurance on such items of machinery or equipment, other than replacement of original installation by the Port, either by separate policies or by including the same in policies obtained pursuant to Paragraph 5 hereof. As to such items of machinery and equipment, loss under such policies shall be made payable exclusively to the Company, and the Company shall be entitled to collect and retain the proceeds thereof. 12. Notice of termination: It is further agreed that the Port will not terminate this lease nor the Company's right to possession of the demised property, by reason of any default hereunder, unless written notice of any such default shall have been given by the Port to the Company, and such default shall have continued for a period of not less than thirty (30) days after receipt of such notice of default by the Company; provided, however, that this lease may not be terminated until the outstanding revenue bonds have been redeemed and retired, or adequate provision made for the redemption and retirement thereof. 13. Provisions for optional extensions: It is further expressly understood and agreed by and between the parties hereto and as a special inducement to the Company in entering into this lease that the Company shall have and it is hereby granted the right and option to extend the terms of this lease as follows: (a) For a period of five (5) years at an annual rental of One Hundred Dollars ($100.00) per year. This option is given in consideration of the Company having spent substantial sums in site location and preliminary work and in consideration of the Company having made and provided for the deposit of $380,000.00 for security for the payment of said revenue bonds. (b) For three (3) successive five (5) year terms, the first of which shall commence at the expiration of the five (5) year term provided for in sub-paragraph (a) hereof; provided that, if, in accordance with Paragraph 6 (d) of this lease, the Company is entitled to any extension of term because of loss of use due to damage or destruction, and repair or restoration during such period, the first term of extension under (b) shall begin at the end of such extension. Each such five (5) year period shall be subject to the requirements for notice as hereinafter set forth. The annual rental for the extensions provided for in this paragraph shall be a sum equal to 5% of the fair market value of the grain elevator as established at a date thirty-five (35) years from the date hereof in accordance with the formula for establishing fair market value as set forth in Paragraph 6 (c) (3) hereof, or (c) For a term of fifteen (15) years commencing at the expiration of the extension provided for in sub-paragraph (a) hereof and the annual rental during such fifteen (15) year period shall be computed as set forth in sub-paragraph (b) hereof. The Company, if it elects to exercise the options granted herein, shall notify the Port, in writing, of its intention so to do at least thirty (30) days prior to the expiration of the then existing term. Such notice shall be given in the form and manner provided in Paragraph 14 hereof. The Company's right to exercise any of the options provided for in this section shall be conditioned upon the full and faithful performance of all the terms and conditions of the lease including the full payment of all rentals due and payable hereunder, and which may have accrued prior to and at the time of the exercise of either of such options by the Company. It is understood and agreed by and between the Port and the Company that the estimated life of the grain elevator is in excess of fifty (50) years and that the grain elevator has an estimated useful life in excess of the term of this lease and the extensions hereinbefore provided for, returning to the Port at the conclusion of this lease a valuable asset. This agreement and determination is based upon the appraisal of engineering experts that the life of the facilities to be constructed with monies received from the sale of revenue bonds by the Port is in excess of fifty (50) years. 14. Notices: In every case whereunder any of the provisions of this lease, or in the opinion of either the Port or the Company or otherwise, it shall or may become necessary or desirable to make, give or serve any declaration, demand, or notice of any kind or character for any purpose whatsoever, it shall be sufficient to deliver either (1) the same or a copy thereof, in person, to the President or Secretary of the Port Commission of the Port of Kalama, if given by the Company, or to the President or Vice-President of the Company, if given by the Port, or (2) mail the same or a copy thereof, by registered mail, postage prepaid, addressed to the other party, to such address as may have theretofore been designated in writing by such party, by notice served in the manner herein provided, and until such other address shall have been so designated the address of the Port for the purpose of mailing such notices shall be: Port of Kalama, Kalama, Washington, and the address of the Company shall be: North Pacific Grain Growers, Inc., Lewis Building, Portland 4, Oregon. All such declarations, demands, or notices are required to be in writing. Service of any such written declaration, demand, or notice in either of the rules above provided, shall be sufficient and effectual for all purposes and no other or further declaration, demand, or notice or method or manner of giving, service, or delivering the same shall be required. 15. Elevator to be licensed for public grain storage: In order to serve the general needs and purposes of the Port, the Company covenants and agrees to operate the grain elevator at all times during the term of this lease as a public grain terminal warehouse under the provisions of Chapter 22.08, Revised Code of Washington, and under the provisions of any and all other statutes of the State of Washington relating to public warehouses which may be applicable to such facility. 16. Right to use of spur tracks, dock, and moorage facilities: The Port reserves the right to use the spur railroad tracks to be constructed on the leased premises and to construct a switch therein for the purpose of furnishing railroad service to other property of the Port; provided, however, that the use of such spur shall be conducted in a manner which will not interfere with the use thereof by the Company and with all spotting of cars to be done off the switch, the switch and spur to be kept clear of standing cars. The Port shall be obligated to bear its proportionate share of the maintenance of such railroad spur tracks based on the relative number of cars handled by it as compared to that handled by the Company. In order to serve the general needs and purposes of the Port, it reserves the right to use any portion of the dock and moorage facilities which at that time the Company may not be using in connection with its operations; provided, however, that no such use by the Port shall be made at a time or in a manner as to interfere with the prior rights of the Company hereby granted, and to the extent of such use the Port will pay its fair share of the maintenance of said dock and moorage facilities. 17. Easements: The Port hereby grants to the Company easements over other Port property to continue contemporaneously with the term of this lease to occupy and use such rights of way as are necessary or convenient for the construction, maintenance, and operation of the grain elevator, and of pole lines or underground lines for the transmission of electric current or pipelines for water, oil, or gas across all of the property of the Port adjacent to the grain elevator, at such convenient locations as may be mutually agreed upon. Such easements shall be used in a manner so as not to interfere with the use or development of such other Port property, and the Port reserves the right, at its expense, to relocate the utilities and transmission lines constructed over, upon and through such other property of the Port. The Port reserves the right to construct or have constructed, use, operate, maintain, repair, and replace pole lines for the transmission of electric current or underground lines for water, oil, or gas, over, across, and through the property leased to the Company; that the same shall be used or done in a manner so as not to interfere with the use of said premises by the Company, and the location of the same shall be subject to agreement by the Company. 18. Dock and switching charges: It is further understood and agreed that the Port may, at its option, elect to levy and collect reasonable ship's service charge for the mooring of any and all vessels at the dock to be constructed in connection with the grain elevator and may elect to levy and collect other and further reasonable charges for the mooring, loading, and unloading of any and all vessels but not in excess of such charges as may be levied and collected by other Ports on the Columbia River having elevator plants and dock facilities, but the Port will not make or allow any use of such dock if it in any manner will interfere with Company's use thereof. Provided, however, that no such charges, in excess of actual expenses of the Port, shall be made for vessels owned, chartered, or leased by the Company. The Port may, at its option, elect to levy and collect reasonable charges from the railroad for railroad cars and engines crossing over and being upon any railroad spur or spurs constructed by and/or owned by the Port. 19. Port to construct roads: The Port shall, at no expense to the Company, and not as an expense in the construction of the grain elevator, construct or cause to be constructed a road as shown on the attached Exhibit A as approved by the Port and the Company, as marked therein in red and designated "Road to be constructed by Port." When requested by the Company, the said road shall be brought to grade as provided in the Marshall, Barr & Associates specifications referred to on Page 2 of this lease, and as soon as reasonably convenient after request by the Company, ballast shall be installed thereon. Upon completion of the grain elevator, or at an earlier time if requested by the Company, asphalt type paving to a width of 20 feet shall be installed on said road. The said road and paving shall be constructed and built in accordance with the existing specifications of Cowlitz County, State of Washington, for the building of county roads, which specifications are by this reference incorporated herein as if set forth in full herein. 20. County Treasurer: The Cowlitz County Treasurer, as Treasurer for the Port, shall receive all payments of rental made hereunder and all rental bonds, insurance policies and certificates of renewal thereof required to be furnished by the Company under the terms of this lease, and such payments of rental and delivery of such documents shall constitute payment and delivery to the Port. 21. Reserve Account for benefit of bondholders: (a) The Company has made advances in payment of fees to Marshall, Barr & Associates for the preparation of plans and specifications, on account of the contract for piling and of other sums for the construction of improvements preliminary to the main construction contract of the grain elevator on which advances the Port has agreed to pay interest from the date of each such advance to the date of repayment at the rate of 4% per annum. It has been agreed between the parties that such advances shall be deducted from the proceeds of the sale of revenue bonds to be sold by the Port, and as and when such advances become payable $380,000.00 thereof, representing an amount equal to approximately one year's rental under the lease as shown in Schedule B, shall be deposited with the County Treasurer of Cowlitz County as Treasurer of the Port in a Reserve Account, sometimes herein referred to as a deposit fund, for the benefit of the bondholders. Any excess of advances as hereinabove mentioned, plus interest, which may be due to the Company from the Port over the amount to be deposited in the Reserve Account, shall be paid to the Company. The Port, at the written request of the Company, will cause the County Treasurer to purchase immediately such certificates, notes, bonds or other direct obligations of the United States of America, or any agency or instrumentality thereof, herein referred to as securities, and wherever practical such securities shall be registered in the name of the Port. For the purpose of the initial deposit such securities shall be valued at the purchase price thereof. The Reserve Account herein created is to provide additional security for the holders of the revenue bonds and shall be used and maintained as provided in this section of the lease. (b) The Company, may at any time, while the Reserve Account is in existence, request the Port to invest cash thereof in any of the specific securities described in (a) hereof, and may instruct the Port to sell securities at any time converting such securities to cash or to purchase other securities. At quarterly intervals the Port will give to the Company an itemized list of the assets making up the Reserve Account, and the receipts and disbursements thereof since the last report to the Company. The Company may request the Port to pay all interest received on the Reserve Account or any securities thereof to the Company at the time the Company makes payment of each installment of rental, and such payment shall be made if the Company is not in declared default in payment of rental. (c) The Port agrees to carry out promptly the instructions of the Company to buy or sell securities, but the Port shall not be liable for any market decline in securities, unless there is a delay of more than ten days from the date of receipt of written order to purchase or sell before such order is placed. All instructions herein provided shall be in writing. (d) In the event the Company fails to make any payment of rental as provided in Exhibit B and prior to payment under the lease performance bond, the Port may advance from the Reserve Account, and may sell such securities as may be necessary in order to make such payment, such amount as may be necessary to meet the interest payment, or interest and principal payment, according to the terms of said revenue bonds, and shall immediately give notice in writing to the Company of such payment. If and when the Company makes the payment of rental which was past due, the Port shall repay to the Reserve Account so much thereof as had been deducted therefrom for payment to the bondholders. In event of default in rental payments by the Company, advances may be made from the reserve account only in case of delay in payment under the lease performance bond, it being the intention of the parties that, in the event of such default, rental payments shall be made first from the proceeds of the lease performance bond and only upon the exhaustion thereof from the Reserve Account. (e) If the Company is in default of payment of rental for more than 20 days after written notice of such default is given to the Company, the Port shall call on the surety of the statutory bond provided for in Paragraph 8 of this lease to pay so much of the rental as is in default after applying to such rental all interest received on the Reserve Account or on securities thereof since the last payment therefrom to the Company. Payment by the surety will be deposited by the Port in the Reserve Account to the extent that any advance has been made therefrom to the bondholders. (f) If the Company exercises the option provided in Paragraph 6 (b) (1), and after making provision for the payment of the balance of the outstanding revenue bonds according to the terms thereof, any part of the Reserve Account which has not been used for such purpose, shall be paid promptly by the Port to the Company, and if part of such Reserve Account is in the form of securities, such securities shall be transferred to the Company, or at its request, shall be sold and the proceeds paid to the Company. The Company shall make written demand on the Port for such payment, transfer or sale of securities as the case may be. (g) Wherever provision is made in this lease for payment of all outstanding revenue bonds, the Reserve Account shall be used for that purpose provided there are sufficient other funds, which, together with the amount therein is sufficient to retire all bonds according to their terms. (h) If, after payment of all outstanding revenue bonds, either at their maturity or through refunding operations prior to maturity or otherwise, there remains any balance in the Reserve Account, such balance shall be paid and transferred to the Company. (i) In the event the surety on said statutory bond has made any payment to the Port, if there be any balance of said Reserve Account after the revenue bonds have been paid in full, or provision is made for such payment, and if said surety has not been reimbursed by the Company, or does not hold adequate collateral to cover its payment, said surety shall be subrogated to the rights of the Company in Reserve Account up to the extent of any unreimbursed payment which it has made. 22. Financing of additional improvements by Port: If any additional improvements or facilities, other than as provided in Paragraph 1 hereof, are to be constructed by the Port for the Company upon land covered by this lease, and are to be financed by revenue bonds to be issued by the Port, it is agreed that such land may then be withdrawn from this lease, but without changing the rental payments set forth in Exhibit B, and provided further that such withdrawal would not affect substantially the improvements and facilities provided for in Paragraph 1 hereof. Such withdrawn land would then be the subject of a new lease to be entered into between the parties hereto. 23. Right to assign or sub-let: This lease may be assigned or the premises herein described sub-let by the Company, but such assignment or sub-letting shall not relieve the Company from any obligations hereunder. 24. Credit for advances not otherwise provided for: Should the Company make any advances required by this lease and for which provision has not been made elsewhere in this lease, it shall be entitled to interest thereon at the rate of 4% per annum from date of advance to completion of reimbursement, such reimbursement to be in the form of a credit on rental for the period after the first 35 years of the term of this lease, to the extent of such advances plus interest thereon as above provided. 25. Payment from Construction Fund on approval by the Company: No payment shall be made from the Construction Fund which shall be set up from the Revenue Bond proceeds, without written approval of the Company, which approval shall not be unreasonably withheld. IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized officers, and their respective corporate seals to be hereto affixed this 22nd day of November, 1960. PORT OF KALAMA, a municipal corporation By: /s/ Otto E. Engelmann President (SEAL) By: /s/ V. E. Stevens Secretary NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation By: /s/ Robert H. Tank President (SEAL) By: /s/ W. S. Richards Secretary SEMI-ANNUAL LEASE RENTAL PAYMENTS Date of Date of Payment Amount Payment Amount ------- ------ ------- ------ November 10, 1962 $241,400.00 May 10, 1977 $ 90,543.75 May 10, 1963 134,300.00 November 10, 1977 290,543.75 November 10, 1963 244,300.00 May 10, 1978 85,918.75 May 10, 1964 132,100.00 November 10, 1978 295,918.75 November 10, 1964 247,100.00 May 10, 1979 81,062.50 May 10, 1965 129,800.00 November 10, 1979 301,062.50 November 10, 1965 249,800.00 May 10, 1980 75,975.00 May 10, 1966 127,400.00 November 10, 1980 305,975.00 November 10, 1966 252,400.00 May 10, 1981 70,656.25 May 10, 1967 124,900.00 November 10, 1981 309,656.25 November 10, 1967 254,900.00 May 10, 1982 64,980.00 May 10, 1968 122,300.00 November 10, 1982 314,980.00 November 10, 1968 257,300.00 May 10, 1983 59,042.50 May 10, 1969 119,600.00 November 10, 1983 322,042.50 November 10, 1969 259,600.00 May 10, 1984 52,796.25 May 10, 1970 116,625.00 November 10, 1984 328,796.25 November 10, 1970 266,625.00 May 10, 1985 46,241.25 May 10, 1971 113,437.50 November 10, 1985 334,241.25 November 10, 1971 268,437.50 May 10, 1986 39,401.25 May 10, 1972 110,143.75 November 10, 1986 341,401.25 November 10, 1972 270,143.75 May 10, 1987 32,228.75 May 10, 1973 106,743.75 November 10, 1987 348,228.75 November 10, 1973 276,743.75 May 10, 1988 24,723.75 May 10, 1974 102,918.75 November 10, 1988 354,723.75 November 10, 1974 277,918.75 May 10, 1989 16,886.25 May 10, 1975 98,981.25 November 10, 1989 363,886.25 November 10, 1975 283,981.25 May 10, 1990 8,645.00 May 10, 1976 94,818.75 November 10, 1990 372,645.00 November 10, 1976 284,818.75 EXHIBIT "B" All moneys remaining in the Construction Fund after payment of all costs of constructing the improvements provided for in the lease, and after payment of all costs incidental thereto, shall be transferred to the Bond Redemption Fund created by Resolution Number 503 of the Commission of the Port of Kalama, and shall be applied in payment of the first rentals due as set in the above schedule. AGREEMENT THIS AGREEMENT, made and entered into this 15th day of August, 1979, by and between the PORT OF KALAMA, a municipal corporation organized under the laws of the state of Washington, hereinafter referred to as "Port", and NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation, hereinafter referred to as "Company". WHEREAS the parties hereto entered into a lease dated November 22, 1960, (hereinafter LEASE") for a term of 30 years from February 6, 1963, plus options, and thereafter by agreement dated August 11, 1976, and by letter dated July 5, 1966, modified lease. Copies of said modification are attached hereto as Exhibits A and B respectively and are by this reference incorporated herein. WHEREAS Company has made several modifications and improvements to the grain elevator constructed pursuant to LEASE, and WHEREAS Company is considering the construction and installation of further modifications and expansions of the grain elevators and associated equipment which substantially increase the value of the leased property, improve its operating efficiency, increase its potential to store and move grain and thereby attract cargo ships to the Port of Kalama which will increase Port's revenues. NOW, THEREFORE, in consideration of the premises and to induce Company to attempt to arrange for such further modifications and expansions and thereby improve opportunities for future increased revenue to Port, it is agreed as follows: 1. PREVIOUS MODIFICATIONS RESCINDED: The agreement dated August 11, 1965, and the letter dated July 5, 1966, are hereby rescinded. 2. ADDITIONAL OPTIONS: In addition to the options granted to Company under paragraph 13 of LEASE, Company shall have and it is hereby granted the right and option to lease the Property, as hereby modified or expanded, covered by LEASE for one or more of the three succeeding five-year terms following the last of the options exercised by Company under paragraph 13 of LEASE. The three option periods in this paragraph 2 cover the period from February 6, 2013, to February 5, 2028. 3. ANNUAL RENTAL & FIVE YEAR ADJUSTMENTS: a. Annual rental for the option extensions provided in paragraph 13(b) of the LEASE and for the additional terms provided in paragraph 2 above shall be the sum of the following: (1) An amount which is computed by adjusting $78,500 (1963 dollars) to the then current value of the dollar as measured by the United States Bureau of Consumer Price Index (or, if there be no such index, then as measured by acceptable standards), as of the beginning of the calendar year in which the respective optional extensions provided in paragraph 13 (b) of the LEASE and paragraph 2 hereof. ($78,540.00 results from a maximum of 70% depreciation of the initial construction cost of the building which was $5,250,000.00. This product was then multiplied by 5%.), PLUS (2) 5% of the value of the real property being leased hereunder. This market value shall be determined by agreement between the parties and in the event they are unable to agree each shall appoint an appraiser who shall agree upon the value. In the event the appraisers unable to agree they shall appoint a third appraiser and the decision of the three appraisers shall be binding. b. After the first option period provided for in paragraph 13 (b) and for each option period thereafter, the rent shall be adjusted as follows: (1) The amount above-described in paragraph 3.a.(1) shall be adjusted to the value of the dollar as measured by the United States Bureau of Labor Consumer Price Index (or if there be no such index, then measured by acceptable standards), PLUS (2) The real property rental which shall be adjusted and computed pursuant to the procedure above described in paragraph 3.a.(2). 4. RESCINDING OF 13.(c) LEASE: Paragraph 13.(c) of the November 22, 1960, lease is hereby rescinded by the parties. 5. OTHER TERMS & CONDITIONS: Except as modified by this agreement, LEASE is incorporated herein and its provisions shall apply as if fully set forth. 6. EXECUTION OF DOCUMENTS: Port and Company agree to execute such documents as reasonably necessary to carry out the intent of this agreement including amendments prepared by the Company to this agreement or a new lease so long as such amendments or new lease do not materially change the parties rights and liabilities under LEASE and this agreement. In the event that any provision of this agreement is in violation of the laws of the State of Washington or is deemed to constitute an act of default of the terms of the revenue bonds referred to in the LEASE and company is unable or unwilling to take such action as necessary to remedy such a violation or default the Port may, after 30 days written notice during which such action is not taken, declare this agreement, or such portion of this agreement as is necessary to remedy such a violation or default, as rescinded. IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized officers this 15th day of August, 1979. PORT OF KALAMA a municipal corporation By: /s/ Louis L. Rasmussen President By: /s/ Calvin L. Cox Secretary NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation By: /s/ Ronald Watkins President By: /s/ R. K. Bauer Secretary STATE OF WASHINGTON ) ) ss. COUNTY OF COWLITZ ) On this 22nd day of August, 1979, before me personally appeared LOUIS RASMUSSEN and CALVIN COX, to me known to be the President and Secretary, respectively, of the Port Commission of the Port of Kalama, a municipal corporation, and the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ Linda M. Durgeloh Notary Public in and for the State of Washington, residing at Kalama STATE OF OREGON ) ) ss. COUNTY OF MULTNOMAH ) On this 17th day of August, 1979, before me personally appeared RONALD WATKINS and R. K. BAUER, to me known to be the President and Secretary, respectively, of the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ Clinton M. Helvey Notary Public in and for the State of Oregon, Residing at Milwaukie, Oregon My Commission Expires Oct. 5, 1979 AGREEMENT THIS AGREEMENT is made and entered into this ____ day of _______, 1985, by and between the PORT OF KALAMA, a municipal corporation organized under the laws of the State of Washington ("Port"), and NORTH PACIFIC GRAIN GROWERS, INC., a Oregon corporation ("Company"). WHEREAS the parties hereto entered into a lease dated November 22, 1960, recorded under Auditor's File No. 526606, ("Lease") for a term of 30 years from February 6, 1963, plus options, and said agreement was modified by an agreement dated August 15, 1979; and WHEREAS, the Port has acquired interests in certain property the use of which will be beneficial to the Company; and WHEREAS, certain facilities and property which are currently leased to the Company are no longer used, useful or necessary to the Port or the Company in the operation of facilities described in the Lease; NOW, THEREFORE, in consideration of the mutual agreements and covenants below the parties agree as follows: 1. Legal Description Modified. The legal description contained in the Lease is hereby modified, and the legal description of the property leased, together with appurtenances and improvements thereon, shall be as follows: A parcel of land in Government Lots 4 and 5 and in Jacob Ahles DLC No. 44 in Section 20, Township 6 North, Range 1 West, Willamette Meridian, Cowlitz County, Washington. Described as follows: Commencing at the Southeast corner of said Section 20; THENCE North 87 degrees 46' 44" West along the South line of Section 20 a distance of 599.0 feet to a point on the corner of the right of way of the Burlington Northern Railroad; THENCE North 25 degrees 28' 47" West along the corner of said right of way a distance of 396.31 feet to a point on the Easterly extension of the North line of Toteff Road; THENCE South 84 degrees 28' 00" West on said North line and its Easterly extension a distance of 207.02 feet to the true point of beginning; THENCE North 59 degrees 21' 02" West a distance of 125.34 feet; THENCE North 5 degrees 32' 00" West a distance of 13.15 feet; THENCE South 84 degrees 28' 00" West a distance of 17.98 feet; THENCE North 59 degrees 21' 02" West a distance of 132.79 feet; THENCE along the arc of a curve to the right whose radius point bears North 30 degrees 38' 58" East a distance of 558.00 feet and having a central angle of 32 degrees 42' 17" for an arc distance of 318.51 feet; THENCE North 28 degrees 47' 00" West a distance of 1927.79 feet to a point on the South line of the Virginia Chemical property; THENCE North 88 degrees 55' 59" West along said South line a distance of 590 feet more or less to the top of bank of the Columbia River; THENCE Southeasterly along said top of bank to a point on the North line of Toteff Road that bears South 84 degrees 28' 00" West a distance of 822.68 feet from the true point of beginning; THENCE North 84 degrees 28' 00" East a distance of 822.68 feet along the North line of Toteff Road to the true point of beginning. Containing 41.4 acres. Also that portion of tideland lots 5 and 6 as shown on the official plat of Kalama tidelands on file with the Commissioner of Public Lands in Olympia, Washington, adjacent to and abutting said property. Said property is depicted on a survey map recorded in Cowlitz County under Auditor's File No. 840905024, Book 6 of Surveys, Pages 243 and 244. 2. Grant of rail easement. Pursuant to that certain right of way easement granted to the Port by Public Utility District No. 1 of Cowlitz County, Washington, and Public Utility District No. 1 of Clark County, Washington, dated October 21, 1980, and recorded June 24, 1982, as Auditor's File No. 820624001 in volume 939, page 554 of the records of Cowlitz County, Washington, the Port hereby grants to the Company during the term of the Lease and any options or extensions thereof the nonexclusive right to use the following described real property as a rail spur for access to its faility: A parcel of land in Government Lot 5 and the Robert Weldon DLC No. 37 in Section 20 and the Robert Weldon DLC No. 37 in Section 29, Township 6 North, Range 1 West of the Willamette Meridian, Cowlitz County, Washington bounded and described as follows: Beginning at the intersection of the Westerly right of way line of the Burlington Northern Railroad and the South line of said Section 20 which point bears North 87 degrees 46' 44" West a distance of 655.47 feet from the Southeast corner of Section 20. THENCE North 25 degrees 28' 47" West along said Westerly right of way line a distance of 62.96 feet; THENCE South 82 degrees 06' 43" West a distance of 27.39 feet to a point on the Westerly right of way line of Old Toteff Road; THENCE along an arc of a curve to the right whose radius point bears North 45 degrees 35' 26" East a distance of 210.98 feet and having a central angle of 19 degrees 03' 34" for an arc distance of 70.18 feet; THENCE North 25 degrees 21' 00" West a distance of 98.80 feet; THENCE along an arc of a curve to the left whose radius point bears South 64 degrees 39' 00" West a distance of 170.98 feet and having a central angle of 25 degrees 56' 49" for an arc distance of 77.43 feet; THENCE North 25 degrees 10' 18" West a distance of 69.44 feet; THENCE along an arc of a curve to the left whose radius point bears South 32 degrees 34' 54" West a distance of 210.98 feet and having a central angle of 27 degrees 02' 54" for an arc distance of 99.60 feet; THENCE South 84 degrees 28' 00" West a distance of 266.87 feet; THENCE along an arc of a curve to the right whose radius point bears South 11 degrees 13' 12" West a distance of 235.60 feet and having a central angle of 10 degrees 35' 45" for an arc distance of 43.57 feet; THENCE South 68 degrees 11' 03" East a distance of 189.75 feet; THENCE along an arc of a curve to the right whose radius point bears South 21 degrees 48' 57" West a distance of 544.96 feet and having a central angle of 21 degrees 58' 45" for an arc distance of 209.05 feet; THENCE South 46 degrees 12' 18" East a distance of 66.09 feet; THENCE South 41 degrees 04' 59" East a distance of 104.96 feet; THENCE South 52 degrees 42' 09" East a distance of 143.33 feet to a point on the Westerly right of way line of the Burlington Northern Railroad; THENCE North 25 degrees 28' 47" West along said right of way line a distance of 106.65 feet to the point of beginning. Containing 1.31 acres. Said property is depicted on a survey map recorded in Cowlitz County under Auditor's File No. 840905024, Book 6 of Surveys, Pages 243 and 244. 3. Consideration. In consideration of the modified leased premises, the Company hereby agrees to pay to the Port the amount of $15,120.00. In consideration of the right to use the rail spur easement as described above, together with related transactions, the Company hereby agrees to pay to the Port the amount of $12,500.00. The sum of these two amounts ($27,620.00) shall be payable over a ten year period. The first payment (1/10th of the total) shall be due as of February 6, 1983, and annual payments shall be due and payable thereafter, in advance, on the 6th day of February of each year until paid. The amount due and payable shall be increased by 5 percent each year, as follows: 1983 $2,762.00 1984 2,900.10 1985 3,045.11 1986 3,197.36 1987 3,357.23 1988 3,525.09 1989 3,701.34 1990 3,886.41 1991 4,080.73 1992 4,285.10 In addition to the payments hereinder, the Company shall pay any leasehold taxes and other taxes applicable concerning said payments. In addition, the Company agrees to pay to the Port, within 15 days, survey fees and attorneys' fees incurred in connection with the modifications and transactions described above. 4. Other terms and conditions. Except as modified herein the original lease dated November 22, 1960, as amended by the agreement dated August 15, 1979, shall remain in full force and effect. 5. Preservation of lease. In the even that any provision of this Agreement is in violation of the laws of the State of Washington or is deemed to constitute an act of default of the terms of the revenue bonds referred to in the Lease, and the Port or the Company is unable or unwilling to take such action as necessary to remedy such a violation or default, the Port or the Company may, after 30 days' written notice during which such action is not taken, declare this Agreement, or such portion of this Agreement as is necessary to remedy such a violation of default, as rescinded. IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized officers this _____ day of ________, 1985. PORT OF KALAMA a municipal corporation By __________________________________ President By __________________________________ Secretary NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation By /s/ Garry A. Pistoria President By /s/ Harvey S. Kaner Secretary STATE OF WASHINGTON ) ) ss. COUNTY OF COWLITZ ) On this _____ day of __________, 1985, before me personally appeared CALVIN L. COX and MILFORD S. WESTIN, to me known to be the President and Secretary, respectively, of the Port Commision of the Port of Kalama, a municipal corporation and the corporation that executed the within and foregoing instrument, and ackowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein lmentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. ______________________________________ NOTARY PUBLIC in and for the State of Washington, Residing at ______________________. STATE OF MINNESOTA ) ) ss. COUNTY OF RAMSEY ) On this 28th day of May, 1985, before me personally appeared Garry A. Pistoria and Harvey S. Kaner, to me known to be the President and Secretary, respectively, of NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation and the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein lmentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ Nanci L. Lilja NOTARY PUBLIC in and for the State of Minnesota, Residing at Dakota County My commission expires June 25, 1991 [STAMP: NANCI L. LILJA NOTARY PUBLIC - MINNESOTA DAKOTA COUNTY MY COMM. EXPIRES JUNE 25, 1991] THIRD AMENDMENT TO LEASE THIS AGREEMENT is made and entered into this 8th day of July, 1986, by and between the PORT OF KALAMA, a municipal corporation organized under the laws of the State of Washington ("Port"), and NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation ("NPGG"). I. Recitals A. The parties hereto entered into a lease dated November 22, 1960, recorded under Auditor's File No. 526606, ("Lease") for a term of 30 years from February 6, 1963, plus options. Said Lease was modified by an agreement dated August 15, 1979 and an agreement dated August 28, 1985. B. Because of adverse economic conditions NPGG ceased its normal operations in March, 1985. C. It is in the best interest of the Port to have the facility in full operation since it generates dockage revenue for the Port and creates significant employment for individuals within the Port district. D. The Port and NPGG have been working together and with other parties involved in the operation of the facility for a number of months in order to resolve differences between the parties and to produce agreements which would make operation of the facility economically viable. II. Agreement NOW, THEREFORE, in consideration of the terms and conditions set forth below, the parties agree as follows: A. Each of the twelve months starting July 1, 1986 and ending June 30, 1987 will be identified as a "quota-month." NPGG will load a minimum of two ships during each of nine quota-months. NPGG will load a minimum of one ship during each of three quota-months. NPGG shall notify the Port, in writing, by the last day of the month immediately following each quota-month whether NPGG elects it to be a "one ship" or a "two ship" quota-month. B. During the period from July 1, 1986 until June 30, 1987, for each quota-month that the quotas set forth above are met, the Port will pay NPGG $11,250. For purposes of determining whether the quotas are met, NPGG may count ships loaded in the month immediately preceding and/or the month immediately following each quota-month. A single ship call shall not be counted to fill the quota for more than one quota-month. The Port will make payment to NPGG on or before the 15th of the month immediately following the notification as required in paragraph A above. C. Sub-paragraph 13(a), Page 15, of the original lease agreement dated November 22, 1960, shall be stricken and shall be replaced by the following paragraph: 13(a) For a period of five (5) years commencing on February 6, 1993 and ending on February 5, 1998. During each year of the option the annual rental shall be as follows: February 6, 1993-February 5, 1994 As set forth in Paragraph 3, page 2, of that Agreement between the parties dated August 15, 1979. February 6, 1994-February 5, 1995 $100.00 February 6, 1995-February 5, 1996 $100.00 February 6, 1996-February 5, 1997 $100.00 February 6, 1997-February 5, 1998 $100.00 This option is given in consideration of the Company having spent substantial sums in site location and preparation work and in consideration of the Company having made and provided for the deposit of $380,000 for security for the payment of said revenue bonds. E. Other terms and conditions. Except as modified herein, the original lease dated November 22, 1960, as amended by the Agreement dated August 15, 1979 and the Agreement dated August 28, 1985, shall remain in full force and effect. F. Preservation of lease. In the event that any provision of this Third Amendment to Lease is in violation of the laws of the State of Washington or is deemed to constitute an act of default of the terms of the revenue bonds referred to in the Lease, and the Port or NPGG is unable or unwilling to take such action as necessary to remedy such a violation or default, the Port or NPGG may, after 30 days' written notice during which such action is not taken, declare this Third Amendment to Lease or such portion of this Third Amendment to Lease as is necessary to remedy such a violation of default, as rescinded. IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized officers this 8th day of July, 1986. PORT OF KALAMA, a municipal corporation By /s/ James Lucas President By /s/ Calvin L. Cox Secretary NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation By /s/ T. F. Baker Treasurer By /s/ Harvey S. Kaner Secretary STATE OF WASHINGTON ) ) ss COUNTY OF COWLITZ ) On this 9th day of July, 1986, before me personally appeared JAMES LUCAS and CALVIN L. COX, to me known to be the President and Secretary, respectively, of the Port Commission of the Port of Kalama, a municipal corporation and the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ Linda M. Durgeloh NOTARY PUBLIC in and for the State of Washington, residing at Kalama STATE OF MINNESOTA ) ) ss COUNTY OF RAMSEY ) On this 8th day of July, 1986, before me personally appeared T. F. Baker and Harvey S. Kaner to me known to be the Treasurer and Secretary, respectively, of NORTH PACIFIC GRAIN GROWERS, INC., an Oregon corporation and the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ William L. Devitt NOTARY PUBLIC in and for the State of Minnesota, residing at STAMP: WILLIAM L. DEVITT NOTARY PUBLIC - MINNESOTA HENNEPIN COUNTY MY COMMISSION EXPIRES NOV. 5, 1990 FOURTH AMENDMENT TO LEASE BETWEEN THE PORT OF KALAMA, A MUNICIPAL CORPORATION OF THE STATE OF WASHINGTON AND HARVEST STATES COOPERATIVES, A MINNESOTA ASSOCIATION EFFECTIVE DATE: FEBRUARY 1, 1988 AGREEMENT DATED: April 12, 1988 TABLE OF CONTENTS I. Recitals 1 II. Agreement A. Term of Agreement 2 B. Quota-Months 2 1. Quota-Periods 2 2. Quota-Month Defined 2 3. Ship Loading Defined 3 C. Payments 3 1. Monthly Amount To Be Paid 3 2. Payments for Short-Quota Months 4 3. Ship Counting Procedure 4 D. Identification of Accounts 4 1. Operations Expense Account 4 2. General Maintenance Account 5 3. Capital Investment Account 6 E. Other Terms and Conditions 6 F. Preservation of Lease 6 FOURTH AMENDMENT TO LEASE THIS AGREEMENT is made and entered into as of the 1st day of February, 1988, by and between the PORT OF KALAMA, a municipal corporation organized under the laws of the State of Washington ("Port"), and HARVEST STATES COOPERATIVES, a Minnesota cooperative association ("HSC"), (formerly NORTH PACIFIC GRAIN GROWERS, INC.) organized under the laws of the State of Minnesota. I. Recitals A. The parties hereto entered into a lease dated November 22, 1960, recorded under Auditor's File No. 526606, ("Lease") for a term of 30 years from February 6, 1963, plus options. Said Lease was modified by agreements dated August 15, 1979, August 28, 1985 and July 8, 1986. B. Because of adverse economic conditions HSC ceased its normal operations in July, 1987. C. It is in the best interest of the Port to have the facility in full operation since it generates dockage revenue for the Port and creates significant employment for individuals within the Port district. D. The Port and HSC have been working together and with other parties involved in the operation of the facility for a number of months in order to resolve differences between the parties and to produce agreements which would make operation of the facility economically viable. II. Agreement NOW, THEREFORE, in consideration of the terms and conditions set forth below, the parties agree as follows: A. TERM OF AGREEMENT. This agreement shall be in effect commencing on the first day of February, 1988, and shall terminate on the 31st day of January, 1991. B. QUOTA-MONTHS. 1. Quota Periods. The agreement shall be divided into three twelve-month Quota Periods as follows: a. Quota-Period ONE (QP-1) from February 1, 1988, and ending on January 31, 1989. b. Quota-Period TWO (QP-2) from February 1, 1989, and ending on January 31, 1990. c. Quota-Period THREE (QP-3) from February 1, 1990, and ending on January 31, 1991. 2. Quota-Month Defined. Within each Quota-Period, each month shall be identified as a "quota-month." HSC will load a minimum of three ships during each of nine quota-months within each Quota-Period. Said months shall be identified as "three ship" quota-months. HSC will load a minimum of five ships during the remaining three quota-months combined within each Quota-Period. Said months will be identified as "short" quota-months. HSC shall notify the Port, in writing, by the last day of the month immediately following each quota-month whether HSC elects it to be a short quota-month or a three ship quota-month. Should HSC fail to make the election and notification as required, said month shall be deemed to be a three-ship quota-month. 3. Ship Loading Defined. For purposes of this agreement, in order to be counted, a ship must be a motorized seagoing vessel which has received a minimum of 5,000 tons of grain elevated through the Kalama HSC facility for purposes of conveying the grain to export destinations. C. PAYMENTS. 1. Monthly Amount To Be Paid. During each month of this agreement, except as set forth below in Paragraph 2, $19,400 shall be paid to the three accounts identified below in Paragraph D. For each quota-month that the quotas set forth above are met, the Port will pay $19,400 to said accounts. For each quota-month that the quotas are not met, HSC will pay $19,400 to said accounts. The parties will make payments to the account as required herein on or before the 15th of the month following the notification as required above in Paragraph B. 2. Payments for Short Quota-Months. The short quota-months require a cumulative total of five ships during all of said short quota-months in each Quota-Period in order to earn the payments hereunder. For the first two short quota-months neither party shall make any payments to the accounts upon receipt of the notice from HSC electing a month to be a short quota-month. When the third short quota-month has passed, if HSC has met the quota (five ships total), then the Port shall pay $58,200) ($19,400 per quota-month) to the accounts for the three short quota-months. When the third short quota-month has passed, if HSC has not met the quota (five ships total), then HSC shall pay $58,200 ($19,400 per quota-month) to the accounts for the three short quota-months. 3. Ship Counting Procedure. For purposes of determining whether the quotas are met, HSC may count ships loaded in the month immediately preceding and/or the month immediately following each quota-month. Notwithstanding the preceding sentence, ships loading in one Quota-Period may not be counted in another Quota-Period. A single ship shall not be counted to fill the quota for more than one quota-month. D. IDENTIFICATION OF ACCOUNTS. 1. Operations Expense Account - This account shall be distributed on a monthly basis. For each month the ship-quota is met, the Port shall pay to HSC $6,466 from the payment of the $19,400 required to be paid in Paragraph C above. For each month the ship-quota is not met, HSC shall pay to the Port $6,466 from the payment of the $19,400 required to be paid in Paragraph C above. The money received by either party shall be deposited in its general operating account to be utilized for operating expenditures. 2. General Maintenance Account - Each month, from the payment of the $19,400 required to be paid in Paragraph C above, the appropriate party shall pay into this account $6,467. The account shall be used for general maintenance "hard items" such as heat sensitive bearings, buckets for belts and other such expenditures. The Port will establish and maintain an interest bearing account separate from its other accounts and all interest shall accrue to the benefit of the account. Such items may be purchased by HSC on Port approval after fifteen (15) days written notice and explanation. If a dispute arises over any voucher approval, it shall be settled as set forth below in Paragraph D.3. Upon purchase, HSC shall bill the Port, which billings shall have attached copies of invoices and/or receipts for each purchase. Payments shall be disbursed within thirty (30) days after the close of each calendar quarter. 3. Capital Investment Account - Each month, from the payment of $19,400 required to be paid in Paragraph C above, the appropriate party shall pay $6,467 into this account. The Port will establish and maintain an interest bearing account separate from its other accounts and all interest shall accrue to the benefit of the account. Payments expended from the account shall be by agreement of the parties. It is expected that by the 30th month of this agreement the parties will have decided on the capital expenditure(s) which will utilize the fund. The decision will be made by the Port Manager and the HSC Commodity Export Operations Manager. In the event they are unable to agree on the priority of the project(s), then the President of HSC and the President of the Port Commission (not designees) shall meet and determine the priorities. E. OTHER TERMS AND CONDITIONS. Except as modified herein, the Lease dated November 22, 1960, as amended by agreements dated August 15, 1979, August 28, 1985, and July 8, 1986, shall remain in full force and effect. F. PRESERVATION OF LEASE. In the event that any provision of this Fourth Amendment to Lease is in violation of the laws of the State of Washington or is deemed by bond counsel to constitute an act of default of the terms of the revenue bonds referred to in the Lease, and the Port or HSC is unable or unwilling to take such action as necessary to remedy such a violation or default, the Port or HSC may, after 30 days' written notice during which such action is not taken, declare this Fourth Amendment to Lease as rescinded. IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized officers this 12th day of April, 1988. PORT OF KALAMA, a municipal corporation By: /s/ Milford S. Westin President By: /s/ James Lucas Secretary HARVEST STATES COOPERATIVES, a cooperative association By: /s/ Michael H. Bergeland Its Group Vice President By: /s/ Dennis D. Wendland Its Vice President STATE OF WASHINGTON ) ) ss. COUNTY OF COWLITZ ) On this 22nd day of April, 1988, before me personally appeared MILFORD S. WESTIN, and JAMES LUCAS to me known to be the President and Secretary, respectively, of the Port Commission of the Port of Kalama, a municipal corporation and the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ Linda M. Durgeloh NOTARY PUBLIC for the State of Washington, residing at Kalama STATE OF MINNESOTA ) ) ss. COUNTY OF RAMSEY ) On this 12th day of April, 1988, before me personally appeared MICHAEL H. BERGELAND and DENNIS D. WEDLAND to me known to be the Group Vice President and Vice President respectively, of HARVEST STATES COOPERATIVES, a cooperative association and the association that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ Nanci L. Lilja NOTARY PUBLIC for the State of Minnesota, residing at Eagan, Minnesota [STAMP: NANCI L. LILJA NOTARY PUBLIC - MINNESOTA DAKOTA COUNTY MY COMM. EXPIRES JUNE 25, 1991] FIFTH AMENDMENT TO LEASE THIS AGREEMENT is made and entered into as of the 9th day of November, 1988, by and between the PORT OF KALAMA, a municipal corporation organized under the laws of the State of Washington ("Port"), and HARVEST STATES COOPERATIVES, a Minnesota cooperative association ("HSC"), (formerly NORTH PACIFIC GRAIN GROWERS, INC.) organized under the laws of the State of Minnesota. I. Recitals A. The parties hereto entered into a lease dated November 22, 1960, recorded under Auditor's File No. 526606, ("Lease") for a term of thirty (30) years from February 6, 1963, plus options. Said Lease was modified by agreements dated August 15, 1979, August 28, 1985, July 8, 1986, and April 12, 1988. B. AT&T Communications of the Pacific Northwest ("AT&T") has requested a long term lease over certain property which is presently covered by the Lease between the Port and HSC. C. The parties wish to adjust the northern boundary line of the lease agreement in order to facilitate the long term Lease between the Port and AT&T. II. Agreement NOW, THEREFORE, in consideration of the terms and conditions set forth below, the parties agree as follows: A. EFFECTIVE DATE. This agreement shall take effect upon the date first written above. B. ADJUSTMENT OF BOUNDARY LINE. The Property which is the subject of the Lease between the parties is hereby amended. Henceforth the property leased is described as follows, to-wit: REAL PROPERTY: A parcel of land in Government Lots 4 and 5 and in Jacob Ahles DLC No. 44 in Section 20, Township 6 North, Range 1 West, Willamette Meridian, Cowlitz County, Washington described as follows: Commencing at the Southeast corner of said Section 20; THENCE North 87 degrees 46'44" West along the South line of Section 20 a distance of 599.0 feet to a point on the centerline of the right of way of the Burlington Northern Railroad; THENCE North 25 degrees 28'47" West along the centerline of said right of way a distance of 396.31 feet to a point on the Easterly extension of the North line of Toteff Road; THENCE South 84 degrees 28'00" West on said North line and its Easterly extension a distance of 207.02 feet to the true point of beginning; THENCE North 59 degrees 21'02" West a distance of 125.34 feet; THENCE North 5 degrees 32'00" West a distance of 13.15 feet; THENCE South 84 degrees 28'00" West a distance of 17.98 feet; THENCE North 59 degrees 21'02" West a distance of 132.79 feet; THENCE along the arc of a curve to the right whose radius bears North 30 degrees 38'58" East a distance of 558.00 feet and having a central angle of 32 degrees 42'17" for an arc distance of 318.51 feet; THENCE North 28 degrees 44'32" West a distance of 1,927.86 feet to a point on the South line of the property conveyed by deed to the Port of Kalama and recorded under Auditor's File No. 850805007; THENCE North 88 degrees 46'22" West along said South line a distance of 245.10 feet; THENCE South 01 degree 13'38" East 120.00 feet; THENCE along the arc of a curve to the left whose radius point bears South 88 degrees 46'22" East a distance of 445.81 feet and having a central angle of 18 degrees 20'40" for an arc distance of 142.73 feet; THENCE South 63 degrees 44'59" West 200.26 feet more or less to the top of bank of the Columbia River; THENCE Southeasterly along said top of bank to a point on the North line of Toteff Road that bears South 84 degrees 28'00" West a distance of 822.68 feet from the true point of beginning; THENCE North 84 degrees 28'00" East a distance of 822.68 feet along the North line of Toteff Road to the true point of beginning. Containing 39.55 acres. EASEMENT: Together with an easement for ingress and egress described as follows: Commencing at the Southeast corner of said Section 20; THENCE North 87 degrees 46'44" West along the South line of Section 20 a distance of 599.0 feet to a point on the center line of the right of way of the Burlington Northern Railroad; THENCE North 25 degrees 28'47" West along the center line of said right of way a distance of 396.31 feet to a point on the Easterly extension of the North line of Toteff Road; THENCE South 84 degrees 28'00" West on said North line and its Easterly extension a distance of 207.02 feet; THENCE North 59 degrees 21'02" West a distance of 125.34 feet; THENCE North 5 degrees 32'00" West a distance of 13.15 feet; THENCE South 84 degrees 28'00" West a distance of 17.98 feet; THENCE North 59 degrees 21'02" West a distance of 132.79 feet; THENCE along the arc of a curve to the right whose radius point bears North 30 degrees 38'58" East a distance of 558.00 feet and having a central angle of 32 degrees 42'17" for an arc distance of 318.51 feet; THENCE North 28 degrees 44'32" West a distance of 1,927.86 feet to a point on the South line of the property conveyed by deed to the Port of Kalama and recorded under Auditor's File No. 850805007; THENCE North 88 degrees 46'22" West along said South line a distance of 245.10 feet to the true point of beginning; THENCE South 01 degree 13'38" West 120.00 feet; THENCE along the arc of a curve to the left whose radius point bears South 88 degrees 46'22" East a distance of 445.81 feet and having a central angle of 18 degrees 20'40" for an arc distance of 142.73 feet; THENCE South 63 degrees 44'59" West 20.25 feet; THENCE along the arc of a curve to the right whose radius point bears North 72 degrees 29'15" East a distance of 465.81 feet and having a central angle of 18 degrees 44'23" for an arc distance of 152.35 feet; THENCE North 01 degree 13'38" East 120.00 feet; THENCE North 01 degree 12'00" West 612.50 feet; THENCE North 20 degrees 23'00" West 186.52 feet to the Southwesterly line of Hendrickson Drive; THENCE South 37 degrees 24'37" East along said Southwesterly line 68.30 feet; THENCE leaving said Southwesterly line South 20 degrees 23'00" East 124.54 feet; THENCE South 01 degree 12'00" East 616.78 feet to the true point of beginning C. MAP OF PROPERTY. Attached hereto as Exhibit A and by this reference incorporated herein is a map prepared by Barbieri and Associates, dated the 21st day of October, 1988, which depicts the lease property as defined herein. Said map is recorded in Cowlitz County in Book 9 of Surveys, at page 50, Auditor's File #881110033. D. PAYMENT TO HSC. The Port shall pay to HSC four (4) times one-half of the first year's rent identified in the Port of Kalama/AT&T lease. The exact amount of the first years rent has not been determined at this time although it is expected to be approximately $2,500 making the payment to HSC estimated to be $5,000. The payment to HSC is due within thirty (30) days of the execution of the agreement between the Port and AT&T. E. OTHER TERMS AND CONDITIONS. Except as modified herein, the Lease dated November 22, 1960, as amended by agreements dated August, 15, 1979, August 28, 1985, July 8, 1986, and April 12, 1988, shall remain in full force and effect. F. PRESERVATION OF LEASE. In the event that any provision of this Fifth Amendment to Lease is in violation of the laws of the State of Washington or is deemed by bond counsel to constitute an act of default of the terms of the revenue bonds referred to in the Lease, and the Port or HSC is unable or unwilling to take such action as necessary to remedy such a violation or default, the Port or HSC may, after thirty (30) days' written notice during which such action is not taken, declare this Fifth Amendment to Lease as rescinded. IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized officers this 9th day of November, 1988. PORT OF KALAMA, a municipal corporation By /s/ Milford S. Westin Milford S. Westin, President By /s/ James Lucas James Lucas, Secretary HARVEST STATES COOPERATIVES, a cooperative association By /s/ Michael H. Bergeland Michael H. Bergeland, Group Vice President By /s/ Dennis D. Wendland Dennis D. Wendland, Vice President STATE OF WASHINGTON ) ) ss. COUNTY OF COWLITZ ) On this 9th day of November, 1988, before me personally appeared MILFORD S. WESTIN and JAMES LUCAS to me known to be the President and Secretary, respectively, of the Port Commission of the Port of Kalama, a municipal corporation and the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ Linda M. Durgeloh NOTARY PUBLIC for the State of Washington, residing at Kalama My Commission Expires: 1-26-90 STATE OF MINNESOTA ) ) ss. COUNTY OF RAMSEY ) On this 4th day of November, 1988, before me personally appeared MICHAEL H. BERGELAND and DENNIS D. WENDLAND to me known to be the Group Vice President and Vice President respectively, of HARVEST STATES COOPERATIVES, a cooperative association and the association that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument. IN WITNESS WHEREOF, I have hereunto set my hand on the date first hereinabove written. /s/ Esther I. Longseth NOTARY PUBLIC for the State of Washington, residing at Stillwater, MN My Commission Expires: 6/30/91 STAMP: ESTHER I. LONGSETH NOTARY PUBLIC - MINNESOTA WASHINGTON COUNTY MY COMM. EXPIRES JUNE 30, 1991 [attached graphic: Port of Kalama drawing] EX-10.3 6 LIMITED LIABILITY COMPANY AGREEMENT LIMITED LIABILITY COMPANY AGREEMENT FOR WILSEY-HOLSUM FOODS, LLC, A DELAWARE LIMITED LIABILITY COMPANY Dated as of July 24, 1996 TABLE OF CONTENTS Page ARTICLE 1 - GENERAL PROVISIONS 1 1.1 Formation 1 1.2 Name 1 1.3 Filings; Registered Office and Statutory Agent 1 1.4 Principal Executive Office 2 1.5 Purpose 2 1.6 Company Powers 2 1.7 Term 3 1.8 Qualification in Other Jurisdictions 3 1.9 Definitions 3 ARTICLE 2 - MEMBERS 12 2.1 Members 12 2.2 Access to Books of Account 12 2.3 Confidential Information 13 2.4 Duty of Members to Cooperate 14 ARTICLE 3 - MANAGEMENT 15 3.1 Management 15 3.2 Members Committee 15 3.3 Powers of the Members Committee 16 3.4 Members Committee Meetings 18 3.5 Voting 19 3.6 Deadlock. Deadlock Resolution 20 3.7 Members 21 ARTICLE 4 - OFFICERS AND EMPLOYEES 21 4.1 Officers 21 4.2 Chief Executive Officer 21 4.3 Treasurer 21 4.4 Secretary 22 4.5 Executive Vice Presidents 22 ARTICLE 5 - INTENTIONALLY OMITTED 22 ARTICLE 6 - DISPUTE RESOLUTION 22 6.1 Dispute Resolution 22 ARTICLE 7 - BUY-SELL RIGHT 26 7.1 Buy-Sell 26 7.2 Certain Agreements 28 ARTICLE 8 - CAPITAL CONTRIBUTIONS 29 8.1 Capital Accounts 29 8.2 Initial Contributions of Capital 30 8.3 Additional Contributions by Members 30 8.4 Member Obligations 31 8.5 Withdrawals of Capital Accounts 31 8.6 Interest on Capital Accounts 31 8.7 Revaluation of Company Assets 31 8.8 Redetermination of Percentage Interests 32 8.9 Determination of Fair Market Value 32 (a) Selection of Appraisers 32 (b) Evaluation Procedures 33 (c) Fair Market Determination 33 (d) Selection of and Procedure for Third Appraiser 34 (e) Alternative Determination of Fair Market 34 (f) Costs 34 (g) Conclusive Determination 35 (h) Initial Capital Contributions 35 ARTICLE 9 - ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS 35 9.1 Allocation of Profits and Losses 35 9.2 Allocation of Taxable Income and Loss 38 (a) General 38 (b) Section 704(c) Allocations 38 (c) Recapture 38 (d) Credits 38 (e) Conformity of Reporting 38 9.3 Distribution of Assets by the Company. 39 9.4 Wilsey Deferred Tax Distributions 39 (a) Reversal through Depreciation 39 (b) Reversal through Disposition 40 ARTICLE 10 - TAX MATTERS AND REPORTS; ACCOUNTING 40 10.1 Filing of Tax Returns 40 10.2 Tax Matters Partner 40 10.3 Tax Reports to Current and Former Members 41 10.4 Accounting Records. Independent Audit 41 10.5 Fiscal Year 41 10.6 Tax Accounting Method 41 10.7 Withholding 41 10.8 Tax Elections 42 10.9 Prior Tax Information 42 ARTICLE 11 - TRANSFER AND ASSIGNMENT OF INTERESTS; PUBLIC OFFERING; ADDITIONAL MEMBERS 42 11.1 Transfer and Assignment of Interests 42 11.2 Permitted Transfers 43 11.3 Assignment of Right to Appoint Committee Members 44 11.4 Right of First Refusal Procedures 44 11.5 Assignees and Substituted Members 45 11.6 Additional Members 46 ARTICLE 12 - DISSOLUTION AND LIQUIDATION 46 12.1 Events of Dissolution 46 12.2 Voluntary Dissolution 47 12.3 Buy-Sell Procedure Rights 47 12.4 Liquidation and Order of Dissolution 47 12.5 Liquidator 48 12.6 Termination of Company 49 12.7 Orderly Winding Up 49 ARTICLE 13 - INDEMNIFICATION AND EXCULPATION; CERTAIN AGREEMENTS 49 13.1 Indemnification of the Members 49 13.2 Reimbursement and Indemnity 50 13.3 Exculpation 50 13.4 Indemnification Relating To Initial Contributions 51 ARTICLE 14 - MISCELLANEOUS 51 14.1 Notices 51 14.2 Governing Law 52 14.3 Amendments 52 14.4 Entire Agreement 52 14.5 Waiver of Partition 52 14.6 Consents 53 14.7 Successors 53 14.8 Counterparts 53 14.9 Severability 53 14.10 Survival 53 14.11 No Third Party Beneficiaries 53 LIMITED LIABILITY COMPANY AGREEMENT FOR WILSEY-HOLSUM FOODS, LLC, A DELAWARE LIMITED LIABILITY COMPANY This Limited Liability Agreement of WILSEY-HOLSUM FOODS, LLC (the "Company") is made as of July 24, 1996, by and between WILSEY FOODS, INC., a Delaware corporation ("Wilsey") and HARVEST STATES COOPERATIVES, a Minnesota corporation ("Harvest States"), each of which shall be a Member (as hereinafter defined) from and after said date for all purposes hereof. WHEREAS, Wilsey and Harvest States have concluded that it will be in their best interests to form a limited liability company for the purpose of acquiring, owning and operating the Business hereinafter described and, in furtherance thereof, Wilsey and Harvest States wish to become Members in the Company; and NOW, THEREFORE, in consideration of the promises, mutual covenants and agreements herein contained and in order to set forth the respective rights, obligations and interests of the Members to one another and to the Company, the Members hereby agree as follows: ARTICLE 1 GENERAL PROVISIONS 1.1 Formation. Wilsey and Harvest States hereby agree to form the Company as a limited liability company under and pursuant to the Act (as hereinafter defined), and this Agreement. Except as provided in this Agreement, the rights, duties, liabilities and obligations of the Members and the administration, dissolution, winding up and termination of the Company shall be governed by the Act. 1.2 Name. The name of the Company shall be "Wilsey-Holsum Foods, LLC". The name of the Company may be changed with the unanimous approval of the Members acting through the Members Committee. 1.3 Filings; Registered Office and Statutory Agent. (a) The Members shall cause the Certificate to be filed with the Secretary of State of Delaware and any other office in accordance with the Act. The Members shall cause additional amendments to the Certificate to be filed whenever required by the Act. The Members shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Company as a limited liability company under the Act. (b) The registered office of the Company in the State of Delaware required by the Act shall be c/o The Corporation Trust Company, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801, as set forth in the Certificate, until such time as the registered office is changed with the unanimous approval of the Members acting through the Members Committee in accordance with the Act and the filing of an amendment to the Certificate. (c) The statutory agent of the Company in the State of Delaware required by the Act shall be the Corporation Trust Company, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801 until such time as the statutory agent is changed with the unanimous approval of the Members acting through the Members Committee in accordance with the Act and the filing of an amendment to the Certificate. 1.4 Principal Executive Office. The principal executive office for the transaction of the business of the Company may be fixed upon the unanimous approval of the Members acting through the Members Committee within or without the State of Delaware. 1.5 Purpose. The purpose of the Company shall be to enter into the Joint Venture Agreement (as hereinafter defined), acquire, own and operate substantially all of the assets (real and personal, tangible and intangible), businesses and operations of Wilsey and the Holsum Foods division of Harvest States ("Holsum") and Ventura Foods, L.L.C., a limited liability company under the laws of the State of Delaware owned equally by Wilsey and Harvest States ("Ventura Foods") and to conduct such other business activities as may from time to time be unanimously approved by the Members acting through the Members Committee (collectively the "Business"). The terms and conditions of the acquisition of the Business shall be more fully described in the Joint Venture Agreement. 1.6 Company Powers. (a) The Company shall have the power: (i) to acquire and operate the Business; (ii) to acquire or lease all equipment, supplies and services and to make improvements necessary for the ownership, operation, management and maintenance of the Business; (iii) to borrow or raise money necessary for the acquisition, ownership, operation, management and maintenance of the Business; (iv) to use any contributions from the Members for such purposes; (v) to execute any documents required in connection with the foregoing; (vi) to do any and all acts and things which may be necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the Business as contemplated by this Agreement; and (vii) to take any other action permissible under the Act in connection with the Business; (b) The Company may enter into, deliver and perform all contracts, agreements and other undertakings and engage in all activities and transactions as may be necessary or appropriate to carry out the foregoing purposes. Without limiting the foregoing, the Company may: (i) acquire, sell, lease, exchange, transfer, assign, encumber, pledge or mortgage assets of the Business or otherwise exercise all rights, powers, privileges and other incidents of ownership or possession with respect to such assets; (ii) borrow or raise money and secure the payment of any obligations of the Company by mortgage upon, or pledge or hypothecation of, all or any part of the assets of the Company; (iii) engage personnel, whether part-time or full-time, to do such acts as are necessary or advisable in connection with the maintenance, operation and administration of the Company and its investments; and (iv) engage attorneys, independent accountants, investment bankers, consultants or such other Persons as are necessary or advisable. 1.7 Term. The term of the Company shall commence on the date that the Certificate is executed and filed in the Office of the Secretary of State of the State of Delaware pursuant to Section 18-201 of the Act. The duration of the Company shall be perpetual, unless earlier dissolved as provided in Article 12, or by applicable law. 1.8 Qualification in Other Jurisdictions. The Members acting through the Members Committee shall cause the Company to be qualified, formed, or registered under assumed or fictitious name statutes or similar laws in any jurisdiction in which the Company owns property or engages in activities if such qualification, formation or registration is necessary to permit the Company lawfully to own property and engage in the Company's Business. The Members shall execute, file and publish all such certificates, notices, statements or other instruments necessary to permit the Company to engage in the Company's Business as a limited liability company in all jurisdictions where the Company elects to engage in or do Business. 1.9 Definitions. For purposes of this Agreement the following terms have the following meanings unless indicated otherwise, all Article and Section references are to Articles and Sections in this Agreement, and all Schedule references are to Schedules to this Agreement: "Acceptance" shall mean an unconditional written acceptance by a Member of any Offer made pursuant to Section 7.1. "Act" means Title 6 Chapter 18 of the Delaware Code (the Delaware Limited Liability Company Act), as from time to time in effect in the State of Delaware, or any corresponding provision or provisions of any succeeding or successor law of such State; provided, however, that in the event that any amendment to the Act, or any succeeding or successor law, is applicable to the Company only if the Company has elected to be governed by the Act as so amended or by such succeeding or successor law, as the case may be, the term "Act" shall refer to the Act as so amended or to such succeeding or successor law only after the appropriate election by the Company, if made, has become effective. "Additional Member" means any additional Person admitted as a Member to the Company pursuant to Article 11. "Adjusted Capital Contributions" means, for each Member, the cumulative amount of such Member's capital contributions to the Company which for purposes of this definition shall be equal to the sum of (i) the amount of cash and the Fair Market Value as of the date of contribution of any other property contributed to the capital of the Company, plus (ii) the cumulative amount of Adjusted Revaluation Gain, and less (iii) the cumulative amount of Adjusted Revaluation Loss. "Adjusted Revaluation Gain" or "Adjusted Revaluation Loss" means, respectively, the Revaluation Gain or Revaluation Loss, as the case may be, with respect to an asset being revalued which would have arisen had the basis used in computing Revaluation Gain or Revaluation Loss been equal to the Capital Account book basis of such asset immediately following the later of its contribution or acquisition or any immediately preceding revaluation. "Affiliate" means a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the Person specified. For purposes of this definition, the term "control" (including the terms "controlling," "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to (i) vote in excess of 50% of the Voting Stock of such Person, or (ii) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. Anything hereinabove to the contrary notwithstanding, under no circumstances shall the Company be deemed to be an Affiliate of Wilsey, Harvest States or any of their respective Affiliates. "Affiliate Transferee" means, with respect to a Member, a Wholly Owned Affiliate of such Member to which an ownership interest of all or any part of its Membership Interest has been transferred in accordance with Article 11 hereof. "Agent" means any officer, director, Committee Member, employee, partner, shareholder or agent of any Person. "Agreement" means this Limited Liability Company Agreement, as it may be amended, supplemented or restated from time to time. "Appraiser" means any of the First Appraiser, the Second Appraiser and the Third Appraiser as defined in Section 8.9 of this Agreement. "Appraiser's Certificate" means a certificate prepared by an Appraiser, executed on behalf of an Appraiser by a duly authorized officer thereof, and setting forth such Appraiser's opinion as to the Fair Market Value of an asset. "Asset Member" shall have the meaning set forth in Section 8.9(a) of this Agreement. "Asset Value" with respect to any Company asset means: (a) The Fair Market Value when contributed of such asset contributed to the Company by any Member; (b) The Fair Market Value on the date of distribution of such asset distributed by the Company to any Member as consideration for its Membership Interest; (c) The Fair Market Value of such asset upon a revaluation pursuant to Section 8.7 of this Agreement; or (d) The Basis of the asset in all other circumstances. "Assignee" means the Person to whom a transfer of a Membership Interest is made; an Assignee is not a Substituted Member unless and until the Assignee complies with Section 11.5(b) of this Agreement. "Basis" with respect to an asset means the adjusted basis from time to time of such asset for United States federal income taxes purposes. "Budget" means a one-year revenue, expense and capital expenditure budget for the Company, as it may be amended from time to time in accordance with the terms of this Agreement. Each such annual Budget shall include, in respect of the Company for the next fiscal year, an income statement, balance sheet and capital budget (with line item detail showing revenues and expenses projected for the Business) prepared on an accrual basis for the Company for the forthcoming fiscal year; a cash flow statement which shall show in reasonable detail the receipts and disbursements (including without limitation, the anticipated distributions) projected for the Company for the forthcoming fiscal year and the amount of any corresponding cash deficiency or surplus, and the amount and due dates of all required capital contributions, if any; and any information reasonably available which could assist the Members in evaluating such Budgets. Each such Budget shall be prepared on a basis consistent with the Company's financial statements and the Business Plan approved by the Members Committee. "Business" shall have the meaning set forth in Section 1.5. "Business Plan" means a rolling [three]-year business plan for the Company, as it may be amended from time to time in accordance with the terms of this Agreement, which shall include (i) an annual operating budget for each year contemplated in the Business Plan; (ii) a [two]-year financial plan (including financial view and financial commitment, such as capital contributions) for the Company; and (iii) a detailed description of the key underlying assumptions and key strategies. The Business Plan shall also include, for each year thereof, the following details: information on the objectives and funding requirements (including any proposed borrowings); methods and sources of financing, including, with respect to compensation plans, monthly projected profit and loss statements, monthly balance sheets, monthly projected cash flow statements, capital expenditure budgets, departmental budgets, projected detailed personnel requirements, annual key performance milestones for the business and any proposed capital improvements or expansions; and detailed management plans. "Buy-Sell Procedure" shall have the meaning set forth in Section 3.6(c) of this Agreement. "Capital Account" means the capital account maintained by the Company for each Member as described in Section 8.1 of this Agreement. "Certificate" means the certificate of formation filed with the Secretary of State of the State of Delaware pursuant to the Act to form the Company as originally executed and amended, modified or restated from time to time. "Closing" shall have the meaning set forth in Section 7.1(e) of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means the limited liability company formed pursuant to this Agreement and the Certificate. "Confidential Information" means all documents and information (including, without limitation, confidential and proprietary information with respect to customers, sales, marketing, production, costs and the design and development of new products or services) of each of the Company, the Members and their respective Affiliates, except to the extent that such information can be shown to have been (a) generally available to the public other than as a result of a breach of the provisions of Section 2.4 of this Agreement; (b) already in the possession of the receiving Person or its Agents without restriction and prior to any disclosure in connection with the Company or pursuant to any of the terms of this Agreement; (c) lawfully disclosed to the receiving Person or its Agents by a third party who is free lawfully to disclose the same; or (d) independently developed by the receiving Person without use of any Confidential Information obtained in connection with the transactions leading up to and contemplated by this Agreement and the operation of the Company or its businesses. "CPR" shall mean the CPR Institute for Dispute Resolution (formerly, the Center for Public Resources). "CPR Rules" shall mean the Rules for Non-Administered Arbitration of International Disputes promulgated by CPR. "Default Amount" shall have the meaning set forth in Section 8.3(b) of this Agreement. "Default Fee" shall have the meaning set forth in Section 8.3(b) of this Agreement. "Defaulting Member" shall have the meaning set forth in Section 8.3(b) of this Agreement. "Depreciation" for any fiscal year or other period means the cost recovery or amortization deduction with respect to an asset for such year or other period as determined for federal income tax purposes, provided that if the Asset Value of such asset differs from its Basis at the beginning of such year or other period, depreciation shall be determined by applying tax recovery periods and methods to the Asset Value of the asset as provided in Income Tax Regulation Section 1.704-l(b)(2)(iv)(g)(3). "Dispute" shall have the meaning set forth in Section 6.1. "Distribution Agreement" means the Master Distribution Agreement between the Company and Mitsui & Co., Ltd., attached as Exhibit L to the Joint Venture Agreement. "Effective Date" means the date upon which the acquisition by the Company of the Business shall have been consummated, pursuant to the Joint Venture Agreement. "Employment Agreement" means the employment agreement dated as of January 1, 1996 between Wilsey and Jack Davis, assigned to and assumed by the Company as of the Effective Date. "Fair Market Value" means, with respect to any asset, as of the date of determination, the cash price at which a willing seller would sell, and a willing buyer would buy, each being apprised of all relevant facts and neither acting under compulsion, such asset in an arm's-length negotiated transaction with an unaffiliated third party without time constraints, all as determined under Section 8.9 of this Agreement. "GAAP" means generally accepted accounting principles, consistently applied with prior periods. "Harvest States Substituted Member" means any Substituted Member which has acquired its Membership Interest from Harvest States or whose Membership Interest was originally owned by Harvest States. "Holsum" shall have the meaning set forth in Section 1.5 of this Agreement. "Income Tax Regulations" means the United States federal income tax regulations, including temporary (but not proposed) regulations, promulgated under the Code. "Initial Offer" shall have the meaning set forth in Section 7.1(a) of this Agreement. "Initiating Member" shall have the meaning set forth in Section 7.1(a) of this Agreement. "Joint Venture Agreement" means the Joint Venture Agreement to be entered into among Wilsey, Harvest States and the Company, pursuant to which Wilsey and Harvest States shall, not later than September 30, 1996, transfer the Business to the Company in consideration of their respective Membership Interests in the Company. "Lien" means, as to any Membership Interest, liens, encumbrances, security interests and other rights, interests or claims of others therein (including, without limitation, warrants, options, rights of first refusal, rights of first offer, co-sale and similar rights). "Liquidator" has the meaning set forth in Section 12.5. "Member" means each of Wilsey and Harvest States, and includes any Person admitted as an Additional Member or Substituted Member of the Company pursuant to Article 11 of this Agreement. Wilsey and Harvest States shall be admitted as Members of the Company on the date hereof. A Person who is not admitted on the date hereof as a Member of the Company shall be deemed admitted as a Member upon satisfaction of the requirements of Article 11. "Membership Interest" means the interest and ownership of a Member in the Company, including the Capital Account of such Member, its participation in the profits and losses of the Company in accordance with its Percentage Interest, and all of its other rights and obligations under this Agreement and the Act, relating to the Company. "Net Operating Available Cash" means at the time of determination, (a) all cash and cash equivalents on hand in the Company, less (b) the Forecast Cash Requirements, if any, of the Company, as determined by the Members [in a manner consistent with an Approved Budget.] For purposes of this definition, "Forecast Cash Requirements" means, for the twelve-month period following the date of determination, the excess, if any, of (a) forecast capital expenditures, capital contributions to other entities and other investments, acquisitions, cash income tax payments and debt service (including principal and interest) requirements and other non-cash credits to income, plus forecast cash reserves for future operations or other requirements, over (b) forecast net income of the Company, plus the sum of forecast depreciation, amortization, interest expenses, income tax expenses and other non-cash charges to income, in each case to the extent deducted in determining such net income, plus or minus forecast changes in working capital, plus the forecast cash proceeds of dispositions of assets (net of expenses), plus an amount equal to the forecast net proceeds or debt financings. "Non-Defaulting Members" shall have the meaning set forth in Section 8.3(b) of this Agreement. "Offer" means the Initial Offer and any subsequent offer made pursuant to Section 7.1 of this Agreement to the Initiating Member or the Other Member, as the case may be, each of which offers shall comply with the following requirements: (a) Such offer shall be in writing, duly authorized, executed and delivered, irrevocable and remain available for acceptance for a period following receipt thereof by the Member to whom it was delivered for a period at least equal to the lesser of (x) 60 days, or (y) the period ending on the date, if any, upon which the offeree delivers a subsequent Offer pursuant to Section 7.1 of this Agreement; (b) Such offer shall be for cash only; (c) Such offer shall be to purchase all, but not less than all, of the Membership Interest held by the Member to whom it is addressed; (d) Such offer shall stipulate the Price of the Membership Interest, the Total Value from which such Price was derived, and the Percentage Interest of the Member to whom the offer is addressed. "Offeree Members" means Members other than the Selling Member who must be offered a right of first refusal to purchase the Selling Member's Membership Interest all as provided in Section 11.4 of this Agreement. "Other Member" shall have the meaning set forth in Section 7.1(a) of this Agreement. "Parent Entity" means, as to any Person, an Affiliate of which such Person is a Wholly Owned Subsidiary. "Percentage Interest" means, for each Member, the Percentage Interest of the Member as set forth on Schedule I, as such Percentage Interests may be modified pursuant to Section 8.8. "Person" means any individual, corporation, partnership, limited liability company, firm, joint venture, association, joint-stock company, trust, estate, unincorporated organization, governmental or regulatory body or other entity. "Price" means a dollar amount determined by multiplying the Percentage Interest of the Member to whom an Offer is addressed by the Total Value stipulated in such Offer, provided that the Price stipulated in any Initial Offer arising by reason of initiating the Buy-Sell Procedures under Section 3.6(c) of this Agreement shall be not less than the balance of the Capital Account of the offeree, as reflected in the most recently available financial statements of the Company. "Prime Rate" means the per annum rate publicly announced by Union Bank of California from time to time at its head office in San Francisco, California as its "Reference Rate". "Profits and Losses" for any fiscal year or other period means an amount equal to the Company's taxable income for United States federal income tax purposes for such year or period determined in accordance with Code Section 703(a) and the Income Tax Regulations thereunder with the following adjustments: (a) All items of income, gain, loss, and deduction of the Company required to be stated separately shall be included in taxable income or loss; (b) Income of the Company exempt from United States federal income tax shall be treated as taxable income; (c) Expenditures of the Company described in Code Section 705(a)(2)(B) or treated as such expenditures under Income Tax Regulation Section 1.704-l(b)(2)(iv)(i) shall be subtracted from taxable income; (d) Revaluation Gain and Revaluation Loss shall be included; (e) Gain or loss resulting from the disposition of property from which gain or loss is recognized for United States federal income tax purposes shall be determined with reference to the Asset Value of such property; and (f) Depreciation shall be determined based upon Asset Value instead of as determined for United States federal income tax purposes. "Public Offering" means an offering of securities of the Company registered with the Securities and Exchange Commission with a total public offering price of at least $5,000,000. "Revaluation Gain" means the amount of gain which would have been realized had there been a taxable disposition of any Company asset being revalued under Section 8.7 of this Agreement for an amount of cash equal to such asset's then Fair Market Value, determined in accordance with the provisions of Section 8.9 of this Agreement. "Revaluation Loss" means the amount of loss which would have been realized had there been a taxable disposition of any Company asset being revalued under Section 8.7 of this Agreement for an amount of cash equal to such asset's then Fair Market Value, determined in accordance with the provisions of Section 8.9 of this Agreement. "Selling Member" means the Member proposing to transfer all or a part of its Membership Interest, which transfer is subject to rights of first refusal in the other Members as provided in Section 11.4 of this Agreement. "Substituted Member" shall have the meaning set forth in Section 11.5 of this Agreement. "Supply Agreement" means the Long Term Supply Agreement between the Company and Harvest States, attached as Exhibit K to the Joint Venture Agreement. "Tax Matters Partner" means the Tax Matters Partner of the Company as referred to in Section 10.2 of this Agreement. "Taxes" means all taxes, charges, fees, levies or other assessments imposed by any taxing authority, including, but not limited to, income, gross receipts, excise, property, sales, use, transfer, payroll, license, ad valorem, value added, withholding, social security, national insurance (or other similar contributions or payments), franchise, estimated, severance and stamp taxes (including any interest, fines, penalties or additions attributable to, or imposed on or with respect to, any such taxes, charges, fees, levies or other assessments) and "Tax Return" means any return, report, information return or other document (including any related or supporting information) with respect to Taxes. "Total Value" means a dollar amount stipulated in the Offer by the Offeror, in its sole discretion, to be the value of 100% of the Percentage Interests of all Members, provided that in all Offers made subsequent to the Initial Offer, the Total Value stipulated therein shall be at least 105% of the Total Value stipulated in the most recent Offer received by the offeror from the other Member with respect to the purchase of the Offeror's Membership Interest. "Transfer" means as a verb to transfer, sell, assign, exchange, pledge, give, hypothecate or otherwise convey or encumber all or any portion of a Membership Interest, and, as a noun, any transfer, sale, assignment, exchange, change, gift, hypothecation or other conveyance or encumbrance of all or any portion of a Membership Interest. "Ventura Foods" shall have the meaning set forth in Section 1.5 of this Agreement. "Wilsey Net Deferred Income Tax Liability" shall have the meaning as defined in Article 1 of the Joint Venture Agreement. "Wilsey Substituted Member" means any Substituted Member which has acquired its Membership Interest from Wilsey or whose Membership Interest was originally owned by Wilsey. "Wholly Owned Affiliate" means, as to any Person, a Parent Entity or any Affiliate that is a Wholly Owned Subsidiary of such Parent Entity. "Wholly Owned Subsidiary" means, as to any Person, a corporation or other entity all of the capital stock or other equity interests of which corporation or entity is at the time owned, directly or indirectly, through one or more intermediaries, or both, by such Person. ARTICLE 2 MEMBERS 2.1 Members. Each of the parties to this Agreement, and each Person admitted as a Member of the Company pursuant to the Act and Article 11 of this Agreement, shall be Members of the Company until they cease to be Members in accordance with the provisions of the Act, the Certificate, or this Agreement. The names of the Members shall be set forth in Schedule I hereto, as such Schedule I may be amended from time to time. 2.2 Access to Books of Account. Each Member shall have the right at all reasonable times during usual business hours to audit, examine, and make copies or extracts of or from the complete books of account of the Company, including but not limited to the books and records maintained in accordance with Section 10.4 and all other books and records of the Company. Such right may be exercised through any Agent of such Member designated by it or by independent certified public accountants or counsel designated by such Member. Each Member shall bear all expenses incurred in any examination made for such Member's account. 2.3 Confidential Informaiton. (a) The Company and each Member shall not use or disclose to others any Confidential Information received from the Company or any other Member for any purpose other than provided for in this Agreement, and shall take or cause to be taken such precautions as are reasonably necessary to prevent disclosure or use of Confidential Information to others, except to or by (i) any lender to the Company, or (ii) any Member or any of their respective Affiliates or Agents on a "need to know" basis in connection with the transactions leading up to and contemplated by this Agreement, including with respect to any agreements or contracts between the Member and the Company, and the operation of the Company and its Business, and such Member disclosing Confidential Information pursuant to this Section 2.3 shall use, and shall cause its Affiliates and Agents to use, such Confidential Information only for the benefit of the Company in conducting the Business or for any other specific purposes for which it was disclosed to such party; provided that the disclosure of financial statements of, or other information relating to, the Company shall not be deemed to be the disclosure of Confidential Information (i) to the extent that any Member is required by law or GAAP to disclose such financial statements or other information or (ii) to the extent that in order to sustain a position taken for tax purposes, any Member deems it necessary and appropriate to disclose such financial statements or other information. All Confidential Information disclosed in connection with the Company or pursuant to this Agreement shall remain the property of the Person whose property it was prior to such disclosure. (b) No Confidential Information regarding the plans or operations of any Member or any Affiliate thereof received or acquired by or disclosed to any other Member or Affiliate thereof in the course of the conduct of the Business, or otherwise as a result of the existence of the Company, may be used by such other Member or Affiliate thereof for any purpose other than for the benefit of the Company in conducting the Business. (c) In the event that a Member or anyone to whom a Member transmits any Confidential Information becomes legally compelled (by oral questions, interrogatories, requests for information or documents, subpoena, investigative demand or similar process) to disclose any of the Confidential Information, such Member will provide the other Members and the Company with prompt written notice prior to disclosure so that the other Members and the Company may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement. In the event that such protective order or other remedy is not obtained, or that the Company and the other Members waive compliance with the provisions of this Section 2.3, the Member or Person who is compelled to disclose such Confidential Information will take reasonable measures to minimize any required disclosure. (d) Each Member who ceases to be such will, and will cause its Affiliates, Representatives and Agents to, maintain the confidentiality required by this Section 2.3 and to destroy or return upon request, all documents and other materials, and all copies thereof, obtained by such Member or on its behalf from either the Company or the other Members or any of their Affiliates in connection with the transactions leading up to and contemplated by this Agreement and the operation of the Company and its Business, that are subject to such confidentiality obligations. The obligations under this Section 2.3 shall survive the dissolution of the Company for a period of five years. (e) To the fullest extent permitted by law, if a Member or any of its Affiliates or Agents breaches, or threatens to commit a breach of, this Section 2.3, the other Members and the Company shall have the right and remedy to have this Section 2.3 specifically enforced by and pursuant to the arbitration provisions in Section 6.1, and to obtain injunctive relief as authorized by Section 6.1, it being acknowledged and agreed that money damages will not provide an adequate remedy to such other Members or the Company. Nothing in this Section 2.3 shall be construed to limit the right of any Member or the Company to collect money damages in the event of breach of this Section 2.3. 2.4 Duty of Members to Cooperate. Each Member will, to the extent permitted by applicable law and consistent with this Agreement, furnish such information, execute such applications and similar documents as are required by governmental authorities, and take such other action reasonably requested by the other Members or the Members Committee and as may be necessary or reasonably desirable in connection with the Business of the Company. ARTICLE 3 MANAGEMENT 3.1 Management. The Business of the Company shall be managed by the Members in accordance with this Article 3. Except as provided in Section 3.7, all decisions concerning the management of the Company's Business shall be made by the Members acting through the Members Committee and the officers of Company, in each case as further described in Sections 3.2 and 3.3. Any Person not a party to this Agreement which deals with the Company shall be entitled to rely conclusively upon the power and authority of the Members Committee. Except upon the express authorization or designation by the Members or the Members Committee in accordance with this Agreement, no Member shall have any unilateral right or authority to take any action on behalf of the Company with respect to third parties. 3.2 Members Committee. (a) The Members Committee of the Company shall be composed of ten individuals, five of whom shall be appointed by Wilsey and five of whom shall be appointed by Harvest States (collectively the "Committee Members" and individually a "Committee Member"). Each Committee Member shall be an officer, director or employee of the appointing Member and shall not be an officer or employee of the Company. The foregoing restriction on qualifications of Committee Members shall be subject to waiver and exceptions if approved by all Members. The Committee Members shall serve without compensation. (b) Each Member's initial Committee Members shall be as set forth in Schedule II. Effective upon the giving of written notice thereof to the other Members, any Member may, at any time, in its sole discretion and with or without cause, replace any or all of its appointed Committee Members with other individuals and may designate one or more alternates for any or all of its Committee Members; provided that such replacement Committee Members or alternates meet the requirements provided in Section 3.2(a) above. Each Committee Member shall serve on the Members Committee until his or her successor is appointed, or until his or her earlier death, resignation or removal. In the event that a Committee Member ceases to serve for any reason, the Member that appointed such Committee Member shall promptly designate a successor. Effective upon a Member ceasing to be a member of the Company, the Committee Members representing such Member on the Members Committee shall cease to be Committee Members. 3.3 Powers of the Members Committee. (a) Without prejudice to the general powers of the Members to manage the Business of the Company subject to Section 3.7, but subject to any limitations contained in the Act, it is hereby expressly declared that the Members delegate to the Members Committee the full and complete authority, power and discretion to manage and control the Business of the Company including the following powers, authority duties: (i) to cause the Company to enter into (a) the Joint Venture Agreement and all other documents, instruments and agreements in connection with the transfer of the Business of the Company; (b) all credit agreements with the lenders and other agreements or instruments relating thereto, with respect to any loans or other financing obtained by the Company; (c) the Supply Agreement with Harvest States; (d) the Distribution Agreement with Mitsui & Co., Ltd.; and (e) the Employment Agreement; (ii) to change the scope of the Business of the Company; (iii) to adopt the annual Budgets and Business Plans for the Company and the amendments thereto; (iv) to approve the admission of an Additional Member of the Company; (v) to approve a merger or consolidation of the Company with or into any other Person; (vi) to approve the sale of all or substantially all of the Company's assets; (vii) to establish or dissolve any subsidiary of the Company; (viii) to require any additional capital contributions and determine the form of such contributions; (ix) to form or dissolve a joint venture, partnership or any other similar arrangement between the Company and any other Person; (x) to appoint, replace or discharge the Chief Executive Officer ("CEO") of the Company; (xi) to appoint, replace or discharge the Chief Operating Officer ("COO") (if any) and one or more of the Executive Vice Presidents (other than the two Executive Vice Presidents appointed by Wilsey and Harvest States as set forth in Section 4.4 of this Agreement) the Senior Vice Presidents or the Vice Presidents, the Secretary, the Treasurer and the other officers of the Company, in each case after receiving the recommendation of the CEO of the Company; (xii) to approve any acquisitions or disposition of shares or bonds of any other equity or other interest in any other Person or business enterprise; (xiii) to authorize any acquisition of assets of any other Person, or any disposition of assets of the Company, except in the ordinary course of business; (xiv) to borrow money or incur indebtedness in the name of the Company and in connection therewith issue notes or other debt securities of the Company and secure any such indebtedness by mortgage, pledge or other lien excluding all or any portion of the Company's assets; (xv) to appoint or change the independent auditor of the Company; (xvi) except as otherwise provided in this Agreement, to make any distribution to the Members of the Company; (xvii) to bring and defend actions in law or at equity and compromise, submit to arbitration, or settle all claims in favor of or against the Company; (xviii) to settle or compromise any claims against the Company; (xix) to make any accounting and income tax elections, determinations or other decisions; (xx) to appoint one or more subcommittees of the Members Committee, such subcommittees to have such power and authority as shall be delegated to them by the Members Committee; and (xxi) to establish, amend or abolish internal rules of the Company with respect to the authority of the CEO and other designated officers and to create, reorganize or abolish departments and offices of the Company. (b) The powers, authority and duties delegated to the Members Committee in Section 3.3(a) above may be delegated by the Members Committee to any sub-committee established by the Members Committee or to any one or more officers of the Company, provided that any such delegation with respect to the items enumerated in Section 3.3(a)(i) through Section 3.3(a)(viii) shall require the unanimous affirmative vote of all Committee Members then serving. Each Member, by execution of this Agreement, agrees to, consents to, and acknowledges the delegation of the powers, authority and duties of the Members to the Committee Members in accordance with this Agreement, and to the actions and decisions of the Committee Members within the scope of their authority as provided herein. 3.4 Members Committee Meetings. (a) The Members Committee shall hold regular meetings (at least quarterly) at such time and place as shall be determined by the Members Committee (or the Presiding Chairman of the Members Committee). Special meetings of the Members Committee may be called at any time by any Committee Member by delivering a notice of meeting in accordance with Section 3.4(g) hereof. The CEO and other officers of the Company may be invited by any Committee Member to attend and express their respective opinions at meetings of the Members Committee. (b) There shall be two Chairmen of the Members' Committee, one of whom shall be appointed by Wilsey from among its appointed Committee Members and the other of whom shall be appointed by Harvest States from among its appointed Committee Members. Each Chairman so appointed shall serve as such at the pleasure of the Member appointing such Chairman and until his respective successor is appointed by the Member who appointed him. The Chairman appointed by Wilsey shall serve as the Presiding Chairman until December 31, 1997. The Chairman appointed by Harvest States shall serve as the Presiding Chairman during calendar year 1998, the next Chairman appointed by Wilsey shall serve as the Presiding Chairman during calendar year 1999, and so on, with the Chairman appointed by each of Wilsey and Harvest States alternating as the Presiding Chairman, calendar year by calendar year. If the Presiding Chairman shall be absent from any meeting of the Members Committee, the other Chairman shall act as the Presiding Chairman in his place. The Presiding Chairman shall establish the agendas for, and regulate the proceedings of, meetings of the Members Committee, but must include on such agendas matters requested by any Committee Member in writing received at least two business days in advance of any meeting. (c) Committee Members may participate in a meeting of the Members Committee by conference telephone or similar communications equipment by means of which all Persons participating in the meeting can hear each other, and such participation shall constitute presence in person of such Committee Members at such meeting. (d) Any action required or permitted to be taken at any meeting of the Members Committee may be taken without a meeting upon the unanimous written consent of all of the Committee Members. (e) The Members Committee may appoint, from time to time, a person to act as Secretary of one or more meetings of the Members Committee ("Committee Secretary"). The Committee Secretary may or may not be the same person as the Secretary of the Company described in Section 4.4. The Committee Secretary shall prepare complete written minutes of the meetings of the Members Committee and shall cause same to be kept with the books and records of the Company. A duplicate copy of such written minutes shall be provided to each Committee Member. (f) A Committee Member shall have the right by written notice to the Presiding Chairman to designate an alternate Person to attend meetings of the Members Committee, instead and in place of such Committee Member, and to exercise all of the functions of such Committee Member. Any such alternate shall be deemed to be a Committee Member for all purposes hereunder until such designation is revoked. A Committee Member shall also have the right to give a written proxy to any other Committee Member for a specific meeting to exercise all voting rights of the Committee Member at such meeting. (g) Notice of each regular meeting and each special meeting of the Members Committee shall be given in writing to each Committee Member at least fourteen (14) business days before such meeting. Notices of special meetings shall contain a description, in reasonable detail, of the items of business to be conducted at such meeting and no business other than those items (unless expressly and unanimously agreed to by all of the Committee Members) may be conducted at such special meeting. The notice provisions of this Section 3.4(g) shall be waived upon either the signing of a written waiver thereof or attendance at a meeting by all of the Committee Members appointed by each Member. 3.5 Voting. Except as provided in the next sentence, any action that may be taken by the Members Committee, including without limitation in exercise of the powers set forth in Section 3.3, shall require the affirmative vote of a majority of Committee Members present (in person or by proxy) at the meeting; provided that in the event that all Committee Members representing any Member shall abstain from the vote on any matter (because of a conflict of interest or for any other reason), the outcome of such vote shall be determined by the affirmative vote of Committee Members representing the other Member entitled to vote on such matter, and such vote shall constitute the act of the Members Committee with respect to such matter. Notwithstanding the foregoing, any action taken by the Members Committee with respect to the items enumerated in Section 3.3(a)(i) through Section 3.3(a)(viii) shall require the unanimous affirmative vote of all Committee Members; provided that as long as there is any vacancy on the Members Committee the affirmative vote of all of the Committee Members then serving shall be sufficient. A quorum of any meeting of the Members Committee shall require the presence (in person or by proxy) of at least six (6) Committee Members. Each Committee Member shall be entitled to one vote regarding all matters coming before the Members Committee and each Committee Member may vote in the best interests of the Member who appointed him or her, and shall have no duty to consider or to vote with regard to the best interests of the Company or any other Member. 3.6 Deadlock. Deadlock Resolution. (a) If the Members Committee fails to adopt, by the requisite affirmative vote, the annual Budget and Business Plan for the Company prior to the first day of any fiscal year of the Company, the Company shall be operated in accordance with the annual Budget and Business Plan for the next previous fiscal year of the Company until the Members Committee adopts the annual Budget and Business Plan for the relevant fiscal year. (b) If the Members Committee fails to resolve, by the requisite affirmative vote, any matter submitted thereto (other than the annual Budget and Business Plan), within ninety (90) days after such matter is first referred to the Members Committee, then each Member shall appoint a delegate in order to resolve such disagreement. Such delegates shall then meet as necessary to resolve such disagreement and attempt to resolve such disagreement by mutual agreement. If such delegates fail to resolve the disagreement within ninety (90) days of their appointment, no action with respect to such matter will be taken by the Company. (c) If either Wilsey or Harvest States shall give the other written notice of its proposal that a Public Offering and/or the incorporation of the Company take place, as contemplated by Section 11.2(c), each of them shall enter into good faith discussions with the other concerning the proposed terms and conditions and the business, legal and tax consequences to the Company and each other of the proposal. If, within ninety (90) days after the giving of such notice both Wilsey and Harvest States shall have failed to consent to such proposal, or some modification thereof, as contemplated by Paragraph 11.2(c), then, either Wilsey or Harvest States (but no other Member) shall have the right to initiate the buy-sell procedure described in Article 7 of this Agreement (the "Buy-Sell Procedure"). If the Buy-Sell Procedure is initiated pursuant to this Section 3.6(c), the Initial Offer shall be not less than the balance of the capital account of the Offeree Member, as set forth in Article 7. 3.7 Members. Notwithstanding anything contained herein to the contrary, the Members reserve the right, power and authority by unanimous written consent to take the following actions: (a) to amend the Certificate; (b) to amend the Agreement; (c) to approve the dissolution or liquidation of the Company other than as required by the Act; (d) to direct the Members Committee to take any action or make, modify or amend any decision. ARTICLE 4 OFFICERS AND EMPLOYEES 4.1 Officers. The officers of this Company shall include a chief executive officer ("CEO"), two Executive Vice Presidents, a Secretary, a Treasurer and such other officers, including a chief operating officer ("COO"), as the CEO shall recommend for the operation and management of this Company. The powers, rights, duties and responsibilities of the officers shall be as provided in this Agreement or determined by the Members Committee. The CEO shall recommend to the Members Committee the appointment, discharge or replacement of the COO (if any), the Secretary, the Treasurer and other officers (excluding the Executive Vice Presidents appointed pursuant to section 4.4 below) of the Company. 4.2 Chief Executive Officer. The CEO shall have the responsibility for the general active day-to-day management of the business of the Company. The CEO shall see that all orders and resolutions of the Members Committee are carried into effect. Except to the extent otherwise directed by the Members Committee, the CEO shall have the general powers and duties usually vested in the office of the Chief Executive Officer of a Delaware corporation and shall have such other powers and perform such other duties as may from time to time be prescribed by the Members Committee. Jack Davis shall serve as the initial CEO of the Company until his resignation or removal and subject to the terms of the Employment Agreement. 4.3 Treasurer. The Treasurer shall be the Chief Financial Officer of the Company and shall have the care and custody of the Company's funds and securities and shall disburse the funds of the Company as may be ordered from time to time by the Members Committee or the CEO. The Treasurer shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects and all securities of the Company in the name and to the credit of the Company in such depositories as may be designated from time to time by the Members Committee. Except to the extent that some other person or persons may be specifically authorized by the Members Committee to so do, the Treasurer shall make, execute and endorse all checks and other commercial paper on behalf of the Company. The Treasurer shall report the financial condition of the Company when requested to do so by the Members Committee or the CEO and shall perform such other duties as may from time to time be prescribed by the Members Committee or the CEO. 4.4 Secretary. The Secretary shall keep or cause to be kept at the principal executive office of the Company with the books and records of the Company, or such other place as the CEO may order, a complete book of written minutes of all proceedings of the Members and of the Members Committee, with the time and place of holding, whether regular or special, and if special how authorized, the notice thereof given, the names of those present and the number of votes present or represented at Members' or Members Committee meetings, and all written consents in lieu of meetings. The Secretary or an assistant secretary, or, if they are absent or unable or refuse to act, any other officer of the Company, shall give or cause to be given notice of all the meetings of the Members required by the Agreement or by law to be given, and he or she shall keep the seal of the Company, if any, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the CEO or by this Agreement or by the Members Committee. 4.5 Executive Vice Presidents. Each of Wilsey and Harvest States shall have the right to appoint one Executive Vice President of the Company and replace such Executive Vice President, at any time in its sole discretion. Such Executive Vice Presidents shall have such compensation, powers and duties as determined by the Members Committee. No such Executive Vice President, so appointed by Wilsey or Harvest States may be removed or replaced except by the Member appointing him. ARTICLE 5 INTENTIONALLY OMITTED ARTICLE 6 DISPUTE RESOLUTION 6.1 Dispute Resolution. The Members desire to avoid all forms of traditional litigation, subject to the provision for preliminary injunctive relief described in Section 6.1(d) below. Any dispute, controversy or claim of any nature whatsoever between the Members arising out of or relating to this Agreement or the breach, termination or invalidity of this Agreement or any related agreements, whether in contract, tort or equity, or under any statute or regulation arising out of or relating to such agreements, the relationship between or among the Members or any circumstances pertaining to the creation or termination thereof, including without limitation, claims of discrimination, breach of fiduciary duty, bad faith, or interference with other business opportunities and including determining in the first instance the interpretation or scope of this dispute resolution agreement and other preliminary jurisdictional questions (a "Dispute"), shall be resolved in accordance with this Article 6. All other remedies to which the Members (including their respective Affiliates) may otherwise have been entitled, whether at law or in equity, are hereby waived to the fullest extent allowed by law. The obligations under this Article 6 shall survive the dissolution of the Company. The preceding provision notwithstanding, if a Dispute arises out of third-party litigation against any Member, these procedures shall not be mandatory, and such Member shall have the right to engage in such litigation with the third-party claimant and with other Members concerning such Dispute. For purposes of this exception pertaining to Disputes arising out of third-party litigation, a third-party means a party (i) which is not an Affiliate of a Member, (ii) has no record or beneficial financial, ownership or other significant interest in or with a Member and (iii) in which a Member has no record or beneficial financial, ownership or other significant interest. (a) Informal Dispute Resolution. The Members shall initially attempt in good faith to resolve any Dispute promptly by confidential negotiations between representatives of the Members with authority to settle the matter. All such negotiations shall be treated as compromise and settlement negotiations for purposes of the relevant rules of evidence. Any Member making a claim shall give the other Member written notice that the Member is invoking the dispute resolution procedures of this Article 6 with respect to a specified Dispute. Within ten (10) days after delivery of the written notice, the receiving Members shall submit to the other Member a written response. The notice and the response shall include (a) a statement of each Member's position and a summary of arguments supporting that position, and (b) the name of the Person(s) who will represent that Member and the name of any other Person who will accompany the representative(s) to the meeting. Within thirty (30) days after delivery of the written notice, the representatives of both parties shall meet at a mutually acceptable time and place (or failing such agreement at the Company's headquarters), or confer by telephone and thereafter as often as they reasonably deem necessary, to attempt to resolve the Dispute. (b) Mediation. If the Dispute has not been resolved by negotiation within forty-five (45) days of the initial written notice, any Member may notify the other Members that it intends to submit such Dispute to non-binding mediation under the then current model procedure for mediation of business disputes promulgated by CPR. In such event the Members shall mediate the Dispute. The Members shall promptly attempt to agree upon a reputable and experienced mediation service. Failing agreement within five (5) days after the notice of intent to mediate has been given by a Member, the mediator will be selected in accordance with the previously mentioned CPR procedure. Any such mediation process shall be conducted in Los Angeles, California and must be completed within seventy-five (75) days of delivery of the initial written notice unless otherwise agreed by the Members. (c) Formal Dispute Resolution. (i) Any Dispute which remains unresolved seventy-five (75) days after delivery of the initial written notice shall be promptly resolved by final and binding arbitration. Such arbitration shall be conducted pursuant to the CPR Rules except to the extent herein otherwise provided. The place of arbitration shall be Los Angeles, California unless all Members which are parties to the arbitration agree to a different locale. There shall be a single neutral and impartial arbitrator appointed by CPR experienced in the subject matter of the Dispute and who has not had a material personal or financial relationship with any participant to the Dispute or any Affiliate of any such participant in the preceding three years, to be selected in accordance with the CPR Rules. The arbitration shall be conducted in the English language, provided that a witness may testify in another language if the party calling such witness shall provide a competent interpreter at such party's expense. The arbitrator shall follow the laws of the State of California (without regard to conflict of law provisions) in resolving any Dispute, provided that any question concerning arbitrability shall be governed exclusively by the United States Arbitration Act as then in force. Each Member hereby waives any right to and the arbitrator shall not have the power to award punitive, exemplary, double or treble damages. The award of the arbitrator shall be final and binding, and judgment on it may be entered in any court having jurisdiction. The Members agree that any decision or award resulting from proceedings in accordance with this dispute resolution provision shall have no preclusive or other effect in any other matter between the Members or involving a third-party. (ii) The arbitrator may consolidate an arbitration under this Agreement with any other arbitration between the Members if the subject of the Dispute arises out of or relates essentially to the same facts or transaction(s). No other person may be included in the arbitration of a Dispute, whether by consolidation, joinder or in any other manner, except by written consent of the Members which are parties to the Dispute. (d) Injunctive Relief. The Members agree that notwithstanding anything to the contrary contained herein, any Member may seek a temporary restraining order or a preliminary injunction from any court of competent jurisdiction in order to prevent immediate and irreparable injury, loss or damage; provided such Member has commenced in good faith an informal dispute resolution proceeding pursuant to this Article 6. The arbitrator once appointed shall have the power to modify or vacate such temporary restraining order or preliminary injunction or to issue a restraining order or injunction. (e) Confidentiality. The dispute resolution proceedings contemplated by this Article 6 shall be as confidential and private as permitted by law. To that end, the Members shall not disclose the existence, content or results of any proceedings conducted in accordance with this provision, and materials submitted in connection with such proceedings shall not be admissible in any other proceeding, provided, however, that this confidentiality provision shall not prevent a petition to vacate or enforce an arbitral award, and shall not bar disclosures required by law. (f) Limitations Period. The statutes of limitation of the State of California shall be applicable to the arbitration of any Dispute hereunder just as if such arbitration were a lawsuit between the Members, except that all applicable statutes of limitation and defenses based upon the passage of time shall be tolled during the pendency of any informal dispute resolution or mediation under Sections 6.1(a) and (b). ARTICLE 7 BUY-SELL RIGHT 7.1 Buy-Sell. (a) For purposes of this Article 7, only Harvest States or Wilsey may be the Initiating Member or Other Member for purposes of delivering any Offer or Acceptance contemplated below. No Additional Member or Substituted Member shall be entitled or obligated to sell any part of its Membership Interest nor to purchase any part of the Membership Interest of Harvest States or Wilsey under this Article in the event either Harvest States or Wilsey initiate Buy-Sell Procedures herein. (b) If Harvest States or Wilsey (the "Initiating Member") shall have the right to initiate these Buy-Sell Procedures pursuant to Section 3.6(c) or Section 12.3 of this Agreement, such right shall be exercisable by written notice (the "Initial Offer") to the other Member (the "Other Member"), to offer to buy the Other Member's Membership Interest in the Company at a Price and upon the other terms specified in the Initial Offer, including the Total Value from which such Price was derived. (c) Upon receipt of an Initial Offer pursuant to Section 7.1(a) or any subsequent Offer pursuant to Section 7.1(c), the Other Member shall be obligated, within 60 days after such receipt, to do one of the following: (i) Deliver to the Initiating Member its Acceptance of such Offer; or (ii) Deliver to the Initiating Member an Offer to purchase the Membership Interest in the Company held by the Initiating Member at a Price, based upon a Total Value at least equal to 105% of the Total Value specified in the Initial Offer to the Other Member. (d) Upon receipt of any Offer pursuant to Section 7.1(b), the Initiating Member shall be obligated, within 60 days after such receipt, to do one of the following: (i) Deliver to the Other Member its Acceptance of such Offer; or (ii) Deliver to the Other Member an Offer to purchase the Membership Interest in the Company held by the Other Member at a Price based upon a Total Value at least equal to 105% of the Total Value specified in the most recent Offer to the Initiating Member. (e) The process set forth in Sections 7.1(b) and 7.1(c) above shall continue, with each Member receiving an Offer to purchase its Membership Interest in the Company being obligated, within 60 days of receipt of such Offer, to accept same or offer to purchase the Membership Interest of the other Member at a Price based upon a Total Value at least equal to 105% of the Total Value specified in the most recent Offer received from such other Member, until a Member accepts an Offer. In the event a Member receiving an Offer fails, within 60 days after receipt thereof, either to deliver its Acceptance of such Offer or deliver a new Offer, as provided above, to purchase the Membership Interest of the other Member, then such Member shall be conclusively deemed to have accepted the Offer to purchase its Membership Interest and to have delivered its Acceptance of such Offer to the other Member. (f) Upon the delivery by a Member of an Acceptance of any Offer delivered hereunder, the closing of the purchase to be made pursuant thereto (the "Closing") shall take place on the date established by the purchasing party (not less than 10 days nor more than 120 days after delivery of such Acceptance), or, if federal or applicable state agencies' approval for such assignment is required, not more than thirty days after such approval has been obtained. At the Closing, the purchasing Member and the selling Member shall deliver such certificates and such assignment documents in customary form as may be reasonably requested in order to consummate the transaction, and the purchasing Member shall deliver the purchase price in immediately available funds to such bank account as shall have been specified by the selling Member at least three days prior to the closing (or, if no such notice has been given, by delivery of a certified or bank check). At such Closing, the selling Member shall sell and transfer its Membership Interest to the purchaser free and clear of Liens other than Liens arising out of Company financing and shall so warrant to the purchasing Member. The selling Member shall also represent and warrant to the purchasing Member that the selling Member has good and marketable title to the Membership Interest being sold and transferred. In addition, each of the selling Member and the purchasing Member shall make customary representations and warranties to the other including representations and warranties with respect to organization, valid existence, authorization, and non-contravention. With respect to obligations arising out of Company financing, the purchasing Member shall, in addition to paying the Price as provided above, either (i) satisfy or otherwise obtain release from all liability on the part of the selling Member and its Affiliates with respect to all obligations of the Company, including debt and lease obligations, which such selling Member and/or its Affiliates shall have guaranteed, or (ii) indemnify and hold harmless the selling Member and its Affiliates against such liability and secure such indemnification with a letter of credit or payment bond reasonably satisfactory to such selling Member. 7.2 Certain Agreements. (a) The parties acknowledge that the intent of this Article 7 is, following an Initial Offer, to create a private auction between the Members with increases in the Total Value (from which the offered Price of a Membership Interest is derived) in 5% increments, until a Member buys another Member's entire Membership Interest in the Company. (b) In the event a Member accepts an Offer to sell its Membership Interest and either the buyer or the seller fails timely to consummate such purchase, then the non-defaulting party may seek judicial redress in the courts of the State of California in and for the County of Los Angeles against the defaulting party, where such relief may include, but need not necessarily be limited to, an award of damages, specific performance, and/or an injunction. In such case, the Dispute Resolution provisions of Article 6 shall not apply. Without limiting the foregoing, in such event the non-defaulting party may elect to purchase the Membership Interest of the defaulting party at the Price such non-defaulting party initially offered to purchase the Membership Interest of the defaulting party either as the Initial Offer or the immediately subsequent Offer to the Initial Offer. (c) Notwithstanding the foregoing, a Member shall not be entitled to make an Initial Offer or subsequent Offer pursuant to this Article 7 if (i) such Member shall have ceased to be a member of the Company by reason of its dissolution or the transfer of its Percentage Interest (ii) such Member shall have become unable to pay its debts generally as they become due or shall make a general assignment for the benefit of creditors, or shall file a petition in bankruptcy, or shall have been adjudicated or declared bankrupt or insolvent, or shall file a petition or answer seeking, consenting to or acquiescing in any reorganization, arrangement, adjustment, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file an answer admitting or not contesting the material allegations of a petition or answer filed against it for or proposing any such relief or if any proceeding against such Member of the type referred to herein seeking any such relief shall not have been dismissed within thirty (30) days after commencement thereof or if a trustee, receiver or liquidator of such Member or of any material part of such Member's assets or properties shall be appointed with the consent or acquiescence of such Member, or if any such appointment not so consented to or acquiesced in, shall remain unvacated or unstayed or such trustee, receiver or liquidator shall not have been dismissed or discharged for an aggregate of thirty (30) days (whether or not consecutive), (iii) such Member shall be in default with respect to any of its material obligations under this Agreement (including without limitation failure to pay any amount when due thereunder), or (iv) except for dissolutions under Sections 12.2(b) and 12.2(c), the Company shall have been dissolved or be in the process of dissolution and liquidation under the provisions of Article 12. (d) Without limiting any of the foregoing, the Members shall not, and shall cause each of their respective Affiliates not to, (i) take any action the effect of which would prevent or frustrate the carrying out of the procedures contemplated by this Article 7 or (ii) at any time (whether before or after any termination of this Agreement) make any assertion, claim or defense that this Article 7 or any of the provisions hereof violate or are inconsistent with the terms of this Agreement or any laws or public policies. ARTICLE 8 CAPITAL CONTRIBUTIONS 8.1 Capital Accounts. (a) A single capital account shall be maintained for each Member (regardless of the class of interests owned by such Member and regardless of the time or manner in which such interests were acquired) in accordance with the capital accounting rules of section 704(b) of the Code, and the Income Tax Regulations thereunder (including particularly section 1.704-l(b)(2)(iv) of the Income Tax Regulations) (a "Capital Account"). (b) In general, under such rules, a Member's Capital Account shall be: (i) Increased by (x) the amount of money contributed by the Member to the Company (including the amount of any make-up contributions made by such Member pursuant to Section 8.3(b) and the amount of any Company liabilities that are assumed by such Member other than in connection with distribution of Company property); (y) the Fair Market Value (determined in accordance with Section 8.9(c) hereof) of property contributed by the Member to the Company (net of liabilities secured by such contributed property that the Company is considered to assume or take subject to under section 752 of the Code); and (z) allocations to the Member of Company Profits; and (ii) Decreased by (w) the amount of money distributed to the Member by the Company (including the amount of such Member's individual liabilities that are assumed by the Company other than in connection with contribution of property to the Company); (x) the Fair Market Value (determined in accordance with Section 8.9 hereof) of property distributed to the Member by the Company (net of liabilities secured by such distributed property that such Member is considered to assume or take subject to under section 752 of the Code); (y) allocations to the Member of expenditures of the Company not deductible in computing its taxable income and not properly capitalized; and (z) allocations to the Member of Company Losses; and (iii) Increased or decreased by any Revaluation Gain or Revaluation Loss determined under Section 8.7. 8.2 Initial Contributions of Capital. On or before the Effective Date, Wilsey and Harvest States shall each make the contributions of assets and liabilities to the Company as set forth on Schedule I hereto. 8.3 Additional Contributions by Members. (a) In the event that the Members Committee determine that an additional capital contribution, payable in cash or other property (or combination thereof), is necessary or advisable, each Member will be notified in writing by the Members Committee, at least sixty (60) days prior to the date on which such capital contribution is payable (the "Due Date"), of the amount of the capital contribution required from each of them, on a pro rata basis, determined in accordance with such Member's respective Percentage Interest, and the Due Date for such capital contribution. Each such capital contribution shall be payable in cash unless otherwise determined by vote of the Members Committee. Such contributions, when made by a Member, shall be credited to such Member's Capital Account. (b) In the event that a Member fails to make a required capital contribution on or prior to the Due Date thereof (a "Defaulting Member"), the other Members, who have made their respective capital contributions and are not Affiliate Transferees of the Defaulting Member (the "Non-Defaulting Members"), within thirty (30) days following the mailing of notice from the Company that payment from the Defaulting Member has not been made, may (but shall not be obligated to) [by a vote of the Non-Defaulting Members representing a majority of the Percentage Interests of the Non-Defaulting Members exercise any or all of the following remedies with respect to the contribution which the Defaulting Member failed to make to the capital of the Company (a "Default Amount"): (i) Withdraw the required capital contributions contributed by each of the Non-Defaulting Members from the Company; (ii) Pay to the Company the Default Amount on behalf of the Defaulting Members; provided that each of the Non-Defaulting Members shall be required to contribute a portion of the Default Amount that is equal to such Non-Defaulting Member's Percentage Interest divided by the Percentage Interests of all Non-Defaulting Members unless the Non-Defaulting Members otherwise agree to contribute different percentages of the Default Amount. To the extent that a Default Amount shall be paid in whole or in part by one or more Non-Defaulting Members, the Capital Accounts of the Non-Defaulting Members who make such payment and their Percentage Interests shall be appropriately increased and the Percentage Interest of the Defaulting Member shall be appropriately decreased. (iii) Initiate and maintain an action, under the sole control of the Non-Defaulting Members, against the Defaulting Member for the Default Amount and to pursue any available remedy, including but not limited to seeking payment by the Defaulting Member of such Default Amount or the unpaid portion thereof and damages incurred by the Company in connection therewith. The costs of any action commenced by the Company pursuant to this Section 8.3(b)(iii) shall be paid by the Company and shall be reimbursed by the Defaulting Member to the Company and to the extent not so reimbursed shall be deducted from such Defaulting Member's Capital Account and Adjusted Capital Contributions. 8.4 Member Obligations. No Member shall have any obligation to restore any portion of any deficit balance in such Member's Capital Account, whether upon liquidation of its interest in the Company, liquidation of the Company or otherwise. 8.5 Withdrawals of Capital Accounts. No Member shall be entitled to withdraw any amount from its Capital Account prior to dissolution of the Company. 8.6 Interest on Capital Accounts. No interest or compensation shall be paid on or with respect to the Capital Account or capital contributions of any of the Member, except as otherwise expressly provided herein. 8.7 Revaluation of Company Assets. (a) The assets of the Company shall be revalued in accordance with Section 8.9 hereof to their then Fair Market Values as of the date of and immediately prior to (i) the acquisition of an additional interest in the Company (including adjustments to Percentage Interests arising as a result of a failure of any Member to make a required capital contribution pursuant to Section 8.3 hereof) by any new or existing Member in exchange for more than a de minimis capital contribution to the Company, (ii) the distribution by the Company of more than a de minimis amount of property as consideration for the redemption of a portion (but not all) of a Member's interest in the Company and (iii) the liquidation of a Member's entire interest in the Company, or immediately prior to the distribution of Company assets in liquidation of the Company within the meaning of Income Tax Regulations section 1.704-l(b)(2)(ii)(g); provided, however, that no revaluation shall occur if the Members Committee reasonably determines that a revaluation would not materially affect the Capital Accounts of the Members or that the cost of such revaluation would be disproportionate to any benefit to be derived by the Members from such revaluation. (b) Immediately prior to the distribution of any asset by the Company, the Members Committee shall revalue such asset to its then Fair Market Value. (c) Any Revaluation Gain or Revaluation Loss arising from a revaluation of any Company asset pursuant to this Section 8.7 shall respectively be credited to or debited from the Members' Capital Accounts in accordance with their respective Percentage Interests immediately prior to the event giving rise to such revaluation. 8.8 Redetermination of Percentage Interests. The respective Percentage Interests of each of the Members shall be redetermined immediately after the election of the Non-Defaulting Members to contribute the Default Amount pursuant to Section 8.3(b)(ii) or (b) the admission of an Additional Member pursuant to Section 11. 8.9 Determination of Fair Market Value. The Fair Market Value, as of the date of determination, of any asset shall be determined (a) by mutual agreement of the Members or (b) if no such agreement is reached within ten days of the relevant date of determination, as follows: (a) Selection of Appraisers. Each of (A) the Member who is either contributing an asset to the Company, receiving an asset as a distribution from the Company or transferring an asset which is being valued hereunder (or, if there is no such Member, Wilsey) (the "Asset Member") and (B) the other Members shall designate by written notice to the Company and each Member a firm of recognized national standing familiar with appraisal techniques applicable to assets of the type being evaluated to serve as an Appraiser pursuant to this Section 8.9 (the firms designated by the Asset Member and the other Members being referred to herein as the "First Appraiser" and the "Second Appraiser," respectively) within five business days after the expiration of the ten day period referred to in clause (b) above. In the event that either the Asset Member or the other Members fail to designate its or their Appraiser within the foregoing time period, the other(s) shall have the right to designate such Appraiser by rectifying the failing party or parties in writing of such designation (and the Appraiser so designated shall be the First Appraiser or the Second Appraiser, as the case may be). (b) Evaluation Procedures. Each Appraiser shall be directed to determine the Fair Market Value of the asset. Each Appraiser will also be directed to deliver an Appraiser's Certificate to each Member on or before the 30th day after their respective designation (the "Certificate Date"), upon the conclusion of its evaluation, and each Appraiser's Certificate once delivered may not be retracted or modified in any respect. Each Appraiser shall keep confidential all information disclosed by the Company in the course of conducting its evaluation, and, to that end, will execute such customary documentation as the Company may reasonably request with respect to such confidentiality obligation. The Members shall cooperate in causing the Company to provide each Appraiser with such information within the Company's possession which may be reasonably requested in writing by the Appraiser for purposes of its evaluation hereunder. The Appraisers shall consult with each other in the course of conducting their respective evaluations. Each Member shall have full access to each Appraiser's work papers. Each Appraiser shall be directed to comply with the provisions of this Section 8.9, and to that end each Member shall provide to its respective Appraiser a complete and correct copy of this Section 8.9 (and the definitions of capitalized terms used in this Section 8.9 that are defined elsewhere in this Agreement). (c) Fair Market Determination. The Fair Market Value of any asset shall be determined on the basis of the Appraisers' Certificates in accordance with the provisions of this subparagraph (iii), each of which shall be simultaneously delivered to each Member. The higher of the values set forth in the Appraisers' Certificates is hereinafter referred to as the "Higher Value" and the lower of such values is hereinafter referred to as the "Lower Value". If the Higher Value is not more than 110% of the Lower Value, the Fair Market Value will be the arithmetic average of such two Values. If the Higher Value is more than 110% of the Lower Value, a third appraiser shall be selected in accordance with the provisions of subparagraph (iv) below, and the Fair Market Value shall be determined in accordance with the provisions of subparagraph (v) below. (d) Selection of and Procedure for Third Appraiser. If the Higher Value is more than 110% of the Lower Value, then within seven days after delivery to the Members of the Appraiser's Certificates, the First Appraiser and the Second Appraiser shall agree upon and jointly designate a third firm of recognized national standing familiar with appraisal techniques applicable to assets of the type being evaluated to serve as an appraiser pursuant to this Section &.9 (the "Third Appraiser"), by written notice to each Member. If, within ten days after delivery of the Appraiser's Certificates, as provided in clause (iii) above, the First Appraiser and the Second Appraiser shall have failed to so designate the Third Appraiser, then any Member may apply to the American Arbitration Association to appoint the Third Appraiser which shall be a firm of recognized national standing familiar with appraisal techniques applicable to assets of the type being evaluated. The Members shall direct the Third Appraiser to determine the Fair Market Value of the asset (the "Third Value") in accordance with the provisions of subparagraph (ii) above, and to deliver to the Members an Appraiser's Certificate on or before the 30th day after the designation of such Appraiser hereunder. The Third Appraiser shall be directed to comply with the provisions of this Section 8.9, and to that end the parties shall provide to the Third Appraiser a complete and correct copy of this Section 8.5 (and the definitions of capitalized terms used in this Section 8.9 that are defined elsewhere in this Agreement). (e) Alternative Determination of Fair Market. Upon the delivery of the Appraiser's Certificate of the Third Appraiser, the Fair Market Value shall be determined as provided in this subparagraph (v). The Fair Market Value shall be (w) the Lower Value, if the Third Value is less than the Lower Value, (x) the Higher Value, if the Third Value is greater than the Higher Value, (y) the arithmetic average of the Third Value and the other Value (Lower or Higher) that is closer to the Third Value if the Third Value falls within the range between (and including) the Lower Value and the Higher Value and (z) the Third Value, if the Lower Value and the Higher Value are equally close to the Third Value. (f) Costs. Each of the Asset Member and the other Members shall bear the cost of the Appraiser designated by it or on its behalf. If the Higher Value is not more than 115% of the Lower Value, or if the Higher Value and the Lower Value are equally close to the Third Value, each of the Asset Member and the other Members shall bear 50% of the cost of the Third Appraiser, if any; otherwise, the party whose Appraiser's determination of Fair Market Value is further away from the Third Value shall bear the entire cost of the Third Appraiser. The Members agree to pay when due the fees and expenses of the Appraisers in accordance with the foregoing provisions. (g) Conclusive Determination. To the fullest extent provided by law, the determination of the Fair Market Value made pursuant to this Section 8.9 shall be final and binding on the Company and the Members and such determination shall not be appealable to or reviewable by any court or arbitrator; provided that the foregoing shall not limit a Member's rights to seek arbitration of the obligations of the other Members and the Company hereunder. (h) Initial Capital Contributions. The Members hereby agree that the Fair Market Value of the Wilsey Assets and the Holsum Assets, as defined in the Joint Venture Agreement, shall be as specified in Schedule I. ARTICLE 9 ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS 9.1 Allocation of Profits and Losses. (a) Company Profits and Losses, and items of income, gain, loss and deduction included in determining Profits and Losses, shall be allocated among the Members as provided in this Section. As set forth in the definition of Profit and Loss, the amounts allocated under this Section are determined by using Asset Value, which may be based on Fair Market Value at the time of contribution or revaluation pursuant to Section 8.7. The allocation of taxable income and loss is governed by Section 9.2. (b) Except as otherwise provided in this Section 9.1, Company Profits, Losses and items of income, gain, loss and deduction included in determining Profits and Losses shall be allocated among the Members proportionately in accordance with their respective Percentage Interests as set forth on Schedule I and, if applicable, as redetermined under Section 8.8. (c) Minimum Gain Chargeback. Notwithstanding anything to the contrary in this Article 9, if there is a net decrease in "Partnership Minimum Gain" or "Partner Nonrecourse Debt Minimum Gain" (as such terms are defined in sections 1.704-2(b) and 1.704-2(i)(2), respectively, of the Income Tax Regulations) during a Company taxable year, then each Member shall be allocated items of Company income and gain for such year (and, if necessary, for subsequent years), to the extent required by, and in the manner provided in, section 1.704-2 of the Income Tax Regulations. This provision is intended to be a "minimum gain chargeback" within the meaning of sections 1.704-2(f) and 1.704-2(i)(4) of the Income Tax Regulations and shall be interpreted and implemented as therein provided. (d) Qualified Income Offset. Subject to the provisions of Section 9.1(c), but otherwise notwithstanding anything to the contrary in this Article 9, if any Member's Capital Account has a deficit balance in excess of such Member's obligation to restore its Capital Account balance, computed in accordance with the rules of paragraph (b)(2)(ii)(d) of section 1.704-1 of the Income Tax Regulations (including such Member's share of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain as provided in sections 1.704-2(g) and 1.704-2(i)(5) of the Income Tax Regulations), then sufficient amounts of income and gain (consisting of a pro rata portion of each item of Company income, including gross income, and gain for such year) shall be allocated to such Member in an amount and manner sufficient to eliminate such deficit as quickly as possible. This provision is intended to be a "qualified income offset" within the meaning of section 1.704-l(b)(2)(ii)(d) of the Income Tax Regulations and shall be interpreted and implemented as therein provided. (e) Loans. Except as otherwise provided in Section 9.1(g), if and to the extent any Member is deemed to recognize income as a result of any loans described herein pursuant to the rules of sections 1272, 1273, 1274, 1274A, 7872, 482 or 483 of the Code, or any similar provision now or hereafter in effect, any corresponding resulting deduction of the Company shall be allocated to the Member who is charged with the income. Subject to the provisions of section 704(c) of the Code and Sections 9.1(c) (d) and (g) hereof, if and to the extent the Company is deemed to recognize income as a result of any loans described herein pursuant to the rules of sections 1272, 1273, 1274, 1274A, 7872, 482 or 403 of the Code, or any similar provision now or hereafter in effect, such income shall be allocated to the Member who is entitled to any corresponding resulting deduction. (f) Change in Interests. Except as provided in Section 9.1(e) hereof or as otherwise required by law, if the Company Interests of the Members are changed herein during any taxable year, all items to be allocated to the Members for such entire taxable year shall be prorated on the basis of the portion of such taxable year which precedes each such change and the portion of such taxable year on and after each such change according to the number of days in each such portion, and the items so allocated for each such portion shall be allocated to the Members in the manner in which such items are allocated as provided in this Article 9 during each such portion of the taxable year in question. (g) Losses. (i) Items of deduction and loss attributable to recourse liabilities of the Company (within the meaning of section 1.752-l(a)(1) of the Income Tax Regulations, but excluding "partner nonrecourse debt" within the meaning of section 1.7042(b)(4) of the Income Tax Regulations) shall be allocated among the Members in accordance with the ratio in which the Members share the economic risk of loss (within the meaning of section 1.752-2 of the Income Tax Regulations) for such liabilities. (ii) Items of deduction and loss attributable to "Partner Nonrecourse Debt" within the meaning of section 1.704-2(b)(4) of the Income Tax Regulations shall be allocated to the Members bearing the economic risk of loss with respect to such debt in accordance with section 1.704-2(i) of the Income Tax Regulations. (iii) Items of deduction and loss attributable to the Company's "Nonrecourse Liabilities" within the meaning of section 1.704-2(b)(3) of the Income Tax Regulations shall be allocated among the Members proportionately in accordance with their Percentage Interests. (iv) All other items of operating net loss ("Net Loss") shall be allocated among the Members, proportionately in accordance with their Percentage Interests, except that Net Loss shall not be allocated to any Member to the extent it would create a deficit balance in excess of such Member's obligation to restore its capital account balance, computed in accordance with the rules of section 1.704-l(b)(2)(ii)(d) of the Income Tax Regulations (including such Member's share of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain as provided in sections 1.704-2(g) and 1.704-2(i)(5) of the Income Tax Regulations). Any Net Loss which cannot be allocated to a Member because of the limitation set forth in the previous sentence shall be allocated first to the other Members to the extent such other Members would not be subject to such limitation and second any remaining amount to the Members in the manner required by the Code and the Income Tax Regulations. (h) Purpose and Application. The purpose and the intent of the special allocations provided for in Sections 9.1(c), (d), and (g) are to comply with the provisions of sections 1.704-l(b) and 1.704-2 of the Income Tax Regulations, and such special allocations are to be made so as to accomplish that result. However, to the extent possible, the Members in allocating items of income, gain, loss, or deduction among the Members shall take into account the special allocations in such a manner that the net amount of allocations to each Member shall be the same as such Member's distributive share of Profits and Losses would have been had the events requiring the special allocations not taken place. The Members shall apply the provisions of this Section 9.1 in whatever order they reasonably believe will minimize any economic distortion that otherwise might result from the application of the special allocations. 9.2 Allocation of Taxable Income and Loss. (a) General. Items of income, gain, loss, and deduction reported for federal income tax purposes shall be allocated in the same manner as the corresponding items included in Profits and Losses and allocated under Section 9.1, except as provided in this Section 9.2. (b) Section 704(c) Allocations. A Member's distributive share of income, gain, loss, or deduction with respect to any tangible property with Asset Value that differs from Basis shall be determined in accordance with the principles of the "remedial allocation method" set forth in section 1.704-3(d) of the Income Tax Regulations. A Member's distributive share of income, gain, loss, or deduction with respect to any intangible property with Asset Value that differs from Basis shall be determined in accordance with the principles of the "traditional allocation method" set forth in section 1.704-3(b) of the Income Tax Regulations. (c) Recapture. Subject to the provisions of section 704(c) of the Code and Sections 9.1 and 5.2(b) hereof, gain recognized (or deemed recognized under the provisions hereof) upon the sale or other disposition of Company property, which is treated as depreciation recapture, shall be allocated to the Member who was entitled to deduct such depreciation. (d) Credits. Except as otherwise required by law, tax credits shall be allocated among the Members pro rata in accordance with the manner in which Company profits are allocated to the Members under this Article 9, as of the time the credit property is placed in service or if no property is involved, as of the time the credit is earned. Recapture of any tax credit required by the Code shall be allocated to the Members in the same proportion in which such tax credit WAS allocated. (e) Conformity of Reporting. The Members hereby agree to be bound by the provisions of this Article 9 in reporting their shares of Company income, loss, credits and other items for income tax purposes. 9.3 Distribution of Assets by the Company. (a) Subject to any restrictions under applicable law, as promptly as practical after the end of each quarter, but in any event within thirty (30) days after the end of each quarter, the Company shall estimate the Company's Net Profits and Net Operating Available Cash for the fiscal year to date and shall distribute to the Members the lesser of (i) 50% of the Company's estimated Net Profits and (ii) all of the Company's estimated Net Operating Available Cash, in each case reduced by any amounts distributed with respect to the fiscal year to date. Subject to any restrictions under applicable law, as promptly as practical after the end of the fiscal year but in any event within sixty (60) days after the end of the fiscal year, the Company shall distribute to the Members the lesser of (i) 50% of the Company's Net Profits; and (ii) all Net Operating Available Cash of the Company (as determined based on the Company's financial statements for the relevant fiscal year), reduced by any amounts distributed to date to the Members with respect to such fiscal year. Other distributions, whether in cash or in kind, shall be made to the Members at such times and in such amounts as shall be determined by the Members Committee. The amount of any in-kind distribution shall be distributed on the basis of the property's then Fair Market Value (determined in accordance with Section 8.9 hereof). (b) Except as provided in Section 5.3(c), distributions shall be made among the Members in accordance with their respective Percentage Interests at the time of such distribution. (c) Upon liquidation of the Company, within the meaning of Income Tax Regulations section 1.704-l(b)(2)(ii)(g), distributions shall be made among the Members as provided in Section 12.4. (d) All matters not expressly provided for by the terms of Article 9 or elsewhere in this Agreement concerning the valuation of any assets of the Company, the allocation of profits and losses and items thereof (including credits) among the Members and accounting procedures shall be agreed by the Members or referred to arbitration under Article 6. 9.4 Wilsey Deferred Tax Distributions. The Company shall make distributions to Wilsey to satisfy the Company's Wilsey Net Deferred Income Tax Liability. These distributions shall be determined as follows: (a) Reversal through Depreciation. The Company shall make distributions to Wilsey on or before March 15 of each year equal to the product of (i) the tax rate used in determining the Wilsey Net Deferred Income Tax Liability, and (ii) the excess of (x) depreciation that would have been allocated to Wilsey for the preceding year under Section 9.1 if the Asset Value of property contributed by Wilsey were equal to the book value of such property on Wilsey's Closing Balance Sheet (as defined in the Joint Venture Agreement) on the contribution date over (y) tax depreciation allocated to Wilsey for the preceding year in respect to such property under Section 9.2(b). (b) Reversal through Dispostion. The Company shall make distributions to Wilsey on or before March 15 of each year equal to the product of (i) the tax rate used in determining the Wilsey Net Deferred Income Tax Liability and (ii) the excess of gain or loss on dispositions during the preceding year of Wilsey-contributed property that would have been allocated to Wilsey under Section 9.1 if Asset Value had been equal to book value on the contribution date over tax gain or loss allocated under Section 9.2(b). ARTICLE 10 TAX MATTERS AND REPORTS; ACCOUNTING 10.1 Filing of Tax Returns. The Members Committee shall prepare and file, or cause the accountants of the Company to prepare and file, all federal, state and local Tax Returns for each tax year of the Company and shall upon request, provide copies of such Tax Returns to each Member. 10.2 Tax Matters Partner. (a) The "Tax Matters Partner" of the Company within the meaning of section 6231(a)(7) of the Code shall be Harvest States. Unless otherwise expressly provided herein, the Tax Matters Partner is authorized to take any action that it determines to be necessary or appropriate with respect to all tax matters, provided that the Tax Matters Partner shall not have the authority to bind any other Member to any consent, determination, resolution of a dispute or other legal matter. (b) The Tax Matters Partner shall promptly advise the other Members of all audits or other actions by the Internal Revenue Service and shall furnish to the Company and to each Member a copy of each notice or other communication received by the Tax Matters Partner from the Internal Revenue Service except such notice or communication sent directly to the Members by the Internal Revenue Service. All expenses incurred by the Tax Matters Partner in its capacity as such shall be expenses of the Company and shall be paid by the Company. (c) To the fullest extent permitted by law, the Company shall indemnify Members on an after-tax basis against any liabilities incurred while acting as the Tax Matters Partner of the Company but only to the extent such Member acts within the scope of its authority as Tax Matters Partner under this Agreement or the Tax Matters Partner has acted in reliance on advice of the Company's tax accountants or legal counsel or at the direction of the Members Committee. The Tax Matters Partner shall not be indemnified against any liability regarding Company tax matters arising by reason of the willful misconduct, bad faith, gross negligence or reckless disregard of the duties of the Tax Matters Partner. 10.3 Tax Reports to Current and Former Members. After the end of each fiscal year, the Company shall, in a timely manner, prepare and mail, or cause its accountants to prepare and mail, to each Member and, to the extent necessary, to each former Member (or its legal representatives), a report setting forth in sufficient detail such information as is required to be furnished to members or partners by law (e.a., section 6031(b) of the Code and the Income Tax Regulations thereunder) and as shall enable such Member or former Member (or its legal representatives) to prepare their respective federal and state income tax or informational returns in accordance with the laws, rules and regulations then prevailing and, if requested, a full copy of the Company's Tax Return. 10.4 Accounting Records. Independent Audit. Complete books and records accurately reflecting the accounts, business, transactions and Members of the Company shall be maintained and kept by the Company at the Company's principal place of business. The accounting records of the Company shall be maintained to assure preparation of the financial statements in accordance with GAAP. The accounting records of the Company shall be audited by a firm of independent certified public accountants selected by the Management Committee. 10.5 Fiscal Year. Except as may otherwise be required by the federal tax laws, the fiscal year of the Company for both financial and tax reporting purposes shall end on December 31. 10.6 Tax Accounting Method. The books and accounts of the Company shall be maintained using the accrual method of accounting for tax purposes. 10.7 Withholding. Notwithstanding any other provision of this Agreement, the Members Committee is authorized to take any action that it determines to be necessary or appropriate to cause the Company to comply with any federal, state and local withholding requirement with respect to any allocation, payment or distribution by the Company to any Member or other Person. All amounts withheld to satisfy any federal, state or local withholding requirement with respect to a Member shall be treated as distributions to such Member. If any such withholding requirement with respect to any Member exceeds the amount distributable to such Member under this Agreement, or if any such withholding requirement was not satisfied with respect to any amount previously allocated or distributed to such Member, such Member and any successor or assignee with respect to such Member's interest in the Company hereby, to the fullest extent permitted by law, indemnifies and agrees to hold harmless the Members and the Company for such excess amount or such withholding requirement, as the case may be. 10.8 Tax Elections. Upon the request of a transferee of an Interest in the Company or a distributee of a Company distribution, the Company shall make the election under section 754 of the Code in accordance with applicable Income Tax Regulations thereunder for the first fiscal year in which such election could apply. The Company may seek to revoke such election (if made) if agreed to by the Members Committee. In addition to the foregoing, the Members Committee shall, determine whether to make any other available tax elections and select any other appropriate tax accounting methods and conventions for any purpose under this Agreement. 10.9 Prior Tax Information. Each Member agrees to deliver to the Company all relevant information regarding Taxes that the Company will require in order to comply with its own tax accounting and reporting requirements, including without limitation schedules setting forth the fair market value and tax basis of each asset that may from time to time be contributed by a Member to the Company; provided, however, that no Member shall be required to disclose the income tax returns of itself or any of its Affiliates. ARTICLE 11 TRANSFER AND ASSIGNMENT OF INTERESTS; PUBLIC OFFERING; ADDITIONAL MEMBERS 11.1 Transfer and Assignment of Interests. Except as provided in Section 11.2, no Member shall be entitled to Transfer, all or any part of its Membership Interest, including any economic interest therein except with the prior written approval of each other Member, which approval may be given or withheld as the other Members may determine in their sole discretion. Any Transfer of a Membership Interest in contravention of this Article 11 shall be null and void and of no force whatsoever. No Member, without the prior written consent of the other Members, shall retire or withdraw from the Company. 11.2 Permitted Transfers. Notwithstanding Section 11.1, commencing with the third anniversary of the Effective Date, the Members may Transfer all or any part of their respective Membership Interests as follows: (a) Wilsey and Harvest States may each Transfer privately, at any time and from time to time, a portion of their respective Membership Interests free of any right of first refusal on the part of any Member and without the consent of any Member, so long as immediately after such Transfer, the transferor shall own not less than 25.5% of the outstanding Membership Interests in the Company. (b) Subject to Section 11.2(a) above, and the procedures set forth in Section 11.4, any Member who receives a bona fide written offer to purchase all or a part of its Membership Interest may Transfer all or any part of its Membership Interest in the Company in a case other than that permitted under Section 11.2(a) or 11.2(c), subject, however, to rights of first refusal in favor of the other Members. For purposes of this paragraph 11.2(b), a right of first refusal shall mean the right of the other Members to purchase the offering Member's offered Membership Interest at a price and upon the terms and conditions contained in a bona fide offer from a third party to purchase such offered interest, all in accordance with the procedures set forth in Section 11.4. (c) Any Member may Transfer all or a part of its Member's Interest in the Company free and clear of the restrictions and rights of first refusal set forth in Sections 11.1, 11.2(a) and 11.2(b) above pursuant to a Public Offering of securities of the Company by the Company and/or by one or more Members of the Company, and all such restrictions on Transfer and rights of first refusal shall terminate upon the consummation of such Public Offering, provided that provided that neither a Public Offering nor the incorporation of the Company in connection therewith shall occur without the prior written consent of (i) the holders of a majority of the Membership Interests, and (ii) Wilsey and Harvest States. Nothing in this Paragraph 11.2(c) shall be deemed to obligate either Wilsey or Harvest States to consent to a Public Offering or incorporate nor entitle either of them (or any other Member) to have any of their respective Membership Interests or other securities in the Company included in such Public Offering. Wilsey and Harvest States each acknowledge their interest in pursuing the possibility of a Public Offering in the future and each agrees, upon the request of the other, to discuss and consider in good faith the feasibility of a Public Offering, recognizing that a Public Offering may, as a practical matter, require the incorporation of the Company. In any such discussion, the parties agree to consider (i) providing preferential rights to the Members and/or their members or shareholders to subscribe for the purchase of securities in the Public Offering, and (ii) providing rights to the Members to have Company securities owned by them included in the Public Offering, all subject to the approval of the underwriters of the Public Offering. Wilsey and Harvest States acknowledge that the incorporation of the Company in connection with a Public Offering may cause Harvest States and its members to lose the benefit of certain tax exempt "patronage dividends". In agreeing to discuss and consider in good faith the feasibility of a Public Offering, Harvest States may take the loss of such benefit into account as well as the benefits to be derived from a Public Offering by it and its members. 11.3 Assignment of Right to Appoint Committee Members. In the event of any transfer pursuant to Sections 11.2(a) or 11.2(b) above, the transferor Member may, in its discretion, assign to the transferee the right to appoint one or more representatives to the Members Committee out of the selling Member's right to appoint five (5) such representatives provided that, so long as the transferor Member retains an interest in the Company of at least 25.5%, such transferor Member shall retain (and may not assign) its right to appoint at least three (3) representatives to the Members Committee. 11.4 Right of First Refusal Procedures. If any Member (hereinafter "Selling Member") should receive a bona fide written offer for the purchase of all or any part of its Membership Interest in a transfer other than that permitted under Section 11.2(a) or 11.2(c), the Selling Member shall give written notice of said offer to the remaining Members ("Offeree Members"). The Membership Interest being offered for sale shall be first offered for sale to the Offeree Members at the same price and upon the same terms as that offered by the offeror to the Selling Member. Each Offeree Members shall have the right to purchase such percentage of the Membership Interest being offered for such as the Percentage Interest owned by it to the total Percentage Interests owned by all Offeree Members desiring to exercise their right of first refusal. The purchasing Offeree Members shall exercise their right to purchase all of said Membership Interest offered for sale by giving written notice of acceptance of the offer to the Selling Member within sixty (60) days from receipt of written notice of the offer as provided in this Section. If the Offeree Members do not exercise their right to purchase all of the Membership Interest offered for sale within the prescribed sixty (60) day period, said Membership Interest may then be sold by the Selling Member to the offeror upon the terms and conditions no more favorable that set forth in the bona fide written offer; provided, however, that said Membership Interest purchased by the offeror shall remain subject to this Agreement; and provided, however, that such sale shall be completed within one hundred twenty (120) days after the failure of the Offeree Members to exercise their right to purchase such Membership Interest, in which case any sale of such Membership Interest shall again be subject to the terms of this right of first refusal. 11.5 Assignees and Substituted Members. (a) In the event of a Transfer of part or all of any Membership Interest permitted pursuant to the provisions of this Article XI, the Assignee of such Membership Interest shall become a Member hereunder upon and subject to compliance with Section 11.5(b). If Section 11.5(b) is not complied with, the Person to whom such Transfer is made shall not become a Member hereunder and shall be considered only an Assignee of the Membership Interest and, as such, shall only be entitled to share in those distributions, if any, in which its assignor would be eligible. An Assignee who does not comply with Section 11.5(b) shall have no right to require any information or accounting of any transactions of the Company or inspect the Company books and records. (b) An Assignee of a Membership Interest pursuant to a Transfer permitted under the provisions of this Article may become a Substituted Member with all the rights and liabilities of its assignor under the Agreement (except as limited by Section 11.3) if and only if [] (i) the Assignee expressly assumes and agrees to be bound by the Agreement, (ii) the appropriate instruments, documents, or statements, if any, are prepared, executed, acknowledged, filed, recorded, published and delivered as required by the law, (iii) the Assignee pays or obligates itself to pay any and all reasonable expenses of the Company connected with such substitution, and (iv) the Assignee causes to be delivered to the Company, at its sole cost and expense, a favorable opinion of legal counsel reasonably acceptable to the other Members, to the effect that (1) the contemplated Transfer of such Membership Interest to the Assignee will not violate any applicable federal or state laws, including securities laws, (2) the Assignee has the legal right, power and capacity to own the Membership Interest, (3) the contemplated Transfer will not cause the Company to cease to be classified as a partnership for federal tax purposes, and (4) the contemplated Transfer will not cause any of the Members any material adverse tax consequences. Upon compliance with all provisions hereof applicable to such Person becoming a Member, all other Members agree to execute and deliver such amendments hereto as are necessary to constitute such Person a Member of the Company. (c) Upon a Transfer by a Member of all or part of its Membership Interest and substitution of a Substituted Member with respect to all or such portion of its Membership Interest, the transferring Member shall cease to be a Member to the extent of the Membership Interest so Transferred. (d) The admission of a Substituted Member shall not result in the release of the Member who assigned the Membership Interest from any liability that such transferor Member may have incurred prior to the assignment and substitution. 11.6 Additional Members. With the unanimous consent of the Members, acting by and through the Members Committee, the Company may issue additional Membership Interests for such consideration and on such terms and conditions and to such Persons as the Members, acting through the Members Committee, shall unanimously approve, provided that (i) the Person or Persons to whom such additional Membership Interests are to be issued ("Additional Members") expressly assume and agree to be bound by this Agreement, (ii) the appropriate instruments, documents or statements, if any, are prepared, executed, acknowledged, filed, recorded, published and delivered as required by law, (iii) if required by the Company, the Additional Member or Additional Members pays or obligates itself or themselves to pay any and all reasonable expenses of the Company incurred in connection with the issuance of such additional Membership Interests, and (iv) the Company shall have received the favorable opinion of legal counsel to the Company reasonably acceptable to the existing Members of the Company to the effect that (1) the issuance of such additional Membership Interests to such Additional Member or Additional Members will not violate any applicable federal or state laws, including securities laws, (2) the Additional Member or Additional Members have the legal right, power and capacity to own the additional Membership Interests, (3) the issuance of the additional Membership Interests will not cause the Company to cease to be classified as a partnership for federal tax purposes, and (4) the issuance of such additional Membership Interests will not cause any of the Members any material adverse tax consequences. ARTICLE 12 DISSOLUTION AND LIQUIDATION 12.1 Events of Dissolution. The Company shall be dissolved upon (a) October 1, 1996 if the Effective Date shall not have occurred, (b) an election to dissolve the Company pursuant to Section 12.2, (c) the expulsion, bankruptcy or dissolution of a Member, or the occurrence of any other event that results in a Member ceasing to be a Member of the Company under the Act; provided, the Company shall not be dissolved and required to be wound up in connection with any of the events specified in this clause (d) if within ninety (90) days after the occurrence of such event, all of the remaining Members agree in writing to continue the business of the Company and to the appointment, if necessary or desired, effective as of the date of such event, of one or more additional Members of the Company, (e) the entry of a decree of judicial dissolution pursuant to Section 18-802 of the Act, and (vi) the unanimous written consent of the Members. 12.2 Voluntary Dissolution. Either Wilsey or Harvest States but no other Member may elect, upon the occurrence of any of the following events, by written notice to the Company and the other Members, to require the Company to dissolve and wind up in accordance with the terms of this Article 12: (a) If the other Member shall, for any reason, fail to make all of the initial capital contributions required to be made by such other Member under Section 8.2 and the Joint Venture Agreement, when and as required by Section 8.2. (b) If the Company shall at any time have cumulative losses, as reflected in the most recent financial statements of the Company, in excess of $25,000,000; or (c) If the Company is unable to discharge its liabilities as they become due. 12.3 Buy-Sell Procedure Rights. Upon the occurrence of any event described in 12.2(b) or 12.2(c) above either Wilsey or Harvest States may initiate the Buy-Sell Procedure described in Article 7. If the Buy-Sell Procedure has been or is initiated by a Member, then the Company shall not be dissolved notwithstanding a request therefor under Section 12.2. Any initiation of the Buy-Sell Procedure by a Member after a request for dissolution has been made must take place on or before sixty (60) days following receipt by such Member of the written notice requesting dissolution of the Company. If the Buy-Sell Procedure is initiated pursuant to this Section 12.3, there shall be no minimum Initial Offer. 12.4 Liquidation and Order of Dissolution. In all cases of dissolution of the Company, the Business of the Company shall be continued to the extent necessary to allow an orderly winding up of its affairs, including the liquidation and termination of the Company pursuant to the provisions of this Article 12, as promptly as practicable thereafter, and each of the following shall be accomplished: (a) The Liquidator shall cause to be prepared a statement setting forth the assets and liabilities of the Company as of the date of dissolution, a copy of which statement shall be furnished to each Member. (b) The property and assets of the Company shall be liquidated by the Liquidator as promptly as possible, but in an orderly and businesslike manner. The Liquidator may, in the exercise of its business judgment, determine not to sell all or any portion of the remaining assets of the Company, in which event such remaining assets shall be distributed in kind pursuant to Section 12.4(d). (c) Any gain or loss realized by the Company upon the sale of its assets shall be deemed recognized and allocated to the Members in the manner set forth in Article 9. To the extent that an asset is to be distributed in kind, such asset shall be deemed to have been sold at its Fair Market Value on the date of distribution, the gain or loss deemed recognized upon such deemed sale shall be allocated in accordance with Article 9 and the amount of the distribution shall be considered to be such fair market value of the asset. (d) The proceeds of sale and all other assets of the Company, including Operating Cash Flow of the Company, shall be applied and distributed as follows and in the following order of priority: (i) To pay (or make reasonable provision for the payment of) all creditors of the Company, including to the extent permitted by law, Members or their Affiliates who are creditors, in satisfaction of liabilities of the Company in the order of priority provided by law, including expenses relating to the dissolution and winding up of the affairs of the Company (including, without limitation, expenses of selling assets of the Company, discharging the liabilities of the Company, distributing the assets of the Company and terminating the Company as a limited liability company in accordance with this Agreement and the Act); and (ii) To the Members in proportion to their respective positive Capital Account balances, as those balances are determined after all adjustments to such Capital Accounts as required by this Agreement for all periods immediately prior to such distribution. (iii) If the Company shall be dissolved by reason of the failure of the Effective Date to occur prior to October 1, 1996, then, anything hereinabove to the contrary notwithstanding, Wilsey and Harvest States shall be liable for all of the liabilities and expenses of the Company incurred through the date of dissolution, in the proportions of 60% and 40%, respectively, subject to any rights or remedies each may have against the other arising out of the Joint Venture Agreement, this Agreement or any other matter. 12.5 Liquidator. The Members Committee is hereby named as the Liquidator and the Chairman thereof is irrevocably appointed as the true and lawful attorney in the name, place and stead of each of the Members, such appointment being coupled with an interest, to make, execute, sign, acknowledge and file with respect to the Company all papers which shall be necessary or desirable to effect the dissolution, liquidation and termination of the Company in accordance with the provisions of this Article. Notwithstanding the foregoing, if either Wilsey or Harvest States objects to the Members Committee acting as the Liquidator, then the Members will cooperate in naming a third party to act as Liquidator, or if the Members are unable to agree on a third party Liquidator within thirty [30] days after the event of dissolution, either Member may seek a court appointed Liquidator. Without limiting the foregoing, the Liquidator shall, upon the final dissolution of the Company, file an appropriate certificate to such effect in the proper governmental office or offices under the Act as then in effect. Notwithstanding the foregoing, each Member, upon the request of the Liquidator, shall promptly execute, acknowledge and deliver all such documents, certificates and other instruments as the Liquidator shall reasonably request to effectuate the proper dissolution, liquidation and termination of the Company, including the winding up of the Business of the Company. 12.6 Termination of Company. The Company shall be terminated upon (a) completion of any dissolution and liquidation thereof pursuant to the provisions of this Article, and (b) preparation, execution, acknowledgment, filing, recordation, publication, delivery and/or cancellation of any instruments, documents or statements if and as required by the Act, the Code or any other applicable laws. 12.7 Orderly Winding Up. Notwithstanding anything to the contrary in this Article 12 upon winding up and liquidation, if required to maximize the proceeds of liquidation, the Members may, upon unanimous approval, transfer the assets of the Company to a liquidating trustee or trustees. ARTICLE 13 INDEMNIFICATION AND EXCULPATION; CERTAIN AGREEMENTS 13.1 Indemnification of the Members. The Company shall indemnify and hold harmless the Members, the Committee Members, and their Affiliates, and their respective Agents and/or the legal representatives of any of them, and each other Person who may incur liability as a Member or otherwise in connection with the management or ownership of the Company (each, an "Indemnified Party"), against all liabilities and expenses (including amounts paid in satisfaction of judgments, in compromise, as fines and penalties, and as counsel fees) reasonably incurred by him, her or it in connection with the investigation, defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which any Indemnified Party may be involved or with which he, she or it may be threatened, while a Member or serving in such other capacity or thereafter, by reason of its being or having been a Member, or by serving in such other capacity, except with respect to any matter which constitutes willful misconduct, bad faith, gross negligence or reckless disregard of the duties of his office, or criminal intent. The Company shall have the right to approve any counsel selected by any Indemnified Party and to approve the terms of any proposed settlement. The rights accruing to a Member and each other Indemnified Party under this Section 13.1 shall not exclude any other right to which it or they may be lawfully entitled; provided that any right of indemnity or reimbursement granted in this Section 13.1 or to which any Indemnified Party may be otherwise entitled may only be satisfied out of the assets of the Company, and no Member and no withdrawn Member shall be personally liable with respect to any such claim for indemnity or reimbursement. Notwithstanding any of the foregoing to the contrary, the provisions of this Section 13.1 shall not be construed so as to provide for the indemnification of a Member or any other Indemnified Party for any liability to the extent (but only to the extent) that such indemnification would be in violation of applicable law or such liability may not be waived, modified or limited under applicable law, but shall be construed so as to effectuate the provisions of this Section 13.1 to the fullest extent permitted by law. 13.2 Reimbursement and Indemnity. If a Member shall, pursuant to authorization of or approval by the Members Committee or a final judgment of a court of competent jurisdiction or in compliance with law or order of any governmental agency, pay any amount on behalf of or for the account of the Company with respect to any liability, obligation, undertaking, damage, or claim for which the Company shall or may, pursuant to contract or applicable law, be liable or responsible, or with respect to making good any loss or damage sustained by, or paying any duty, cost, claim, or damage incurred by, the Company, then the Company shall reimburse such Member for such amount as shall have been so paid by such Member. If the Company shall fail fully to reimburse such paying Member, the other Member shall indemnify such paying Member by paying to it that share of the excess of (a) such payments over (b) the aggregate reimbursement, if any, which such paying Member shall have received from the Company in respect of such payments, as shall be proportionate to the other Member's Percentage Interest. This Section 13.2 shall have no application to any liability incurred by the Company to a Member pursuant to any contract between the Company and such Member, including without limitation, the Long Term Supply Agreement between the Company and Harvest States referred to in Section 2.7(c) of the Joint Venture Agreement. 13.3 Exculpation. No Officer, Committee Member, Company employee, Member or Affiliate thereof or their respective Agents and/or the legal representatives of any of them shall be liable to any Member or the Company for mistakes of judgment or for any action or inaction which may cause or result in any loss or damage to the Company or the other Members unless such action or inaction constitutes fraud or willful misconduct. Each Member may (on its own behalf or on the behalf of any Committee Member or Officer designated by such Member, any Affiliates of such Member or their respective Agents and/or legal representatives of any of them), consult with counsel, accountants and other experts in respect of the Company's affairs and such Person shall be fully protected and justified in any action or inaction which is taken in accordance with the advice or opinion of such counsel, accountants or other experts; provided that they shall have been selected with reasonable care. The Members shall have no duties or obligations to the Company or the other Members unless expressly imposed by this Agreement. 13.4 Indemnification Relating To Initial Contributions. Wilsey and Harvest States each hereby agree to indemnify and hold harmless each other from and against any and all liability, loss or damage which shall result from the failure of either of them, for any reason, to timely make the initial contributions of capital to the Company required by Section 8.2. Such indemnity shall include, but shall not be limited to, the reimbursement by the defaulting party of the non-defaulting party for 100% of all organizational expenses incurred by the non-defaulting party in connection with the Joint Venture Agreement, this Agreement and the transactions contemplated thereby and hereby, including but not limited to the expenses provided in Section 14.2 of the Joint Venture Agreement to be reimbursed by the Company. The indemnification provided for in this Section 13.4 shall apply only in the case of the failure of either Wilsey or Harvest States to timely make the initial capital contributions required by Section 8.2 and shall not apply to their respective obligations to contribute additional capital to the Company or to any other of their respective obligations under this Agreement, preserving unto each of Wilsey and Harvest States, however, such rights as may be afforded them under applicable law in the case of a breach of any of such other obligations. ARTICLE 14 MISCELLANEOUS 14.1 Notices. All notices, requests, demands or other communications required by or otherwise with respect to this Agreement shall be in writing and shall be deemed to have been duly given to any party (i) where delivered personally (by courier service or otherwise), (ii) when delivered by facsimile and confirmed by return facsimile, (iii) on the business day after the date sent by a nationally recognized overnight courier service, or (iv) seven days after being mailed by first-class, registered or certified mail, postage prepaid and return receipt requested, in each case to the applicable addresses set forth below: If to Harvest States: Harvest States Cooperatives P.O. Box 64594 1667 Snelling Avenue N. St. Paul, Minnesota 55164 Attn: Senior Vice President Consumer Products Packaging Facsimile: (612) 641-6832 With copies to: Harvest States Cooperatives P.O. Box 64594 St. Paul, Minnesota 55164 Attention: Legal Department Facsimile: (612) 641-6832 If to Wilsey: Wilsey Foods, Inc. 14840 East Don Julian Road City of Industry, CA 91746 Attn: President Facsimile: (818) 336-4217 With copies to: Mitsui & Co., Ltd. 2-1, Ohtemachi 1-chome Chiyoda-ku Tokyo 100, Japan Attention: General Manager Oil Seeds, Oils & Fats Division (TKPOZ) Facsimile: 81-3-3285-9032 or to such other address or facsimile number as any party may have furnished to the other parties in writing in accordance with this Section 14.1. 14.2 Governing Law. This Agreement shall be governed by, interpreted, and construed in accordance with the laws of the State of Delaware, without regard to Delaware choice of law provisions. 14.3 Amendments. (a) This Agreement may be modified or amended only by an instrument in writing signed by each Member, and, as so modified and amended, shall inure to the benefit of all of the Members. (b) Wilsey and Harvest States acknowledge that in the event of the admission of one or more Additional Members or Substituted Members of the Company, appropriate revision of portions of this Agreement will be necessary, to be mutually agreed by Wilsey and Harvest States as a condition of the admission of such Additional Member or Substituted Member. 14.4 Entire Agreement. Except to the extent other agreements are specifically referred to herein, this Agreement constitutes the entire agreement between the Members with respect to the matters covered hereby and thereby and supersedes all prior agreements, understandings, offers and negotiations, oral or written. 14.5 Waiver of Partition. Each Member hereby irrevocably waives any and all rights that it may have to maintain an action for partition of any of the Company's property. 14.6 Consents. All consents, agreements and approvals required or permitted by this Agreement shall be in writing and a signed copy thereof shall be filed and kept with the books of the Company. 14.7 Successors. Subject to Articles 11, all rights and duties of the Members hereunder shall inure to the benefit of and be binding upon their respective successors and assigns. 14.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 14.9 Severability. Each provision of this Agreement shall be considered severable and if for any reason any provision which is not essential to the effectuation of the basic purposes of the Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable and contrary to existing or future applicable law, such invalidity shall not impair the operation of or affect those provisions of this Agreement which are valid. In that case, this Agreement shall be construed so as to limit any term or provision so as to make it enforceable or valid within the requirements of any applicable law, and in the event such term or provision cannot be so limited, this Agreement shall be construed to omit such invalid or unenforceable provisions. 14.10 Survival. All indemnities and reimbursement obligations made pursuant to this Agreement shall survive dissolution and liquidation of the Company until expiration of the longest applicable statute of limitations (including extensions and waivers) with respect to the matter for which a party would be entitled to be indemnified or reimbursed, as the case may be. 14.11 No Third Party Beneficiaries. Nothing contained in this Agreement is intended to, or shall, confer upon any Person other than the parties hereto any rights or remedies hereunder. IN WITNESS WHEREOF, the Members have executed this Limited Liability Company Agreement as of the date first hereinabove written. HARVEST STATES COOPERATIVES By: /s/ James D. Tibbetts Name: James D. Tibbetts Title: Senior Vice President WILSEY FOODS, INC. By: /s/ Jack Davis Name: Jack Davis Title: President/CEO EXHIBITS Schedules I Members; Capital Contributions; Percentage Interests II Initial Committee Members SCHEDULE I INITIAL CAPITAL CONTRIBUTION OF MEMBERS
==================================================================================================== INITIAL CAPITAL CONTRIBUTION - - - - ----------------------- --------------------------------------------------- ======================== Percentage Member Total Interest - - - - ----------------------- --------------------------------------------------- ======================== Wilsey The Wilsey Assets described in the Joint Venture 60% Agreement with an agreed Fair Market Value (net of the Wilsey Liabilities assumed by the Company) of $40,544,000 ======================= =================================================== ======================== Harvest States The Holsum Assets described in the Joint Venture 40% Agreement with an agreed Fair Market Value (net of the Holsum Liabilities assumed by the Company) of $27,030,000 ======================= =================================================== ========================
SCHEDULE II INITIAL APPOINTEES TO MEMBERS COMMITTEE WILSEY HARVEST STATES ------ -------------- Shigeru Endo Steven Burnet Hiroshi Ito John D. Johnson Hiroshi Ichikawa Tom F. Baker Nobutaro Shimizu James Tibbetts Yasuyuki Suzuki Patrick Kluempke EX-10.4 7 LONG TERM SUPPLY AGREEMENT LONG TERM SUPPLY AGREEMENT BETWEEN WILSEY-HOLSUM FOODS L.L.C. AND HARVEST STATES COOPERATIVES AUGUST 30, 1996 - TABLE OF CONTENTS RECITALS................................................................... 1 1. PRODUCTS; SPECIFICATIONS .............................................. 2 2. MINIMUM QUANTITY REQUIREMENT........................................... 3 3. OPTIONAL QUANTITY; RIGHT OF FIRST REFUSAL ............................. 5 4. QUANTITY DEFICIENCIES ................................................. 7 5. VOLUME FORECASTS....................................................... 11 6. TERM; TERMINATION...................................................... 11 7. MINIMUM QUANTITY PRICE................................................. 13 Definitions: ......................................................... 13 8. WESTERN CASH CRUDE BASIS............................................... 14 9. ADJUSTMENT OF REFINING PREMIUMS........................................ 16 10. ADJUSTMENT OF REFINING LOSS............................................ 17 11. PURCHASE ORDERS: TERMS OF PAYMENT; DELIVERY............................ 17 a) Terms of Payment.................................................... 17 b) Delivery............................................................ 18 12. RISK OF LOSS ......................................................... 18 13. QUALITY; QUALITY CONTROL; QUALITY RESPONSIBILITIES..................... 18 a) Quality............................................................. 19 b) Quality Control..................................................... 19 c) Quality Responsibilities............................................ 19 14. INSPECTIONS............................................................ 19 15. NON-SPECIFICATION PRODUCTS............................................. 20 a) Rejection; Replacement.............................................. 20 b) Reworking........................................................... 21 16. MODIFICATIONS TO SPECIFICATIONS; NEW PRODUCTS.......................... 21 17. FOREIGN OIL............................................................ 24 18. CUSTOMER OIL PURCHASING OPERATIONS..................................... 24 19. SCOPE OF THIS AGREEMENT................................................ 25 20. EDIBLE OIL PURCHASES BY CUSTOMER AFTER SEVENTH CONTRACT YEAR................................................................... 25 21. MATERIAL ADVERSE EFFECT................................................ 27 22. INDEMNIFICATION BY SUPPLIER............................................ 29 23. INDEMNIFICATION BY CUSTOMER............................................ 30 24. INDEMNIFICATION PROCEDURES............................................. 32 25. INSURANCE.............................................................. 34 26. TRADEMARKS AND TRADE NAMES............................................. 35 27. CONFIDENTIAL INFORMATION............................................... 35 28. RELATIONSHIP OF PARTIES................................................ 37 28. FORCE MAJEURE.......................................................... 37 30. GOVERNING LAW.......................................................... 37 31. ARBITRATION OF REFINING PREMIUM ADJUSTMENTS............................ 38 32. GENERAL DISPUTE RESOLUTION PROVISIONS.................................. 39 33. SEVERABILITY........................................................... 46 34. ASSIGNMENTS............................................................ 46 35. NOTICES................................................................ 47 36. ENTIRE AGREEMENT....................................................... 47 Draft 8/8/96 ____________, 1996 LONG TERM SUPPLY AGREEMENT This Agreement is made and entered into this 30th day of August, 1996, between WILSEY-HOLSUM FOODS, L.L.C., a Delaware limited liability company ("Customer") and HARVEST STATES COOPERATIVES, a Minnesota corporation ("Supplier"). RECITALS Pursuant to a Joint Venture Agreement dated August _, 1996 ("Joint Venture Agreement") between WILSEY FOODS, INC. ("Wilsey") and Supplier, Wilsey has this date transferred to Customer substantially all of its assets and liabilities and Supplier has transferred to Customer substantially all of the assets of its Holsum Foods Division and certain liabilities more particularly described in the Joint Venture Agreement. As a result of the transaction, Wilsey is a sixty (60%) percent owner of Customer and Supplier is a forty (40%) percent owner of Customer. Wilsey and Supplier have entered into a Limited Liability Company Agreement ("LLC Agreement") under the terms of which Customer is governed by a Members Committee comprised of an equal number of representatives of Wilsey and Supplier. It is a condition to the obligations of both Wilsey and Supplier under the Joint Venture Agreement that this Agreement be entered into by said parties at the closing of the transactions contemplated by the Joint Venture Agreement. All references herein to Exhibits, Schedules and Paragraphs are to the exhibits and schedules attached to this Agreement and to the Paragraphs of this Agreement. * * * 1. PRODUCTS; SPECIFICATIONS. The products to be sold by Supplier to Customer under this Agreement shall be as follows: a) Soybean Salad Oil; b) Hydrogenated Soybean Oil 100 I.V. and below; c) Hydrogenated Soybean Oil above 100 I.V; and d) subject to Paragraph 16, any other edible oils which Supplier may hereafter refine during the term of this Agreement. All of the products described in a) through d) above are hereinafter collectively referred to as the "Products". The specifications for the Products described in a) through c) above are attached hereto as Exhibit A. Such specifications, together with the specifications of any new Products referred to in d) above, are hereinafter collectively referred to as the "Specifications". 2. MINIMUM QUANTITY REQUIREMENT. Subject to Paragraphs 4 and 7, Supplier shall be obligated to sell to Customer and Customer shall be obligated to purchase from Supplier, pursuant to the terms and conditions of this Agreement, but only out of and subject to Customer's "Requirements", as defined below, for each calendar year during the term of this Agreement ("Contract Year"), the greater of (i) 430,000,000 pounds of Products, or (ii) fifty (50%) percent of such Requirements, provided that if Customer's Requirements for any Contract Year shall be less than 430,000,000 pounds of Products, then Customer shall be obligated to purchase from Supplier 100% of Customer's Requirements for Products during such Contract Year. The amount of Products described in the preceding sentence of this Paragraph 2 is hereinafter referred to as the "Minimum Quantity." The obligations of Supplier and Customer pursuant to this Paragraph 2 are subject to the following: a) The term "Requirements" as used herein means Customer's requirements for Products which it shall satisfy through purchases from outside suppliers, including Supplier, but shall not include that portion, if any, of Customer's requirements for Products which Customer shall satisfy internally from its Lou Ana Foods facility at Opelousas, Louisiana. b) Of the total annual purchases of Products by Customer within the Minimum Quantity, not less than (***) percent shall be (***). (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. c) Supplier's obligation to sell the Minimum Quantity to Customer is absolute and subject to no conditions or qualifications, except for Force Majeure as provided in Paragraph 29. If Supplier, for any reason whatsoever, shall lack the capacity or otherwise be unable to deliver the Minimum Quantity to Customer in the quarterly quantities set forth in the Volume Forecasts provided for in Paragraph 5 and by the requested shipment dates as provided in Paragraph 11, or if Supplier in its discretion shall so elect, Supplier shall be obligated, subject to said Force Majeure provision, to purchase on the open market in the United States for delivery to Customer the Products necessary to satisfy Supplier's obligation to sell to Customer the Minimum Quantity in the quantities requested by Customer pursuant to Paragraphs 5 and 11 and at the price and otherwise on the terms and conditions provided in this Agreement. 3. OPTIONAL QUANTITY; RIGHT OF FIRST REFUSAL. For and during each of the first seven (7) Contract Years of this Agreement, Supplier shall have the right of first refusal to sell to Customer and Customer shall be obligated to purchase from Supplier, to the extent such right of first refusal is exercised, an amount of liquid or hydrogenated soybean oil (of any kind) equal to (***) during each of said Contract Years, less the Minimum Quantity ("Optional Quantity"). Subject to Paragraph 5, during each such Contract Year, Customer shall, at such times as Customer in its sole discretion shall deem appropriate, and regardless of whether or not Customer's obligation to purchase the Minimum Quantity for any Contract Year shall have then been satisfied, disclose to Supplier the type, quantity, shipment date, payment terms and delivered price of such soybean oil which Customer is prepared to purchase from a third party, identifying the third party, and shall offer to purchase the same type and quantity of such soybean oil from Supplier for the same delivered price to the relevant Customer Plant and otherwise on the same terms and conditions offered by such third party. Such offer by Customer (the "Offer") may be made orally and need not be in writing. Supplier shall advise Customer, not later than 11:00 A.M., Los Angeles time, on the next trading day of the Chicago Board of Trade after the day upon which such Offer is made, whether Supplier accepts or rejects such Offer. If Supplier shall fail to advise Customer that it accepts any such Offer within the time specified in the preceding sentence, such Offer shall be deemed to have been rejected by Supplier and the obligation of Customer to grant Supplier a right of first refusal under this Paragraph 3 shall be thereby deemed to have been satisfied with respect to the number of pounds of soybean oil stipulated in such Offer. If Supplier shall reject any such Offer within the time set forth above, Customer shall have the right to purchase the type and quantity of soybean oil described in such Offer to Supplier from the third party source identified in such Offer (or from any other source) but only for the same (or a lower) delivered price to the relevant Customer facility and otherwise on the same terms and conditions set forth in such Offer to Supplier, or on terms and conditions not more favorable to the third party supplier than those set forth in such Offer to Supplier. Complete information relating to any such purchase from a third party source shall be furnished to Supplier upon request. Such information shall be limited to information relating to Customer's purchases of refined soybean oil from third parties after Customer shall have previously offered to purchase such soybean oil from Supplier pursuant to Supplier's right of first refusal granted by this Paragraph 3. The purpose of such information right is to permit Supplier to confirm Customer's compliance with the provisions of this Paragraph 3. Otherwise, Supplier shall have no right to any information concerning prices paid by Customer to other suppliers of refined soybean oil, in any particular or specific transaction, except as provided in Paragraph 4. (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. 4. QUANTITY DEFICIENCIES. If, during any Contract Year, Customer shall, for any reason whatsoever (other than a "Supplier Deficiency", as defined below), fail to purchase from Supplier the Minimum Quantity for such Contract Year, as provided in Paragraph 2, the difference between the Minimum Quantity and the amount of Products actually purchased during such Contract Year shall be deemed the "Minimum Quantity Deficiency". If, during any Contract Year, Customer shall, for any reason whatsoever, other than a Supplier Deficiency, fail to offer to purchase from Supplier the Optional Quantity for such Contract Year, as provided in Paragraph 3, the difference between the Optional Quantity and the amount of Products which Customer shall have actually offered to purchase during such Contract Year shall be deemed the "Optional Quantity Deficiency". The sum of the Minimum Quantity Deficiency, if any, and the Optional Quantity Deficiency, if any, for any Contract Year, shall be deemed the "Quantity Deficiency" for such Contract Year. In the event of a Quantity Deficiency for any Contract Year ("Deficiency Contract Year") and absent a Supplier Deficiency during the Deficiency Contract Year, anything herein above to the contrary notwithstanding, Customer shall be obligated, during the next succeeding Contract Year ("Succeeding Contract Year"), to offer to purchase all of its Requirements for Products from Supplier until its purchases of Products, in pounds, equal the Quantity Deficiency attributable to the Deficiency Contract Year. The purchase price of Products so purchased in order to satisfy any such Quantity Deficiency shall be determined in the same manner that the purchase price of the Minimum Quantity of Products is determined pursuant to Paragraphs 7 and 8, notwithstanding that the Quantity Deficiency may include an Optional Quantity Deficiency. The purchase by Customer of Products during the Succeeding Contract Year, for the purpose of satisfying a Quantity Deficiency attributable to the preceding Deficiency Contract Year, shall not be counted toward Customer's obligation to purchase the Minimum Quantity of Products during the Succeeding Contract Year, provided, however, that Supplier shall not be obligated to sell to Customer more than the Minimum Quantity of Products in the Succeeding Contract Year nor any other Contract Year, except to the extent Supplier shall have accepted Offers to sell to Customer all or part of the Optional Quantity, pursuant to Paragraph 3. If Customer shall offer to purchase Products from Supplier in a Succeeding Contract Year for the purpose of satisfying a Quantity Deficiency from the preceding Deficiency Contract Year and Supplier shall, for any reason, decline to accept such Offer or Offers, then Customer's obligation to satisfy such Quantity Deficiency shall be deemed satisfied. For purposes of this Paragraph 4, a "Supplier Deficiency" means the inability of Supplier, for any reason whatsoever (including Force Majeure and regardless of whether the cause thereof constitutes a breach by Supplier of its obligations under this Agreement) to ship any Product timely ordered by Customer on or before the shipment date stipulated in Customer's purchase order, in accordance with the provisions of Paragraph 11. If a Quantity Deficiency shall occur and shall not be caused, in whole or in part, by a Supplier Deficiency, such Quantity Deficiency shall not constitute a breach of this Agreement by Customer, so long as the same is satisfied in the Succeeding Year by Customer as provided above. If a Supplier Deficiency shall occur, the same shall not constitute a breach of this Agreement by Supplier if excused by Force Majeure, as provided in Paragraph 29. If a Supplier Deficiency constitutes a breach by Supplier of its obligations under this Agreement, Customer may terminate this Agreement if such Supplier Deficiency shall continue for more than ninety (90) days and, provided further that, regardless of the cause of such Supplier Deficiency (including Force Majeure), if the same shall continue for more than three hundred and sixty-five (365) days, Customer may terminate this Agreement. Any such termination of this Agreement by Customer shall be upon thirty (30) days prior written notice to Supplier. The termination of this Agreement by Customer, as provided above, shall not be the exclusive remedy by Customer and Customer shall have, in addition, such other remedies as shall be afforded by law or equity. For so long as any Supplier Deficiency shall continue, regardless of its cause, Customer shall have the right to purchase Products from other suppliers. If, during any Contract Year, there shall exist one or more Supplier Deficiencies, regardless of their cause or causes, then, the provisions of this Agreement shall continue to apply during such Supplier Deficiencies and Customer shall be obligated to purchase the Minimum Quantity and to offer to purchase the Optional Quantity for such Contract Year, failing which Quantity Deficiencies shall arise, as provided above and with the same effect as in all other cases except that: a) The number of pounds of Products purchased by Customer from other suppliers during all such Supplier Deficiencies shall firstly be counted toward Customer's obligation to purchase the Minimum Quantity for the Contract Year during which such Supplier Deficiencies shall exist; and b) The number of pounds of Products purchased by Customer from other suppliers during all such Supplier Deficiencies shall secondly be counted toward Customer's obligation to offer to purchase the Optional Quantity for the Contract Year during which such Supplier Deficiencies shall exist, as if Customer shall have made Offers, pursuant to Paragraph 3, with respect to all such Products so purchased from such other suppliers in excess of the amount described in (a) above and as if all such Offers shall have been rejected. Customer shall have no obligation actually to make any such Offers to Supplier during the existence of a Supplier Deficiency. Information relating to such purchases of Products from other suppliers shall be furnished by Customer to Supplier upon request, subject to the same limitations provided in Paragraph 3 with respect to information relating to purchases of soybean oil from third parties. 5. VOLUME FORECASTS. Within thirty (30) days prior to (i) the commencement of the first Contract Year under this Agreement and (ii) March 31, June 30, September 30 and December 31 of each Contract Year thereafter, Customer shall furnish Supplier with its Volume Forecast for the ninety (90) day period commencing on the first day of the next succeeding month ("Quarter"). Each such Volume Forecast shall be in writing and shall contain Customer's non-binding estimate of (a) the number of pounds of Products out of the Minimum Quantity provided for in Paragraph 2 which Customer expects to purchase from Supplier during such Quarter, and (b) the number of pounds of soybean oil out of the Optional Quantity provided for in Paragraph 3 which Customer expects to offer to purchase from Supplier during such Quarter. 6. TERM; TERMINATION. The term of this Agreement shall commence on January 1, 1997 (the "Commencement Date") and shall expire upon the later of December 31, 2011 or the date upon which Supplier shall cease to own at least twenty-five and one-half (25.5%) percent of the total outstanding equity of Customer. This Agreement may be sooner terminated: (a) By Customer in the event of a Supplier Deficiency constituting a breach of this Agreement and continuing for more than ninety (90) days, as provided in Paragraph 4; (b) By Customer in the event of a Supplier Deficiency not constituting a breach of this Agreement and continuing for more than five hundred and forty (540) days, as provided in Paragraph 4; (c) By Customer in the event of a material breach by Supplier of its obligations under this Agreement (other than as provided in (a) above) but only if such breach is not cured by Supplier within thirty (30) days after notice thereof by Customer to Supplier; and (d) By Supplier in the event of a material breach by Customer of its obligations under this Agreement, including but not limited to its obligation to timely pay to Supplier the price of Products, but only if such breach is not cured by Customer within thirty (30) days after notice thereof by Supplier to Customer. 7. MINIMUM QUANTITY PRICE. Subject to Paragraphs 8 and 9, the price per pound of Products for the Minimum Quantity of Products shall be F.O.B. (***), as defined below, and shall be determined in accordance with the following formula: Price = (***) Definitions: (***) (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. 8. (***) Customer shall furnish Supplier with copies of all pruchase orders and other documentation reasonably necessary to evidence the purchase price of such (***). (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. 9. ADJUSTMENT OF (***). The parties shall annually renegotiate all (***) stipulated in this Agreement and all (***) applicable to each new Product as provided in Paragraph 16. Such negotiations shall commence within ninety (90) days prior to each anniversary of the Commencement Date (the "Negotiation Period"). The (***) shall be renegotiated for the purpose of adjusting them, as nearly as practicable, to (***) which would, as of the adjustment date, be available to Customer from competitive alternative sources in the marketplace ("Market Standard"). If the parties shall fail to agree on the Market Standard and the resulting adjustment to the (***) within sixty (60) days after the beginning of the Negotiation Period, the disagreement may be referred to mediation by either party within ten (10) days after the expiration of said sixty (60) day period. If either party shall so refer the matter to mediation, the other party shall be obligated to participate in the mediation. If no settlement of the disagreement is reached through mediation within thirty (30) days after the end of said sixty (60) day period, the disagreement shall be referred to binding arbitration as provided in Paragraph 31. For purposes hereof, "mediation" shall consist of the designation by the parties of a professional mediator whose fees and expenses shall be equally borne by the parties. Any settlement recommended or negotiated by the mediator must be acceptable to both parties in order to be binding upon them. (***) Denotes confidential information that has been omitted from the exhibit and filed separately, accompanied by a confidential treatment request, with the Securities Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended. 10. ADJUSTMENT OF REFINING LOSS. There shall be no adjustment to the Refinery Loss during the term of this Agreement unless and until Subsection C (Adjustments for Loss) of Section 3 (Settlements for Crude Soybean Oil) of Rule 102 (Grade, Quality, Settlements of Crude Soybean Oil and Referee Chemists) promulgated by the National Oilseed Processors Association shall be amended to provide for payment by "Shipper" to "Consignee" for more or less than "each 1.0% loss above 5.0% calculated on the official net weight crude."In the event of any such change, the Refining Loss shall be proportionately adjusted, upward or downward, to reflect such change as of the date of such change. 11. PURCHASE ORDERS; TERMS OF PAYMENT; DELIVERY. a) Terms of Payment. Purchase orders for Products shall be in writing and received by Supplier at least five (5) days in advance of the requested shipment date. All Products ordered by Customer hereunder shall be invoiced by Supplier to Customer as of the date of shipment. Terms of payment shall be net cash 30 days from date of invoice. b) Delivery. Although the price of the Minimum Quantity of Products is F.O.B. Supplier's Plant, as provided in Paragraph 7, the delivery of such Products and of Products comprising the Optional Quantity, as provided in Paragraph 3, shall be deemed to have occurred, for all purposes of this Agreement, when the Products are unloaded from the carrier at the facility of Customer to which shipment is made ("Customer's Plant"). Notice of delivery shall be promptly furnished Supplier. Shipping, transportation and delivery charges shall be paid by Customer and included in the invoices to Customer to the extent incurred or advanced by Supplier. 12. RISK OF LOSS. Supplier shall bear the risk of loss or damage to Products until the Products are delivered pursuant to Customer's instructions, to Customer's Plant. Customer shall bear the risk of loss or damage to Products after the same shall have been delivered by the carrier to Customer's Plant. 13. QUALITY; QUALITY CONTROL; QUALITY RESPONSIBILITIES. a) Quality. All Products shall be manufactured, processed and packaged by Supplier under this Agreement in accordance with the Specifications, which have been prepared by Customer. Products shall (i) not be short in weight, adulterated, misbranded, mispackaged or mislabeled within the meaning of applicable federal, state or local food and drug laws and regulations, and (ii) be merchantable, of good quality and fit for the purpose intended. b) Quality Control. In connection with the manufacture and refining of Products under this Agreement, Supplier shall comply with the quality standards and procedures set forth in the Specifications. Supplier shall conduct periodic ingredient and process tests as set forth in the Specifications and shall reject any ingredients or process which do not conform to the standards set forth in the Specifications. c) Quality Responsibilities. Supplier's responsibility to Customer for the quality of Products sold by Supplier to Customer under this Agreement shall be limited to its obligations set forth in Subparagraphs (a) and (b) of this Paragraph 13. Anything herein to the contrary notwithstanding, Supplier shall have no responsibility to Customer for the adequacy of the Specifications. 14. INSPECTIONS. Customer shall have the right to have representatives of Customer enter any Supplier's Plant for the purpose of observing, in behalf of Customer, all aspects of Supplier's manufacturing techniques, quality control, sanitation procedures and testing procedures. Supplier shall maintain and make available to such representatives all records of chemical, physical and microbiological tests of raw materials and ingredients used in the manufacture of Products. Such representatives shall also be permitted to inspect Products after manufacture and prior to delivery to Customer, provided that such inspections shall not delay or in any manner interfere with Supplier's production or delivery schedules. 15. NON-SPECIFICATION PRODUCTS. The term "Non-Specification Product" shall mean any Product which is not manufactured and refined in accordance with the Specifications. a) Rejection; Replacement. Customer shall have the right to reject any Non-Specification Products prior to their being delivered to Customer's Plant or within three (3) business days thereafter. Rejection shall be made by written notice to Supplier, stating in reasonable detail the reasons for such rejection. Non-Specification Products so rejected after delivery may be returned by Customer to Supplier at Supplier's Plant and within 10 days after written request by Customer, Supplier shall refund the purchase price of rejected Non-Specification Products. If Customer elects to return the rejected Non-Specification Products, Supplier shall reimburse Customer for all reasonable shipping and handling costs incurred thereby. If Customer shall return rejected Non-Specification Products, other than the obligation to reimburse Customer for any such shipping and handling costs, Supplier shall replace same with Products which meet the Specifications ("Replacement Products") at Supplier's sole cost and expense. b) Reworking. Supplier shall not use or rework for Customer's account any Non-Specification Products into Replacement Products unless such Replacement Products meet the Specifications. 16. MODIFICATIONS TO SPECIFICATIONS; NEW PRODUCTS. The Specifications for the Products described in Paragraph 1 and attached hereto as Exhibit A have been prepared by Customer and may be changed by Customer, in its discretion, at any time and from time to time, by ten (10) business days prior written notice to Supplier, in which event, the Specifications, so changed, shall thereafter be deemed to be the "Specifications" for all purposes of this Agreement, provided that Customer and Supplier shall first agree upon the Refinery Premium applicable to such changed Specifications. If Supplier shall, during the term of this Agreement, manufacture or refine edible oils other than those described in Paragraph 1 and Exhibit A ("New Products"), then such New Products shall be deemed to be "Products" for all purposes of this Agreement, provided that: a) Customer and Supplier shall agree on the specifications for such New Products, in which case such specifications shall be deemed part of the "Specifications" for all purposes of this Agreement; and b) Customer and Supplier shall agree upon the Refinery Premium applicable to each such New Product. Unless and until Customer and Supplier agree upon the Refinery Premium applicable to changed Specifications for Products subject to this Agreement, the change in Specifications shall not become effective, in which case the Product, if manufactured by another supplier in accordance with such changed Specifications, shall not be deemed a "Product" under this Agreement and Customer shall be entitled to purchase same from other suppliers without any limitation imposed by this Agreement. Unless and until Customer and Supplier agree upon the specifications for New Products and the Refinery Premium applicable to such New Products, such New Products shall not be deemed "Products" for purposes of this Agreement and Customer shall be entitled to purchase such New Products from other suppliers without any limitation imposed by this Agreement. Notwithstanding anything to the contrary in Paragraphs 2, 3 or elsewhere in this Agreement, Customer's obligation to purchase from Supplier the "Minimum Quantity" as defined in Paragraph 2 shall apply only to the Products specifically described in subparagraphs (a), (b) and (c) of Paragraph 1 and in Exhibit A and shall not apply to any New Products. Instead, with respect to New Products, Supplier shall be obligated to sell to Customer and Customer shall be obligated to purchase from Supplier, fifty (50%) percent of Customer's "Requirements" (as such term is defined in Paragraph 2(a)) for any New Product during each full Contract Year during the term of this Agreement after the Contract Year during which such New Product is first deemed a "Product" hereunder as provided above and continuing for each Contract Year thereafter. Such obligation shall be in addition to the obligations of the parties to purchase and sell the Minimum Quantity of the Products specified in subparagraph (a), (b) and (c) of Paragraph 2. Any deficiency in the quantity of New Products actually purchased by Customer during any Contract Year below the 50% annual obligation stated above, shall be deemed a Quantity Deficiency within the meaning of Paragraph 4 and shall be satisfied in the manner provided in Paragraph 4 in the case of Quantity Deficiencies. 17. FOREIGN OIL. Anything herein above to the contrary notwithstanding, if at any time during the term of this Agreement, the delivered purchase price of crude soybean oil from a source outside the United States to the Supplier's Plant nearest such foreign source shall be less than the lowest purchase price of Western Crude Soybean Oil delivered to the same Supplies Plant from any of the prime Western locations in the United States listed in Paragraph 8, such foreign delivered purchase price shall be deemed to be the Western Cash Crude for purposes of determining the price of the Minimum Quantity Products payable to Supplier by Customer pursuant to the formula set forth in Paragraph 7; or if, at any time during the term of this Agreement, the delivered price of refined soybean oil, i.e. "Products", from a source outside the United States to a Customer Plant ordering such Products shall be less than the price of such Products determined in accordance with the formula stipulated in Paragraph 7 (except that such price shall include freight to such Customer Plant),then the price of such Products shall be such delivered price from such foreign source, notwithstanding the provisions of said Paragraph 7. 18. CUSTOMER OIL PURCHASING OPERATIONS. Customer shall have the sole and exclusive authority over all its purchases of vegetable oil and other raw materials. All such purchasing shall be conducted and the execution of all purchase orders shall be made from Customer's offices in the City of Industry, California and/or such other locations as Customer shall in its discretion elect. 19. SCOPE OF THIS AGREEMENT. This Agreement shall apply only to the sale by Supplier and the purchase by Customer of the Minimum Quantity of Products as provided in Paragraph 2, the Optional Quantity of Products as provided in Paragraph 3 and 50% of Customer's annual Requirements for any New Products, as provided in Paragraph 16. Otherwise, Customer shall have the right to purchase any and all other vegetable oils and other commodities from any other sources, without any rights of first refusal in favor of Supplier being applicable thereto, and for such prices and on such terms and conditions as Customer shall in its sole discretion elect. 20. EDIBLE OIL PURCHASES BY CUSTOMER AFTER SEVENTH CONTRACT YEAR. Under the provisions of Paragraph 3, the right of first refusal of Supplier to sell liquid and hydrogenated soybean oil to Customer in excess of the Minimum Quantity of Products will expire after the seventh Contract Year of this Agreement, i.e. December 31, 2003 (the "Rights Expiration Date"). If, on or before the Rights Expiration Date, Wilsey shall have given notice to Supplier to the effect that one or more of its affiliates ("Wilsey Affiliate") have entered into, or plans to enter into, the business of crushing soybeans and/or refining soybean oil or other vegetable oils or other raw materials purchased by Customer, including but not limited to "Products" then subject to this Agreement ("Raw Materials"),then the purchase of Raw Materials by Customer (but only to the extent in excess of the Minimum Quantity of Products required to be purchased from Supplier under this Agreement) shall be allocated between purchases from Supplier and purchases from any such Wilsey Affiliate (and if there should be more than one Wilsey Affiliate, all Wilsey Affiliates shall be treated in the aggregate as one for this purpose ), in proportion to the then respective equity ownership interests of Wilsey and Supplier in Customer and otherwise on such terms and conditions as shall be fair and equitable to Customer, Supplier and such Wilsey Affiliate or Affiliates. For purposes of this Paragraph 20, the term "Affiliate" means any entity which controls Wilsey or is controlled by Wilsey or which is under common control with Wilsey. If, on or before the Rights Expiration Date, Wilsey shall not have given notice to Supplier that a Wilsey Affiliate has entered into or plans to enter into the business of crushing, refining, manufacturing or otherwise producing Raw Materials, then, upon timely request of Supplier, Customer and Supplier shall, during the six months prior to the Rights Expiration Date, enter into negotiations relating to one or more new rights of first refusal on the part of Supplier to sell to Customer additional amounts of Products, as then defined under this Agreement, in excess of the Minimum Quantity, provided that neither Customer nor Supplier shall be obligated to agree to any such additional rights of first refusal. 21. MATERIAL ADVERSE EFFECT. If, at any time during the term of this Agreement, either Customer or Supplier shall claim, in written notice to the other, that economic, business or other conditions have changed since the Commencement Date, with the result that the continuation of this Agreement would have a material adverse effect upon its financial condition, business operations, business prospects or business opportunities ("Material Adverse Effect"), then the parties shall be obligated to negotiate in good faith in an attempt to agree upon an amendment to this Agreement which will eliminate or substantially reduce such claimed Material Adverse Effect. If, within 90 days after the date of such notice, the issue shall not have been resolved to the satisfaction of both parties, then the party claiming a Material Adverse Effect may apply to CPR (as defined in Paragraph 32) for arbitration of the dispute in accordance with the CPR Rules (as defined in Paragraph 32) and otherwise in accordance with the arbitration rules and procedures provided for in Paragraph 32 in the case of other disputes under this Agreement except that Subparagraph(a) of Paragraph 32 (informal dispute resolution) and Subparagraph (b) of Paragraph 32 (mediation) shall not apply, nor shall the seventy-five (75) day waiting period in the first sentence of Subparagraph (c) of Paragraph 32 apply. The arbitration proceedings shall commence upon referral of the dispute to arbitration by either party after the expiration of the 90 day period referred to above. In any such case, the sole issue to be determined by the arbitrator shall be whether or not a Material Adverse Effect exists and to determine with reasonable specificity the nature and extent thereof. The arbitrator shall not have the authority to require any amendment to this Agreement. If, the arbitrator shall determine that a Material Adverse Effect exists, then the parties shall again negotiate in good faith in an attempt to agree upon an amendment to this Agreement which will eliminate or substantially reduce the Material Adverse Effect, as the same shall have been determined by the arbitrator. Neither party shall be under any obligation to agree upon any such amendment but only to negotiate in good faith. If, within 90 days after the agreement of both parties that a Material Adverse Effect exists or the arbitrator's decision to that effect, the parties shall not have executed an amendment to this Agreement satisfactory to the party who referred to matter to arbitration, then said party may, within 30 days after the expiration of said 90 day period, if said Material Adverse Effect shall then be continuing, by written notice to the other party, suspend the effectiveness of this Agreement for so long as the said Material Adverse Effect shall continue. Absent the agreement of both parties that a Material Adverse Effect exists or a decision of an arbitrator to that effect, as set forth above, this Agreement shall continue unsuspended and in full force and effect in all of its parts and clauses. If the other party shall, at the time of said suspension notice or at any time thereafter, contend that the Material Adverse Effect has ceased and that the suspension of this Agreement should, therefore, not occur or continue, then, unless the parties shall agree on the matter, the party so contending may refer the dispute to binding arbitration in accordance with Subparagraph (c) of Paragraph 32, provided that the sole issue to be determined by the arbitrator shall be whether or not the Material Adverse Effect has ceased or is continuing. If the arbitrator shall find that the Material Adverse Effect has ceased, the suspension of this Agreement shall cease as of the date of the arbitrator's decision and this Agreement shall be reinstated and in full force and effect but only as of the date of the arbitrator's decision. If this Agreement shall, pursuant to this Paragraph 21, be suspended for a continuous period of more than two years, then either party may, by written notice to the other, terminate this Agreement. 22. INDEMNIFICATION BY SUPPLIER. Except as otherwise limited below, Customer and its officers, directors, employees, successors and assigns shall be indemnified and held harmless by Supplier from any and all liabilities, losses, damages, claims, costs and expenses, interest, awards, judgments and penalties (including, without limitation, reasonable legal costs and expenses) actually suffered or incurred by it or them (hereinafter a "Customer Loss"), actually arising out of or resulting from: a) the breach of any representation, warranty, covenant or agreement by Supplier contained herein; b) the consumption or use by any person of any products sold by Customer which include Products purchased by Customer from Supplier if such Products fail to meet the Specifications or otherwise fail to meet the quality standards set forth in Paragraph 13. Notwithstanding the foregoing, Supplier shall have no obligation to indemnify or hold harmless Customer to the extent such Customer Losses shall result from (i) the negligence of Customer, (ii) compliance with the Specifications, or (iii) the acts or omissions of employees or agents of Customer. The provisions of this Paragraph 22, relating to indemnification of Customer, shall not apply to Supplier's liability to Customer for Non-Specification Products, which is governed exclusively by the provisions of Paragraph 15. 23. INDEMNIFICATION BY CUSTOMER. Except as otherwise limited below, Supplier and its officers, directors, employees, successors and assigns shall be indemnified and held harmless by Customer from any and all liabilities, losses, damages, claims, costs and expenses, interest, awards, judgment and penalties (including, without limitation, reasonable legal costs and expenses) actually suffered or incurred by it or them (hereinafter a "Supplier Loss") actually arising out of or resulting from: a) the breach of any representation, warranty, covenant or agreement by Customer contained herein; b) the consumption or use by any person of any Products which meet the Specifications, provided that such Supplier Loss shall not have been caused by the adulterating, mispackaging or mislabeling of such Products by Supplier, within the meaning of applicable federal, state or local food and drug laws or regulations; c) the negligence of Customer; d) defects in the Specifications; or e) the acts or omissions of employees or other agents of Customer while present in a Supplier Plant or otherwise. 24. INDEMNIFICATION PROCEDURES. a) For the purposes of this Paragraph 24, the term "indemnitee" shall refer to the person indemnified, or entitled, or claiming to be entitled to be indemnified, pursuant to the provisions of Paragraphs 22 or 23, as the case may be, and the term "indemnitor" shall refer to the person having the obligation to indemnify pursuant to such provisions. "Losses" shall refer to "Customer Losses" or "Supplier Losses", as the case may be. b) An Indemnitee shall give written notice (a "Notice of Claim") to the Indemnitor within ten (10) business days after the Indemnitee has knowledge of any claims (including a Third Party Claim, as hereinafter defined) which could give rise to a right of indemnification under this Agreement. No failure to give such Notice of Claim shall affect the indemnification obligations of the Indemnitor hereunder, except to the extent Indemnitor can demonstrate such failure materially prejudiced such Indemnitor's ability to successfully defend the matter giving rise to the claim. The Notice of Claim shall state the nature of the claim, the amount of the Loss, if known, and the method of computation thereof, all with reasonable particularity and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises. c) The obligations and liabilities of an Indemnitor under this Paragraph 24 with respect to Losses arising from claims of any third party that are subject to the indemnification provisions provided for in this Paragraph 24 ("Third Party Claims") shall be governed by and be contingent upon the following additional terms and conditions: The Indemnitee at the time it gives a Notice of Claim to the Indemnitor of the Third Party Claim shall advise the Indemnitor that it shall be permitted, at its option, to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives prompt notice of its intention to do so to the Indemnitee and confirms that the Third Party Claim is one with respect to which the Indemnitor is obligated to indemnify. In the event that Indemnitor exercises its right to undertake the defense against any such Third Party Claim as provided above, the Indemnitee shall cooperate with the Indemnitor in such defense and make available to the Indemnitor all witnesses, pertinent records, materials and information in its possession or under its control relating thereto as is reasonably required by the Indemnitor and the Indemnitee may participate through its own counsel and, subject to the proviso below, at its own expense in the defense of such Third Party Claim; provided, however, that in the event both the Indemnitee and the Indemnitor are named as parties and the Indemnitee shall in good faith determine that representation by the same counsel is inappropriate, the fees and expenses of the Indemnitee's separate counsel shall be at the expense of the Indemnitor. Similarly, in the event the Indemnitee is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnitor shall cooperate with the Indemnitee in such defense and make available to it all such witnesses, records, materials and information in its possession or under its control relating thereto as shall be reasonably required by the Indemnitee and the Indemnitor may participate by its own counsel and at its own expense in the defense of such Third Party Action. Except for the settlement of a Third Party Claim which involves the payment of money only, no Third Party Claim may be settled by the Indemnitor without the written consent of the Indemnitee, which consent shall not be unreasonably withheld or delayed. No Third Party Claim may be settled by the Indemnitee without the written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. 25. INSURANCE. During the term of this Agreement, Supplier shall maintain comprehensive general liability insurance of at least $10,000,000, with a deductible not to exceed $500,000, endorsed to cover the indemnifications contained in this Agreement. Customer shall maintain comprehensive general liability insurance of at least $10,000,000 with a deductible not to exceed $500,000 endorsed to cover the indemnifications contained in this Agreement. Upon the execution of this Agreement, Supplier and Customer shall furnish each other with certificates of insurance evidencing such coverages. Such certificates shall contain clauses for notification of both Supplier and Customer thirty days in advance of any cancellation, reduction or change in coverage. 26. TRADEMARKS AND TRADE NAMES. Supplier shall have no right, title or interest in and to the trademarks or trade names of Customer. Supplier shall not use any of such trademarks or trade names except as authorized in writing by Customer. 27. CONFIDENTIAL INFORMATION. The term "Confidential Information" as used herein shall mean (i) all information relating to the Specifications, (ii) all information contained in the Volume Forecasts, and (iii) all other sales volume information, Product distribution information, and other technical information disclosed by Customer to Supplier and designated in writing by Customer as "Confidential Information." Supplier shall hold the Confidential Information in confidence and shall use the same only for the purpose of manufacturing Products under this Agreement, provided that Supplier may disclose the Confidential Information to such of its employees who shall have a need to know same in order to carry out, in behalf of Supplier, Supplier's obligations under this Agreement. Upon the expiration or termination of this Agreement, Supplier shall return to Customer all such Confidential Information which shall be in written form, together with all copies thereof, and retain none for its files. The restriction in this Paragraph 27, relating to Confidential Information, shall not apply to such Confidential Information that (i) is or becomes available to the public or part of the public domain other than as a result of wrongful disclosure by Supplier, its employees, agents or representatives, (ii) was known by Supplier (without a non-disclosure obligation on the part of Supplier) before disclosure by Customer, its employees, agents or representatives, (iii) becomes known to Supplier from any source (except from parties obligated not to disclose same) other than Customer, its employees, agents or representatives, (iv) is approved for release by written authorization of Customer, or (v) shall be required by law to be disclosed. In the case of clause (v), Supplier shall promptly notify Customer before such Confidential Information is disclosed so that Customer may seek a protective order or other appropriate remedy or waive compliance with this Paragraph. In the event that such protective order or other remedy is not obtained, Supplier shall disclose only that portion of the Confidential Information it is legally required to disclose, as confirmed by a legal opinion of a nationally recognized law firm, and will exercise all reasonable efforts to assist Customer to obtain reliable assurance that confidential treatment will be accorded the Confidential Information, provided, however, that any such assistance rendered by Supplier, its agents and representatives, shall be at the sole cost and expense of Customer. 28. RELATIONSHIP OF PARTIES. The parties hereto are independent contractors and engage in the operation of their own respective businesses and neither Supplier nor Customer shall be considered the agent of the other for any purpose whatsoever, and neither Supplier nor Customer has any authority to enter into any contracts or assume any obligations for the other or to make any warranties or representations on behalf of the other. Nothing in this Agreement shall be considered to establish a relationship of co-partners or joint venturers between Supplier and Customer. 29. FORCE MAJEURE. If either Customer or Supplier is prevented from performing any of its obligations under this Agreement or is substantially delayed in such performance by reason of any cause beyond its reasonable control, including any governmental restrictions, act of God, riots, war, insurrections, fire, labor disputes, crop failure or other cases of force majeure, such party shall be excused from the performance of its obligations affected by the reasons referred to, or from the delay in such performance. 30. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California without regard to its provisions concerning conflicts or choice of law. 31. ARBITRATION OF REFINING PREMIUM ADJUSTMENTS. In the event of a dispute between Supplier and Customer with respect to the annual adjustment of one or more Refining Premiums, as provided in Paragraph 9, if no settlement of the dispute is reached though mediation within ten (10) days after the beginning of the mediation, as provided in Paragraph 9, then either Supplier or Customer may apply to CPR (as defined in Paragraph 32) for arbitration of the dispute in accordance with the CPR Rules (as defined in Paragraph 32) and otherwise in accordance with the arbitration rules and procedures provided for in Paragraph 32 in the case of other disputes under this Agreement, except that the following special rules shall apply: a) Subparagraph (a) of Paragraph 32 (informal dispute resolution) and Subparagraph (b) of Paragraph 32 (mediation) shall not apply, nor shall the sixty-five (65) day waiting period in the first sentence of Subparagraph (c) of Paragraph 32 apply. The arbitration proceedings shall commence upon the referral of the dispute to arbitration by either party after the expiration of the sixty (60) and thirty (30) day periods referred to in Paragraph 9. b) Prior to the commencement of the arbitration each of Supplier and Customer shall communicate in writing to the arbitrator their respective positions concerning the appropriate Refining Premiums to be applicable to each Product under the Agreement for the Contract Year in question. c) The determination of the arbitrator shall be limited solely to the issue of whether Supplier's or Customer's proposed Refining Premiums is the closest to the "Market Standard", as defined in Paragraph 9. d) The fees and expenses of the arbitrator shall be borne solely by the losing party. 32. GENERAL DISPUTE RESOLUTION PROVISIONS. The parties hereto desire to avoid all forms of traditional litigation, subject to the provision for preliminary injunctive relief described in Paragraph 32(d) below. Any dispute, controversy or claim of any nature whatsoever between the parties hereto arising out of or relating to this Agreement or the breach, termination or invalidity of this Agreement or any related agreements, whether in contract, tort or equity, or under any statute or regulation arising out of or relating to such agreements (a "Dispute"), shall be resolved in accordance with this Paragraph 32. All other remedies to which the parties (including their respective Affiliates) may otherwise have been entitled, whether at law or in equity, are hereby waived to the fullest extent allowed by law. The obligations under this Paragraph 32 shall survive termination of this Agreement. The preceding provision notwithstanding, if a Dispute arises out of third-party litigation against any party hereto, these procedures shall not be mandatory, and such party shall have the right to engage in such litigation with the third-party claimant and with each other concerning such Dispute. For purposes of this exception pertaining to Disputes arising out of third-party litigation, a third-party means a party (i) which is not an Affiliate of a party hereto, (ii) has no record or beneficial, financial, ownership or other significant interest in or with a party hereto and (iii) in which a party hereto has no record or beneficial, financial, ownership or other significant interest. (a) Informal Dispute Resolution. The parties shall attempt in good faith to resolve any Dispute promptly by confidential negotiations between representatives of the parties with authority to settle the matter. All such negotiations shall be treated as compromise and settlement negotiations for purposes of the relevant rules of evidence. Any party making claim shall give the other party written notice that the party is invoking the dispute resolution procedures of this Paragraph 32 with respect to a specific Dispute. Within ten (10) days after delivery of the written notice, the receiving party shall submit to the other a written response. The notice and the response shall include (a) a statement of each party's position and a summary of arguments supporting that position, and (b) the name of the person (s) who will represent that party and the name of any other person (and an indication, if applicable, that such other person is an attorney) who will accompany the representatives (s) to the meeting. Within thirty (30) days after delivery of the written notice, the representatives of both parties shall meet at a mutually acceptable time and place (or failing such agreement at Supplier's headquarters), or confer by telephone and thereafter as often as they reasonably deem necessary, to attempt to resolve the Dispute. (b) Mediation. If the Dispute has not been resolved by negotiation within forty-five (45) days of the initial written notice (or such longer time as the parties may agree), either party may notify the other that it intends to submit such Dispute to non-binding mediation under the then current model procedure for mediation of business disputes promulgated by CPR. In such event the parties shall mediate the Dispute. The parties shall promptly attempt to agree upon a reputable and experienced mediator. Failing agreement within five (5) days after the notice of intent to mediate has been given by a party hereto (or such longer time as the parties may agree), the mediator will be selected in accordance with the previously mentioned CPR procedure. Any such mediation process shall be concluded in Los Angeles, California and must be completed within seventy-five (75) days of delivery of the initial written notice unless otherwise agreed by the parties (c) Formal Dispute Resolution. (i) Any Dispute which remains unresolved seventy-five (75) days after delivery of the initial written notice shall be promptly resolved by final and binding arbitration. Such arbitration shall be conducted pursuant to the CPR Rules except to the extent herein otherwise provided. The place of arbitration shall be Los Angeles, California unless both parties agree to a different locale. There shall be a single neutral and impartial arbitrator appointed by CPR experienced in the subject matter of the Dispute and who has not had a material personal or financial relationship with either participant to the Dispute or any Affiliate of either participant in the preceding three years, to be selected in accordance with the CPR Rules. The arbitration shall be conducted in the English language, provided that a witness may testify in another language if the party calling such witness shall provide an interpreter at such party's expense. The arbitrator shall follow the laws of the State of California (without regard to conflict of law provisions) in resolving any Dispute, provided that any question concerning arbitrability shall be governed exclusively by the United States Arbitration Act as then in force. Each party hereby waives any right to and the arbitrator shall not have the power to award punitive, exemplary, double or treble damages. The award of the arbitrator shall be final and binding, and judgment on it may be entered in any court having jurisdiction. The parties agree that any decision or award resulting from proceedings in accordance with this dispute resolution provision shall have not preclusive or other effect in any other matter between the parties or involving a third-party. (ii) The arbitrator may consolidate an arbitration under this Agreement with any other arbitration between the parties to this Agreement if the subject of the Dispute arises out of or relates essentially to the same facts or transaction(s). No other person may be included in the arbitration of a Dispute, whether by consolidation, joinder or in any other manner, except by written consent of both parties to the Dispute. (iii) Each party shall bear its own costs and attorneys' fees, and the parties shall equally bear the fees, costs and expenses of the arbitrator and the arbitration proceedings; provided, however, that the arbitrator may exercise discretion to award costs and/or attorneys' fees to the prevailing party. (d) Injunctive Relief. The parties agree that notwithstanding anything to the contrary contained herein, any party may seek a temporary restraining order or a preliminary injunction from any court of competent jurisdiction in order to prevent immediate and irreparable injury, loss or damage; provided such party has commenced in good faith an informal dispute resolution proceeding pursuant to this Paragraph 32. The arbitrator once appointed shall have the power to modify or vacate such temporary restraining order or preliminary injunction or to issue a restraining order or injunction. (e) Confidentiality. The dispute resolution proceedings contemplated by this Paragraph 32 shall be as confidential and private as permitted by law. To that end, the parties shall not disclose the existence, content or results of any proceedings conducted in accordance with this Paragraph 32, and materials submitted in connection with such proceedings shall be treated as confidential, and not be admissible in any other proceeding, provided, however, that this confidentiality provision shall not prevent a petition to vacate or enforce an arbitral award, and shall not bar disclosures required by law. Any decision or award resulting from proceedings in accordance with this Paragraph 32 shall have no preclusive effect in any matter involving third parties. (f) Limitations Period. The statutes of limitation of the State of California shall be applicable to the arbitration of any Dispute hereunder just as if such arbitration were a lawsuit between the parties, except that all applicable statutes of limitation and defenses based upon the passage of time shall be tolled during the pendency of any informal dispute resolution or mediation under Subparagraphs 32(a) and (b) hereof. The parties shall take such action, if any, as may be required to effectuate the tolling provided for in this Subparagraph 32(f). (g) Continued Performance. Each party is required to continue to perform its obligations under the Agreement pending final resolution of any dispute arising out of or relating to this Agreement. (h) Certain Definitions. For purposes of Paragraph 31 and this Paragraph 32, the following definitions shall apply: (i) "Affiliate" shall mean a person, form or corporation, which directly or indirectly, alone or through one or more intermediaries, controls, or is controlled by, or is under common control with a party to this Agreement. (ii) "CPR" shall mean the CPR Institute for Dispute Resolution (formerly, the Center for Public Resources). (iii) "CPR Rules" shall mean the Non-Administered International Arbitration Rules promulgated by CPR. 33. SEVERABILITY. If any portion of this Agreement shall be in violation of any applicable law, such paragraph or portion shall be inoperative, but the remainder of this Agreement shall remain valid and shall continue to bind the parties. 34. ASSIGNMENTS. This Agreement shall be binding and inure to the benefit of each of the parties, their successors and assigns, provided that this Agreement may not be transferred or assigned by either party without the prior written consent of the other party. 35. NOTICES. All notices permitted or required to be given by Customer and Supplier hereunder shall be given in the manner set forth in the Joint Venture Agreement. 36. ENTIRE AGREEMENT. This Agreement, together with the Schedules attached hereto, contains all of the terms, warranties, representations, agreements, covenants, conditions, and provisions agreed upon by the parties with respect to the matters described herein. This agreement shall not be altered or changed unless the change shall be in writing and signed by authorized officials of both parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. HARVEST STATES COOPERATIVE By: /s/ Merritt E. Peterson -------------------------------- Name: Merritt E. Peterson ------------------------------- Title: Group Vice President ------------------------------ WILSEY-HOLSUM FOODS, L.L.C. By: HARVEST STATES COOPERATIVE By: WILSEY FOODS, INC. Member Member By: /s/ James D. Tibbitts By: /s/ Jack Davis --------------------- -------------------------------- James D. Tibbitts Name: Jack Davis Senior Vice President ------------------------------- Title: President and CEO ------------------------------ EX-10.5 8 PARTNERSHIP AGREEMENT TACOMA EXPORT MARKETING COMPANY PARTNERSHIP AGREEMENT BETWEEN CONTINENTAL GRAIN COMPANY AND HARVEST STATES COOPERATIVES DATED AS OF SEPTEMBER 28, 1992 THIS PARTNERSHIP AGREEMENT made as of this 28th day of September, 1992, between HARVEST STATES COOPERATIVES, a Minnesota corporation ("Harvest States") and CONTINENTAL GRAIN COMPANY, a Delaware corporation ("Continental"). WITNESSETH: WHEREAS, the Partners desire to form a general partnership for the purpose of engaging in the buying, selling, storing and handling of certain feedgrains and oilseeds for export from the Pacific Northwest, United States primarily through Continental's presently leased facility at Tacoma, Washington (the "Tacoma Facility") and such other business activities as are related thereto, and WHEREAS, the partnership formed hereby desires to sublease the Tacoma Facility from Continental and Continental desires to sublease the Tacoma Facility to the partnership. NOW, THEREFORE, in consideration of the premises and covenants and agreements hereinafter set forth, the Partners hereby agree as follows: ARTICLE I DEFINITIONS Definitions. The following terms wherever used in this Agreement shall have the meanings hereinafter assigned to them: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. "Agreement" means this Partnership Agreement as in effect on the date hereof and as the same may be modified or amended by action of the Partners as provided herein. "Control" (including "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person by ownership of more than 50% of the voting securities of a corporation or by contract or otherwise. "Controlling Affiliate" means, with respect to any Person, any Affiliate of such Person that Controls such Person. "Encumbrance" means and includes any mortgage, pledge, lien, charge, encumbrance, lease, sublease, security interest or trust interest; and to "Encumber" an asset is to create an Encumbrance thereon. "Feedqrains" means the corn and sorghum as provided in Section 7.1. "Fundamental Issues" means those issues which require the vote of both of the Partners or the approval of the Management Committee, as provided in Section 5.3. "Management Committee" means the Management Committee constituted as provided in Section 5.2. "Net Income" and "Net Loss" shall mean the income and losses of the Partnership, determined on an accrual basis in accordance with generally accepted accounting principles consistently applied, after all expenses of the Partnership have been taken into account (including allowances for depreciation or amortization of Partnership assets) and shall include gain or loss realized by the Partnership on the sale or the disposition of assets in connection with a dissolution of the Partnership pursuant to Article XI. "Oilseeds" means soybeans as provided in Section 7.1. "Partner" or "Partners" means Continental or Harvest States or both Continental or Harvest States, as the case may be, and their permitted successors and assigns. "Partner Account" means, with respect to each Partner, the account maintained for such Partner in accordance with Section 10.10. "Partner Interest" means the interest of a Partner in the Partnership. "Partnership Law" means the Washington Uniform Partnership Act, Ch. 25.04 RCW as amended from time to time. "Person" means any natural person, firm, trust, partnership, joint venture, unincorporated association, corporation, government or governmental agency. "Prime Rate" means the prime or base rate announced from time to time by the Chase Manhattan Bank, N.A. The Prime Rate shall be adjusted on a [daily] basis. "Secretary" means the Secretary of the Partnership as provided in Section 6.2. "Share", when used with respect to either Partner means fifty percent (50%) unless and until such percentage shall be changed by a vote of the Partners. "Treasurer" means the Treasurer of the Partnership as provided in Section 6.3. ARTICLE II 2.1 The Partnership. The Partners hereby form and constitute a partnership as a general partnership (the "Partnership") under the Partnership Law of the State of Washington upon the terms and conditions set forth in this Agreement. Except as otherwise provided in this Agreement, the rights and liabilities of the Partners shall be governed by the Partnership Law. 2.2 Name. The Partnership shall operate under the name of Tacoma Export Marketing Company ("TEMCO"). 2.3 Principal Office. The principal office of the Partnership shall be located at 222 SW Columbia Street, Koin Tower, Suite 1100, Portland, Oregon 97201 or at such other place as may be designated by the Management Committee as hereinafter defined. 2.4 Duration. The Partnership shall commence on September 15, 1992 and shall continue through the close of business on September 14, 1997, unless sooner terminated as provided herein. The term of the Partnership shall be extended automatically for successive five (5) year periods unless either Partner delivers written notice to the other Partner not less than 120 days prior to the expiration of the then current term that it elects not to renew or extend the term of the Partnership. In no event, however, shall the term of the Partnership continue beyond 2012 without the written agreement of both Partners. 2.5 Purpose. The purpose of the Partnership is to engage in the business of buying, trading, selling, handling and transporting for export and exporting Feedgrains and Oilseeds, as defined in Section 7.1, primarily from the Pacific Northwest, United States through the Tacoma Facility to Pacific Basin destinations and engaging in such other activities and business as may be incidental or related thereto or necessary or desirable in furtherance of such purpose. The Partnership shall establish or cause to be established such business organizations and shall own, directly or indirectly, such assets as the Partners shall agree are appropriate to achieve the purpose of the Partnership. 2.6 Scope. The Partnership is and shall be a partnership only for the purposes specified in this Agreement and nothing contained in this Agreement shall be deemed to create a general partnership between the Partners with respect to any activities whatsoever other than activities within the proper business purposes of the Partnership. Neither of the Partners shall have the power to bind the other Partner or the Partnership except as specifically provided in this Agreement. Neither of the Partners or the Partnership shall be responsible or liable for any indebtedness, liability or obligation of the other Partner incurred either before or after the execution of this Agreement except for indebtedness, liabilities, and obligations incurred after the execution of this Agreement in connection with authorized activities within the proper business purposes of the Partnership. Each Partner, respectively, hereby indemnifies and agrees to hold the other Partner, and its Affiliates and directors and officers, and the Partnership harmless from and against all such indebtedness, liabilities and obligations incurred by it which are not authorized and within the proper business purposes of the Partnership. ARTICLE III 3.1 Initial Capital Contributions. The initial capital of the Partnership shall consist of $100.00 cash, contributed by the Partners in proportion to their Shares. Each Partner shall make its initial capital contribution contemporaneous with the execution of this Agreement. 3.2 Additional Capital Contributions. (a) The Partners agree that the Partnership shall meet its capital needs through the borrowing of funds as provided in Section 10.3 and that unless specifically agreed to by the Partners and except as set forth in this Section 3.2, the Partners shall not be obligated to make any additional capital contributions to the Partnership. If the Partners agree to make additional capital contributions, the contributions shall be made at such times, in such amounts and under such conditions as shall be determined by the Partners in accordance with the provisions of this Agreement. (b) No interest shall accrue on any Partner's Partner Account. A Partner shall not be entitled to withdraw any part of its capital in the Partnership or to receive any capital distribution from the Partnership except as part of a distribution of capital agreed to by the Management Committee as hereinafter defined or as provided in Article XI. (c) All capital contributions and other payments required or permitted to be made by a Partner under this Agreement shall be either in cash or, at the request of any Partner and if agreed to by the Management Committee, on such conditions and for such fair value as the Management Committee as hereinafter defined shall so determine, in kind. (d) If a Partner (a "Delinquent Partner") shall fail to make when due a contribution required pursuant to this Agreement, the other Partner (the "Contributing Partner") may, in its sole discretion, advance all or part of that amount to the Partnership. Such advance shall be deemed to be a demand loan by the Contributing Partner to the Delinquent Partner at an interest rate equal to 2% in excess of the Prime Rate for the period during which the advance is outstanding. This loan shall be repaid, together with such interest, by the Delinquent Partner promptly upon demand from any funds of the Delinquent Partner, including, without limitation, any distribution from the Partnership which would otherwise be payable to the Delinquent Partner. Unless and until the Delinquent Partner makes such repayment, the Partnership shall make no cash distribution to such Partner (except that a cash distribution shall be applied to make such repayment and the balance then made to the formerly Delinquent Partner). The Contributing Partner to which such debt is due (or to which a debt pursuant to Article VIII is due) shall have a security interest in the Partner Interest of the Delinquent Partner to secure such amounts owed to it, and such security interest is hereby granted by each Partner. To the extent that the principal amount of the delinquency is repaid, the principal amount of such repayment (excluding any interest) shall be deemed a contribution to the capital of the Partnership by the Delinquent Partner and shall be reflected as such in the Partner Account of the Delinquent Partner. ARTICLE IV 4.1 Allocation of Profits and Losses. Except as otherwise specifically provided in Section 10.10; all items of Net Income and Net Loss shall be allocated to the Partners in accordance with their respective Shares. ARTICLE V 5.1 Voting and Meeting of the Partners. Each Partner shall have an equal vote in the management of the Partnership. Meetings of the Partners may be called by either Partner on ten (10) Business Days prior notice to discuss any matter including, without limitation, any matter related to the finances, operations, management, policies, or personnel of the Partnership. Notice of meetings may be waived by the Partner entitled to such notice. 5.2 Management Committee. (a) The conduct of the business and affairs of the Partnership shall be managed by a standing Management Committee consisting of four (4) members, with each Partner appointing two (2) regular members and such alternate members as such Partner deems advisable. Each of the Partners may initially appoint or replace any or all of its members or alternate members of the Management Committee by written notice to the Partnership and the other Partner. Each of the Partners shall at all times maintain in effect the appointment of at least one (1) member of the Management Committee. Each member of the Management Committee shall serve for indefinite terms at the pleasure of the appointing Partner. (b) The Management Committee shall meet not less than quarterly at such times and places as it may determine. Meetings of the Management Committee may be called by one (1) member of the Management Committee. The General Manager shall have the right to attend all meetings of the Management Committee but shall not be entitled to participate in the voting on any decision or other matter before the Management Committee. Notice of each meeting of the Management Committee shall be telexed, telecopied, sent by mail or delivered personally, or by telephone, to each regular and alternate member not later than ten (10) Business Days before the date on which the meeting is to be held. Notice of meetings may be waived by the member or members entitled to such notice. (c) The attendance of one (1) member from each Partner shall constitute a quorum for the transaction of business of the Management Committee. Each member at the meeting shall be entitled to one vote for each matter to be voted upon by the Management Committee. Any decision or approval before the Management Committee shall be taken by majority vote of those of the Management Committee present or participating in a meeting at which a quorum is present; provided, however, no action shall be authorized unless at least one (1) member appointed by each Partner votes affirmatively on such action. The failure of the Management Committee to authorize action with respect to any matter pursuant to the foregoing sentence shall constitute a Deadlocked Matter pursuant to Section 5.4. (d) Any decision or approval of the Management Committee may be made without a meeting if either (i) such decision is first approved in writing by one of the members or alternates of each of the Partners or (ii) such meeting is held by means of a conference telephone or similar communications equipment allowing all Persons participating in the meeting to hear each other at the same time. (e) The regular members of the Management Committee shall alternately act as chairman of meetings of the Management Committee. Minutes of all meeting shall be prepared by the Secretary and shall be distributed to all regular members (and alternate members if present at a meeting) within thirty (30) days following any meeting. 5.3 Fundamental Issues. No action may be taken or decision made which binds the Partnership by the General Manager, any Partner on behalf of the Partnership, or the Partnership, with regard to any of the Fundamental Issues without the vote (or written consent) of the Management Committee in accordance with Section 5.2(c). Fundamental Issues shall include decisions and actions on the following matters, and such other matters as may be deemed Fundamental Issues, from time to time, by the Management Committee: (a) calls for additional capital or guarantees hereunder; (b) the issuance of any notes, bonds, debentures or other obligations by the Partnership, or the incurrence of or assumption of any indebtedness if, after giving effect thereto, the aggregate principal amount of all such indebtedness of the Partnership, other than indebtedness previously approved by the Management Committee (including, without limitation, the utilization by the Partnership of lines of credit previously approved by the Management Committee for the purpose of financing the business of the Partnership in the ordinary course), would either (i) exceed the amounts specifically provided therefor and sufficiently identified in the Partnership's current annual budgets referred to in Sections 5.3(p) and 10.1, or (ii) result in direct or indirect liability on either or both of the Partners for repayment of such indebtedness; (c) any acquisition, disposition, sale, conveyance, lease, sublease, exchange or other disposition of any interest in the Tacoma Facility other than the sublease contemplated by Section 7.2 hereof; (d) the acquisition, disposition, sale, conveyance, lease, sublease, exchange or other disposition of real property having a value greater than a threshold amount to be determined by the Management Committee; (e) the acquisition, disposition, sale, conveyance, lease, sublease, exchange or other disposition of personal property, other than agricultural commodities traded in the ordinary course of business, with a value greater than a threshold amount to be determined by the Management Committee; (f) investing in any Person; (g) the establishment of trading position limits for agricultural commodities traded by the Partnership; (h) the making of loans or provision of guaranties, or the extension or pledge of credit to others, except endorsements and extensions of credit in the ordinary course of business; (i) the sale of any equity interests (or operation, warrant, conversion in similar rights with respect thereto) in the Partnership; (j) the selection, appointment, remuneration, removal and determination of the terms and conditions of employment agreements of officers, executives and key employees of the Partnership; (k) the payment of bonuses and perquisites to officers, executives and key employees of the Partnership; (l) the confession of any judgment against the Partnership or the creation, assumption, incurrence, or suffering to be created, assumed or incurred or to exist of, any encumbrance upon any of the assets or property of the Partnership, or the acquisition or holding or agreement to acquire or hold such property or assets subject to any encumbrance other than (i) liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, and (ii) other minor encumbrances incidental to the conduct of the business of the Partnership or the ownership of its property and assets which are not incurred in connection with the borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Partnership; (m) the compromise or submission to arbitration (other than contract specifically providing for arbitration) or litigation of any claim due, or any dispute or controversy involving the Partnership for any claim, dispute or controversy in excess of any amount to be determined by the Management Committee; (n) the entering into of any contract or commitment (other than those contracts made in the ordinary course of business) involving aggregate expenditures in excess of an amount to be determined by the Management Committee; (o) the entering into any contract or commitment (other than those commodity, sales and purchase contracts made in the ordinary course of the Partnership's grain merchandising business) involving either Partner, or any of their affiliates; (p) the approval of the annual business operating budget, capital expenditure budget and business plan and the amount of cash for distribution and adoption of other major financial policies of the Partnership; (q) the approval of the opening financial statements of the Partnership as referred to in Section 10.7; (r) the appointment and removal of the independent accountants for the Partnership; (s) the appointment and removal of the Liquidator of the Partnership pursuant to Section 11.2; (t) any material changes in the purposes of the Partnership beyond that expressly contemplated by this Agreement as provided in Section 2.5; (u) the voluntary dissolution and winding-up of the Partnership, provided, however, that this provision shall in no way limit the rights of the Partners under Article XI. (v) any changes in the scope or method of operations or business policies of the Partnership which is likely to materially increase the working capital or cash requirements of the Partnership. (w) approval of the credit policy applicable to export sales and any material deviation therefrom. 5.4 Deadlock. (a) In the event that the Partners or the Management Committee cannot agree on any Fundamental Issue considered by the Management Committee (or otherwise by the Partners) within 45 days following the Management Committee meeting at which a decision on such Fundamental Issue was sought (a "Deadlocked Matter"), either Partner may elect to dissolve the Partnership in accordance with Article XI by notice in writing to the other Partner ("Notice of Dissolution"). The Partners shall attempt within such 45 days period to resolve any Deadlocked Matter in good faith. 5.5 Subcommittees. The Management Committee shall appoint an operating committee which shall consist of four members, two persons appointed from Harvest States and two Persons appointed from Continental (the "operating Committee"). The Operating Committee shall meet regularly to assure that the proper implementation of the operations objectives of the Partnership, the adequate coordination of supporting services, such as accounting and administration provided by the Partners to the Partnership and the adequacy of communication between the Partnership and the Partners. The Operating Committee shall report to the Management Committee. The Management Committee shall appoint such other subcommittees as it deems advisable, each with an equal number of representatives from each Partner. ARTICLE VI OFFICERS AND EMPLOYEES 6.1 The General Manager. (a) The General Manager of the Partnership shall be appointed by the Management Committee and shall serve for a term of one (1) year unless extended by action of the Management Committee. The General Manager is hereby vested with such executive and financial authority as to enable him to direct the business and affairs of the Partnership, subject to the directions of the Management Committee and in accordance with this Agreement. The General Manager shall be authorized to execute documents within the scope of his authority on behalf of the Partnership which will bind the Partnership without the necessity of obtaining the signature of either of the Partners. The General Manager shall be responsible for the implementation of the various decisions of the Management Committee and for the day-to-day management and operation of the Partnership. The General Manager shall regularly inform the Management Committee of the Partnership's on-going activities. The General Manager shall report to and take direction from the Management Committee. The General Manager shall enter into transactions on behalf of the Partnership except that the General Manager is not authorized to take any action on a Fundamental Issue unless such action shall have been approved by the Partners of the Management Committee under Section 5.2. (b) The General Manager shall provide the following reports to the Management Committee: (i) daily position reports; (ii) a weekly management report; (iii) a monthly report on the financial condition and the business prospects of the Partnership; (iv) a monthly report summarizing all claims made and suits filed against the Partnership, all potential claims and suits, and the final settlement or other resolution of claims and suits; and (v) other reports requested by the Management Committee or one of the Partners. 6.2 Secretary. The Secretary shall be appointed by the Management Committee and shall report to the General Manager. The Secretary shall act as Secretary of all meetings of the Management Committee, shall keep the minutes thereof in the proper book or books to be provided for that purpose, shall see that all notices required to be given by the Partnership are duly given and served, shall have charge of the books, records and papers of the Partnership relating to its organization and management as a Partnership, and shall see that the reports, statements and other documents required by law are properly kept and filed; and shall, in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Management Committee and the General Manager. 6.3 Treasurer. The Treasurer shall be appointed by the Management Committee. The Treasurer shall report to the Management Committee. The Treasurer shall perform all the duties assigned to him by this Agreement including, without limitation, (a) arranging for the Partnership to borrow funds pursuant to Section 10.3; (b) submission to each Partner of quarterly comparisons pursuant to Section 10.1(b), current cash estimates pursuant to Section 10.2, and statements relating to Emergency Needs pursuant to Section 10.2(b); (c) determination of the amount of Cash for Distribution and the distribution of such Cash for Distribution pursuant to Section 10.4; (d) causing to be prepared and given to each Partner unaudited financial statements pursuant to Section 10.8(b); (e) having charge of, and being responsible for, all funds, securities and notes of the Partnership; (f) receiving and giving receipts for moneys due and payable to the Partnership from any sources whatsoever; (g) depositing all such moneys in the name of the Partnership in such banks, trust companies or other depositories as shall be selected by the Management Committee; (h) against proper vouchers, causing such funds to be disbursed by checks or drafts on the authorized depositories of the Partnership, and being responsible for accuracy of the amounts of all moneys so disbursed; (i) regularly entering or causing to be entered into books to be kept by him or under his discretion full and adequate account of all moneys received or paid by him for the account of the Partnership; (j) having the right to require, from time to time, reports or statements giving such information as he may desire with respect to any and all financial transactions of the Partnership from the officers or agents transacting the same; and, (k) in general, all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Management Committee or the General Manager. 6.4 Other Persons. The Management Committee may appoint such other executive and management employees, including Persons employed by Continental or Harvest States, as it shall from time to time deem appropriate, and may approve a plan for hiring of other salaried employees including employees from Continental and Harvest states. 6.5 Appointment and Removal of Officers and Employees. The appointment and removal of officers and employees of the Partnership shall be made by the Management Committee. Either Partner may request the removal of any officer or employee. 6.6 Affiliations. The officers, executives and other employees of the Partnership may also be employees of the Partners or their Affiliates, and shall not be required (except as may be determined by the Management Committee) to be full-time employees of the Partnership. The Management Committee and the Partners will agree on the designation of employees of the respective Partners to be made available by the respective Partners for the purpose of providing marketing, transportation, logistics, export administration, grain settlements, accounting and other services, for and on behalf of the Partnership. Such designated employees shall at all times remain employees of the respective Partners. The duties performed by such designated employees for and on behalf of the Partnership in conducting and performing Partnership business shall be Partnership business activities. In consideration of each of the Partner's making such employees available to the Partnership, the Partnership shall pay to each of the Partners the charges for services by and other expenses incurred by such designated employees in performing Partnership business and agreed by the Management Committee as reflected in the operating budget. The Partnership shall have the right to direct the action of such designated employees in performance of their duties for and on behalf of the Partnership. If the Partnership does not desire to maintain the services of any such designated employee, the Partnership may so advise the respective Partner employing such designated employee and such Partner shall cause the designated employee to cease performing such services for and on behalf of the Partnership. Each Partner retains the right to fire its employees even if designated to the Partnership or to transfer any such employee to other duties within the business of such Partner; provided, however, that such Partner will cooperate with the Partnership to provide a suitable replacement so that the services, of like kind provided by such dismissed or transferred employee will continue to be provided to the Partnership. 6.7 Exculpation. Any regular or alternate member of the Management Committee, the officers, executives and employees of the Partnership which are employed by either Partner or its Affiliate shall not be liable to the Partnership or to the Partners for any action taken or omitted to be taken by him with respect to the Partnership, except to the extent any such act or omission was attributable to the willful misconduct, gross negligence or bad faith of such member of the Management Committee, officer, executive or employee. ARTICLE VII 7.1 The Partnership business shall be limited to corn and sorghum ("Feedgrains") and soybeans ("Oilseeds") destined primarily for export from the Pacific Northwest, United States. The Partnership intends to source Feedgrains and Oilseeds from its Partners and its Partners intend to supply Feedgrains and Oilseeds on market terms from their grain originating facilities and, in the case of Harvest States, its affiliated cooperatives from which it purchases such Feedgrains and Oilseeds, customarily tributory to the Pacific Northwest export market. 7.2 In order to facilitate the ability of the Partnership to transport and handle the Feedgrains and Oilseeds which it intends to market into export channels, the Partnership desires to utilize the Tacoma Facility and concurrently with the execution of this Agreement, the Partnership has executed the five-year Sublease Agreement between Continental Grain Company and the Partnership providing annual rental of $2.5 million payable to Continental by the Partnership with provision for one five-year renewal option at $3 million rental annually (the "Sublease"). The Sublease shall terminate on the termination, expiration or dissolution of the Partnership. ARTICLE VIII NATURE OF OBLIGATIONS; INDEMNITIES; CHARGES 8.1 Obligations. As between the Partner, no Partner shall be liable or bear responsibility for more than its Share of each and all of the costs, expenses, liabilities and charges incurred or accrued by the Partnership. If any Partner shall pay or be required to pay, discharge or otherwise bear responsibility for any amount in excess of its share of the costs, expenses, liabilities and charges incurred or accrued by the Partnership, (i) such payment shall be deemed a demand loan by the advancing Partner to the other Partner, and shall be treated in the same manner as a loan pursuant to Section 3.2(d), and (ii) the other Partner covenants and agrees to indemnify, hold harmless and reimburse such Partner against and for the amount of such excess. 8.2 Indemnities. Each Partner covenants and agrees to indemnify and hold harmless the Partnership and the other Partner from and against any and all damage, losses and expenses caused by or arising out of any and all of the following: (i) any failure to perform any obligation required to be performed by such Partner hereunder and (ii) any wrongful or negligent act or omission by such Partner in connection with the Partnership's property or the ownership or operation thereof. 8.3 Charges. Upon the request of the General Manager or the Management Committee, either Partner, without charge, shall provide to the Partnership basic management and administrative advice and consultation of the kind generally provided by corporate staff to operating line functions and, including but not limited to, legal services, loss prevention and safety counselling, transportation and human resources counselling, and insurance counselling (but excluding management information services), so long as that Partner is providing those services to its other business segments. ARTICLE IX TRANSFER OF INTERESTS 9.1 No Transfer of Interest. Except as hereinafter otherwise provided in this Article IX, during the term of this Agreement, no Partner (or any successor) shall, directly or indirectly in any manner, sell, transfer, assign, encumber or otherwise dispose of any interest in the Partnership, nor shall any such interest be subject, in whole or in part, directly or indirectly, to sale, transfer, assignment, encumbrance or other disposition by operation of law or agreement, without the prior written consent of the other Partner, and any attempt so to do shall be void. 9.2 Transfer to Affiliates. Notwithstanding anything in Section 9.1 to the contrary, any Partner may sell, transfer or otherwise dispose of its Partner Interest to any entity which is an Affiliate of such Partner or of the ultimate Controlling Affiliate of such Partner, subject, however, to the conditions that (i) in the opinion of counsel to the Partnership, such sale, transfer or other disposition would not (a) constitute a default under any material agreement to which the Partnership is a party or (b) result in the termination of the Partnership for Federal income tax purposes, (ii) the transferee may not be a debtor subject to any proceeding under Title 7 or 11 of the United States Bankruptcy Code or any successor legislation or similar state legislation (unless otherwise consented to in writing by the other Partner), and (iii) the transferor and its Affiliates shall not be released from any of its or their obligations under this Agreement or the Sublease. 9.3 Reasonableness of Restrictions. Each Partner acknowledges and agrees that the restrictions on the transfer of interests herein are reasonable in view of the purpose and intent of the Partners. 9.4 Certain Encumbrances Permitted. Anything in this Agreement to the contrary notwithstanding, any Partner (and the Affiliates of any Partner) may encumber all or part of such Partner's Partner Interest to the extent and in the manner which may be required pursuant to financing agreements contemplated by Section 10.3. ARTICLE X FINANCIAL MATTERS 10.1 Programs and Budgets. (a) The General Manager shall, not later than one (1) month prior to the commencement of the next succeeding fiscal year of the Partnership, prepare and submit to the Management Committee for its review and approval a business operating budget and a capital expenditure budget for such fiscal year. (b) Not later than the 25th calendar day after the close of each fiscal quarter, the Controller shall submit to each Partner a comparison, for the immediately preceding quarter and for the year-to-date, of the results of operations of the Partnership with the applicable fiscal year budget. 10.2 Estimates on Cash Needs. (a) Based on the budgets referred to in Section 10.1 (a), and the quarterly comparisons referred to in Section 10.1 (b), the Treasurer will, at such time and for such periods as requested by the Management Committee, submit to the Management Committee a current cash estimate showing: (i) the estimated cash disbursements which the Partnership will be required to make during the next succeeding calendar period for operating costs; (ii) estimated receipts; (iii) amounts needed for additional working capital; and (iv) the amount of funds ("Cash Needs") that will be required to cover the amount, if any, by which estimated cash disbursements and amounts needed for additional working capital exceed estimated receipts available to cover such cash disbursements and additional working capital. The current cash estimate shall also specify the dates on which the Partnership must receive the necessary funds. (b) In the event an emergency requires cash payments ("Emergency Needs") not provided for by such current cash estimates, the General Manager or the Treasurer, may at any time furnish a statement thereof to the Management Committee, giving the maximum period of notice for any such additional cash payments as is practicable in the circumstances, specifying in detail the reasons for such emergency cash payment and the amount thereof. Upon receipt of such emergency cash statement, the Management Committee shall promptly decide, taking into account the circumstances, how the Emergency Needs shall be met. (c) Unless otherwise agreed by the Management Committee, the Cash Needs and the Emergency Needs shall be made through borrowings of the Partnership in accordance with Section 10.3. 10.3 Partnership Borrowings and Partner Loans. In the event that the Management Committee decides at any time during the term of this Agreement that it is desirable for the Partnership to borrow funds to acquire significant inventories or to meet the Cash Needs, Emergency Needs or other requirements of the Partnership, the Treasurer shall, within the limits of his authority as defined by the Management Committee, negotiate on behalf of the Partnership to borrow such funds from financial institutions. The Management Committee may approve, reject, or modify the terms negotiated by the Treasurer and may negotiate or authorize others to negotiate borrowings on behalf of the Partnership in order to find terms more beneficial to the Partnership. The Partnership may, upon approval of the Management Committee, also borrow from the Partners, based on their respective Shares, on terms to be separately agreed. The parties agree to use their best efforts to obtain Partnership borrowings from financing institutions who will agree to limit recourse to each Partner to 50% of any sums financed. 10.4 Cash for Distribution. The Treasurer shall determine, at such times as requested by the Management Committee, the amount of cash for distribution and shall distribute such cash for distribution, if any, to the Partners, in accordance with their Shares; provided, however, that (a) if any Partner has advanced loans to a Delinquent Partner, the distributions otherwise payable to the Delinquent Partner shall be made to the other Partner up to an amount sufficient to repay such loans in full with interest, and (b) if any Partner is in default or delinquent in respect of an obligation to the Partnership, no distribution shall be made to such Partner until such default is cured or such delinquent obligation is paid. 10.5 Deposits and Investments. The funds of the Partnership shall be deposited in the name of the Partnership in accounts designated by the Management Committee in banks or banking institutions to be selected by the Management Committee or invested in such manner as shall be authorized by the Management Committee. The Management Committee shall prescribe such procedures as it shall deem necessary with respect to making such investments. 10.6 Fiscal Year. The fiscal year of the Partnership shall end on March 31 in each year. 10.7 Books of Account. (a) The Management Committee shall approve the opening financial statements for the Partnership as of the date hereof. (b) Accurate books of account of the Partnership shall be maintained in accordance with generally accepted accounting principles consistently applied. In those instances in which more than one generally accepted accounting principle can be applied, the Management Committee shall determine, in consultation with the Partnership's independent accountants, which principle will be adopted by the Partnership. Such books shall at any reasonable time be available for examination by either Partner or Persons acting on its behalf at the sole expense of such Partner. 10.8 Financial Statements. (a) Within ninety (90) days after the close of each fiscal year of the Partnership there shall be prepared and submitted to each Partner the following financial statements, accompanied by the report thereon of the independent accountants for the Partnership: (1) a balance sheet of the Partnership as at the end of such fiscal year; (2) a statement of profit and loss for such fiscal year; (3) a statement of changes in financial position; and (4) a statement of the respective Partner Accounts and changes therein for such fiscal year. (b) Within twenty (2) Business Days after the close of each fiscal month the Treasurer will cause to be prepared and given to each Partner unaudited financial statements comparable to those referred to in Section 10.8(a)(1) and (2). 10.9 Tax Matters. (a) The Partners hereby agree that the Partnership shall be treated as a partnership for purposes of United States, Federal, state and local income tax or other taxes, and further agree not to take any position or make any election, in a tax return or otherwise, inconsistent therewith. (b) The Management Committee shall cause all required United States Federal, state and local partnership income, franchise, property or other tax returns, including information returns, to be filed with the appropriate office of the Internal Revenue Service or any other relevant taxing jurisdiction, as the case may be. As promptly as practicable, and in any event in sufficient time to permit timely preparation and filing by each Partner of its respective state and Federal tax returns, the Partnership shall deliver to each Partner a copy of each state and Federal tax return or tax report filed by the Partnership. (c) All elections for Federal income tax purposes, except as stated in Section 10.9(a), required or permitted to be made by the Partnership, and all material decisions with respect to the calculation of its income or loss for tax purposes, shall be made in such manner as the Management Committee shall determine. 10.10 Partner Accounts. (a) An individual partner account ("Partner Account") shall be maintained for each Partner and shall be adjusted as set forth herein. (b) The Partner Account maintained for each Partner (x) shall be credited with the sum of (a) the fair market value at the time of contribution of all capital contributions made by such Partner to the Partnership and the amount of all Net Income credited to the Partner account of such Partner pursuant to Section 4 and decreased by the sum of (i) the amount of all distributions made to such Partner and (ii) the amount of Net Loss charged to the Partner Account of such Partner pursuant to Section 4.1; (c) Partnership income, gains, losses and deductions shall, solely for income tax purposes, be allocated among the Partners in accordance with Section 704(c) of the Internal Revenue Code of 1986, as amended. ARTICLE XI DISSOLUTION AND WINDING UP 11.1 Dissolution Events. The Partnership shall be dissolved in case any of the following events shall occur: (a) The term of the Partnership shall expire pursuant to Section 2.4 of this Agreement. (b) Either Partner shall deliver the Notice of Dissolution following a Deadlocked Matter pursuant to Section 5.4. (c) The sale, abandonment or disposal by the Partnership of all or substantially all of its assets not in the ordinary course of business. (d) The Partnership or either Partner shall (i) file a petition in bankruptcy, (ii) petition or apply to any tribunal for the appointment of a receiver or any trustee for it or a substantial part of its assets, (iii) commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statue of any jurisdiction, whether now or hereafter in effect, or (iv) make an assignment for the benefit of creditors or take any other similar action for the protection or benefit of creditors; or if there shall have been filed any such petition or application, or any such petition shall have been commenced against it, in which an order for relief is entered or which remains undismissed for a period of forty-five (45) days or more; or the Partnership or either Partner by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a receiver or any trustee for it or any substantial part of any of its properties, or shall suffer any such receivership or trusteeship to continue undischarged for a period of forty-five (45) days or more. No Partner shall have the right to dissolve or terminate the Partnership for any reason other than as set forth above or to withdraw from the Partnership other than as set forth in Article IX, and each Partner hereby waives any other right it may have with respect thereto. 11.2 Winding Up. Upon dissolution of the Partnership pursuant to Section 11.1, the Partnership shall be wound up and liquidated in accordance with law and the following provisions: (a) Each Partner shall pay to the Partnership all amounts owing by it to the Partnership. (b) The Partnership shall continue with the business necessary to complete and perform existing contracts until the distribution of the Partnership's assets as hereinafter provided. No new business or contracts shall be undertaken except as necessary to wind up and liquidate the Partnership. (c) The property and business of the Partnership shall be wound up and liquidated under the direction of the Management Committee or a Person duly appointed by the Management Committee (in any such case, the "Liquidator"). Upon the dissolution of the Partnership, the Liquidator shall cause a statement setting forth the assets and liabilities of the Partnership as of the date of dissolution of the Partnership (the "Dissolution Date") (including the fair market value of all of the assets of the Partnership) to be prepared promptly and furnished to each of the Partners, or upon the written request of either Partner, by the independent auditors of the Partnership. In preparing such a statement, the Liquidator may retain such independent appraisers or other advisors as the Liquidator deems advisable. All fees, costs, and expenses incurred in connection therewith shall be borne by the Partnership. (d) following the preparation and distribution of such statement, the Liquidator shall distribute all the assets and assign all the liabilities of the Partnership to the Partners in the ratio of the Partner Account balances of the Partners after adjustment of the Partner Accounts for any profit or loss in the year of liquidation, any profit or loss realized or to be realized on any property sold or disposed of as part of the liquidation, and any profit which would be realized if any property distributed in kind had been sold at its fair market value by the Partnership. ARTICLE XII DISPUTES; ARBITRATION 12.1 Resolution of Controversies. Any dispute, controversy or claim between the Partners arising from this Agreement or the performance thereof shall be settled solely by arbitration in accordance with the provisions of Section 12.2. 12.2 Method of Arbitration. The arbitration shall be effected by arbitrators selected as hereinafter provided and shall be conducted by the American Arbitration Association in Chicago, Illinois applying the Commercial Arbitration Rules in effect on the date thereof. The dispute shall be submitted to three arbitrators, each of who shall have had at least five (5) years' experience in connection with the business of the Partnership, one arbitrator being selected by the Partner submitting the controversy or dispute to arbitration, the second arbitrator being selected by the other Partner and the third arbitrator being selected by the two arbitrators so selected. Conditions of any such arbitration shall include (a) that the arbitrators shall not have the authority to modify, amend or supplement the terms of this Agreement and shall interpret this Agreement strictly in accordance with its terms; and (b) that the Partner submitting such controversy or dispute to arbitration shall appoint its arbitrator within fifteen (15) Business Days after the date of such submission. The failure of the Partner requesting arbitration to timely appoint such arbitrator shall void the effectiveness of the notice of submission of the matter to arbitration. The second arbitrator to be selected by the other Partner as hereinbefore provided shall be selected within fifteen (15) Business Days after receipt of notice by such Partner of the selection of the submitting arbitrator and, if the second arbitrator is not so selected, the determination of the single arbitrator selected by the submitting Partner shall be binding and conclusive. If the non-submitting Partner shall have timely selected the second arbitrator, then the two selected arbitrators shall select the third arbitrator within five (5) Business Days following the selection of the second arbitrator. The meetings of the arbitrators shall be held at such place or places as may be agreed upon by the arbitrators, and each Partner shall bear the cost of the fees and expenses of the arbitrator selected by or for it, with the fees and expenses of the third arbitrator to be borne equally. Upon making any order or award, which order may include an order to dissolve the Partnership pursuant to the provisions of Article X, the arbitrators shall retain jurisdiction to determine any subsequent claim that a defaulting Partner has failed to comply with terms of any such order or award. The arbitrators shall have no authority to impose a fine or penalty. ARTICLE XIII CONFIDENTIAL INFORMATION 13.1 Confidential Information. During the continuance of the Partnership and for a period of three (3) years after its termination, no Partner or its Affiliates or any officer or employee thereof shall divulge to any Person (except an Affiliate of such Person which shall undertake to be bound to the provisions of this Article XIII) any trade secret, or secret process, method or means or any other confidential information concerning the business or properties of the Partnership, the Partners or their Affiliates, or the manufacture, sale or licensing of products, processes and designs made or owned by the Partnership, the Partners, or their Affiliates, that come to the knowledge of such Partner, Affiliate, officer or employee by reason of the relationship of such Partner, Affiliate, officer or employee with the Partnership. The obligations under this Article XIII shall not apply to any information to the extent that (a) such information is or shall become part of the public domain, by publication or otherwise, through no fault of the Partner seeking to use or disclose such information, or (b) the receiving Partner, Affiliate, officer or employee shall be able to show such information to have been in its or his possession prior to the receipt thereof from the Partnership or other Partner or Affiliate or to have been received from a third party which shall not itself have received such information on a confidential basis from the Partnership or any Partner or Affiliate of a Partner. ARTICLE XIV SECURITY INTEREST 14.1 Security for Indemnity. To secure their respective indemnity obligations hereunder, each Partner hereby grants to the Partnership and to the other Partner, pursuant to Article I of the Uniform Commercial Code, a security interest in their respective right, title and interest in and to the Partnership, and under the Partnership Agreement, including all present and future rights to any profits, payments, distributions, or other rights to payment arising under or in connection with the Partnership Agreement (the "Collateral"); provided, however, that for so long as a Partner is not in default of any of its indemnity obligations hereunder, that Partner may receive all payments or distributions to which its is entitled as Partner of the Partnership. In the event a Partner is in default under its indemnity obligation, to the extent such default may be cured by the payment of money, the Partnership may, at the request of the non-defaulting Partner make such payment and pay to the non-defaulting Partner the next available funds which would otherwise have been distributed to the defaulting Partner, up to an amount which will make the non-defaulting Partner whole, together with interest thereon from the date paid by the Partnership until reimbursed to the other Partner at the rate of 2% in excess of the Prime Rate. Alternatively, if such loss is incurred by the other Partner, such other Partner shall be entitled to receive all subsequent distributions otherwise payable to the defaulting Partner until the non-defaulting Partner has recovered the full amount of its loss together with interest at the rate of 2% in excess of the Prime Rate. Neither Partner will transfer or assign, grant a security interest in or otherwise dispose of its respective interests as debtor in and to the Collateral and will maintain the Collateral free and clear of all other liens, claims and security interests whatsoever. Provided that a Partner has discharged its respective obligations under and it not otherwise in default of its obligations hereunder, and is not the subject of any bankruptcy or insolvency proceeding, this security interest shall terminate only upon the settlement of all debts and claims outstanding with respect to the dissolution of the Partnership. Each Partner shall furnish to the Partnership and the other Partner, upon request, duly executed UCC-1 financing statements covering the Collateral and such other documents, certifications and instruments as requested by the Partnership or the other Partner, to evidence, grant, perfect and prioritize the security interest granted in the Collateral. ARTICLE XV GOVERNING LAW 15.1 Governing Law. The Partnership is formed pursuant to and shall be governed by and construed in accordance with the Partnership Law and laws of the State of Washington, exclusive of Washington's conflict of laws rules. ARTICLE XVI 16.1 Amendments. The terms of this Agreement cannot be modified, varied or amended orally but only by a written instrument executed by all the Partners. ARTICLE XVII NOTICES 17.1 Notices. (a) All notices, consents, demands, requests, reports and other documents authorized or required to be given pursuant to this Agreement shall be given in writing and either personally served as an officer or a member of the Management Committee of the Partner to whom it is given or mailed by registered or certified first class mail, postage prepaid, or sent by facsimile or telegram, addressed as follows: If to Continental: CONTINENTAL GRAIN COMPANY 222 South Riverside Plaza Suite 2600 Chicago, IL 60606 Attention: Mr. John T. Zick Senior Vice President, North American Grain Division Facsimile No.: (312) 207-5236 With a copy to: CONTINENTAL GRAIN COMPANY 277 Park Avenue New York, NY 10172 Attention: David G. Friedman Deputy General Counsel Facsimile No.: (212) 207-2980 If to Harvest-States: HARVEST STATES COOPERATIVES 1667 Snelling Avenue North St. Paul, Minnesota 55184 Attention: Legal Department Facsimile No.: (612) 641-6832 (b) Any Partner may change the address to which notices and other communications to it shall be sent by giving to the other Partner written notice of such change, in which case notices and other communications to the Partner giving the notice of the change of address shall not be deemed to have been sufficiently given or delivered unless addressed to it at the new address as stated in said notice. Notices shall be deemed to have been given (except as otherwise expressly set forth in this Agreement) (i) when delivered, if given by personal delivery or actual delivery during normal business hours, (ii) three (3) Business Days after posting, if given by registered or certified mail, return receipt requested, (iii) two (2) Business Days after dispatch if given by telegram, or (iv) upon receipt, if given by facsimile. ARTICLE XVIII SUCCESSORS AND ASSIGNS 18.1 Successors and Assigns. Subject to the provisions of Article IX, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of the respective parties hereto in all respects as if they were mentioned throughout by words of proper designation. ARTICLE XIX MISCELLANEOUS 19.1 Entire Agreement. This Agreement sets forth the entire agreement and understanding of the Partners with respect to the formation and operation of the Partnership and related transactions contemplated by this Agreement, and supersedes all prior agreements and understandings, written or oral, between the Partners with respect thereto. 19.2 Severability. The unenforceability, invalidity, or illegality of any provision of this Agreement shall not affect or impair any other provision hereof or render it unenforceable, invalid or illegal. 19.3 Interpretation. Wherever used in this Agreement, unless the context clearly indicates otherwise, the use of the singular includes the plural, and vice versa; and the use of any gender is applicable to any other gender. 19.4 Captions. Captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. 19.5 Partition Waived. The Partners agree that the Partnership's interest, properties and investments are not and will not be suitable for partition. Accordingly, each of the Partners hereby irrevocable waives any and all rights that it may have to maintain any action for partition of any of such interest, properties or investments. 19.6 Waiver and Consent. No consent or waiver, express or implied, by any Partner to or of any breach or default by any other Partner in the performance by such other Partner of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such other Partner of the same or any other obligations of such Partner hereunder. Failure on the part of any Partner to complain of any act or failure to act of the other Partner or to declare such other Partner in default, irrespective of how long such failure continues, shall not constitute a waiver by such Partner of its right hereunder. 19.7 Commercial Efficacy. The Partners shall take all reasonable actions to give commercial efficacy to the terms and conditions of this Agreement and to promote the business of the Partnership, including, but not limited to, taking or causing the members of the Management Committee appointed by them to take all necessary actions in a timely fashion, in order for the Partnership to pursue the business contemplated by this Agreement, entering into all the agreements contemplated hereby and any additional agreements or instruments of further assurance, as on advice from legal counsel, the Partners shall reasonably deem necessary, and seeking all necessary governmental approvals. 19.8 Counterparts. This Agreement may be executed in any number of counterpart copies, each of which shall constitute an original and all of which shall constitute one agreement. 19.9 GAAP Basis. In the event the auditors of the Partnership are required hereunder to determine the values, accounts, give opinions or make any other valuation of any nature, the auditors shall employ generally accepted accounting principles consistently applied unless the context otherwise requires the application of the principles of tax accounting (or differing regulatory rules). IN WITNESS WHEREOF, the Partners have executed this Agreement as of the date first above written. CONTINENTAL GRAIN COMPANY By /s/ Stephen Morganstern Name: Stephen Morganstern Title: Senior VP Finance and Administration Commodity Marketing Sector HARVEST STATES COOPERATIVE By /s/ Michael H. Bergeland Name: Michael H. Bergeland Title: Group V.P. EX-10.6 9 DEFERRED COMPENSATION PLAN HARVEST STATES COOPERATIVES DEFERRED COMPENSATION PLAN ARTICLE I GENERAL SEC. 1.1 NAME OF PLAN. The name of this plan is "Harvest States Cooperatives Deferred Compensation Plan" (referred to hereinafter as the "Plan"). SEC. 1.2 PURPOSE. The Plan has been established to provide additional future compensation to certain highly compensated employees through voluntary deferrals of compensation so that such employees may be retained and their productive efforts encouraged. SEC. 1.3 EFFECTIVE DATE. The "Effective Date" of the Plan, the date as of which the Plan was established, is April 1, 1994. SEC. 1.4 HARVEST STATES. For purposes of this Plan, "Harvest States" means Harvest States Cooperatives, a Minnesota corporation, and any Successor Employer thereof. SEC. 1.5 CONSTRUCTION AND APPLICABLE LAW. The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, within the meaning of section 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan shall be administered and construed consistent with said intent. This Plan also shall be governed and construed in accordance with the laws of the State of Minnesota as applied to contracts executed and to be wholly performed within said state to the extent that such laws are not preempted by the laws of the United States of America. ARTICLE II DEFINITIONS SEC. 2.1 ACCOUNT. An "Account" shall be established for each eligible Participant reflecting the deferred compensation owed to the Participant or the Participant's Beneficiary under the terms of this Plan. SEC. 2.2 BENEFICIARY. "Beneficiary" means the person or persons designated as such pursuant to the provisions of Sec. 5.3. SEC. 2.3 PARTICIPANT. A "Participant" is an individual described as such in Article III. SEC. 2.4 PLAN YEAR. A "Plan Year" is the 12-consecutive-month period commencing on each January 1 and ending December 31. However, the first Plan Year commences on April 1, 1994 and ends on December 31, 1994. SEC. 2.5 QUALIFIED EMPLOYEE. "Qualified Employee" means any select management or highly compensated employee of Harvest States who is designated as eligible to participate in this Plan on Exhibit A. The President of Harvest States may amend Exhibit A to add or delete eligible employees at any time; provided, however, that all such changes shall apply prospectively only. SEC. 2.6 SUCCESSOR EMPLOYER. A "Successor Employer" is any entity that succeeds to the business of Harvest States through merger, consolidation, acquisition of all or substantially all of its assets, or any other means and which elects before or within a reasonable time after such succession, by appropriate action evidenced in writing, to continue the Plan. SEC. 2.7 TERMINATION OF EMPLOYMENT. The "Termination of Employment" of an employee for purposes of the Plan shall be deemed to occur upon the employee's resignation, discharge, retirement, death, failure to return to active work at the end of an authorized leave of absence or the authorized extension or extensions thereof, failure to return to work when duly called following a temporary layoff, or upon the happening of any other event or circumstance which, under the policy of Harvest States as in effect from time to time, results in the termination of the employer-employee relationship. ARTICLE III PARTICIPATION SEC. 3.1 ELIGIBILITY FOR PARTICIPATION. An employee of Harvest States shall become a Participant in the Plan on the earliest date (on or after the Effective Date) on which he or she is a Qualified Employee and has elected to make contributions under Sec. 4.1. Prior to the time a Qualified Employee becomes a Participant, the employee shall make the elections required under Sec. 5.1. SEC. 3.2 DURATION OF PARTICIPATION. A Participant shall continue to be such until the earliest of: (a) The Participant's Termination of Employment. (b) The date on which the Participant ceases to be a Qualified Employee. (c) The date the Participant fails to meet the requirements of any regulations which may be issued by the Department of Labor that define the phrase "select group of management or highly compensated employees" under ERISA. SEC. 3.3 NO GUARANTEE OF EMPLOYMENT. Participation in the Plan does not constitute a guarantee or contract of employment with Harvest States. Such participation shall in no way interfere with any rights Harvest States would have in the absence of such participation to determine the duration of the employee's employment with Harvest States. ARTICLE IV DEFERRED COMPENSATION AND ACCOUNTS SEC. 4.1 ELECTION OF DEFERRED COMPENSATION. Prior to the first day of any Plan Year beginning on or after the Effective Date, a Participant may elect to have an amount of deferred compensation credited to the Participant's Account for the Plan Year. The compensation actually earned during the Plan Year by a Participant who elects deferred compensation under this section shall be reduced by the percentage or amount so elected. (a) Elections for the Plan Year commencing on April 1, 1994 must be filed with Harvest States by March 25, 1994. Elections for subsequent Plan Years must be filed by the preceding December 15. However, if an individual becomes a Qualified Employee during a Plan Year, an election for that year may be filed within 30 days following the date the individual became a Qualified Employee and shall apply to compensation earned following the date the election is filed. (b) A Participant may elect to have either or both of the following types of deferrals made from the Participant's compensation: (1) The Participant may elect to contribute a percentage of each payment of base compensation. The percentage may not exceed 30%, and must be expected to result in annual contributions totaling at least $1000. (2) The Participant may elect to contribute either a percentage or a specific dollar amount (not less than $1000) of any bonus or similar incentive payment which may become payable during the Plan Year. If a specific dollar amount is elected and that amount exceeds the amount of bonuses payable on or prior to a particular date during the year, 100% of the bonus will be contributed under this Plan. If a percentage is elected, the contribution will not be less than the smaller of $1000 or 100% of the bonus payable. (c) A Participant may elect to change the amount to be contributed, or discontinue contributions, in a future Plan Year by filing an approved form with Harvest States on or before the December 15th preceding that Plan Year. If no such election is filed, the election in effect during the previous Plan Year will continue in effect during the next Plan Year. Each election for a Plan Year shall become irrevocable on the December 15th deadline for that year. SEC. 4.2 ALLOCATION TO ACCOUNTS. The deferred compensation credited under the Plan by Harvest States on behalf of a Participant for a Plan Year shall be allocated to the Account of the Participant as of the date that the compensation would otherwise have been paid to the Participant in cash. SEC. 4.3 VALUATION OF ACCOUNTS. As of any date as of which an Account is to be valued, the value of the Account shall be adjusted to reflect the effect of additional credits under Sec. 4.1 and any credit for income with respect to that Account, less any distributions under the Plan with respect to said Account, since the last date the value of the Account was determined. Income shall be 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, adjusted as appropriate to reflect contributions to and distributions from the Account during the Plan Year. SEC. 4.4 UNSECURED OBLIGATIONS. A Participant's credits in his or her Account shall be an unsecured obligation of Harvest States to pay the Participant (or the Participant's Beneficiary, in the event of the Participant's death) the actual amount of the credits at the time designated in Article V. Each Participant or Beneficiary is only a general creditor of Harvest States with respect to his or her Account. Accounts are maintained for recordkeeping purposes only. Notwithstanding the foregoing, obligations of Harvest States to pay benefits under this Plan may be satisfied by distributions from a grantor trust created by Harvest States in its sole discretion for such purpose. ARTICLE V DISTRIBUTION OF ACCOUNTS SEC. 5.1 DISTRIBUTION ON TERMINATION OF EMPLOYMENT OR OTHER EVENT. Prior to the date an employee becomes a Participant in the Plan, the employee shall elect a time and method in which the amount credited to the Participant's Account is to be paid by Harvest States to the Participant. The election shall be irrevocable as to all contributions credited to an Account and all earnings on those contributions until the Participant files a subsequent election changing the time and/or method of payment of future contributions and earnings on such contributions. The elected time must be a definitely determinable date, such as the date of the Participant's Termination of Employment or the date the Participant attains a specified age. The elected method may be either a lump sum payment or a schedule of installment payments. If payments are to be made in installments, the Participant's Account shall continue to be revalued prior to each payment as provided in Sec. 4.3. The amount of the installments during each Plan Year shall be equal to the balance in the Account on the first day of the Plan Year divided by the number of years in which installments remain to be paid. Installment payments by Harvest States to any Participant or Beneficiary shall cease when the Participant's Account balance is reduced to zero. Harvest States in its sole discretion may allow a Participant to elect a different time or method than specified in the preceding sentences of this section, provided that the payment method is definitely determinable at the time the election is filed. SEC. 5.2 DISTRIBUTION ON DEATH. Upon the death of a Participant, Harvest States shall pay to the Participant's Beneficiary an amount equal to the entire balance of the Participant's Account. Such payment shall be made in a single sum payment to the Participant's Beneficiary as soon as administratively feasible following the Participants's death; provided, however, that if the Participant has made a written election as to the time and method of distribution to a Beneficiary, the Account shall instead be distributed in accordance with said election. SEC. 5.3 BENEFICIARY DESIGNATION. Each Participant shall have the right, at any time, to designate any person or persons as Beneficiary or Beneficiaries to whom payments under this Plan shall be made in the event of the Participant's death prior to complete distribution of the amount credited to the Participant's Account. Each Participant shall have the right to change his or her Beneficiary designation at any time. Each Beneficiary designation shall become effective only when filed in writing with Harvest States during the Participant's life on a form prescribed by Harvest States. If a Participant fails to designate a Beneficiary as provided above, then the Participant's Beneficiary shall be the Participant's estate. SEC. 5.4 DISTRIBUTION ON DISABILITY. A Participant's election under Sec. 5.1 may include a separate election of the time and method of payment of a Participant's account in the event the Participant incurs a disability which entitles the Participant to benefits under a long-term disability plan sponsored by Harvest States which covers the Participant, subject to approval by Harvest States. In the absence of such a separate election, the Participant's election under Sec. 5.1 shall control. SEC. 5.5 DISTRIBUTIONS FOR UNFORESEEABLE EMERGENCY. Notwithstanding any election under the foregoing sections of this Article V, Harvest States in its sole discretion may approve a request by a Participant (or by a Beneficiary following the Participant's death) for a withdrawal from the Participant's Account due to an unforeseeable emergency. An "unforeseeable emergency" is an unanticipated emergency that is caused by an event beyond the control of the Participant or Beneficiary and that would result in severe financial hardship to the individual if an early withdrawal is not permitted. Any such early withdrawal approved by Harvest States may not exceed the amount necessary to meet the emergency. SEC. 5.6 WITHHOLDING OF TAXES. The benefits payable under this Plan shall be subject to the deduction of any federal, state, or local income taxes or other taxes which are required to be withheld from such payments by applicable laws and regulations. ARTICLE VI ADMINISTRATION SEC. 6.1 ADMINISTRATION BY HARVEST STATES. Harvest States shall administer the Plan, establish, adopt, or revise such rules and regulations as it may deem necessary or advisable for the administration of the Plan and interpret the provisions of the Plan. The interpretations of Harvest States shall be conclusive. ARTICLE VII AMENDMENT AND TERMINATION SEC. 7.1 AMENDMENT. The President of Harvest States may at any time amend the Plan in whole or in part for any reason. No amendment shall decrease the benefits under the Plan which have accrued prior to the date of such amendment, but an amendment may modify the interest rate under Sec. 4.3 to be used following the adoption of the amendment, both for future deferrals and for the balance in each Account on the date the amendment was adopted. SEC. 7.2 TERMINATION OF PLAN. Harvest States, by action of its President, may at any time terminate the Plan. After such termination, no employee of Harvest States shall become a Participant, and no further amounts shall be credited pursuant to Sec. 4.1 to Accounts of Participants. At the discretion of Harvest States, the amounts credited to the Accounts of such Participants may be either (i) distributed to such Participants as soon as reasonably possible after the date of termination or (ii) distributed in accordance with Article V. ARTICLE VIII MISCELLANEOUS SEC. 8.1 BENEFITS MAY NOT BE ASSIGNED OR ALIENATED. Neither a Participant nor any Beneficiary thereof shall have the right to sell, assign, transfer, encumber or otherwise convey any right to receive any payment hereunder. No part of the amounts payable hereunder shall be subject to seizure or sequestration for the payment of any debts or judgments owed by a Participant or any other person. SEC. 8.2 HEADINGS. Headings at the beginning of articles and sections hereof are for convenience of reference, shall not be considered a part of the text of the Plan, and shall not influence its construction. SEC. 8.3 CAPITALIZED DEFINITIONS. Capitalized terms used in the Plan shall have their meaning as defined in the Plan unless the context clearly indicates to the contrary. SEC. 8.4 GENDER. Any references to the masculine gender include the feminine and vice versa. SEC. 8.5 USE OF COMPOUNDS OF WORD "HERE". Use of the words "hereof", "herein", "hereunder", or similar compounds of the word "here" shall mean and refer to the entire Plan unless the context clearly indicates to the contrary. SEC. 8.6 CONSTRUED AS A WHOLE. The provisions of the Plan shall be construed as a whole in such manner as to carry out the provisions hereof and shall not be construed separately without relation to the context. EX-10.7 10 DEFERRED COMPENSATION SUPPLEMENTAL RETIREMENT PLAN HARVEST STATES COOPERATIVES Deferred Compensation Supplemental Retirement Plan General Beginning in 1994, Harvest States Cooperatives will offer a deferred compensation plan, the Harvest States Cooperatives Deferred Compensation Plan, to selected management employees. Compensation deferred under that plan is not eligible for Pay Credits or Special Career Credits under the Harvest States Cooperatives Cash Balance Retirement Plan Retirement or matching contributions under the Harvest States Cooperatives Savings Plan. This plan is intended to replace the benefits lost under those plans due to internal Revenue Code (IRC) 414(s) and participation in the Harvest States Cooperatives Deferred Compensation Plan, and for any compensation which cannot be considered for purposes of benefits due to IRC Section 401 (a)(17) under the qualified plans that Harvest States Cooperatives offers. This Supplemental Retirement Plan is only for a select group of management or highly compensated employees of Harvest States Cooperatives. This Plan is completely separate from the Harvest States Cooperatives Cash Balance Retirement Plan and the Harvest States Cooperatives Savings Plan and is not funded or qualified for special tax treatment under the Internal Revenue Code. ARTICLE I General Section 1.1 Name of Plan. The name of this plan is "Harvest States Cooperatives Deferred Compensation Supplemental Retirement Plan" (referred to hereinafter as the "Plan"). Section 1.2 Purpose. The Plan has been established to replace the benefits lost under the Harvest States Cooperatives Cash Balance Retirement Plan and the Harvest States Cooperatives Savings Plan due to Internal Revenue Code (IRC) Section 414(s) and participation in the Harvest States Cooperatives Deferred Compensation Plan, and for any compensation which cannot be considered for purposes of benefits due to IRC Section 401(a)(17) Section 1.3 Effective Date. The "Effective Date" of the Plan, the date as of which the plan is established, is January 1, 1994. Section 1.4 Harvest States. For purposes of this Plan, "Harvest States" means Harvest States Cooperatives, a Minnesota corporation, and any Successor Employer thereof, as that term is defined in the Harvest States Cooperatives Deferred Compensation Plan. Section 1.5 Construction and Applicable Law. The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, within the meaning of Section 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan shall be administered and construed consistent with said intent. This Plan also shall be governed and construed in accordance with the laws of the State of Minnesota as applied to contracts executed and to be wholly performed within said state to the extent that such laws are not preempted by the laws of the United States of America. ARTICLE II Definitions Section 2.1 Beneficiary "Beneficiary" means the person or persons designated as such under the provisions of Section 5.3 of the Harvest States Cooperatives Cash Balance Retirement Plan. Section 2.2 Class Year Account "Class Year Account" shall refer to all Pay Credits, Special Career Credits, and Matching Contribution Credits allocated to a Participant's accounts during a single Plan Year and all future Investment Credits and Interest Credits allocated to a Participant's Accounts due to such year's Contributions. Section 2.3 Contribution "Contribution" shall refer collectively to Pay Credits, Special Career Credits, and Matching Contribution Credits. Section 2.4 Participant "Participant" shall mean an Active Participant or an Inactive Participant, as those terms are defined in Article III. Section 2.5 Plan Year "Plan Year" is the 12-consecutive-month period commencing on each January 1 and ending December 31. Section 2.6 Successor Employer. "Successor Employer" shall have the same meaning as that term is defined in the Harvest States Cooperatives Deferred Compensation Plan. Section 2.7 Termination of Employment. "Termination of Employment" shall have the same meaning as that term is defined in the Harvest States Cooperatives Deferred Compensation Plan. ARTICLE III Eligibility Section 3.1 Participation. The term Participant shall refer to Active Participants and Inactive Participants. All employees named in appendix A will become Active Participants in this Plan effective January 1, 1994. No other employees may become Active Participants in this Plan unless specifically included by the President of Harvest States Cooperative (the President). Section 3.2 Reclassification. The President may reclassify any Active Participant as an Inactive Participant for any Plan Year prior to the beginning of such Plan Year by notifying such Participant in writing. The term Plan Year shall have the same meaning as that term has in the Harvest States Cooperatives Cash Balance Retirement Plan. ARTICLE IV Amount of Benefits Section 4.1 Amount of Benefits. The benefit payable under this Plan is the sum of the amount in the Cash Balance Make-up Account and the Savings Plan Make-up Account. Section 4.2 Cash Balance Make-up Account Section 4.2.1 Opening Balance Each Participant shall have an Opening Balance at January 1, 1994 in the Cash Balance Make-up Account equal to the amount listed in Appendix B. At any time after that, a Participant's balance shall be the sum of the Opening Balance, the Pay Credits, the Special Career Credits, and the Investment Credits allocable to such Participant's account. Section 4.2.2 Investment Credits Each December 31, a Participant's account shall be credited with an Investment Credit equal to the product of the balance in the Cash Balance Make-up Account at January 1 of the same year (adjusted for distributions during the year), and the Investment Percentage in effect during such Plan Year in the Harvest States Cooperatives Cash Balance Retirement Plan. If a Participant terminates employment and commences benefit payments prior to December 31 of any Plan Year under an annuity or lump sum form of payment, pro rata Investment Credits shall be credited for such Plan Year for the period January 1 of such Plan Year to the date benefit payments commence. Section 4.2.3 Pay Credits Each December 31, an Active Participant's account shall be credited with a Pay Credit equal to the excess, if any, of: a. the amount of such Active Participant's Pay Credit that would be credited under the Harvest States Cooperatives Cash Balance Retirement Plan if the Active Participant did not defer any compensation under the Harvest States Cooperatives Deferred Compensation Plan and without regard to Section 401(a)(17) of the Internal Revenue Code regarding maximum compensation over b. the actual amount of such Active Participant's Pay Credit that is credited under the provisions of the Harvest States Cooperatives Cash Balance Retirement Plan, subject to the limitations of IRC Section 401 (a)(17) and 414(s). If an Active Participant terminates employment prior to December 31 of any Plan Year, Pay Credits shall be credited for such Plan Year for the period January 1 of such Plan Year to the date of termination under the provisions of this section. Section 4.2.4 Special Career Credits Each December 31, an Active Participant's account shall be credited with a Special Career Credit equal to the excess, if any, of: a. the amount of such Participant's Special Career Credit that would be credited under the Harvest States Cooperatives Cash Balance Retirement Plan if the Active Participant did not defer any compensation under the Harvest States Cooperatives Deferred Compensation Plan and without regard to Section 401(a)(17) of the Internal Revenue Code regarding maximum compensation over b. the actual amount of such Active Participant's Special Career Credit that is credited under the provisions of the Harvest States Cooperatives Cash Balance Retirement Plan, subject to the limitations of IRC Section 401(a)(17) and 414(s). If an Active Participant terminates employment prior to December 31 of any Plan Year, Special Career Credits shall be credited for such Plan Year for the period January 1 of such Plan Year to the date of termination under the provisions of this section. Section 4.3 Savings Plan Make-up Account Section 4.3.1 Interest Credits Each December 31, a Participant's account shall be credited with an Interest Credit equal to the product of the balance in the Savings Plan Make-up Account at January 1 of the same year (adjusted for distributions during the year), and the Investment Percentage which is credited during such year in the Harvest States Cooperatives Cash Balance Retirement Plan. If a Participant terminates employment and commences benefit payments prior to December 31 of any Plan Year under an annuity or lump sum form of payment, pro rata Interest Credits shall be credited for such Plan Year for the period January 1 of such Plan Year to the date benefit payments commence. Section 4.3.2 Matching Contribution Credits Each December 31, an Active Participant's account shall be credited with a Matching Contribution Credit equal to the excess, if any, of: a. the amount of such Active Participant's Matching Contribution that would be contributed under the Harvest States Cooperatives Savings Plan if the Active Participant did not defer any compensation under the Harvest States Cooperatives Deferred Compensation Plan and without regard to Section 401(a)(17) of the Internal Revenue Code regarding maximum compensation over b. the actual amount of such Active Participant's Matching Contribution that is contributed during the Plan Year under the provisions of the Harvest States Cooperatives Savings Plan, subject to limitations of IRC Section 401 (a) ( 17) and 414(s) . For purposes of this section, only employee contributions (either pre-tax or after-tax) actually contributed to the Harvest States Cooperatives Savings Plan shall be considered for calculating the amount of matching contributions. If an Active Participant terminates employment prior to December 31 of any Plan Year, Matching Contribution Credits shall be credited for such Plan Year for the period January 1 of such Plan Year to the date of termination under the provisions of this section . Section 4.4 Unsecured Obligations. The amounts in a Participant's accounts shall be an unsecured obligation of Harvest States to pay the Participant (or the Participant's Beneficiary, in the event of the Participant's death) the actual amount of the accounts according to the provisions of Article VI. Each Participant or Beneficiary is only a general creditor of Harvest States with respect to his or her accounts. Accounts are maintained for record keeping purposes only. Notwithstanding the foregoing, obligations of Harvest States to pay benefits under this Plan may be satisfied by distributions from a grantor trust created by Harvest States in its sole discretion for such purposes. ARTICLE V Vesting Section 5.1 Vesting Requirements. Contributions, as that term is defined in Section 2.3, are allocated to Participants' accounts each December 31, subject to the provisions of Article IV. The Class Year Account due to such Contribution shall not be payable to a Participant unless the Class Year Account becomes vested. Class Year Accounts shall become vested at the fifth anniversary of the date the Contribution was allocated to the Participant's account. If a Participant has attained age 55, all the Class Year Accounts of such Participant shall be vested regardless of when they were established. In addition, each Participant shall sign a Confidentiality/Non - Compete agreement. No benefits shall be payable under this Plan unless the terms of that agreement are fully satisfied, whether such benefits are vested or not. Section 5.2 Vesting on Death or Disability. Notwithstanding the provisions of Section 5.1 above, benefits shall be payable in the event of death or disability, as that term is defined in the Harvest States Cooperatives Cash Balance Retirement Plan. ARTICLE VI Method and Timing of Payments Section 6.1 Payment Commencement. Subject to the provisions of Article V and this Article VI, the benefits under this Plan shall not be payable prior to Termination of Employment. Benefits may commence under this Plan in accordance with the benefit payment commencement rules set forth in the Harvest States Cooperatives Cash Balance Retirement Plan except that the spousal consent rules of such Plan are not applicable to this Plan. In the case of a death benefit payable on account of the Participant's death prior to benefit commencement, the designated beneficiary under this Plan shall be the same beneficiary designated under the Harvest States Cooperatives Cash Balance Retirement Plan. Participants or the Participant's beneficiary must apply in writing for a benefit at least 90 days prior to the first payment. Section 6.2 Optional Payment Forms. The normal form of payment is an installment plan over a period of three years. Optional forms of payment, including all options available under the Harvest Sates Cooperatives Cash Balance Retirement Plan are available. Additionally, an installment option with payments of installments over a fixed number of years, not to exceed 10 years, is available. Under the installment option, Investment Credits and Interest Credits will continue to be credited each calendar year at the Investment Percentage rate in effect under the Harvest States Cooperatives Cash Balance Retirement Plan for such year and the Participant shall designate a beneficiary to receive any remaining payments in the event of the participant's death prior to the expiration of the installment period. Section 6.3 Election of Optional Form of Payment. Participants may elect an optional form of payment at any time, except that any election or change of election that occurs less than one year before Termination of Employment shall be disregarded. In the absence of any valid election, installments over 3 years will become the automatic payment form. Section 6.4 Approval of Distribution Request. All requests for distributions must be approved by the President. In the event the President denies a request for a lump sum distribution, installments over 3 years will become the automatic payment form. Once benefit payments have commenced, a Participant cannot change his election on the form of payment. ARTICLE VII Amendment or Termination Section 7.1 Procedures for Amendment or Termination. The President of Harvest States Cooperatives may amend or terminate this Plan at any time, but any such amendment or termination: 1. Shall not adversely affect the rights of any participant or beneficiary then receiving benefits, or of the beneficiary of any participant then receiving benefits under this Plan. 2. Shall not reduce the amount of benefit payable under this Plan below the amount that would be payable if the participant retired or died on the date of such amendment or termination. The plan shall be considered amended or terminated once the President notifies each affected Participant in writing of such amendment or termination. ARTICLE VIII Section 8.1 Benefits May Not Be Assigned or Alienated. Neither a Participant nor any Beneficiary thereof shall have the right to sell, assign, transfer, encumber or otherwise convey any right to receive any payment hereunder. No Part of the amounts payable hereunder shall be subject to seizure or sequestration for the payment of any debt or judgements owed by a Participant or any other person. Appendix A To the Harvest States Cooperatives Deferred Compensation Supplemental Retirement Plan T. F. Baker Michael Bergeland John Johnson Merritt E. Peterson Allen J. Anderson Patrick Kluempke Mark Palmquist David Swenson Dennis Wendland Gaylon Bratland John Schmitz Debra A. Thornton Richard Browne Thomas DeSmet Kevin Ruda Albert Ambrose Larry Salzwedel Pat Jacoby EX-10.8 11 MANAGEMENT COMPENSATION PROGRAM HARVEST STATES MANAGEMENT COMPENSATION PROGRAM FISCAL YEAR JUNE 1, 1996 THROUGH MAY 31, 1997 OBJECTIVES * Provide more structure to our current Management Compensation Program (MCP). * Communicate company, group, divisional and/or profit center goals and objectives to employees. * Encourage and reward performance which contributes to the success of the company as defined by company objectives and the group/divisional and/or profit center objectives. * Promote strong links between employee contributions and overall company performance to enhance stakeholder/member value. * Reward and recognize innovation and creativity in accomplishing business objectives. * Attract and retain the technical and managerial talent necessary for the company's success. * Provide compensation based on individual and company annual performance without increasing compensation fixed costs. ELIGIBILITY AND PARTICIPATION Eligibility to participate in the program will be limited to key management employees whose positions have a continuous opportunity to significantly influence the profitability or direction of the company. Senior Management will select employees for participation. The Chief Executive Officer has sole discretion to determine eligibility, participation, and interpretation of this policy. All employees such as sales representatives or facility managers whose compensation includes an opportunity for sales commissions or share of profits are excluded from participation in this program. Other employees whose positions no longer meet the eligibility criteria, or whose performance is less than satisfactory, may also be excluded from the program at any time. The level of participation and eligibility will be determined prior to the beginning of each fiscal year. Participants who are hired or promoted to positions of eligibility during the calendar year will participate on a pro-rata basis. Also, those who terminate due to disability, retirement, or death, will participate on a pro-rata basis. Termination for any other reason will not normally qualify for participation. Eligible participants will be selected on meeting most of the following criteria: * Strong performance in a position that impacts business functions and operations. * Possessing potential for higher levels of contribution in critical business functions and operations. * Possessing valuable, often difficult to replace, skills or skill levels essential for critical business functions and operations. * Possessing technical or management leadership roles in critical projects. ADMINISTRATION The Compensation Committee, including the Chief Executive Officer, will approve the overall Management Compensation Program and review for equity across operating divisions. The committee may amend, suspend, terminate, or reinstate any or all provisions of this program. In the event that the company profit or level of performance is not achieved, the incentive payments may be modified or eliminated by the Chief Executive Officer in specific units/divisions/groups or for the entire company. The Chief Executive Officer and group management will review the annual business and financial goals and the group management's individual performance objectives, and will ensure they are consistent with the company's long-term strategic plan and goals. The performance targets will be established and communicated to all eligible participants prior to the beginning of each fiscal year. Incentive payments will be made in cash payments or as adjustments to base wages after year-end results have been verified. ANNUAL SALARY The program will normally maintain base salaries up to the midpoint (competitive market level) of the respective job classification. This will enable the company to manage fixed salary costs. Participants paid below the midpoint of their salary range will be on a learning curve. As the participants gain experience, their knowledge and skills will develop. Once the participant reaches full competency, he/she will be paid at the midpoint of the job being performed. Additional compensation under this program will be used as a motivational tool and generally would be awarded only to those participants who put forth great effort and achieve truly outstanding results. Once an employee reaches the midpoint pay level for that position, additional compensation, in most cases, will only be received from the incentive performance bonus program. All participants are eligible for the performance bonus, regardless of their place in the salary range. However, significant adjustments to base pay will offset a portion of the amount of the bonus award. Base pay is managed to the midpoint of the salary range, with any earnings above that point available from a non-reoccurring annual bonus. Salaries are administered to the midpoint of the salary range with an aggressive performance and development-based merit program, thus ensuring competitive pay levels. LEVEL OF INCENTIVE OPPORTUNITY At the beginning of each fiscal year, participants will be assigned to an eligibility group determined by management responsibility and position, which will be based on the continuous opportunity to significantly influence the profitability or direction of the company. Each of the groups will have different opportunities designed around a "target" award (a level which the company expects to pay over time if it achieves its business program objectives), a "threshold" award (unacceptable company performance), and a "maximum" award (above which no additional awards are payable, normally achieved by very unusual circumstances). The following table represents the threshold, target, and maximum bonus payments available and is based on a percentage of the actual salary assigned to each participant. Target Incentive Example Eligibility Group Threshold Target Maximum - - - - ----------------- --------- ------ ------- I 0 40% 60% II 0 30% 45% III 0 20% 30% IV 0 10% 15% COMPANY, GROUP, DIVISION, AND/OR PROFIT CENTER PERFORMANCE TARGETS Company, group, division, and/or profit center performance will be evaluated by the following criteria and will account for a specific incentive opportunity as defined by Attachment I. Corporate participants will be rewarded according to total company performance. Operating unit participants will be rewarded proportionally for company, group, division or profit center performance to ensure a cooperative effort in maximized performance. Criteria for company, group, division and/or profit center performance evaluations: 1. Economic Value Added (EVA) 2. Pretax Earnings: Pretax earnings of the company, group, divisional, or profit center. MEMBER VALUE OBJECTIVES Individual or team performance will be measured for each participant for the program year based on objectives which are predetermined and contribute economic value to members. Member Value Objectives (MVOs) will be based on the participant's specific job responsibilities and mutually determined in advance with the participant's immediate supervisor. Goals established should reflect truly significant accomplishments which support the business programs and goals. It is critical that the individual participant can in fact impact the outcomes stated in the participant MVOs. The manager will determine the final MVOs and monitor them throughout the year to ensure that the objectives are current and reflective of changing business conditions and the needs of our members. At the end of each year, the participant's manager will assess performance according to the objectives and recommend an individual award within the range from threshold to maximum. Member Value Objectives will be measurable and consistent with the business plan and goals, the performance of job responsibilities, and must contribute economic value to members. Some examples of measurable objectives which enhance customer/member/stakeholder value are presented in the list below. Additional information and guides to writing effective objectives are available from the Human Resources department. Unless noted, objectives below are listed for FY 96-97: * Successfully implement the Harvest States Investment Plan. - or- Implement the Harvest States Investment Plan with at least 30% commitment of shares. * Make significant progress on the implementation of the strategic plan though the specific group or divisional imperative. (state the imperative.) * Increase Harvest States' presence by offering of a service or product in a specific location or territory. * Reduce final unit production or service cost by ___%. * Increase the productivity or profit level of a business unit by ___%. * Increase efficiency of a manufacturing or grain handling/processing facility by ___%. * Decrease defects in ________________ product by ___%. * Reduce input costs by ___%. * Increase market share of current members by ___%. * Increase member equity by ___%. * Develop and implement two Member Educational/Information Programs that involve 200 participants. * Increase customer service level by answering phone calls within 3 rings; answering accounting questions within one hour. * Contact the member customer at least ______ a day with market and production information. * Create a new publication or insert to increase management and cooperative information to our members. * Create a member development program to assist in the analysis and management of position risk. * Foster an environment which promotes the development of employee leadership skills. * Increase the level of delegation to subordinates. 5/24/96 EX-10.9 12 REVOLVING CREDIT AGREEMENT REVOLVING CREDIT AGREEMENT TABLE OF CONTENTS ARTICLE I. DEFINITIONS, ACCOUNTING TERMS, COMPUTATION OF TIME PERIODS, AND RULES OF CONSTRUCTION.......................................1 Section 1.01. Definitions..................................................1 Section 1.02. Accounting Terms............................................13 Section 1.03. Computation of Time Periods.................................14 Section 1.04. Rules of Construction.......................................14 ARTICLE II. LOANS..........................................................14 Section 2.01. 364 Day Facility............................................14 Section 2.02. Bid Rate....................................................15 Section 2.03. All Loans...................................................16 Section 2.04. Notice and Manner of Borrowing for 364 Day Facility Loans...16 Section 2.05. Notice and Manner of Requesting Bid Loans...................16 Section 2.06. Interest Periods............................................17 Section 2.07. Interest....................................................18 Section 2.08. Fees........................................................19 Section 2.09. Notes.......................................................20 Section 2.10. Optional Prepayments........................................20 Section 2.11. Method of Payment...........................................21 Section 2.12. Use of Proceeds.............................................21 Section 2.13. Conversions or Continuations................................21 ARTICLE III. LETTERS OF CREDIT..............................................22 Section 3.01. Letters of Credit...........................................22 Section 3.02. Relationship Between This Agreement and Each Letter of Credit Agreement............................................23 Section 3.03. Outstanding Letters of Credit...............................23 Section 3.04. Reimbursement Obligations on Letters of Credit..............23 ARTICLE IV. CONDITIONS PRECEDENT...........................................23 Section 4.01. Conditions Precedent to Initial Use of a Credit Facility on and After the Closing Date...............................23 Section 4.02. Conditions Precedent to Each Credit Facility................25 Section 4.03. Deemed Representation.......................................25 ARTICLE V. REPRESENTATIONS AND WARRANTIES.................................25 Section 5.01. Incorporation, Good Standing and Due Qualification..........25 Section 5.02. Corporate Power and Authority; No Conflicts.................26 Section 5.03. Legally Enforceable Agreements..............................26 Section 5.04. Litigation..................................................26 Section 5.05. Financial Statements........................................26 Section 5.06. Ownership and Liens.........................................27 Section 5.07. Taxes.......................................................27 Section 5.08. ERISA.......................................................27 Section 5.09. Operation of Business.......................................27 Section 5.10. No Default on Outstanding Judgments or Orders...............27 Section 5.11. No Defaults on Other Agreements.............................28 Section 5.12. Labor Disputes and Acts of God..............................28 Section 5.13. Governmental Regulation.....................................28 Section 5.14. Environmental Protection....................................28 Section 5.15. Margin Securities...........................................28 ARTICLE VI. AFFIRMATIVE COVENANTS..........................................29 Section 6.01. Maintenance of Eligibility and Capitalization...............29 Section 6.02. Maintenance of Existence....................................29 Section 6.03. Maintenance of Properties...................................29 Section 6.04. Maintenance of Records......................................29 Section 6.05. Maintenance of Insurance....................................29 Section 6.06. Compliance with Laws........................................30 Section 6.07. Right of Inspection.........................................30 Section 6.08. Employee Benefit Plans......................................30 Section 6.09. Reporting Requirements......................................30 Section 6.10. Compliance With Environmental Laws..........................32 Section 6.11. Maintenance of Commodity Position...........................32 ARTICLE VII. NEGATIVE COVENANTS.............................................33 Section 7.01. Debt........................................................33 Section 7.02. Liens.......................................................33 Section 7.03. Fiscal Year.................................................35 Section 7.04. Sale of Assets..............................................35 Section 7.05. Mergers, Etc................................................36 Section 7.06. Change in Business..........................................36 Section 7.07. Investments.................................................36 Section 7.08. Contingent Liabilities......................................36 Section 7.09. Loans.......................................................36 Section 7.10. Transaction with Affiliates.................................37 Section 7.11. Patronage Refunds, Etc......................................37 ARTICLE VIII. FINANCIAL COVENANTS............................................37 Section 8.01. Consolidated Working Capital................................37 Section 8.02. Consolidated Members' and Patrons' Equity...................37 Section 8.03. Consolidated Funded Debt to Consolidated Members' and Patrons' Equity.............................................37 ARTICLE IX. EVENTS OF DEFAULT..............................................38 Section 9.01. Events of Default...........................................38 Section 9.02. Remedies....................................................40 ARTICLE X. CHANGE IN CIRCUMSTANCES........................................41 Section 10.01. Additional Costs...........................................41 Section 10.02. Limitation on Types of Advances............................42 Section 10.03. Illegality.................................................43 Section 10.04. Treatment of Affected Loans................................43 Section 10.05. Certain Compensation.......................................43 Section 10.06. Capital Adequacy...........................................44 Section 10.07. Right of Substitution......................................44 ARTICLE XI. FACILITY AND SYNDICATION AGENTS................................45 Section 11.01. Appointment, Powers and Immunities of Facility Agents......45 Section 11.02. Reliance by Facility Agents................................45 Section 11.03. Defaults...................................................46 Section 11.04. Rights of Facility Agents as Banks.........................46 Section 11.05. Indemnification of Facility Agents.........................46 Section 11.06. Non-Reliance on Facility Agents and Syndication Agents and Other Bank Parties.....................................47 Section 11.07. Failure of Facility Agents to Act..........................47 Section 11.08. Resignation or Removal of Facility Agents..................47 Section 11.09. Amendments Concerning Agency Function......................48 Section 11.10. Liability of Facility Agents...............................48 Section 11.11. Transfer of Agency Function................................48 Section 11.12. Notices to Administrative Agent............................48 Section 11.13. Reports....................................................49 Section 11.14. Withholding Taxes..........................................49 Section 11.15. Non-Receipt of Funds by Administrative Agent...............49 ARTICLE XII. MISCELLANEOUS..................................................50 Section 12.01. Amendments and Waivers.....................................50 Section 12.02. Usury......................................................50 Section 12.03. Expenses; Indemnification..................................51 Section 12.04. Assignment; Participation..................................51 Section 12.05. Notices....................................................53 Section 12.06. Setoff.....................................................53 Section 12.07. Jurisdiction; Immunities...................................54 Section 12.07. Jurisdiction; Immunities...................................54 Section 12.09. Counterparts...............................................54 Section 12.10. Exhibits and Schedules.....................................54 Section 12.11. Table of Contents; Headings................................55 Section 12.12. Severability...............................................55 Section 12.13. Integration................................................55 Section 12.14. Renewal of 364 Day Facilities..............................55 Section 12.15. Consents and Terminations..................................56 Section 12.16. Confidentiality............................................56 Section 12.17. Agreement in Writing.......................................56 Section 12.18. Jury Trial Waiver..........................................57 REVOLVING CREDIT AGREEMENT dated as of November 1, 1996 among HARVEST STATES COOPERATIVES, as Borrower BANQUE NATIONALE DE PARIS BOATMEN'S NATIONAL BANK CAISSE NATIONALE DE CREDIT AGRICOLE COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. "RABOBANK NEDERLAND", NEW YORK BRANCH DG BANK DEUTSCHE GENOSSENSCHAFTSBANK FIRST BANK NATIONAL ASSOCIATION HARRIS TRUST AND SAVINGS BANK NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Banks and ST. PAUL BANK FOR COOPERATIVES, as Syndication Agent and Bank and CoBANK, ACB, as Syndication Agent, Administrative Agent, Bid Agent and Bank REVOLVING CREDIT AGREEMENT dated as of November 1, 1996 among HARVEST STATES COOPERATIVES a Minnesota cooperative corporation ("Borrower"), CoBANK, ACB ("CoBank"), ST. PAUL BANK FOR COOPERATIVES ("St. Paul Bank"), BANQUE NATIONALE DE PARIS, BOATMEN'S NATIONAL BANK, CAISSE NATIONALE DE CREDIT AGRICOLE, COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. "RABOBANK NEDERLAND", NEW YORK BRANCH, DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, FIRST BANK NATIONAL ASSOCIATION, HARRIS TRUST AND SAVINGS BANK, NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, and each other lender which may hereafter execute and deliver an Assignment and Assumption Agreement pursuant to Section 12.04 of this Agreement (each a "Bank" and collectively, the "Banks"), CoBank, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, "Administrative Agent"), CoBank, as syndication agent for the Banks (in such capacity, together with its successors in such capacity, "Syndication Agent"), St. Paul Bank, as syndication agent for the Banks (in such capacity, together with its successors in such capacity, "Syndication Agent"), and CoBank, as bid agent for the Banks (in such capacity, together with its successors in such capacity, "Bid Agent"). The parties to this Agreement hereby agree as follows: ARTICLE I. DEFINITIONS, ACCOUNTING TERMS, COMPUTATION OF TIME PERIODS, AND RULES OF CONSTRUCTION SECTION 1.01. DEFINITIONS. As used in this Agreement the following terms have the following meanings (terms defined in the singular to have a correlative meaning when used in the plural and vice versa): "364 Day Borrowing Notice" has the meaning specified in Section 2.04. "364 Day Facility" means the 364 Day Facility Loans, the Bid Loans, and Letters of Credit. "364 Day Facility Advance" has the meaning specified in Section 2.01. "364 Day Facility Commitment" means with respect to the Banks the aggregate amount of the Individual 364 Day Facility Commitments of the Banks. "364 Day Facility Loan" has the meaning specified in Section 2.01. "364 Day Facility Maturity Date" means October 31, 1997 or such later date as extended in accordance with the provisions of Section 12.14. "364 Day Facility Note" has the meaning specified in Section 2.09. "Additional Cost" has the meaning specified in Section 10.01. "Administrative Agent" has the meaning specified in the preamble. "Administrative Agent's Office" means Administrative Agent's address as set forth on the signature page of this Agreement, or such other address as Administrative Agent may designate from time to time by written notice to Borrower, each Bank and Bid Agent. "Advance" means a 364 Day Facility Advance or Bid Advance, or any or all of the foregoing, as the context may require. "Affected Loan" has the meaning specified in Section 10.04. "Affiliate" means, as to any Person, any other Person which directly or indirectly controls, or is controlled by, or is under common control with such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Agreement" means this Revolving Credit Agreement, as may be amended from time to time. "Annual Operating Budget" means the annual operating budget for Borrower and its Subsidiaries in substantially the form of, and containing substantially the same or similar information as set forth in, the Annual Operating Budget (Business Plan) for Borrower and its Subsidiaries included in the Confidential Information Memorandum dated September 6, 1996 delivered to the Banks prior to the Closing Date. "Applicable Lending Office" means, for each Bank and for each type of Advance, the lending office of such Bank designated as such for such type of Advance on its signature page hereof or in the applicable Assignment and Assumption Agreement or such other office of such Bank as such Bank may from time to time specify to Administrative Agent and Borrower as the office by which its Advances of such type are to be made and maintained. "Applicable Margin" means the margin specified as follows: (i) for the First Availability Period, forty-five basis points (.45%); (ii) for the Second Availability Period, a margin mutually acceptable to Borrower and the Syndication Agents on or before July 31, 1997 if such day is a Banking Day, or if such date is not a Banking Day, then the next preceding day that is a Banking Day, (iii) for the Third Availability Period, a margin mutually acceptable to Borrower and the Syndication Agents on or before July 31, 1998 if such day is a Banking Day, or if such date is not a Banking Day, then the next preceding day that is a Banking Day. "Assignee" has the meaning specified in Section 12.04. "Assignment and Assumption Agreement" means an Assignment and Assumption Agreement, substantially in the form of Exhibit G, pursuant to which a Bank assigns and an Assignee assumes rights and obligations in accordance with Section 12.04. "Bank" or "Banks" has the meaning specified in the preamble to this Agreement. "Bank Parties" means the Banks. "Bank Party" means a Bank. "Bank's Office" means in the case of each Bank the office of such Bank designated on the signature page hereof, or as designated in the applicable Assignment and Assumption Agreement or such other office as such Bank may from time to time specify by notice to Borrower and each of the Facility Agents. "Banking Day" means (1) any day on which commercial banks are not authorized or required by law to close in Denver, Colorado, Kansas City, Missouri, Minneapolis, Minnesota or New York, New York, and (2) whenever such day relates to a LIBOR Advance, an Interest Period with respect to a LIBOR Advance, or notice with respect to any LIBOR Advance, a day on which dealings in Dollar deposits are also carried on in the London interbank market. "Base Advance" means any Advance when and to the extent the interest rate for such Advance is determined in relation to the Base Rate. "Base Loan" means any Loan when and to the extent the interest rate for the Advances made as part of such Loan are determined in relation to the Base Rate. "Base Rate" means, for any day, that rate defined as the "prime rate" as published from time to time in the Eastern Edition of THE WALL STREET JOURNAL as the average base rate for corporate loans posted by at least seventy-five percent (75%) of the United States thirty (30) largest commercial banks, or if THE WALL STREET JOURNAL shall cease publication or cease publishing the "prime rate" on a regular basis, such other regularly published average prime rate applicable to such commercial banks as is acceptable to Administrative Agent in its reasonable discretion with the consent of Borrower which will not be unreasonably withheld. "Bid Advance" has the meaning specified in Section 2.02. "Bid Agent" has the meaning specified in the preamble. "Bid Loan" has the meaning specified in Section 2.02. "Bid Maturity Date" has the meaning specified in Section 2.05. "Bid Note" has the meaning specified in Section 2.09. "Bid Notice of Borrowing" has the meaning specified in Section 2.05. "Bid Quote" has the meaning specified in Section 2.05. "Bid Quote Request" has the meaning specified in Section 2.05. "Bid Rate" means the annual rate of interest offered by a Bank in response to a Bid Quote Request that is accepted by Borrower in accordance with Section 2.05. "Board of Governors" means the Board of Governors of the Federal Reserve System. "Borrower" has the meaning specified in the preamble. "Borrower's Funding Account" means the following account: Norwest Bank Minnesota, National Association ABA Number 091000019, Beneficiary Account Number 44070, or such other account as may be designated by Borrower in a written notice to each Facility Agent. "Capital Lease" means any lease of property (whether real, personal or mixed) by a Person which has been or should be , in accordance with GAAP, reflected on the balance sheet of such Person as a capital lease. "Cash Collateral" means a deposit by Borrower, made in immediately available funds, to the cash investment service at Administrative Agent and the execution of all documents and the taking of all steps required to give such Administrative Agent, for the benefit of each of the Banks issuing a Letter of Credit, a perfected first security interest in such investment. "Closing Date" means November 1, 1996. "CoBank" has the meaning specified in the preamble. "Code" means the Internal Revenue Code of 1986. "Commitment" means the 364 Day Facility Commitment. "Commitment Fee" has the meaning specified in Section 2.08. "Consolidated Funded Debt" means at all times the Funded Debt of Borrower and its Subsidiaries on a consolidated basis. "Consolidated Members' and Patrons' Equity" means at any time the amount of capital stock accounts plus (or minus in the case of a deficit) the amount of surplus and retained earnings accounts of Borrower and its Subsidiaries, on a consolidated basis determined at such time, provided that the total amount of intangible assets of Borrower and its Subsidiaries (including, without limitation, unamortized debt discount and expense, deferred charges and good will) included therein shall not exceed $30,000,000; all as determined in accordance with GAAP, but excluding therefrom any minority interests in any Subsidiaries without duplication of deduction if already deducted in determining retained earnings and surplus. "Credit Facility" means any or all of the Loans and Letters of Credit. "Current Assets" of any Person means at any time the aggregate amount of assets of such Person which, in accordance with GAAP, may be properly classified as current assets after deducting adequate reserves where proper all determined at such time. "Current Liabilities" of any Person means at any time (i) all Debt of such Person due on demand or within one year from the date of determination thereof; and (ii) all other items (including taxes accrued as estimated) which, in accordance with GAAP, may be properly classified as current liabilities all determined at such time. "Debt" of any Person shall mean as of any time the same is to be determined, the aggregate of (i) all liabilities, reserves and any other items which would be classified as a liability on a balance sheet of such Person in accordance with GAAP, (ii) all obligations of such Persons under Capital Leases, (iii) all indebtedness and liabilities secured by any lien or any security interest on any property or assets of such Person, whether or not the same would be classified as a liability on a balance sheet of such Person but excluding all general contingency reserves and reserves for deferred income taxes and investment credit. "Default" means any event which with the giving of notice or lapse of time, or both, would become an Event of Default. "Default Rate" means, with respect to an amount of any Advance not paid when due at maturity or earlier by reason of acceleration or otherwise, a rate per annum equal to: (1) if such Advance is a Base Advance, a variable rate two percent (2%) above the rate of interest then in effect thereon; (2) if such Advance is a LIBOR Advance, a fixed rate two percent (2%) above the rate of interest in effect thereon (including the Applicable Margin) at the time of default until the end of the then current Interest Period therefor and, thereafter, a variable rate two percent (2%) above the rate of interest for a Base Advance; and (3) if such Advance is a Bid Advance, a fixed rate two percent (2%) above the rate of interest in effect thereon at the time of default until the applicable Bid Maturity Date and, thereafter, a variable rate two percent (2%) above the rate of interest for a Base Advance. "Dollars" and the sign "$" mean lawful money of the United States of America. "Environmental Discharge" means any discharge or release of any Hazardous Materials in violation of any applicable Environmental Law. "Environmental Law" means any Law relating to pollution of the environment, including Laws relating to noise or to emissions, discharges, releases or threatened releases of Hazardous Materials into the workplace, the community or the environment, or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "Environmental Notice" means any written complaint, order, citation, letter, inquiry, notice or other written communication from any Person (1) affecting or relating to Borrower's or any of its Subsidiaries' compliance with any Environmental Law in connection with any activity or operations at any time conducted by Borrower or such Subsidiary, (2) relating to the occurrence or presence of or exposure to or possible or threatened or alleged occurrence or presence of or exposure to Environmental Discharges or Hazardous Materials at any of Borrower's or such Subsidiary's locations or facilities, including, without limitation: (a) the existence of any contamination or possible or threatened contamination at any such location or facility; and (b) remediation of any Environmental Discharge or Hazardous Materials at any such location or facility or any part thereof; and (3) any violation or alleged violation of any applicable Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, including any rules and regulations promulgated thereunder. "ERISA Affiliate" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as Borrower or is under common control (within the meaning of Section 414(c) of the Code) with Borrower, provided, however, that for purposes of provisions herein concerning minimum funding obligations (imposed under Section 412 of the Code or Section 302 of ERISA), the term "ERISA Affiliate" shall also include any entity required to be aggregated with Borrower under Section 414(m) or 414(o) of the Code. "Event of Default" has the meaning specified in Section 9.01. "Existing Credit Agreements" means (i) the Credit Agreement dated as of October 29, 1993 among Borrower, Harris Trust and Savings Bank as Agent and the banks signatory to such Agreement, as amended and (ii) the Supplement to Master Syndicated Loan Agreement dated as of January 3, 1995 and numbered ML015452(B) among Borrower, CoBank and St. Paul Bank, as amended. "Facility Agents" means, collectively, Administrative Agent and Bid Agent. "Facility Fee" has the meaning specified in Section 2.08. "Fees" means the Commitment Fee or the Facility Fee, or both, all as the context may require. "Fee Letter" means the fee letter dated August 20, 1996 from the Syndication Agents, Administrative Agent and Bid Agent to Borrower. "First Availability Period" means the period from the Closing Date through October 30, 1997. "Fiscal Year" means each period from June 1 to May 31. "Funded Debt" means, with respect to any Person, at any time, all Debt of such Person in each case maturing by its terms more than one year after the date of creation thereof, or which is renewable or extendable at the option of such Person for a period ending more than one year after the date of creation thereof, and shall include Debt of such maturity created or assumed by such Person either directly or indirectly, including obligations of such maturity secured by liens upon property of such Person and upon which such Person customarily pays the interest, and all obligations of such Person under Capital Leases of such maturity, and the net present value of obligations under Operating Leases as discounted by a rate which is 1.5% less than the Base Rate, and all obligations to reimburse any Bank with respect to all Letters of Credit which do not support long-term debt, with expiration dates in excess of one year from the date of issuance thereof. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time. "Good Faith Contest" means the contest of an item if (1) the item is diligently contested in good faith by appropriate proceedings timely instituted, (2) either the item is (a) bonded or (b) adequate reserves are established with respect to the contested item if and to the extent required in accordance with GAAP, (3) during the period of such contest, the enforcement of any contested item is effectively stayed, and (4) the failure to pay or comply with the contested item could not reasonably be expected to result in a Material Adverse Change. "Governmental Approvals" means any authorization, consent, approval, license, permit, certification, or exemption of, registration or filing with or report or notice to, any Governmental Authority. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Materials" means any pollutant, effluents, emissions, contaminants, toxic or hazardous wastes or substances, as any of those terms are defined from time to time in or for the purposes of any applicable Environmental Law, including asbestos fibers and friable asbestos, polychlorinated biphenyls, and any petroleum or hydrocarbon-based products or derivatives. "Individual 364 Day Facility Commitment" means, with respect to each Bank, the commitment of such Bank to make 364 Day Facility Advances hereunder in an amount set forth opposite such Bank's name on the signature page hereto, or as designated in the applicable Assignment and Assumption Agreement, provided, however, that the aggregate of all the Individual 364 Day Facility Commitments shall at no time exceed the Total 364 Day Facility Commitment. "Individual Letter of Credit Obligations" means, with respect to each Bank, the total, without duplication, of (1) the aggregate undrawn face amount of all outstanding Letters of Credit issued by such Bank, (2) the aggregate amount of all unreimbursed obligations with respect to amounts paid under such Letters of Credit and (3) the aggregate amount of all outstanding overdrafts created to satisfy any of the foregoing obligations under (1) or (2) above. "Individual Unused 364 Day Facility Commitment" means at any time for a Bank, the amount (which in no event shall be less than zero) that is equal to (1) the Individual 364 Day Facility Commitment minus (2) the total, without duplication, of (a) the aggregate outstanding principal amount of 364 Day Facility Advances made by such Bank, (b) the aggregate outstanding principal amount of Bid Advances made by such Bank, (c) the aggregate Individual Letter of Credit Obligations owed to such Bank, and (d) the principal amount of all 364 Day Facility Advances which such Bank is obligated to make as a result of Borrower having furnished notice to the Bank pursuant to Section 2.04 hereof all determined at such time. "Interest Period" means with respect to any LIBOR Advance, the period commencing on the date such Advance is made, converted from a Base Advance, or continued, as the case may be, and ending, as Borrower may select pursuant to Section 2.10 on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, provided that each such Interest Period which commences on the last Banking Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Banking Day of the appropriate calendar month. "Investment" means, with respect to any Person, (1) any loan or advance by such Person to any other Person, (2) the purchase or other acquisition by such Person of any capital stock, obligations or securities of, or any capital contribution to, or investment in, or the acquisition by such Person of all or substantially all of the assets of, or any interest in, any other Person, (3) the providing by such Person being the account party with respect to any performance or standby letter of credit where the proceeds of such letter of credit are to be used for the benefit of any other Person, (4) the agreement by such Person to make funds available for the benefit of another Person to either cover cost overruns incurred in connection with the construction of a project or facility, or to fund a debt service reserve account, (5) the agreement by such Person to assume, guarantee, endorse or otherwise be or become directly or contingently responsible or liable for the obligations or Debts of any other Person (other than by endorsement for collection in the ordinary course of business), (6) an agreement to purchase any obligations, stocks, assets, goods or services but excluding an agreement to purchase any assets, goods or services entered into in the ordinary course of business, (7) an agreement to supply or advance any funds, assets, goods or services, or (8) an agreement to maintain or cause such Person to maintain a minimum working capital or net worth or otherwise to assure the creditors of any Person against loss. "Law" means any federal, state or local statute, law, rule, regulation, ordinance, order, code, or policy, now or hereafter in effect, and any judicial or administrative interpretation thereof by a Governmental Authority, including any judicial or administrative order, consent decree or judgment. "Letter of Credit" has the meaning specified in Section 3.01. "Letter of Credit Agreement" means the application for a letter of credit and/or reimbursement agreement entered into between Borrower and the applicable Bank with regard to a Letter of Credit. "LIBOR Advance" means any Advance when and to the extent the interest rate therefor is determined by reference to the LIBOR Rate. "LIBOR Base Rate" means a rate for deposits in Dollars, with a maturity comparable to the selected LIBOR Interest Period, that appears on the display designated as page "3750" of the Telerate Service (or such other page as may replace the 3750 page of that service or such other service or services as may be nominated by the British Bankers' Association for the purpose of displaying London interbank offered rates for Dollar deposits), determined as of 11:00 a.m. (London time), two (2) Banking Days prior to the commencement of such Interest Period. "LIBOR Loan" means a Loan when and to the extent the interest rate for the Advances made as part of such Loan are determined in relation to the LIBOR Rate. "LIBOR Rate" means, for each LIBOR Advance, the rate per annum (rounded upwards, if necessary, to the nearest 1/10,000 of 1%) determined by Administrative Agent to be equal to the quotient of (1) the LIBOR Base Rate for such LIBOR Advance for such Interest Period divided by (2) one minus the LIBOR Reserve Requirement for such Interest Period. "LIBOR Reserve Requirement" means, for any LIBOR Advance, the average actual rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during the Interest Period for such LIBOR Advance under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding One Billion Dollars ($1,000,000,000) against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, but without duplication, the LIBOR Reserve Requirement shall also reflect any other reserves required to be maintained by such member banks by reason of any Regulatory Change against (1) any category of liabilities which includes deposits by reference to which the LIBOR Base Rate is to be determined as provided in the definition of LIBOR Base Rate in Section 1.01 or (2) any category of extensions of credit or other assets which include LIBOR Advances. "Lien" means with respect to any asset any mortgage, deed of trust, pledge, security interest, hypothecation, assignment for security purposes, encumbrance, lien (statutory or other), or other security agreement or charge, or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale, Capital Lease or other title retention agreement related to such asset). "Loan Documents" means each and every one of this Agreement, the Notes, and the Letter of Credit Agreements. "Loans" means the 364 Day Facility Loans, the Bid Loans or any or all of the foregoing, all as the context may require. "Material Adverse Change" means either (1) a material adverse change in the status of the business, assets, liabilities, results of operations, condition (financial or otherwise), property or prospects of the Borrower and its Subsidiaries taken together, or (2) any event or occurrence of whatever nature which could reasonably be expected to have a material adverse effect on Borrower's ability to perform its obligations under the Loan Documents. "Minimum Assignment" means, with respect to each Bank that is making an assignment in accordance with the terms of Section 12.04, an assignment of Commitments and Credit Facility with an aggregate principal or face amount of at least Fifteen Million Dollars ($15,000,000) where such amount is determined by aggregating each of the following assigned by such Bank: (1) Unused 364 Day Facility Commitment, (2) the aggregate principal amount of the outstanding 364 Day Facility Advances, (3) the aggregate principal amount of Bid Advances, and (4) Individual Letter of Credit Obligations. "Minimum Hold" means, with respect to each Bank, Fifteen Million Dollars ($15,000,000) of its Individual 364 Day Facility Commitment. "Monthly Date" means the fifth Banking Day of each month occurring on or after the Closing Date. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a Plan defined as such in Section 3(37) of ERISA. "Notes" means the 364 Day Facility Notes, or the Bid Notes, or any or all of the foregoing, all as the context may require. "Operating Lease" means any lease of property (whether real, personal or mixed) by a Person under which such Person is lessee, other than a Capital Lease. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning specified in Section 12.04. "PBGC" means the Pension Benefit Guaranty Corporation. "Permitted Investments" means (1) marketable obligations issued or unconditionally guaranteed by the United States of America, or issued by any agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within one year from the date of acquisition thereof, (2) certificates of deposit maturing within one year from the date of acquisition thereof issued by (i) any Bank or (ii) any commercial bank with a short term credit rating of either of the two highest short term credit ratings provided by either S&P or Moody's, (3) commercial paper payable in the United States of America in Dollars and rated as at any date of determination A-1 or better (or comparably if the rating system is changed) by S&P or P-1 or better (or comparably if the rating system is changed) by Moody's, (4) payments of amounts required to satisfy patronage refunds or equity redemptions of Borrower as determined by the Board of Directors of Borrower, (5) Investments in CoBank and St. Paul Bank, (6) Investments in cooperatives in which Borrower is a member made in the ordinary course of Borrower's business, (7) marketable general obligations of a state, a territory or a possession of the United States or any political subdivision of any of the foregoing, or the District of Columbia, unconditionally secured by the full faith and credit of such state, territory, possession, political subdivision or district provided that such state, territory, possession, political subdivision or district has general taxing authority and the power to levy such taxes as may be required for the payment of principal and interest thereof; provided that such obligations are rated in either of the two top rating categories established by the national rating agencies for such obligations, and (8) repurchase, reverse repurchase agreements and security lending agreements collateralized by securities of the type described in subsection (1) above, provided that Borrower or Subsidiary, as the case may be, which is a party to such arrangement shall hold (individually or through an agent) all securities relating thereto during the entire term of each such arrangement. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority, limited liability company or other entity of whatever nature. "Plan" means any plan, agreement, arrangement or commitment which is an employee benefit plan, as defined in Section 3(3) of ERISA, maintained by Borrower or any Subsidiary or any ERISA Affiliate or with respect to which Borrower or any Subsidiary or any ERISA Affiliate at any relevant time has any liability or obligation to contribute. "presence", when used in connection with any Environmental Discharge or Hazardous Materials, means and includes presence, generation, manufacture, installation, treatment, use, storage, handling, encapsulation, disposal, transportation, spill, discharge and release. "Prohibited Transaction" means any transaction prohibited under Section 406 of ERISA or Section 4975 of the Code. "Quarterly Date" means each May 31, August 30, November 30 and February 28. "Regulation D" means Regulation D of the Board of Governors. "Regulatory Change" means, with respect to any Bank, any change after the date of this Agreement in United States federal, state, or municipal Laws or foreign Laws or regulations (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including such Bank of or under any United States federal, state, or municipal Law or foreign Laws or regulations (whether or not having the force of Law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA or in the regulations thereunder. "Requisite Banks" means at any time a minimum of four (4) Banks that are providing at least eighty percent (80%) of the Total 364 Day Facility Commitment. "S&P" means Standard & Poor's Rating Group, a division of the McGraw-Hill Companies. "Second Availability Period" means October 31, 1997 through October 29, 1998, provided this Agreement has been extended pursuant to the provisions of Section 12.14. "Subsidiary" means, as to any Person, any corporation, partnership, association or other business entity of which securities or other ownership interests representing more than fifty percent (50%) of the ordinary voting power, or more than fifty percent (50%) of general partnership interest at the time is owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. "Supermajority Banks" means at any time the Banks that are providing one hundred percent (100%) of all Total 364 Day Facility Commitment. "Syndication Agents" means, collectively, CoBank and St. Paul Bank. "Third Availability Period" means October 30, 1998 through October 28, 1999, provided this Agreement has been extended pursuant to the provisions of Section 12.14. "Total 364 Day Facility Commitment" means Five Hundred Fifty Million Dollars ($550,000,000). "Total Letter of Credit Obligations" means at any time an amount equal to the sum, without duplication, of (1) the aggregate undrawn face amount of all outstanding Letters of Credit, (2) the aggregate principal amount of all unreimbursed obligations in respect of amounts paid under Letters of Credit and (3) the aggregate amount of all outstanding overdrafts created to satisfy any of the foregoing obligations under (1) or (2) above all determined at such time. "Total Unused 364 Day Facility Commitment" means at any time, the amount (which in no event shall be less than zero) that is equal to (1) the 364 Day Facility Commitment minus (2) the total, without duplication, of (a) the aggregate outstanding principal amount of 364 Day Facility Advances, (b) the aggregate outstanding principal amount of Bid Advances, (c) Total Letter of Credit Obligations, and (d) the principal amount of all 364 Day Facility Advances which the Banks are obligated to make as a result of Borrower having furnished notice to the Banks pursuant to Section 2.04 hereof all determined at such time. SECTION 1.02. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. All accounting terms which are defined herein with regard to the Borrower and its Subsidiaries shall mean such accounting term determined on a consolidated basis in accordance with GAAP for Borrower and each of its Subsidiaries. All financial data required to be delivered hereunder shall be prepared in accordance with GAAP (except as specified above and as otherwise provided in this Agreement). SECTION 1.03. COMPUTATION OF TIME PERIODS. Except as otherwise provided herein, in this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and words "to" and "until" each means "to but excluding". SECTION 1.04. RULES OF CONSTRUCTION. When used in this Agreement: (1) a reference to a Law includes any amendment or modification to such Law; (2) a reference to a Person includes its permitted successors and permitted assigns and a reference to a Person in a particular capacity excludes such Person in any other capacity; (3) a reference to an agreement, instrument or document shall include such agreement, instrument or document as the same may be amended, modified or supplemented from time to time and, if applicable, as permitted by the Loan Documents, and reference to any Note includes any note issued pursuant hereto in extension or renewal thereof and in substitution or replacement therefor; (4) reference to any gender includes each other gender; (5) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (6) unless the context indicates otherwise, reference to any Article, Section, Schedule or Exhibit means such Article or Section hereof or such Schedule or Exhibit hereto; and (7) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Any reference to Central time shall mean such time as in effect in the United States of America. ARTICLE II. LOANS SECTION 2.01. 364 DAY FACILITY. Subject to the terms and conditions of this Agreement, each of the Banks severally agrees to make loans (each loan made by an individual Bank pursuant to this Section 2.01 a "364 Day Facility Advance" and the total of all such loans made by all the Banks at the same time, the "364 Day Facility Loans") to Borrower from time to time during the period from the Closing Date to the 364 Day Facility Maturity Date, provided that (1) with respect to all Banks, the aggregate principal amount of all 364 Day Facility Loans outstanding at any time does not exceed the amount equal to (a) the Total 364 Day Facility Commitment, minus (b) the aggregate principal amount of all Bid Loans outstanding at such time, minus (c) the Total Letter of Credit Obligations all determined at such time; (2) with respect to each Bank, the aggregate principal amount of such Bank's 364 Day Facility Advances outstanding at any time does not exceed the amount equal to (a) such Bank's Individual 364 Day Facility Commitment, minus (b) such Bank's Bid Advances outstanding at such time, minus (c) such Bank's Individual Letter of Credit Obligations all determined at such time. Each 364 Day Facility Loan, with the specific exception of Advances made pursuant to Section 3.04, will be made by the Banks ratably in proportion to their then existing Individual Unused 364 Day Facility Commitments bears to the total of all Banks' then existing Individual Unused 364 Day Facility Commitments determined as of (1) in the case of LIBOR Loans, 12:00 noon (Central Time) on the Banking Day Borrower delivers the 364 Day Borrowing Notice pursuant to which Borrower requests such LIBOR Loan, and (2) in the case of Base Loans, 12:00 noon (Central Time) on the Banking Day Borrower delivers the 364 Day Borrowing Notice pursuant to which Borrower requests such Base Loan. SECTION 2.02. BID RATE. Subject to the terms and conditions of this Agreement, including the procedures set forth in Section 2.05, each Bank may in its sole discretion make loans (each loan made by a Bank pursuant to this Section 2.02 a "Bid Advance" and the total of such loans made by the Banks the "Bid Loans") to Borrower from time to time during the period from the Closing Date to the 364 Day Facility Maturity Date, provided that (1) with respect to all Banks, the aggregate principal amount of all Bid Loans outstanding at any time does not exceed an amount equal to (a) the Total 364 Day Facility Commitment, minus (b) the aggregate principal amount of all outstanding 364 Day Facility Loans, minus (c) the Total Letter of Credit Obligations all determined at such time, (2) with respect to each Bank, the aggregate principal amount of such Bank's Bid Advances outstanding at any one time may, in the sole discretion of each Bank, together with (a) the aggregate principal amount of such Bank's 364 Day Facility Advances outstanding at such time, and (b) such Bank's Individual Letter of Credit Obligations owed to such Bank, exceed such Bank's Individual 364 Day Facility Commitment all determined at such time. In the case of Bid Loans, each Bid Quote Request shall be in an amount at least equal to One Million Dollars ($1,000,000) and in integral multiples of Five Hundred Thousand Dollars ($500,000), and each Bid Quote shall be in an amount at least equal to Five Hundred Thousand Dollars ($500,000). Each Bid Advance made by the applicable Bank will be in the amount of its bids that are accepted by Borrower in accordance with Section 2.05. In the case of Bid Loans, each Bid Quote Request for an interest rate period of five Banking Days or less shall be directed to only CoBank and St. Paul Bank and in addition to the limitations set forth above, the aggregate principal outstanding of such Bid Loans shall not at any time exceed Thirty-Five Million Dollars ($35,000,000). SECTION 2.03. ALL LOANS. The failure of any Bank to make any requested 364 Day Facility Advance or Bid Advance to be made by it on the date specified for such Advance shall not relieve any other Bank of its obligation (if any) to make any Advance on such date, but no Bank shall be responsible for the failure of any other Bank to make any such Advance to be made by such other Bank. SECTION 2.04. NOTICE AND MANNER OF BORROWING FOR 364 DAY FACILITY LOANS. Borrower shall give Administrative Agent prior written or telegraphic or facsimile notice (effective upon receipt) of each request for a 364 Day Facility Loan (1) in the case of a Base Loan, on or before 12:00 noon (Central time) on the day of making such Base Loan, and (2) in the case of a LIBOR Loan, on or before 12:00 noon (Central time) at least three (3) Banking Days prior to the date of making such LIBOR Loan. Each of the foregoing notices, substantially in the form of Exhibit C ("364 Day Borrowing Notice") must specify (1) the amount of such Loan, (2) the proposed date of making such Loan, (3) whether the Loan will bear interest at (a) the Base Rate minus twenty-five basis points (.25%) or (b) the LIBOR Rate plus the Applicable Margin, and (4) in the case of a LIBOR Loan, the initial Interest Period applicable thereto. Administrative Agent shall promptly notify each Bank of each such 364 Day Borrowing Notice. Not later than 2:00 P.M. (Central time) on the date of a 364 Day Facility Loan, each Bank will make available to Administrative Agent at Administrative Agent's Office, in immediately available funds, such Bank's share of such Loan. After Administrative Agent's receipt of such funds, but not later than 3:00 P.M. (Central time), and upon fulfillment of the applicable conditions set forth in Article IV, Administrative Agent will make such Loan available to Borrower, in immediately available funds, and will transmit such funds by wire transfer to Borrower's Account. SECTION 2.05. NOTICE AND MANNER OF REQUESTING BID LOANS. Borrower may request offers from all of the Banks, acting severally and not jointly, to make Bid Loans. Borrower shall give Bid Agent written or telegraphic or facsimile notice (effective upon receipt), substantially in the form of Exhibit D (a "Bid Quote Request"), of a proposed Bid Loan on or before 9:00 A.M. (Central time) on the date of the proposed Bid Loan. Promptly after receipt of a Bid Quote Request, Bid Agent shall send to all of the Banks by telegraphic or facsimile transmissions a copy of such Bid Quote Request. Each Bid Quote Request must specify (1) the total amount of such requested Bid Loans, (2) the individual amount of each requested Bid Loan with a different proposed Bid Maturity Date, (3) the proposed date of making such Bid Loan, and (4) the proposed maturity dates which must be Banking Days ("Bid Maturity Date") for such Bid Loans. Borrower may request offers to make more than one Bid Loan, each with a different Bid Maturity Date, in a single Bid Quote Request. Each Bank may, in its sole discretion, submit to Bid Agent a written quote, substantially in the form of Exhibit E (a "Bid Quote"), containing an offer or offers to make Bid Advances in response to any Bid Quote Request (and may elect to bid with respect to any or all Bid Loans with different Bid Maturity Dates specified in the Bid Quote Request), provided, however, each Bank is limited to one Bid Quote submission per day (which may cover more than one Bid Maturity Date). Each Bid Quote for CoBank and/or St. Paul Bank will be submitted by CoBank. Each Bid Quote by a Bank (other than Bid Agent acting in its capacity as a Bank) must be submitted to Bid Agent by facsimile not later than 10:30 A.M. (Central time) on the proposed date of making the proposed Bid Loan. Each Bid Quote made by Bid Agent in its capacity as a Bank must be finalized not later than 10:15 A.M. (Central time) on the proposed date of making the proposed Bid Loan and forwarded to Borrower. Each Bid Quote so made shall be irrevocable. A Bid Quote may set forth offers for up to five (5) separate Bid Rates for each of the applicable Bid Advances, provided that each Bid Quote shall specify the aggregate principal amount of Bid Advances for all Bid Maturity Dates that the Bank submitting such Bid Quote is willing to make at the specified Bid Rates pursuant to such Bid Quote. Bid Agent shall disregard a Bid Quote if it (1) is not substantially in conformity with Exhibit E, (2) contains qualifying or conditional language, (3) proposes terms other than or in addition to those set forth in the applicable Bid Quote Request, or (4) arrives after the applicable time set forth in this Section. Promptly after 10:30 A.M. (Central time), Bid Agent shall advise Borrower of the terms of each Bid Quote received by Bid Agent. Not later than 12:00 noon (Central time) on the proposed date for making a Bid Loan, Borrower shall notify Bid Agent of its acceptance or non-acceptance of the offers submitted to Bid Agent pursuant to this Section, and Bid Agent shall provide notice to Administrative Agent of the offers accepted by Borrower and the terms thereof. In the case of acceptance, such notice, which shall be in the form of Exhibit F (a "Bid Notice of Borrowing"), shall specify the aggregate principal amount of offers for each of the Bid Advances that are accepted. Regardless of the amounts or interest rates bid by any Bank, Borrower may accept any Bid Quote in whole or in part, provided that (1) the aggregate principal amount of Bid Loans may not exceed the applicable amount set forth in the related Bid Quote Request, and (2) Borrower may not accept any offer that fails to comply with this Section. Promptly after receipt of a Bid Notice of Borrowing, Bid Agent shall send to the applicable Bank by telegraphic or facsimile transmission a copy of such Bid Notice of Borrowing. Not later than 2:00 P.M. (Central time) on the date of making each Bid Loan, each Bank that is to make a Bid Advance will make available to Administrative Agent at Administrative Agent's Office, in immediately available funds, its Bid Advance. After Administrative Agent's receipt of such funds, but not later than 3:00 P.M. (Central time), and upon fulfillment of the applicable conditions set forth in Article IV, Administrative Agent will make such Advances available to Borrower, in immediately available funds, and will transmit such funds by wire transfer to Borrower's Account. SECTION 2.06. INTEREST PERIODS. In the case of each LIBOR Loan, Borrower shall select an Interest Period of any duration in accordance with the definition of Interest Period in Section 1.01, subject to the following limitations, (1) for each 364 Day Facility Advance, no Interest Period may extend beyond the 364 Day Facility Maturity Date, (2) no Interest Period shall have a duration of less than one (1) month, and if any such proposed Interest Period would otherwise be for a shorter period, such Interest Period shall not be available, and (3) if an Interest Period would end on a day which is not a Banking Day, such Interest Period shall be extended to the next Banking Day, unless, such Banking Day would fall in the next calendar month, in which event such Interest Period shall end on the immediately preceding Banking Day. Notwithstanding anything herein to the contrary, each LIBOR Loan shall be in an amount at least equal to One Million Dollars ($1,000,000) and in integral multiples of Five Hundred Thousand Dollars ($500,000) (LIBOR Loans having different Interest Periods at the same time hereunder to be deemed separate Loans for purposes of the foregoing, one for each Interest Period). Notwithstanding anything herein to the contrary, no Bank will be required to have with respect to such Bank's share of the 364 Day Facility Loans more than fifteen (15) different Interest Periods outstanding at any time. SECTION 2.07. INTEREST. Borrower shall pay interest to the Administrative Agent for the account of each Bank on the outstanding and unpaid principal amount of such Bank's Advances, at a rate per annum as follows (1) for a Base Advance at a rate equal to the Base Rate minus twenty-five basis points (.25%), (2) for a LIBOR Advance at a rate equal to the LIBOR Rate plus the Applicable Margin, and (3) for a Bid Advance at a rate per annum equal to the Bid Rate set forth in the Bid Quote for such Bid Advance accepted by Borrower in its Bid Notice of Borrowing. Any principal amount not paid when due (at maturity, by acceleration or otherwise) shall, after written notice to Borrower by the Administrative Agent, bear interest thereafter, payable on demand, at the applicable Default Rate. The Administrative Agent will distribute such interest paid by Borrower to each Bank under items (1) and (2) above ratably in proportion of such Bank's 364 Day Facility Advances then outstanding bears to the aggregate amount of all 364 Day Facility Advances and with respect to item (3) above, ratably in proportion of such individual Bid Advances made by such Bank then outstanding bears to the aggregate principal amount of all Bid Advances then outstanding. All unreimbursed obligations with respect to payments made by an issuing Bank under a Letter of Credit shall bear interest, payable on demand, at the Base Rate plus the Default Rate. The interest rate on each Base Advance shall change when the Base Rate changes. Interest on each Advance shall not exceed the maximum amount permitted under applicable Law and shall be calculated on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed. Accrued interest shall be due and payable in arrears (1) for each Base Loan, on each Monthly Date, commencing with the first such date after making such Loan, (2) for each LIBOR Loan, on the last day of the Interest Period with respect thereto and, in the case of an Interest Period greater than three months, at three month intervals after the first day of such Interest Period, (3) for each Bid Advance, on the applicable Bid Maturity Date, and, in the case of a Bid Advance with a period from the date of making the Bid Loan to a Bid Maturity Date of greater than 90 days, at 90 day intervals after the first day of making such Bid Advance, and (4) interest accruing at the Default Rate shall be due and payable on demand. Administrative Agent shall provide to Borrower three days prior to the date interest is due and payable to Administrative Agent written notice of the amount of interest to be due and payable. Failure of Administrative Agent to provide such prior written notice, however, shall not affect Borrower's obligation to make such interest payments when due. SECTION 2.08. FEES. Borrower agrees to pay to each Bank an annual facility fee ("Facility Fee") in an amount equal to five basis points (.05%) per annum on the amount of such Bank's Individual 364 Day Facility Commitment payable in quarterly installments, on the fifth Banking Day after each Quarterly Date, commencing on November 30, 1996, and on the 364 Day Facility Maturity Date. Borrower agrees to pay to each Bank a commitment fee ("Commitment Fee") in an amount equal to seven and one half basis points (.075%) per annum on the average daily Individual Unused 364 Day Facility Commitment of such Bank, payable in arrears, and based on a year of three hundred sixty (360) days for the actual number of days elapsed, on the fifth Banking Day after each Quarterly Date and on the 364 Day Facility Maturity Date. In the event a Bank elects to make Bid Advances in an amount that exceeds its Individual 364 Day Facility Commitment pursuant to the provisions of Section 2.02, then the Commitment Fee for each other Bank that has an Individual Unused 364 Day Facility Commitment shall be calculated as follows: (1) The total Commitment Fee shall be calculated by multiplying the average daily Total Unused 364 Day Facility Commitment, after giving effect to such excess Advance(s), by seven and one half basis points (.075%) per annum. (2) The portion of the Commitment Fee calculated under (1) above that is payable to a Bank shall be determined by (i) dividing the actual average daily Individual Unused 364 Day Facility Commitment of such Bank by the sum of the average daily Individual Unused 364 Day Facility Commitments of all Banks and then (ii) multiplying the quotient by the amount of all excess Bid Advances. The end result is subtracted from such Bank's actual average daily Individual Unused 364 Day Facility Commitment and divided by the average daily Total Unused 364 Day Facility Commitment and then multiplied by the Commitment Fee calculated under (1) above. Administrative Agent shall provide to Borrower promptly after each Quarterly Date written notice of the amount of the Commitment Fee and Facility Fee due to it to be due and payable on the fifth Banking Day after such Quarterly Date. Failure of Administrative Agent to provide such written notice, however, shall not affect Borrower's obligation to pay such Fees. Borrower agrees to pay to the Facility Agents and the Syndication Agents the fees set forth in the Fee Letter. SECTION 2.09. NOTES. All 364 Day Facility Advances made by each Bank shall be evidenced by, and repaid with interest in accordance with, a single promissory note of Borrower in substantially the form of Exhibit A duly completed, in the stated maximum principal amount equal to such Bank's Individual 364 Day Facility Commitment, dated the date such Bank becomes a Bank, payable to such Bank for the account of its Applicable Lending Office, and maturing as to principal on the 364 Day Facility Maturity Date (each a "364 Day Facility Note" and collectively, the "364 Day Facility Notes"). All Bid Advances made by any Bank shall be evidenced by, and repaid with interest in accordance with, a single promissory note in substantially the form of Exhibit B duly completed, dated the date such Bank becomes a Bank, payable to such Bank for the account of its Applicable Lending Office, and each Bid Advance will mature as to principal on the applicable Bid Loan Maturity Date (each a "Bid Note" and collectively, the "Bid Notes"). Each Bank shall record on its books and records the amount of each Advance and any unreimbursed obligations to such Bank with respect to payments by such Bank under Letters of Credit issued by such Bank made by it hereunder, the rate and interest period applicable thereto, all payments of principal and interest, and the principal balance from time to time outstanding. The Bank's record thereof shall be prima facie evidence as to all such amounts and shall be binding on Borrower absent manifest error. Notwithstanding the foregoing, Borrower will never be required to pay as principal more than the principal amount of the Loans made by the Banks and any unreimbursed obligations to such Bank with respect to payments by such Bank under Letters of Credit issued by such Bank. SECTION 2.10. OPTIONAL PREPAYMENTS. Borrower may prepay any LIBOR Loans upon giving Administrative Agent prior written or telegraphic or facsimile notice (effective upon receipt) no later than 3:00 P.M. (Central time) three Banking Days prior to the date of such prepayment. Promptly after receipt of such notice of prepayment, Administrative Agent will notify the applicable Banks with regard to such notice. Each such prepayment of the Loans may be made in whole or in part and will be made with accrued interest to the date of such prepayment on the amount prepaid, provided that (1) each partial prepayment shall be in a principal amount of not less than One Million Dollars ($1,000,000) and integral multiples of Five Hundred Thousand Dollars ($500,000), (2) unless Borrower pays compensation in accordance with Section 10.05, LIBOR Loans may only be prepaid on the last day of the Interest Period for such Loan, and (3) Bid Loans may not be prepaid. In addition, each such prepayment of the Loans shall be paid to the Banks ratably based upon the amount each such Bank's outstanding Advances bears to such Loans then outstanding. SECTION 2.11. METHOD OF PAYMENT. Borrower shall make each payment under this Agreement and under each Note not later than 2:00 P.M. (Central time) on the date when due in Dollars in immediately available funds in the case of 364 Day Facility Loans and Bid Loans, to Administrative Agent at Administrative Agent's Office for the account of the Applicable Lending Office of each Bank entitled to receive all or a portion of such payment. Administrative Agent will promptly thereafter cause to be disbursed such payments of principal and interest under this Section in like funds to the Banks entitled to receive all or a portion of such payment. Borrower hereby authorizes each Bank, if and to the extent payment of the Loans or interest thereon, or any Fees are not made when due under this Agreement or under the Notes, to charge from time to time against any account it maintains with such Bank any such amount so due to such Bank and/or any or all of the other Banks. Except to the extent provided in this Agreement, whenever any payment to be made under this Agreement or under the Notes shall be stated to be due on any day other than a Banking Day, such payment shall be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of the payment of interest and the Commitment Fees. SECTION 2.12. USE OF PROCEEDS. The proceeds of the Loans will be used by Borrower for general corporate purposes. Borrower will not, directly or indirectly, use any part of such proceeds for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors or to extend credit to any Person for the purpose of purchasing or carrying any such margin stock. SECTION 2.13. CONVERSIONS OR CONTINUATIONS. Provided that no Default or Event of Default has occurred and is continuing, Borrower shall have the right to convert all or a part of one type of Loan into another type of Loan or to continue all or any part of a LIBOR Loan, at any time or from time to time, provided that (1) Borrower shall give Administrative Agent and each Bank (a) notice of each such conversion into a Base Loan by no later than 12:00 noon (Central time) on the date of such conversion and (b) notice of each conversion into and continuation of a LIBOR Loan by no later than 12:00 noon (Central time) three Banking Days prior to such conversion or continuation, (2) LIBOR Loans may be converted or continued only on the last day of an Interest Period for such Loans, and (3) after giving effect to such continuation or conversion the minimum principal amount of the outstanding LIBOR Loans with the same Interest Period will be One Million Dollars ($1,000,000) and integral multiples of Five Hundred Thousand Dollars ($500,000). All notices given under this Section shall be irrevocable. Each such notice of conversion or continuation shall specify the Loan to be converted or continued and the amount thereof and the date of conversion or continuation (which shall be a Banking Day) and, in respect of a LIBOR Loan, the duration of an Interest Period. Each such notice of the duration of an Interest Period shall specify the LIBOR Loan to which such Interest Period is to relate. In the event that Borrower fails to select the type of Loan, or the duration of any Interest Period for any LIBOR Loan, within the time period and otherwise as provided in this Section, such Loan (if outstanding as a LIBOR Loan) will be automatically converted into a Base Loan on the last day of the then current Interest Period for such LIBOR Loan. ARTICLE III. LETTERS OF CREDIT SECTION 3.01. LETTERS OF CREDIT. Any Bank may, in its sole discretion, issue for the account of Borrower either (1) a documentary letter of credit or (2) a standby letter of credit, in each case with an expiration date of three hundred sixty-four (364) days or less (without regard to any renewal provisions thereof) from the date of issuance of such letter of credit (each of the letters of credit under (1) and (2), a "Letter of Credit") on terms and conditions agreed to by such Bank and Borrower from time to time during the period from the Closing Date to the 364 Day Facility Maturity Date, provided, that (1) with regard to all Banks, at no time will the outstanding Total Letter of Credit Obligations exceed the lesser of (a) Fifty Million Dollars ($50,000,000), or (b) an amount equal to (i) the Total 364 Day Facility Commitment, minus (ii) the aggregate principal amount of all outstanding 364 Day Facility Loans, minus (iii) the aggregate principal amount of all outstanding Bid Loans, minus (iv) the aggregate principal amount of all unreimbursed obligations in respect to amounts paid under such Letters of Credit all determined at such time, and (2) with respect to each Bank, no Letter of Credit may be issued unless there is sufficient Individual Unused 364 Day Facility Commitment of such Bank to cover the requested Letter of Credit. Outstanding Individual Letter of Credit Obligations of a Bank shall not be affected if such Bank elects to offer a Bid Advance in excess of its Individual 364 Day Facility Commitment pursuant to Section 2.02(2). The terms and conditions relating to each Letter of Credit will be set forth in a Letter of Credit Agreement, and such Letter of Credit Agreement will provide that all draws under such Letter of Credit will be reimbursed at the time of such draw. The expiration date of a Letter of Credit may be after the 364 Day Facility Maturity Date. Each Letter of Credit will be an obligation of the Bank issuing such Letter of Credit and the other Banks are not required to purchase participations in such Letter of Credit. Prior to the issuance of each Letter of Credit, the Bank proposing to issue such Letter of Credit will confirm with Administrative Agent that such Letter of Credit will not exceed the limitations set forth in this Section. SECTION 3.02. RELATIONSHIP BETWEEN THIS AGREEMENT AND EACH LETTER OF CREDIT AGREEMENT. Each Bank agrees that to the extent its Letter of Credit Agreement (including with respect to any Letters of Credit listed on Schedule 3.03) contains (1) representations and warranties, covenants or events of default covering substantially the same matters or items that are covered by the representations and warranties, covenants or Events of Default set forth in this Agreement, or (2) any of the items covered by Section 12.07 of this Agreement, such as jurisdiction, service of process, waivers of immunity and so forth, that in all such cases the terms of this Agreement supersede such provisions and the terms of this Agreement are controlling. In addition, each Bank and Borrower agree that the reimbursement obligation on all Letters of Credit are not, and will not be, secured by a Lien on any assets of Borrower or any Subsidiary, except for Liens permitted under Section 7.02. SECTION 3.03. OUTSTANDING LETTERS OF CREDIT. Borrower and each Bank agrees that all letters of credit previously issued by such Bank for the account of Borrower which remain outstanding as of the Closing Date, all of which are set forth in Schedule 3.03, will automatically as of such Date be deemed to be Letters of Credit, as set forth in such Schedule, and, except for previously agreed upon fees and expenses, as such, all such Letters of Credit will be subject to the terms of this Agreement. SECTION 3.04. REIMBURSEMENT OBLIGATIONS ON LETTERS OF CREDIT. Borrower and each Bank agree that all reimbursement obligations of Borrower in respect to amounts paid under a Letter of Credit will immediately and automatically be satisfied by such Bank's making a 364 Day Facility Advance and that all such 364 Day Facility Advances shall in the amount of such payments bear interest at the interest rate for a Base Advance under Section 2.07 and that Borrower hereby irrevocably authorizes such Bank to make such Advance(s) without the receipt of any notice or request of Borrower. ARTICLE IV. CONDITIONS PRECEDENT SECTION 4.01. CONDITIONS PRECEDENT TO INITIAL USE OF A CREDIT FACILITY ON AND AFTER THE SECTION 4.01. CONDITIONS PRECEDENT TO INITIAL USE OF A CREDIT FACILITY ON AND AFTER THE CLOSING DATE. The obligations of the Banks on or after the Closing Date to make a 364 Day Facility Loan or, the ability of Borrower to request either a Letter of Credit or a Bid Request is subject to the condition precedent that the Banks shall have received on or before the Closing Date each of the following documents, in form and substance satisfactory to the Syndication Agents and their counsel, and each of the following requirements shall have been fulfilled: (1) Evidence of Due Organization and all Corporate Actions by Borrower. A certificate of the Secretary or Assistant Secretary of Borrower, dated the Closing Date, attesting to the certificate of incorporation of Borrower and all amendments thereto, to the by-laws and all amendments thereto of Borrower, and to all corporate actions taken by Borrower, including resolutions of its board of directors, authorizing the execution, delivery and performance of the Loan Documents, and each other document to be delivered pursuant to the Loan Documents; (2) Incumbency and Signature Certificate of Borrower. A certificate of the Secretary or Assistant Secretary of Borrower, dated the Closing Date, certifying the names and true signatures of the officers of Borrower authorized to sign the Loan Documents, and the other documents to be delivered pursuant to the Loan Documents; (3) Good Standing Certificate of Borrower. A certificate, dated within ten (10) Banking Days of the Closing Date, from the Secretary of State (or other appropriate official) of the jurisdiction of incorporation of Borrower certifying as to the due incorporation and good standing of Borrower; (4) Notes. For each of the Banks each of its Notes, properly completed and duly executed by Borrower; (5) Opinion of Counsel for Borrower. Favorable opinion of in-house counsel for Borrower addressed to the Banks, dated the Closing Date; (6) Payment of Fees. Payment in full to the Facility Agents and the Syndication Agents of all fees required to be paid as of such date to each of the Facility Agents and the Syndication Agents pursuant to the terms of the Fee Letter, and payment in full of all other fees or expenses required to be paid as of such date in accordance with the Loan Documents; (7) Officer's Certificate. The following statements shall be true and Administrative Agent shall have received a certificate signed by a duly authorized officer of Borrower dated the Closing Date stating that: (a) The representations and warranties contained in this Agreement are, as of the Closing Date, as though made on and as of such Date, correct in all material respects; and (b) No Default or Event of Default has occurred and is continuing; (8) Cancellation of Existing Credit Agreements. Termination of the Existing Credit Agreements and repayment in full of all loans outstanding under and as defined in such agreements; and (9) Additional Documentation. Such other approvals, opinions or documents as any Bank Party may reasonably request. SECTION 4.02. CONDITIONS PRECEDENT TO EACH CREDIT FACILITY. The obligations of the Banks to make each 364 Day Facility Loan after the Closing Date or, the ability of Borrower to request after the Closing Date either a Letter of Credit or a Bid Request, shall be subject to the further conditions precedent that on the date of providing such Credit Facility or request: (1) Representations and Warranties; No Defaults or Events of Default. The following statements shall be true: (a) all the representations and warranties contained in this Agreement and in each of the other Loan Documents are, as of the date of providing such Credit Facility, as though made on and as of such date, correct in all material respects; and (b) no Default or Event of Default has occurred and is continuing. (2) Additional Documentation. Administrative Agent shall have received such other approvals, opinions or documents as any Bank Party may reasonably request. SECTION 4.03. DEEMED REPRESENTATION. Each request for a Credit Facility and acceptance by Borrower of any proceeds of such Loan or the issuance, extension or increase in the face amount of any Letter of Credit, as the case may be, shall constitute a representation and warranty by Borrower that the statements contained in Section 4.02(1) are true and correct both on the date of such notice and as of the date of the providing of such Loan or issuance or amendment of such Letter of Credit, as the case may be. ARTICLE V. REPRESENTATIONS AND WARRANTIES Borrower hereby represents and warrants that: SECTION 5.01. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION. Borrower and each Subsidiary is duly incorporated or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, has the corporate power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged, and is duly qualified as a foreign corporation or entity and in good standing under the laws of each other jurisdiction in which such qualification is required, except to the extent that its failure to be so qualified has not, and could not reasonably be expected to, result in a Material Adverse Change. SECTION 5.02. CORPORATE POWER AND AUTHORITY; NO CONFLICTS. The execution, delivery and performance by Borrower of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action and do not and will not: (1) require any consent or approval of its stockholders which has not been obtained; (2) contravene its certificate of incorporation or by-laws; (3) violate any provision of, or require any filing, registration, consent or approval under, any Law (including, without limitation, Regulations G, T, U and X of the Board of Governors), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to Borrower or any Subsidiary; (4) result in a breach of or constitute a default under or, except for any obtained, require any consent under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower or any Subsidiary is a party or by which it or its properties may be bound or affected; (5) except as contemplated by this Agreement, result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by Borrower or any Subsidiary; or (6) cause Borrower or any Subsidiary to be in default under any such Law, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument (upon obtaining all consents which have been obtained on or before the date hereof). SECTION 5.03. LEGALLY ENFORCEABLE AGREEMENTS. This Agreement and each of the other Loan Documents constitute the legal, valid and binding obligations of Borrower enforceable in accordance with their terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, and other laws affecting creditors' rights generally. SECTION 5.04. LITIGATION. Except as specified on Schedule 5.04, there are no actions, suits or proceedings (private or governmental) pending or, to the knowledge of Borrower, threatened, against or affecting Borrower or any Subsidiary before any Governmental Authority or arbitrator, which have resulted in, or could be reasonably expected to result in, in any one case or in the aggregate, a Material Adverse Change. SECTION 5.05. FINANCIAL STATEMENTS. The consolidated balance sheet of Borrower and its Subsidiaries as of May 31, 1996, and the related consolidated statements of operations, cash flows and consolidated statements of capital shares and equities for the Fiscal Year then ended, and the accompanying footnotes, together with the unqualified opinion thereon, dated August 19, 1996 of Deloitte & Touche LLP, independent certified public accountants, copies of which have been furnished to the Banks, fairly present in all material respects the consolidated financial condition of Borrower and its Subsidiaries as at such dates and the results of the consolidated operations of Borrower and its Subsidiaries for the periods covered by such statements, all in accordance with GAAP consistently applied. Since May 31, 1996, there has been no Material Adverse Change. As of the Closing Date, there are no liabilities of Borrower or any of its Subsidiaries, fixed or contingent, which are material but are not reflected in the financial statements of Borrower and its Subsidiaries referred to above or referred to in the notes thereto, other than liabilities arising in the ordinary course of business since May 31, 1996. No information, exhibit, or report furnished by Borrower or any of its Subsidiaries to either or both Facility Agents or Syndication Agents in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not materially misleading in light of the circumstances in which they were made and taken together with the other information, exhibits and reports furnished to the Bank Parties. SECTION 5.06. OWNERSHIP AND LIENS. Borrower and each Subsidiary have good and marketable title to, or valid leasehold interests in, all of their material properties and assets, real and personal, including the properties and assets and leasehold interests reflected in the financial statements of the Borrower and its Subsidiaries referred to in Section 5.05, except (1) any properties or assets disposed of in the ordinary course of business, and (2) for minor defects in title and minor encumbrances not in any case materially detracting from the value or use of the assets affected thereby; and none of the properties and assets owned by Borrower or any Subsidiary and none of their leasehold interests are subject to any Lien, except as may be permitted under this Agreement. SECTION 5.07. TAXES. Borrower and each Subsidiary have filed all tax returns (federal, state and local) required to be filed (or obtained extensions with respect thereto) and have paid all taxes, assessments and governmental charges and levies thereon prior to the time they are delinquent, including interest and penalties, except (1) to the extent they are the subject of a Good Faith Contest and (2) as otherwise disclosed in Schedule 5.07. SECTION 5.08. ERISA. The Borrower and its Subsidiaries are in compliance in all material respects with ERISA, to the extent applicable to them, and have received no notice to the contrary from the PBGC or any other governmental entity or agency. SECTION 5.09. OPERATION OF BUSINESS. Borrower and each Subsidiary possess all licenses, permits, franchises, and trade names, or rights thereto, to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted, and Borrower and each Subsidiary are not in violation of any valid rights of others with respect to any of the foregoing, except to the extent such lack of possession or violation has not resulted in, and could not reasonably be expected to result in, a Material Adverse Change. SECTION 5.10. NO DEFAULT ON OUTSTANDING JUDGMENTS OR ORDERS. Borrower and each Subsidiary have satisfied all judgments and Borrower and each Subsidiary are not in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court, arbitrator or federal, state, municipal or other Governmental Authority, commission, board, bureau, agency or instrumentality, domestic or foreign, except to the extent such failure to satisfy any or all such judgments or to be in such a default has not resulted in, and could not reasonably be expected to result in, a Material Adverse Change. SECTION 5.11. NO DEFAULTS ON OTHER AGREEMENTS. Neither Borrower nor any Subsidiary is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any certificate of incorporation or corporate restriction which has resulted in, or could reasonably be expected to result in, a Material Adverse Change. Neither Borrower nor any Subsidiary is in default in any respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument where such failure to perform, observe or fulfill has resulted in, or could reasonably be expected to result in, a Material Adverse Change. SECTION 5.12. LABOR DISPUTES AND ACTS OF GOD. Neither the business nor the properties of Borrower or any Subsidiary are currently affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance) which has resulted in, or could reasonably be expected to result in, a Material Adverse Change. SECTION 5.13. GOVERNMENTAL REGULATION. Neither Borrower nor any Subsidiary is subject to regulation under the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce Act, the Federal Power Act or any statute or regulation, in each case, limiting its ability to incur indebtedness for money borrowed as contemplated hereby. SECTION 5.14. ENVIRONMENTAL PROTECTION. Except as set forth on Schedule 5.14, Borrower and each Subsidiary have obtained all permits, licenses and other authorizations which are required under all applicable Environmental Laws, except to the extent failure to have any such permit, license or authorization could not reasonably be expected to result in a Material Adverse Change. Except as set forth on Schedule 5.14, Borrower and each Subsidiary are in compliance with all Environmental Laws and the terms and conditions of the required permits, licenses and authorizations, and are also in compliance with all other limitations, restrictions, obligations, schedules and timetables contained in those Laws or contained in any plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent, in each case, failure to comply has not resulted in, and could not reasonably be expected to result in, a Material Adverse Change. SECTION 5.15. MARGIN SECURITIES. No more than twenty-five percent (25%) of the value of the assets subject to Section 7.02 consists of "margin securities" as that term is defined in Regulations G and U of the Board of Governors of the Federal Reserve System. ARTICLE VI. AFFIRMATIVE COVENANTS So long as any of the Notes shall remain unpaid or any Individual Letter of Credit Obligation shall remain outstanding or any Bank shall have any Individual 364 Day Facility Commitment hereunder or any other amount is owing by Borrower to any Bank Party hereunder or under any other Loan Document, Borrower shall: SECTION 6.01. MAINTENANCE OF ELIGIBILITY AND CAPITALIZATION. Preserve and maintain its status as an entity eligible to borrow from CoBank and St. Paul Bank; and for each Advance made by CoBank and St. Paul Bank purchase such equity in CoBank and St. Paul Bank as CoBank and St. Paul Bank may from time to time require in accordance with CoBank's or St. Paul Bank's bylaws and capital plan. Borrower hereby acknowledges receipt prior to the execution of this Agreement of a written description of the terms and conditions under which equity in CoBank or St. Paul Bank is issued. CoBank and St. Paul Bank reserve the right to sell participations under the provisions of Section 12.04 on a non-patronage basis. SECTION 6.02. MAINTENANCE OF EXISTENCE. Preserve and maintain, and cause each Subsidiary to preserve and maintain, its corporate or other entity existence and good standing in the jurisdiction of its incorporation or formation, and qualify and remain qualified as a foreign corporation or entity in each jurisdiction in which such qualification is required except (1) where the failure to so qualify has not and could not reasonably be expected to result in a Material Adverse Change, and (2) for any mergers permitted under Section 7.05. SECTION 6.03. MAINTENANCE OF PROPERTIES. Maintain, keep and preserve, and cause each Subsidiary to maintain, keep and preserve, all of its material properties (tangible and intangible) necessary or used in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted, and shall cause to be made all repairs, renewals, replacements, betterments and improvements thereof, all as in the sole judgment of Borrower may be reasonably necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times. SECTION 6.04. MAINTENANCE OF RECORDS. Keep, and cause each of its Subsidiaries to keep, adequate records and books of account, in which complete entries will be made in accordance with GAAP, reflecting all of its and their financial transactions. SECTION 6.05. MAINTENANCE OF INSURANCE. Maintain, and cause each Subsidiary to maintain, insurance with financially sound and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in the same or a similar business and similarly situated, provided, however, that Borrower may, to the extent permitted by Law, provide for appropriate self-insurance with respect to worker's compensation. At the request of Administrative Agent, copies of all policies (or such other proof of compliance with this Section 6.05 as may be reasonably satisfactory) shall be delivered to the Banks. SECTION 6.06. COMPLIANCE WITH LAWS. Comply in all material respects, and cause each Subsidiary to comply in all material respects, with all applicable Laws, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property, unless such failure to comply is the subject of a Good Faith Contest. SECTION 6.07. RIGHT OF INSPECTION. At any time and from time to time during normal business hours and upon reasonable notice to Borrower, permit, and cause its Subsidiaries to permit, any Bank Party or any agent or representative thereof, to examine and make copies and abstracts from the financial records and books of account of, and visit the properties of, Borrower and any Subsidiary, and to discuss the affairs, finances and accounts of Borrower and any Subsidiary with any of their respective officers and directors and independent accountants, provided, that, in the case of each meeting with the independent accountants Borrower is given an opportunity to have a representative present at such meeting. SECTION 6.08. EMPLOYEE BENEFIT PLANS. Make or cause to be made, and cause each Subsidiary to make or cause to be made, all payments or contributions to all Plans covered by Title IV of ERISA, which are necessary to enable those Plans to continuously meet all minimum funding standards or requirements. SECTION 6.09. REPORTING REQUIREMENTS. Furnish directly to Administrative Agent: (1) BORROWER'S MONTHLY FINANCIAL STATEMENTS. As soon as available and in any event within forty-five (45) days after the end of each month (except for the last such month in each fiscal year of Borrower), one copy of the consolidated balance sheet, the consolidated summary of earnings, consolidated statement of cash flow of the Borrower and its Subsidiaries, all for such monthly period and the year to date of the Borrower and its Subsidiaries, and for the corresponding periods of the preceding fiscal year, all in reasonable detail, prepared by the Borrower in conformance with GAAP consistently applied and certified to by the Borrower's Group Vice President-Finance, or other officer of Borrower acceptable to the Administrative Agent (subject to normal year end adjustments); and (2) BORROWER'S ANNUAL AUDIT. As soon as available and in any event within 120 days after the close of each fiscal year of Borrower, one copy of the audit report for such year and accompanying consolidated financial statements (including all footnotes thereto), including a consolidated balance sheet, a consolidated statement of earnings, a consolidated statement of capital, and a consolidated statement of cash flow for the Borrower and its Subsidiaries, showing in comparative form the figures for the previous year, all in reasonable detail, prepared in conformance with GAAP consistently applied and certified without qualification by Deloitte & Touche LLP, or other independent public accountants of nationally recognized standing selected by the Borrower and satisfactory to the Administrative Agent, and to be accompanied by a copy of the management letter of such accountants addressed to the board of directors of Borrower related to such annual audit; and (3) CERTIFICATE OF NO DEFAULT. At the time of the delivery of each of the financial statements referred to under (1) and (2) of this Section 6.09, a certificate of the Group Vice President, Finance of Borrower (a) certifying that no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and (b) with computations demonstrating compliance with Sections 7.01(e), 7.08 and 7.11 as well as the financial covenants contained in Article VIII. (4) NOTICE OF LITIGATION. Promptly after the commencement thereof, notice of all actions, suits, arbitration and any other proceedings before any Governmental Authority, affecting Borrower or any Subsidiary which, if determined adversely to Borrower or any Subsidiary, could reasonably be expected to require Borrower or any Subsidiary to have to pay or deliver assets having a value of Five Million Dollars ($5,000,000) or more (whether or not the claim is covered by insurance) or could reasonably be expected to result in a Material Adverse Change. (5) NOTICES OF DEFAULTS AND EVENTS OF DEFAULT. As soon as possible and in any event within three (3) days after the occurrence of each Default or Event of Default, a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken by Borrower and the Subsidiaries with respect thereto. (6) ERISA REPORTS. As soon as possible and in any event within twenty (20) days after Borrower or any Subsidiary knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC or Borrower or any Subsidiary has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, or that Borrower, any Subsidiary or any ERISA Affiliate has completely or partially withdrawn from a Multiemployer Plan, or that a Plan which is a Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA) or is terminating, Borrower or such Subsidiary will deliver to each of the Banks a certificate of the Group Vice President-Finance of Borrower or such Subsidiary setting forth details as to such Reportable Event or Prohibited Transaction or Plan termination or withdrawal or reorganization or insolvency and the action Borrower or such Subsidiary proposes to take with respect thereto, provided, however, that notwithstanding the foregoing, no reporting is required under this subsection (6) unless the matter(s), individually or in the aggregate, result, or could be reasonably expected to result, in aggregate obligations or liabilities of Borrower and/or the Subsidiaries in excess of One Million Dollars ($1,000,000). (7) ANNUAL BUDGET. Promptly upon becoming available and in any event within ninety (90) days after each Fiscal Year end, a copy of the Annual Operating Budget for the next succeeding Fiscal Year approved by Borrower's board of directors, together with the assumptions and projections on which such budget is based and a copy of forecasts of operations and capital expenditures (including investments) and a projection of cash flow by months for each fiscal year. In addition, if any material changes are made to such budget or projections or forecasts during the year, then Borrower will furnish copies to the Administrative Agent of any such changes promptly after such changes have been approved. (8) MATERIAL ADVERSE CHANGE. As soon as possible and in any event within five (5) days after the occurrence of any event or circumstance which could reasonably be expected to result in or has resulted in a Material Adverse Change, written notice thereof. (9) ENVIRONMENTAL NOTICES. As soon as possible and in any event within five (5) days after receipt, copies of all Environmental Notices received by Borrower or any Subsidiary which indicate a potential liability of Five Million Dollars ($5,000,000) or more for Borrower and all its Subsidiaries taken together or which could reasonably be expected to result in or has resulted in a Material Adverse Change. (10) GENERAL INFORMATION. With reasonable promptness, such other information respecting the condition or operations, financial or otherwise, of Borrower or any Subsidiary as any Bank Party may from time to time reasonably request. SECTION 6.10. COMPLIANCE WITH ENVIRONMENTAL LAWS. Comply, and cause each of its Subsidiaries to comply, in all respects with all applicable Environmental Laws, where the failure to comply could reasonably be expected to result in a Material Adverse Change, except where the failure to comply is the subject of a Good Faith Contest, and promptly pay or cause to be paid all costs and expenses incurred in connection with such compliance. SECTION 6.11. MAINTENANCE OF COMMODITY POSITION. Protect its commodity inventory holdings or commitments to buy or sell commodities against adverse price movements, including the taking of equal and opposite positions in the cash and futures markets, to minimize losses and protect margins in commodity production, storage, processing and marketing as is recognized as financially sound and reputable by prudent business persons in the commodity business. ARTICLE VII. NEGATIVE COVENANTS So long as any of the Notes shall remain unpaid or any Individual Letter of Credit Obligation shall remain outstanding or any Bank shall have any Individual 364 Day Facility Commitment hereunder or any other amount is owing by Borrower to any Bank Party hereunder or under any other Loan Document, Borrower shall not and shall not permit any of its Subsidiaries to: SECTION 7.01. DEBT. Create, incur, assume, or allow to exist, directly or indirectly, any Debt or liability for borrowed money or for the deferred purchase price of property or services, except for: (a) indebtedness of Borrower arising under this Agreement and the other Loan Documents; (b) trade payables arising in the ordinary course of business; (c) Capital Leases in existence from time to time, (d) current operating liabilities (other than for borrowed money) incurred in the ordinary course of business; (e) unsecured indebtedness of Borrower and its Subsidiaries arising under uncommitted lines of credit; provided that the maximum principal amount that may be outstanding at any one time shall not exceed $15,000,000, (f) indebtedness of Borrower and its Subsidiaries on the date hereof as set forth in Schedule 7.01 attached hereto, (g) unsecured long-term indebtedness of Borrower and its Subsidiaries, (h) documentary and standby letters of credit issued at the request of Borrower or any Subsidiary by a financial institution other than a Bank, provided the aggregate principal amount outstanding under such letters of credit together with the principal outstanding under Letters of Credit do not exceed $50,000,000 and provided further that the aggregate principal amount outstanding under such letters of credit together with all Advances, principal outstanding under Letters of Credit and unreimbursed obligations to Banks with respect to payments made by such Banks under Letters of Credit shall not exceed the Commitment and (i) such other indebtedness agreed upon in writing between Borrower and the Bank Parties. SECTION 7.02. LIENS. Create, incur, assume or suffer to exist any Lien, upon or with respect to any of its real or personal properties (including, without limitation, leasehold interests, leasehold improvements and any other interest in real property or fixtures), now owned or hereafter acquired, except: (1) Liens for taxes or assessments or other charges or levies of any Governmental Authority, that are not delinquent or if delinquent (i) are the subject of a Good Faith Contest but in no event past the time when a penalty would be incurred, and (ii) the aggregate amount of liabilities so secured (including interest and penalties) does not exceed $10,000,000 at any one time outstanding; (2) Liens imposed by Law, such as mechanic's, worker's, repairman's, miner's, agister's, attorney's, materialmen's, landlord's, warehousemen's and carrier's Liens and other similar Liens which are securing obligations incurred in the ordinary course of business for sums not yet due and payable or if due and payable which are the subject of a Good Faith Contest; (3) Liens under worker's compensation, unemployment insurance, social security or similar legislation (other than ERISA), or to secure payments of premiums for insurance purchased in the ordinary course of business, or to secure the performance of tenders, statutory obligations, surety and appearance bonds and bids, bonds for release of an attachment, stay of execution or injunction, leases, government contracts, performance and return-of-money bonds and other similar obligations, all of which are incurred in the ordinary course of business and not in connection with the borrowing of money; (4) any attachment or judgment Lien, the time for appeal or petition for rehearing of which shall not have expired or in respect of which Borrower or the Subsidiary is protected in all material respects by insurance or for the payment of which adequate reserves have been provided, provided, that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are the subject of a Good Faith Contest, and provided further that the aggregate amount of liabilities of Borrower and its Subsidiaries so secured (including interest and penalties) shall not be in excess of $5,000,000 at any one time outstanding; (5) easements, rights-of-way, restrictions, encroachments, covenants, servitudes, zoning and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by Borrower or any Subsidiary of the property or assets encumbered thereby in the normal course of its business or materially impair the value of the property subject thereto; (6) Liens arising in the ordinary course of business and created in connection with amounts on deposit in charge card and like accounts (such as Visa or MasterCard); (7) Liens on land, buildings and equipment existing at the time of their acquisition or Liens to secure the payment of all or any part of the purchase price of such land, buildings or equipment or to secure Funded Debt incurred prior to, at the time of, or within 180 days after the acquisition of such property for the purpose of financing all or any part of the purchase price thereof, provided that any such Liens shall not encumber any other property of Borrower or its Subsidiaries; (8) Liens assumed in connection with permitted mergers and acquisitions, but only to the extent that such Liens shall secure only Funded Debt and shall not encumber any other property of Borrower or any Subsidiary; (9) Liens on financed property created or incurred in connection with leases, mortgages, conditional sales contracts, security interests or arrangements for the retention of title entered into by Borrower or any of its Subsidiaries to secure "industrial revenue bonds" as defined in Section 103(b)(2) of the Code and treated as obligations described in legislation similar to the provisions of said Sections of the Code enacted in any State of the United States or Puerto Rico, which are issued to finance property useful and intended to be used in carrying on the business of Borrower or any of its Subsidiaries, provided that upon creation of any such Lien Borrower or such Subsidiary shall incur Funded Debt secured thereby in conformity with the provisions of Section 8.03 hereof; (10) Liens related to Letters of Credit, provided such Liens attach only to property financed through such Letters of Credit; (11) Cash Collateral provided to Administrative Agent for the benefit of the Banks to secure Letters of Credit as provided for under Section 9.02; (12) Liens on property or assets of a Subsidiary to secure Debt of such Subsidiary to Borrower or another Subsidiary; (13) Liens of CoBank, St. Paul Bank and other cooperatives, respectively, on Investments by Borrower in the stock, participation certificates, or allocated reserves of CoBank, St. Paul Bank or other cooperatives, respectively, owned by Borrower; (14) all precautionary filings of financing statements under the Uniform Commercial Code which cover property that is made available to or used by Borrower or any Subsidiary pursuant to the terms of an Operating Lease or Capital Lease; SECTION 7.03. FISCAL YEAR. Change its Fiscal Year to a period other than its Fiscal Year in effect on the Closing Date. SECTION 7.04. SALE OF ASSETS. Sell, lease, assign, transfer or otherwise dispose of any material part of its now owned or hereafter acquired assets, except: (1) the sale of inventory, equipment and fixtures disposed of in the ordinary course of business, (2) the sale or other disposition of assets no longer necessary or useful for the conduct of its business. For purposes of this Section, "material part" shall mean 5% or more of the lesser of the book value or the market value of the assets of Borrower at the time of such sale, lease, assignment, transfer or other disposition. SECTION 7.05. MERGERS, ETC. Merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of related transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person, or acquire all or substantially all of the assets or the business of any Person (or enter into any agreement to do any of the foregoing); however, that the foregoing shall not prevent any consolidation or merger if after giving affect thereto: (1) The book value of Borrower and its Subsidiaries does not increase due to all such mergers, consolidations or acquisitions by an aggregate amount in excess of $25,000,000 in any fiscal year of Borrower; (2) The Borrower is the surviving entity; and (3) No Event of Default or Default shall have occurred and be continuing. SECTION 7.06. CHANGE IN BUSINESS. Engage in any material respects in any business activity or operations which are substantially different from or unrelated to its present business activities or operations. SECTION 7.07. INVESTMENTS. In any fiscal year of Borrower make, or suffer to exist, any Investment except (1) Permitted Investments, (2) Investments in Subsidiaries, (3) Investments permitted under Sections 7.05, 7.09 and 7.10 and (4) Investments that are not Permitted Investments in an aggregate amount not exceeding $5,000,000 for each Fiscal Year of Borrower. SECTION 7.08. CONTINGENT LIABILITIES. Assume, guarantee, become liable as a surety, endorse, contingently agree to purchase, or otherwise be or become liable, directly or indirectly (including, but not limited to, by means of a maintenance agreement, an asset or stock purchase agreement, or any other agreement designed to ensure any creditor against loss), for or on account of the obligation of any Person, except (1) by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of the Borrower's or any Subsidiary's business, (2) guarantees made from time to time by Borrower and its Subsidiaries in the ordinary course of their respective businesses; provided, however, that the aggregate amount of all indebtedness guaranteed under Subsection (2) shall not exceed $100,000,000 in the aggregate. SECTION 7.09. LOANS. Lend or advance money, credit, or property to any Person, except for (1) loans to Subsidiaries, (2) trade credit extended in the ordinary course of business, (3) loans made by Borrower to its members on open account maintained by such members with Borrower or made by Borrower to its members pursuant to its Affiliate Financing CoBank Participation Program; provided that the aggregate principal amount of all such loans outstanding at any time shall not exceed $150,000,000 and (4) loans made by Fin-Ag, Inc. to agricultural producers, provided that the aggregate principal amount of all such loans outstanding at any time shall not exceed $35,000,000. SECTION 7.10. TRANSACTION WITH AFFILIATES. Enter into any transaction, including, without limitation, the purchase, sale, lease or exchange of any property, or the rendering of any service, with any Affiliate of Borrower or a Subsidiary except in the ordinary course of and pursuant to the reasonable requirements of Borrower and its Subsidiaries business and upon fair and reasonable terms which are not materially less favorable to Borrower than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate of Borrower or a Subsidiary. SECTION 7.11. PATRONAGE REFUNDS, ETC. In any fiscal year (1) declare or pay any cash patronage refunds to patrons or members which in the aggregate exceed 20% of Borrower's consolidated net patronage income for the Fiscal Year of Borrower preceding the Fiscal Year in which such patronage refunds are to be paid or (2) directly or indirectly redeem or otherwise retire its equity or (3) make any cash distributions of any kind or character in respect of its equity unless (i) at the time of taking such action no Event of Default or Default exists hereunder and (ii) after giving effect thereto no Event of Default or Default would exist hereunder. ARTICLE VIII. FINANCIAL COVENANTS So long as any of the Notes shall remain unpaid or any Individual Letter of Credit Obligation shall remain outstanding or any Bank shall have any Individual 364 Day Facility Commitment hereunder or any other amount is owing by Borrower to any Bank Party hereunder or under any other Loan Document: SECTION 8.01. CONSOLIDATED WORKING CAPITAL. Borrower and its Subsidiaries shall have at all times an excess of Current Assets over Current Liabilities on a consolidated basis of not less than One Hundred Million Dollars ($100,000,000). SECTION 8.02. CONSOLIDATED MEMBERS' AND PATRONS' EQUITY. Borrower and its Subsidiaries shall have at all times Consolidated Members' and Patrons' Equity in an amount not less than Two Hundred Seventy-Five Million Dollars ($275,000,000). SECTION 8.03. CONSOLIDATED FUNDED DEBT TO CONSOLIDATED MEMBERS' AND PATRONS' EQUITY. Borrower and its Subsidiaries shall not permit the ratio of Consolidated Funded Debt of Borrower and its Subsidiaries to Consolidated Members' and Patrons' Equity to exceed at any time .80 to 1.00. ARTICLE IX. EVENTS OF DEFAULT EVENTS OF DEFAULT SECTION 9.01. EVENTS OF DEFAULT. Any of the following events shall be an "Event of Default": (1) PAYMENT DEFAULT. Failure by Borrower to make any payment required to be made hereunder or under any other Loan Document when due; or (2) REPRESENTATIONS AND WARRANTIES. Any representation or warranty made by Borrower herein or in any agreement, certificate or document related hereto or furnished in connection herewith, shall prove to have been false or misleading in any material respect on or as of the date made; or (3) CERTAIN AFFIRMATIVE COVENANTS. Failure by Borrower to perform or comply with any covenant set forth in Sections 6.03 through 6.07, and 6.09 (other than Sections 6.09(5), (6), (9) and (10)) and 6.10 hereof and such failure continues for 15 days after written notice thereof shall have been delivered to Borrower by any Bank; or (4) OTHER COVENANTS AND AGREEMENTS. Borrower shall fail to perform or comply with any other covenant or agreement contained herein, including any covenant excluded in (3) above, provided, however, the provisions of this Subsection (4) notwithstanding, it shall be an Event of Default if Borrower shall fail to comply with the provisions of Sections 7.01 and/or 7.02 and such failure is in excess of $5,000,000 or if such failure is equal to or less than $5,000,000 and such failure is not cured within five (5) Banking Days after such failure is discovered by Borrower's Group Vice President, Finance; and provided further, the provisions of this Subsection (4) notwithstanding, it shall be an Event of Default if Borrower and its Subsidiaries shall fail to maintain compliance with the working capital requirements of Section 8.01, and such failure continues beyond the date financial statements are provided under Subsections 6.09(1) and (2); or (5) CROSS-DEFAULT. Borrower shall, after any applicable grace period, breach or be in default under the terms of any other Loan Document or of any other agreement between Borrower and any Bank; or (6) OTHER DEBT. Borrower or any Subsidiary shall: (a) fail to pay all or any portion of a Debt (other than the payment obligations described in (1) above) of Borrower or any Subsidiary when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) where the aggregate amount of all such Debt is equal to or in excess of Five Million Dollars ($5,000,000) except for the failure to pay such Debt where (i) such Debt constitutes trade obligations, and (ii) such failure to pay is subject to a Good Faith Contest; or (b) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Debt included in clause (a) above, when required to be performed or observed, and such failure shall not be waived and shall continue after the applicable grace period, if any, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, after the giving of notice or the lapse of time, or both, the maturity of such Debt; or any such Debt included in clause (a) above shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment or voluntary prepayment), prior to the stated maturity thereof, unless such failure is subject to a Good Faith Contest; or (7) LEASES. Borrower or any Subsidiary shall fail to pay or to perform any obligations of Five Million Dollars ($5,000,000) or more under or with respect to any material lease of goods (except to the extent that the existence of any such default is subject to a Good Faith Contest); or (8) MATERIAL ADVERSE CHANGE. The Requisite Banks shall have determined that an event or circumstance constituting a Material Adverse Change has occurred; or (9) ERISA. Any reportable event (as defined in ERISA) which constitutes grounds for the termination of any Plan, or for the appointment of a trustee to administer or liquidate any such Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to Borrower by any Bank; or any such Plan shall be terminated; or a trustee shall be appointed; or the PBGC shall institute proceedings to terminate any such Plan; or (10) BANKRUPTCY, ETC. Borrower or any of its Subsidiaries: (a) shall generally not, or be unable to, or shall admit in writing its inability to, pay its debts as such debts become due; (b) shall make an assignment for the benefit of creditors, petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; (c) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; (d) shall have had any such petition or application filed involuntarily against it; and with respect to proceedings for dissolution or liquidation in which an adjudication or appointment is made or order for relief is entered and continues unstayed for a period of sixty (60) days or more; or shall be the subject of any such proceeding under which its assets may be subject to seizure, forfeiture or divestiture; or (e) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property. SECTION 9.02. REMEDIES. If any Event of Default shall occur and be continuing, Administrative Agent shall, upon request of the Requisite Banks, by notice to Borrower (1) declare the Commitments to be terminated, whereupon the same shall forthwith terminate, (2) declare the outstanding Notes, all interest thereon, and all other amounts payable under this Agreement and any other Loan Document to be forthwith due and payable, whereupon the Notes, all such interest, and all such amounts due under this Agreement and under any other Loan Document shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by Borrower, (3) require Borrower to provide Cash Collateral to Administrative Agent for the benefit of the Banks that have issued a Letter of Credit that is outstanding in an amount up to the aggregate undrawn face amount of all outstanding Letters of Credit, (4) exercise any remedies provided in any of the Loan Documents, and/or (5) exercise any rights and remedies provided by Law, provided, however, that upon the occurrence of an Event of Default referred to in Section 9.01(10), the Commitment shall automatically terminate and the outstanding Notes, and any other amounts payable under this Agreement or any of the other Loan Documents, and all interest on any of the foregoing, shall be forthwith due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower The parties hereto agree that all payments on Loans, unreimbursed obligations with respect to payments made under Letters of Credit after the occurrence of an Event of Default and the principal amount of all Letters of Credit that are outstanding and that have not been provided with Cash Collateral under (3) above will be applied ratably based upon the percentage which the aggregate amount of all Advances by such Bank then outstanding, unreimbursed obligations then outstanding to such Bank with respect to payments by such Bank under such Letters of Credit issued by such Bank and that have not been provided with Cash Collateral under (3) above bears to the aggregate amount of all Advances to the Banks then outstanding, unreimbursed obligations with respect to payments by Banks under Letters of Credit owed to all Banks and that have not been provided with Cash Collateral under (3) above. In addition, the parties hereto also agree that all Cash Collateral held on Letters of Credit that expire undrawn or on which the reimbursement obligation is paid will be applied to all the Loans as provided in the prior sentence. At any time after the principal of, and interest accrued on, any or all of the Notes are declared due and payable, the Supermajority Banks, by written notice to Borrower, may, in their sole and complete discretion, rescind and annul any such declaration and its consequences if (1) Borrower has paid all overdue interest on the Notes and the principal of any Notes which have become due otherwise than by reason of such declaration, and at a rate or rates per annum from time to time equal to the Default Rate(s), (2) all Events of Default and Defaults, other than nonpayment of amounts which have become due solely by reason of such declaration, have been cured or waived, and (3) no judgment or decree has been entered for the payment of any monies due pursuant to the Notes or this Agreement; but no such rescission and annulment shall extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. ARTICLE X. CHANGE IN CIRCUMSTANCES SECTION 10.01. ADDITIONAL COSTS. Borrower shall pay directly to each Bank within ten (10) days of a request for payment under this Section (which request shall be accompanied by a statement setting forth the basis for the request), such amounts as such Bank may determine to be necessary to compensate it for any increased costs which such Bank determines are attributable to its making or maintaining any LIBOR Advance, or its obligation to convert any Base Advance to a LIBOR Advance hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such LIBOR Advances or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change which: (1) changes the basis of taxation of any amounts payable to such Bank under this Agreement or the Notes in respect of any of such LIBOR Advances (other than changes in the rate of income tax imposed on such Bank or its Applicable Lending Office by the jurisdiction in which such Bank has its principal office or such Applicable Lending Office); (2) imposes or modifies or deems applicable any reserve, special deposit, deposit insurance or assessment, minimum capital, capital ratio or similar requirements relating to any extensions of credit of the type specified herein or other assets of, or any deposits with or other liabilities of, such Bank (including any LIBOR Advances or any deposits referred to in the definition of "LIBOR Rate" in Section 1.01 hereof), or any Individual 364 Day Facility Commitment of a Bank; or (3) imposes any other condition affecting this Agreement or the Notes (or any of such extensions of credit or liabilities). Without limiting the effect of the provisions of the first paragraph of this Section, in the event that, by reason of any Regulatory Change, any Bank either (1) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the LIBOR Rate is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank which includes loans based on the LIBOR Rate or (2) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Bank so elects by notice to Borrower (with a copy to Administrative Agent), the obligation of such Bank to make or continue, or to convert Base Advances into, LIBOR Advances, as the case may be, shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 10.04 hereof shall be applicable). Determinations and allocations by such Bank for purposes of this Section of the effect of any Regulatory Change pursuant to this Section, on its costs or rate of return of maintaining the Advances or on amounts receivable by it in respect of the Advances, and the amounts required to compensate such Bank under this Section, shall be conclusive absent manifest error. However, to the extent Additional Costs relate to a Bank's loans in general and not specifically to a Loan hereunder, such Bank shall use reasonable averaging and attribution methods. In addition, each Bank agrees that, as promptly as practical after it becomes aware of the occurrence of an event or the existence of a condition that would entitle it to exercise its rights under this Section, it will use commercially reasonable efforts to make, fund or maintain the affected Advance through another lending office of such Bank if (a) as a result thereof the additional money that would otherwise be required to be paid in respect of such Advance could be reduced and (b) the making, funding or maintaining of such Advance through such other lending office would not adversely affect such Advance or such Bank. Finally, if a Bank is to require Borrower to pay Additional Costs under this Section then such Bank must make a demand on Borrower to pay such Additional Costs within ninety (90) days of the later of (1) the date on which such Additional Costs are actually incurred by such Bank, or (2) the date on which such Bank knows, or should have known, that such Additional Costs have been incurred by such Bank. SECTION 10.02. LIMITATION ON TYPES OF ADVANCES. Anything herein to the contrary notwithstanding, if, on or prior to the determination of the LIBOR Rate for any Interest Period: (1) Administrative Agent determines (which determination shall be conclusive) that quotations of interest rates in the definition of "LIBOR Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for LIBOR Loans as provided in this Agreement; or (2) any Bank determines (which determination shall be conclusive) that the relevant rates of interest referred to in the definition of "LIBOR Rate" in Section 1.01 hereof upon the basis of which the rate of interest for LIBOR Loans for such Interest Period is to be determined do not adequately cover the cost to the Banks of making or maintaining such LIBOR Loans for such Interest Period; then Administrative Agent shall give Borrower prompt notice thereof, and so long as such condition remains in effect, in the case of subsection (1) above, the Banks, and in the case of subsection (2) above, the Bank that makes the determination, shall be under no obligation to make LIBOR Loans, convert Base Loans into LIBOR Loans, or continue LIBOR Loans, and Borrower shall, on the last day(s) of the then current applicable Interest Period(s) for the outstanding LIBOR Loans, either prepay such LIBOR Loans or convert such LIBOR Loans into a Base Loan in accordance with Section 2.13. SECTION 10.03. ILLEGALITY. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Bank or its Applicable Lending Office to honor its obligation to make or maintain LIBOR Loans hereunder or convert Base Loans into LIBOR Loans, then such Bank shall promptly notify Administrative Agent and Borrower thereof and such Bank's obligation to make or continue, or to convert Base Loans into, LIBOR Loans shall be suspended until such time as such Bank may again make and maintain LIBOR Loans (in which case the provisions of Section 10.04 hereof shall be applicable). SECTION 10.04. TREATMENT OF AFFECTED LOANS. If the obligations of any Bank to make or continue LIBOR Loans, or to convert Base Loans into LIBOR Loans, are suspended pursuant to Section 10.02 or 10.03 hereof (all LIBOR Loans so affected being herein called "Affected Loans"), such Bank's Affected Loans shall be automatically converted into Base Loans on the last day(s) of the then current Interest Period(s) for the Affected Loans (or, in the case of a conversion required by Section 10.02 or 10.03, on such earlier date as such Bank may specify to Borrower). To the extent that such Bank's Affected Loans have been so converted, all payments and prepayments of principal which would otherwise be applied to such Bank's Affected Loans shall be applied instead to its Base Loans. All Loans which would otherwise be made or continued by such Bank as LIBOR Loans shall be made or continued instead as Base Loans, and all Base Loans of such Bank which would otherwise be converted into LIBOR Loans shall remain as Base Loans. SECTION 10.05. CERTAIN COMPENSATION. Borrower shall pay to each Bank on demand the amount specified below to compensate it for any loss, cost or expense which such Bank determines is attributable to: (1) any payment or prepayment of a LIBOR Advance made to such Bank on a date other than the last day of an Interest Period for such Advance whether by reason of acceleration or otherwise; (2) any failure by Borrower for any reason to borrow, convert or continue a LIBOR Loan to be made, converted or continued by such Bank on the date specified therefor in the relevant notice issued by Borrower (except for any default by any Bank Party); or (3) any payment or prepayment, whether by reason of acceleration or otherwise, of a Bid Advance, or any failure by Borrower for any reason (after acceptance thereof) to borrow, on the date specified therefor for a Bid Advance. Such payment to such Bank shall be in an amount which would result in such Bank being made whole (on a present value basis) for the actual or imputed funding losses (including, without limitation, any loss, cost or expense incurred by reason of obtaining, liquidating or employing deposits or other funds acquired by such Bank to fund or maintain such LIBOR Advance or Bid Advance) incurred by such Bank as a result thereof. A determination of a Bank as to the amounts payable pursuant to this Section shall be conclusive absent manifest error. SECTION 10.06. CAPITAL ADEQUACY. If any Bank shall have determined that, after the date hereof, the adoption of any applicable Law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or the compliance of such Bank with, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, or compliance (taking into consideration its policies with respect to capital adequacy existing on the date of this Agreement) by an amount deemed by such Bank to be material, then from time to time, within fifteen (15) days after demand by such Bank (with a copy to Administrative Agent), Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. A certificate of any Bank claiming compensation under this Section, setting forth in reasonable detail the basis therefor, shall be conclusive in the absence of manifest error. However, to the extent capital costs relate to a Bank's loans in general and not specifically to a Loan hereunder, such Bank shall use reasonable averaging and attribution methods. In addition, each Bank agrees that, as promptly as practical after it becomes aware of the occurrence of an event or the existence of a condition that would entitle it to exercise its rights under this Section, it will use commercially reasonable efforts to make, fund or maintain the affected Advances through another lending office of such Bank if (1) as a result thereof the additional money that would otherwise be required to be paid in respect of such Advances would be reduced, and (2) the making, funding or maintaining of such Advances through such other lending office would not adversely affect such Advances or such Bank. Finally, if a Bank is to require Borrower to make payments under this Section then Bank must make a demand on Borrower to make such payment within ninety (90) days of the later of (1) the date on which such capital costs are actually incurred by such Bank, or (2) the date on which such Bank knows, or should have known, that such capital costs have been incurred by such Bank. SECTION 10.07. RIGHT OF SUBSTITUTION. Borrower and the Banks agree that if (1) a Bank requests compensation pursuant to Section 10.01 or Section 10.06 or (2) Section 10.03 applies, Borrower shall have the right to substitute a bank to replace the Bank in question, provided, that, (1) all the terms and requirements of Section 12.04 are complied with, (2) Borrower compensates the Bank being removed for the losses, costs and expenses incurred by such Bank as a result of such substitution, which shall be limited to the costs and expenses of substituting the new bank as the issuer of all Letters of Credit issued by the Bank to be replaced, and payment to the replaced Bank of compensation in accordance with Section 10.05 as if all Loans transferred to the new bank by the replaced Bank were prepaid on the date of such assignment and the payment of the principal and interest owed to such replaced Bank. ARTICLE XI. FACILITY AND SYNDICATION AGENTS SECTION 11.01. APPOINTMENT, POWERS AND IMMUNITIES OF FACILITY AGENTS. Each Bank hereby irrevocably appoints and authorizes each Facility Agent to act as its agent hereunder and under any other Loan Document with such powers as are specifically delegated to such Facility Agent by the terms of this Agreement and any other Loan Document, together with such other powers as are reasonably incidental thereto. Neither Facility Agent shall have any duties or responsibilities except those expressly set forth in this Agreement and any other Loan Document, and shall not by reason of this Agreement be a trustee or fiduciary for any Bank Party. Neither Facility Agent shall be responsible to any Bank Party for any recitals, statements, representations or warranties made by Borrower or any Subsidiary or any officer or official of Borrower or any Subsidiary or any other Person contained in this Agreement or any other Loan Document, or in any certificate or other document or instrument referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, legality, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or any other document or instrument referred to or provided for herein or therein, or for any failure by Borrower or any Subsidiary to perform any of its obligations hereunder or thereunder. Either Facility Agent may employ agents and attorneys-in-fact and shall not be responsible, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Neither Facility Agent nor any of their respective directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. Borrower shall pay any fee agreed to by Borrower and such Facility Agent with respect to such Facility Agent's services hereunder. SECTION 11.02. RELIANCE BY FACILITY AGENTS. Each Facility Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, facsimile, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by such Facility Agent. Each Facility Agent may deem and treat each Bank as the holder of the Advances made by it and Letters of Credit issued by it for all purposes hereof unless and until a notice of the assignment or transfer thereof satisfactory to such Facility Agent signed by such Bank shall have been furnished to such Facility Agent, but neither Facility Agent shall be required to deal with any Person who has acquired a participation in any Loan or a Letter of Credit from a Bank. As to any matters not expressly provided for by this Agreement or any other Loan Document, each Facility Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Requisite Banks or Supermajority Banks, as the case may be, and any action taken or failure to act pursuant thereto shall be binding on all of the Banks and both Facility Agents and any other holder of all or any portion of any Loan or the issuer of any Letter of Credit. SECTION 11.03. DEFAULTS. Administrative Agent shall not be deemed to have knowledge of the occurrence of a Default or Event of Default unless Administrative Agent has received notice from a Bank or Borrower specifying such Default or Event of Default and stating that such notice is a "Notice of Default." In the event that Administrative Agent receives such a Notice of Default, Administrative Agent shall give prompt notice thereof to the Banks. Administrative Agent shall take such action with respect to such Default or Event of Default which is continuing as shall be directed by the Requisite Banks or Supermajority Banks, as the case may be; provided that, unless and until Administrative Agent shall have received such directions, Administrative Agent may take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Banks; and provided further that Administrative Agent shall not be required to take any such action which it determines to be contrary to Law or this Agreement or any other Loan Documents. SECTION 11.04. RIGHTS OF FACILITY AGENTS AS BANKS. With respect to its Individual 364 Day Facility Commitment and the Advances and Letters of Credit provided by it, each Facility Agent in its capacity as a Bank hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not acting as a Facility Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include each Facility Agent in its capacity as a Bank. Both Facility Agents and their respective Affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to (on a secured or unsecured basis), and generally engage in any kind of banking, trust or other business with Borrower or any of its Subsidiaries or any of their Affiliates as if it were not acting as a Facility Agent, and both Facility Agents may accept fees and other consideration from Borrower or any of its Subsidiaries for services in connection with this Agreement or otherwise without having to account for the same to any Bank. SECTION 11.05. INDEMNIFICATION OF FACILITY AGENTS. Each Bank agrees to indemnify each Facility Agent (to the extent not reimbursed under Section 12.03 or under the applicable provisions of any other Loan Document, but without limiting the obligations of Borrower under Section 12.03 or such provisions), for its proportionate share (based upon each Bank's Individual 364 Day Facility Commitment to the Total 364 Day Facility Commitment) of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against either or both Facility Agents in any way relating to or arising out of this Agreement or any other Loan Document, or any other documents contemplated by or referred to herein or therein, or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses which Borrower is obligated to pay under Section 12.03) or under the applicable provisions of any other Loan Document or the enforcement of any of the terms hereof or thereof or of any such other documents or instruments; provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of such Facility Agent or its directors, officers, employees or agents. SECTION 11.06. NON-RELIANCE ON FACILITY AGENTS AND SYNDICATION AGENTS AND OTHER BANK SECTION 11.06. NON-RELIANCE ON FACILITY AGENTS AND SYNDICATION AGENTS AND OTHER BANK PARTIES. Each Bank agrees that it has, independently and without reliance on either Facility Agent, either Syndication Agent, any other Bank, Letter of Credit Bank, or any other Bank Party, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and its Subsidiaries and the decision to enter into this Agreement and the other Loan Documents and that it will, independently and without reliance upon either Facility Agent, either Syndication Agent, any other Bank, or any other Bank Party, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any other Loan Document. None of the Facility Agents or Syndication Agents shall be required to keep itself informed as to the performance or observance by Borrower or any of its Subsidiaries of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or to inspect the properties or books of Borrower or any Subsidiary (or any of their Affiliates). Neither Facility Agent shall be required to file this Agreement or any other Loan Document or any document or instrument referred to herein or therein, for record or give notice of this Agreement or any other Loan Document or any document or instrument referred to herein or therein, to anyone. Each of the Banks acknowledges and agrees that the Syndication Agents only have the duties and responsibilities explicitly set forth in the Loan Documents. SECTION 11.07. FAILURE OF FACILITY AGENTS TO ACT. Except for action expressly required of the applicable Facility Agent hereunder, each Facility Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall have received further assurances (which may include Cash Collateral) of the indemnification obligations of the Banks under Section 11.05 in respect of any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. SECTION 11.08. RESIGNATION OR REMOVAL OF FACILITY AGENTS. Subject to the appointment and acceptance of a successor Administrative Agent or Bid Agent, as the case may be, as provided below, either Facility Agent may resign at any time by giving written notice thereof to the Banks, Borrower, and the Syndication Agents, and either Facility Agent may be removed at any time with or without cause by a vote of at least 75% in number of the Banks and Bid Agent may be removed at any time with or without cause by Borrower; provided that Borrower and each other Bank Party shall be promptly notified thereof. Upon any such resignation or removal, the Requisite Banks shall have the right to appoint a successor Facility Agent which must be located in the United States of America. If no successor Facility Agent shall have been so appointed by the Requisite Banks and shall have accepted such appointment within thirty (30) days after the retiring Facility Agent's giving of notice of resignation or the Requisite Banks' or Borrower's removal of such retiring Facility Agent, then such retiring Facility Agent may, on behalf of the Banks, appoint a successor Facility Agent which must be located in the United States of America. The Requisite Banks or the retiring Facility Agent, as the case may be, shall upon the appointment of a successor Facility Agent promptly so notify Borrower and each other Bank Party. Upon the acceptance of any appointment as Administrative Agent or Bid Agent hereunder by a successor Administrative Agent or Bid Agent, as the case may be, such successor Administrative Agent or Bid Agent, as the case may be, shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent or Bid Agent, as the case may be, and the retiring Administrative Agent or Bid Agent, as the case may be, shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's or Bid Agent's, as the case may be, resignation or removal hereunder as Administrative Agent or Bid Agent, as the case may be, the provisions of this Article XI shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent or Bid Agent, as the case may be. SECTION 11.09. AMENDMENTS CONCERNING AGENCY FUNCTION. Neither Facility Agent shall be bound by any waiver, amendment, supplement or modification of this Agreement or any other Loan Document which affects its duties hereunder or thereunder unless it shall have given its prior written consent thereto. SECTION 11.10. LIABILITY OF FACILITY AGENTS. Neither Facility Agent shall have any liabilities or responsibilities to Borrower or any Subsidiary or any of their Affiliates on account of the failure of any Bank to perform its obligations hereunder or to any Bank on account of the failure of Borrower or any Subsidiary or any of their Affiliates to perform their respective obligations hereunder or under any other Loan Document. SECTION 11.11. TRANSFER OF AGENCY FUNCTION. Without the consent of Borrower or any Bank Party, either Facility Agent may at any time or from time to time transfer its functions as Administrative Agent or Bid Agent, as the case may be, hereunder to any of its offices located in the United States of America, provided that such Facility Agent shall promptly notify Borrower and each Bank Party. SECTION 11.12. NOTICES TO ADMINISTRATIVE AGENT. On or prior to 2:30 p.m. (Central time) on each Banking Day each Bank, will notify Administrative Agent of each Letter of Credit issued by such Bank on such Day, and all payments on, reimbursements made to such Bank, or terminations of Letters of Credit on such Day. SECTION 11.13. REPORTS. Promptly upon receipt of any information provided to Administrative Agent under Section 6.09, Administrative Agent will provide such information to each of the Banks. Within fifteen (15) days of the end of each month Administrative Agent will send to Borrower and each Bank a report for the prior month indicating as of the end of such month all Credit Facility provided by such Bank. SECTION 11.14. WITHHOLDING TAXES. Each Bank represents that it is entitled to receive any payments to be made to it hereunder without the withholding of any tax and will furnish to Administrative Agent and to Borrower such forms, certifications, statements and other documents as Administrative Agent or Borrower may request from time to time to evidence such Bank's exemption from the withholding of any tax imposed by any jurisdiction or to enable Administrative Agent or Borrower, as the case may be, to comply with any applicable Laws or regulations relating thereto. Without limiting the effect of the foregoing, if any Bank is not created or organized under the Laws of the United States of America or any state thereof, such Bank will furnish to Administrative Agent and Borrower Form 4224 or Form 1001 of the Internal Revenue Service, or such other forms, certifications, statements or documents, duly executed and completed by such Bank, as evidence of such Bank's exemption from the withholding of United States tax with respect thereto. Notwithstanding anything herein to the contrary, Borrower shall not be obligated to make any payments hereunder to such Bank in respect of any Advance and reimbursements of Letters of Credit until such Bank shall have furnished to Administrative Agent and Borrower the requested form, certification, statement or document. SECTION 11.15. NON-RECEIPT OF FUNDS BY ADMINISTRATIVE AGENT. Unless Administrative Agent shall have received notice from a Bank prior to the date on which such Bank is to provide funds to Administrative Agent for an Advance to be made by such Bank that such Bank will not make available to Administrative Agent such funds, Administrative Agent may assume that such Bank has made such funds available to Administrative Agent on the date of such Advance in accordance with the terms of this Agreement and Administrative Agent in its sole discretion may, but shall not be obligated to, in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent such Bank shall not have made such funds available to Administrative Agent, such Bank agrees to repay Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to Borrower until the date such amount is repaid to Administrative Agent, at the customary rate set by Administrative Agent for the correction of errors among banks for three (3) Banking Days and thereafter at the Base Rate. If such Bank shall repay to Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Advance for purposes of this Agreement. If such Bank does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Borrower, and Borrower shall immediately pay such corresponding amount to Administrative Agent with the interest thereon, for each day from the date such amount is made available to Borrower until the date such amount is repaid to Administrative Agent, at the rate of interest applicable at the time to such proposed Advance. Unless Administrative Agent shall have received notice from Borrower prior to the date on which any payment is due to any Bank hereunder that Borrower will not make such payment in full, Administrative Agent may assume that Borrower has made such payment in full to Administrative Agent on such date and Administrative Agent in its sole discretion may, but shall not be obligated to, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent Borrower shall not have so made such payment in full to Administrative Agent, each Bank shall repay to Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to Administrative Agent at the customary rate set by Administrative Agent for the correction of errors among banks for three (3) Banking Days and thereafter at the Base Rate. ARTICLE XII. MISCELLANEOUS SECTION 12.01. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement or any other Loan Document, nor consent to any departure by Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Facility Agents, the Syndication Agents and the Requisite Banks, and, in the case of the waiver provided for under the second paragraph of Section 9.02, the Supermajority Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given, provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all Supermajority Banks, do any of the following: (1) increase the Commitment; (2) reduce the principal of, or interest on, the Notes or the Fees; (3) postpone the date fixed for the payment of principal of, or interest on, the Notes or such Fees or any other amount due hereunder or under any other Loan Document, or, except as specifically provided for under Section 9.02 with regard to a waiver by the Supermajority Banks, waive any default in the payment of principal, interest, reimbursement obligations, or any other amount due hereunder or under any other Loan Document; (4) change the definition of "Requisite Banks", (5) change the definition of "Supermajority Banks", or (6) amend this Section. No failure on the part of Administrative Agent or any Bank or any other Bank Party to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof or preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by Law. No Individual 364 Day Facility Commitment of a Bank may be increased or decreased without the written consent of such Bank. SECTION 12.02. USURY. Anything herein to the contrary notwithstanding, the obligations of Borrower under this Agreement and the Notes shall be subject to the limitation that payments of interest shall not be required to the extent that receipt thereof would be contrary to provisions of Law applicable to a Bank limiting rates of interest which may be charged or collected by such Bank. SECTION 12.03. EXPENSES; INDEMNIFICATION. Borrower agrees to reimburse each of the Facility Agents and the Syndication Agents, on demand for all costs, expenses, and charges (including, without limitation, all reasonable fees and charges of external legal counsel for either Syndication Agent) incurred by such Facility Agents and Syndication Agents, in connection with the preparation of the Loan Documents. Borrower agrees to reimburse Administrative Agent, Bid Agent and each of the Banks on demand for all costs, expenses, and charges (including, without limitation, all fees and charges of external legal counsel for Administrative Agent, Bid Agent and each Bank) incurred by Administrative Agent, Bid Agent or any Bank in connection with compliance with any of the Loan Documents, or enforcement of this Agreement, the Notes, the Letters of Credit, or any other Loan Document. In addition to the foregoing, Borrower agrees to reimburse Administrative Agent and Bid Agent on demand for all fees and charges of external legal counsel for Administrative Agent or Bid Agent, as the case may be, incurred in connection with the administration of this Agreement (including, without limitation, the preparation of any amendments hereto or to the other Loan Documents or any consents furnished hereunder or under the other Loan Documents, but excluding any costs incurred in connection with any participation or assignment by a Bank). Borrower agrees to and hereby does indemnify each Bank Party and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to this Agreement or any of the Loan Documents or to any actual or proposed use by Borrower of the proceeds of the Loans or use of the Letters of Credit or to any violation or alleged violation of any Environmental Law by Borrower or any Subsidiary, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified or its directors, officers, employees or agents). Borrower, each of the Banks and Administrative Agent agree that the cost of each wire transfer to be made by each such Person pursuant to the terms of this Agreement will be borne by the Person making such transfer. The obligations of Borrower under this Section shall survive the repayment of the Loans, the reimbursement of all Letters of Credit, and payment of all amounts due under or in connection with any of the Loan Documents and the termination of the Commitments. SECTION 12.04. ASSIGNMENT; PARTICIPATION. This Agreement shall be binding upon, and shall inure to the benefit of, Borrower, Administrative Agent, Bid Agent, Syndication Agents and Banks and their respective successors and permitted assigns. Borrower may not assign or transfer its rights or obligations hereunder. With the consent of Borrower (which consent shall not be unreasonably withheld or delayed), any Bank may at any time grant to one or more banks or other financial institutions (each a "Participant") participating interests in its portion of the Loans, and its Letters of Credit; provided, however, that at all times the selling Bank must retain for its own account an amount of its Individual 364 Day Facility Commitment equal to or greater than its Minimum Hold. In no event shall a Participant constitute a Bank for purposes hereof. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to Borrower and Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and Borrower and the Facility Agents shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations hereunder. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of Borrower hereunder and under any other Loan Document including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement or any other Loan Document, provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in the proviso in Section 12.01 without the consent of the Participant. Any Bank may at any time assign to one or more banks or insurance companies, investment banks or other financial institutions (each an "Assignee") all, or a part (which are required to be proportional between the 364 Day Facility Commitment and the 364 Day Facility Loans (other than the Bid Loans) of its rights and obligations under this Agreement and its Notes, and such Assignee shall assume rights and obligations, pursuant to an Assignment and Assumption Agreement executed by such Assignee and such Bank, with and subject to the consent of each of the Syndication Agents and Borrower (which consent shall not be unreasonably withheld or delayed) provided, that, if the Assignee of any Bank is an Affiliate of such Bank, neither the consent of the Syndication Agents nor the consent of Borrower shall be required for such assignment; provided that, in each case, (1) the Commitments and Credit Facility assigned are equal to or greater than the Minimum Assignment, (2) during the period from the Closing Date to, but not including, October 31, 1997 and at all times thereafter that the assigning Bank is providing an Individual 364 Day Facility Commitment, the Commitments and Credit Facility retained by the assigning Bank are equal to or greater than its Minimum Hold, and (3) the assigning Bank or Assignee shall pay Administrative Agent a processing and recordation fee of Two Thousand Five Hundred Dollars ($2,500) for each assignment. The Bank making the assignment and the Assignee will make whatever arrangement they decide to with regard to the outstanding Letters of Credit of the Bank making the assignment. If the assigning Bank continues to be the issuer of any Letters of Credit then it shall remain a Bank under this Agreement with regard to such Letters of Credit. Upon execution and delivery of such instrument and payment by such Assignee to the Bank of an amount equal to the purchase price agreed between the Bank and such Assignee, such Assignee shall be a Bank Party to this Agreement and shall have all the rights and obligations of a Bank with respect to the Individual 364 Day Facility Commitment as set forth in such Assignment and Assumption Agreement, and the assigning Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this paragraph, a new Note or Notes shall be issued by Borrower. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to Borrower and Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 11.14. Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. Borrower agrees to provide all assistance reasonably requested by a Bank to enable such Bank either to sell participations in or make assignments of its portion of the Loans and Letters of Credit as permitted by this Section. SECTION 12.05. NOTICES. Unless the party to be notified otherwise notifies each other party in writing as provided in this Section, and except as otherwise provided in this Agreement, notices shall be given to each of the Facility Agents and each of the Syndication Agents by telephone, confirmed by telex, facsimile, or other writing, and to the Banks and to Borrower by ordinary mail, facsimile or telex addressed to such party at its address on the signature page of this Agreement. Notices shall be effective: (1) if given by mail, upon receipt; and (2) if given by telex or facsimile, when the telex or facsimile is transmitted to the telex or facsimile number as aforesaid; provided that notices to each of the Facility Agents and the Banks shall be effective upon receipt. SECTION 12.06. SETOFF. Borrower agrees that, in addition to (and without limitation of) any right of setoff, bankers' lien or counterclaim a Bank may otherwise have, each Bank shall be entitled, at its option, to offset balances (general or special, time or demand, provisional or final) held by it for the account of Borrower at any of such Bank's offices, in Dollars or in any other currency, against any amount payable by Borrower to such Bank under this Agreement or such Bank's Notes, or any other Loan Document which is not paid when due (regardless of whether such balances are then due to Borrower), in which case such Bank shall promptly notify Borrower and Administrative Agent thereof; provided that such Bank's failure to give such notice shall not affect the validity thereof. Each Bank agrees that to the extent any such payment is received by it as the result of a set-off or otherwise and such payment results in such Bank receiving a greater payment than it would have been entitled to, had the total amount of such payment been paid to each of the Banks, then such Bank shall immediately purchase for cash from the other Banks participations sufficient in amount so that such payment shall effectively be shared pro rata with the other Banks in accordance with the amount, and to the extent, of their respective interests in all the Loans and Letters of Credit, provided, however, that if all or any portion of such payment is thereafter recovered from such Bank at any time, the purchase shall be rescinded and the purchase price returned to the extent of such recovery, but without interest or other return thereon. SECTION 12.07. JURISDICTION; IMMUNITIES. Borrower hereby irrevocably submits to the jurisdiction of any Minnesota State or United States Federal court sitting in Minneapolis, MN over any action or proceeding arising out of or relating to this Agreement, the Notes, the Letters of Credit, or any other Loan Document, and Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Minnesota State or Federal court. Borrower irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to Borrower at its address specified in Section 12.05. Borrower agrees, to the extent permitted by law, that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Borrower further waives any objection to venue in such State and any objection to an action or proceeding in such State on the basis of forum non convenience. Borrower agrees that any action or proceeding brought against any Bank Party shall be brought only in Minnesota State or United States Federal court sitting in Minneapolis, Minnesota. Nothing in this Section shall affect the right of any Bank Party to serve legal process in any other manner permitted by Law or affect the right of any Bank Party to bring any action or proceeding against Borrower or its property in the courts of any other jurisdiction. To the extent that Borrower has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether from service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, Borrower hereby irrevocably waives, to the extent permitted by law, such immunity in respect of its obligations under this Agreement, the Notes, the Letters or Credit, and any other Loan Document. SECTION 12.08. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the substantive Laws (other than conflict of laws) of the State of Minnesota applicable to agreements made and to be performed entirely within such State. SECTION 12.09. COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all of the parties hereto. SECTION 12.10. EXHIBITS AND SCHEDULES. The Exhibits and Schedules are a part of this Agreement as if fully set forth herein. All references herein to Sections, subsections, clauses, Exhibits and Schedules shall be deemed references to such parts of this Agreement, unless the context shall otherwise require. SECTION 12.11. TABLE OF CONTENTS; HEADINGS. The headings in the Table of Contents and in this Agreement are for reference only, and shall not affect the interpretation or construction of this Agreement. SECTION 12.12. SEVERABILITY. If any word, phrase, sentence, paragraph, provision or section of this Agreement shall be held, declared, pronounced or rendered invalid, void, unenforceable or inoperative for any reason by any court of competent jurisdiction, Governmental Authority, statute or otherwise, such holding, declaration, pronouncement or rendering shall not adversely affect any other word, phrase, sentence, paragraph, provision or section of this Agreement, which shall otherwise remain in full force and effect and be enforced in accordance with its terms. SECTION 12.13. INTEGRATION. The Loan Documents set forth the entire agreement among the parties hereto relating to the transactions contemplated thereby and, except with regard to the Fee Letters, supersede any prior oral or written statements or agreements with respect to such transactions. SECTION 12.14. RENEWAL OF 364 DAY FACILITIES. On or before July 31, 1997 and July 31, 1998 (or the next preceding Banking Day if such dates(s) is not a Banking Day), the Syndication Agents and Borrower will mutually agree to and the Syndication Agents will advise each of the Banks of the Applicable Margin and the applicable interest spread related to Base Advances that will apply to the 364 Day Facility Loans if the 364 Day Facility is extended for an additional 364 Days after its then effective 364 Day Facility Maturity Date. On or before each such date, Borrower shall have the right to cancel the Commitment effective on the 364 Day Facility Maturity Date by giving written notice thereof to the Administrative Agent. Each Bank may determine, in its sole discretion, whether to agree to such renewal and shall give notice to Administrative Agent (which shall promptly send a copy of such notice to Borrower) on or before September 15, 1997 or September 15, 1998, respectively, of such determination, provided, that, the failure of a Bank to give such notice of determination shall be deemed to be a rejection of such extension by such Bank. If Banks providing one hundred percent (100%) of the Commitment approve of such renewal, then the 364 Day Facility Maturity Date will be extended for an additional 364 days as of the then effective 364 Day Facility Maturity Date. If Banks providing between (but not including) seventy-five percent (75%) and one hundred percent (100%) of the Commitment approve of such renewal, then the 364 Day Facility Maturity Date will be extended for an additional 364 days as of the then effective 364 Day Facility Maturity Date but the Commitment during such period will be reduced to an amount equal to the total of (1) the aggregate of all Individual 364 Day Facility Commitments of the Banks renewing such Commitments plus (2) the aggregate of all Individual 364 Day Facility Commitments assigned from a non-renewing Bank to an Assignee in accordance with Section 12.04 that agrees to such extension of the 364 Day Facility Maturity Date, plus (3) the aggregate of all Individual 364 Day Facility Commitments to be provided by other banks or financial institutions that become effective as of the requested renewal date for such Facility. A Bank that does not approve of such renewal will not have an Individual 364 Day Facility Commitment as of the date of renewal of the 364 Day Facility. In the event less than 100% of the Commitment is renewed pursuant to this Section, then the Syndication Agents will utilize their best efforts to obtain replacement commitments prior to the effective date of the renewal. If Banks providing seventy-five percent (75%) or less of the Commitment approve of such renewal, then the 364 Day Facility will terminate on its scheduled 364 Day Facility Maturity Date. SECTION 12.15. CONSENTS AND TERMINATIONS. Each Bank that is a party to this Agreement hereby consents, to the extent required under any agreement between the Bank and Borrower, to Borrower entering into this Agreement and obtaining the Credit Facility provided under this Agreement. Borrower and each Bank that is a party to the Existing Credit Agreement acknowledge that the Existing Credit Agreement expired on October 26, 1996. SECTION 12.16. CONFIDENTIALITY. Each Bank Party shall maintain the confidential nature of, and shall not use or disclose, any of Borrower's financial information, confidential information or trade secrets without first obtaining Borrower's written consent. Nothing in this Section shall require any Bank Party to obtain the consent after there is an Event of Default. The obligations of the Bank Parties shall in no event apply to: (1) providing information about Borrower to any financial institution contemplated in Section 12.04 or to such Bank Party's parent holding company or any of such Bank Party's Affiliates; (2) any situation in which any Bank Party is required by Law or required by any Governmental Authority to disclose information; (3) providing information to counsel to any Bank Party in connection with the transactions contemplated by the Loan Documents; (4) providing information to independent auditors retained by the Banks; (5) any information that is in or becomes part of the public domain otherwise than through a wrongful act of such Bank Party or any of its employees or agents thereof; (6) any information that is in the possession of any Bank Party prior to receipt thereof from Borrower or any other Person known to such Bank Party to be acting on behalf of Borrower; (7) any information that is independently developed by any Bank Party; and (8) any information that is disclosed to any Bank Party by a third party that has no obligation of confidentiality with respect to the information disclosed. A Bank's confidentiality requirements continue after it is no longer a Bank under this Agreement. SECTION 12.17. AGREEMENT IN WRITING. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER) AND US (CREDITORS) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. THIS AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS BETWEEN HARVEST STATES COOPERATIVES AND THE BANKS AND SYNDICATION AGENTS LISTED BELOW, IS THE FINAL EXPRESSION OF THE AGREEMENT BETWEEN SUCH PARTIES. THE LOAN DOCUMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR OR CONTEMPORANEOUS ORAL CREDIT AGREEMENTS OR PRIOR WRITTEN CREDIT AGREEMENTS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF. ANY ADDITIONAL TERMS OF THE LOAN DOCUMENTS BETWEEN SUCH PARTIES ARE SET FORTH BELOW. THERE ARE NO SUCH ORAL AGREEMENTS BETWEEN SUCH PARTIES. SECTION 12.18. JURY TRIAL WAIVER. EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY OR ANY INSTRUMENT OR DOCUMENT DELIVERED HEREUNDER. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. HARVEST STATES COOPERATIVES By: /s/ T.F. Baker Name: T.F. Baker Title: Group Vice President - Finance Address for Notices: 1667 North Snelling Avenue St. Paul, MN 55108 Attn: T.F. Baker Telephone No.: (612) 641-3736 Telecopy No.: (612) 641-3743 CoBANK, ACB, as Syndication Agent, Administrative Agent, Bid Agent and Bank Commitments: 364-Day Facility Commitment: $277,000,000 By: /s/ J. Daniel Malan Name: J. Daniel Malan Title: Vice President Applicable Lending Office for Base and LIBOR Advances: 1415 Olive Street St. Louis, Missouri 63103 Address for Notices: 1415 Olive Street St. Louis, Missouri 63103 Attention: J. Daniel Malan Telephone No.: (314) 342-3272 Telecopy No.: (314) 342-3348 Telex No.: 3720469 Answerback: COBANK Bank's National Office: 5500 S. Quebec Street Englewood, Colorado 80111 Payment Instructions: Bank Name: CoBank, ACB ABA No. 3070-8875-4 Account Name: CoBank, ACB Account No.: Harvest States SYND Reference: Acct. #: 22274433 ST. PAUL BANK FOR COOPERATIVES, as Syndication Agent, and Bank Commitments: 364-Day Facility Commitment: $123,000,000 By: /s/ Jeff Swanhorst Name: Jeff Swanhorst Title: Associate Vice President Applicable Lending Office for Base and LIBOR Advances: 375 Jackson Street St. Paul, MN 55101-1849 Address for Notices: 375 Jackson Street St. Paul, MN 55101-1849 Attention: Jeff Swanhorst Telephone No.: (612) 282-8205 Telecopy No.: (612) 282-8201 Telex No.: ________________ Answerback: _____________ Bank's Office: 375 Jackson Street St. Paul, MN 55101-1849 Payment Instructions: Bank Name: St. Paul Bank ABA No. 296090471 Account Name: ST BK COOPS Account No.: 271929 Reference: Acct. #: Harvest States BANQUE NATIONALE DE PARIS, as Bank Commitments: By: /s/ Arnaud Collin Du Bolage 364-Day Facility Title: EVP and General Manager Commitment: $20,000,000 By: _____________________________________ Name: Michelle A. Tolliver Title: Vice President By: _____________________________________ Name: Cathleen Schaede Title: Assistant Vice President Applicable Lending Office for Base and LIBOR Advances: 209 S. LaSalle Street, Fifth Floor Chicago, IL 60604 Address for Notices: 209 S. LaSalle Street, Fifth Floor Chicago, IL 60604 Attention: Michelle A. Tolliver Attention: Cathleen Schaede Telephone No.: (312) 977-2242 (Michelle Tolliver) Telephone No.: (312) 977-1384 (Cathleen Schaede) Telecopy No.: (312) 977-1380 Telex No.: 82995 Answerback: BNPCH Bank's Office: 209 S. LaSalle Street, Fifth Floor Chicago, IL 60604 Payment Instructions: Bank Name: Banque Nationale de Paris - New York ABA No. 026007689 Account Name: Banque Nationale de Paris - Chicago Account No.: 14119400189 Reference: Acct. #: HARVEST STATES BOATMEN'S NATIONAL BANK, as Bank Commitments: 364-Day Facility Commitment: $15,000,000 By: /s/ Ellen M. Isch Name: Ellen M. Isch Title: Vice President Applicable Lending Office for Base and LIBOR Advances: 14 W. 10th Street Kansas City, MO 64183 Address for Notices: 14 W. 10th Street Kansas City, MO 64183 Attention: Ellen M. Isch Telephone No.: (816) 691-7748 Telecopy No.: (816) 691-7426 Telex No.: ________________ Answerback: _____________ Bank's Office: 10th and Baltimore Kansas City, MO 64183 Payment Instructions: Bank Name: Boatmen's Natl Bk ABA No. 101 000 035 Account Name: Comml Loan Ops Account No.: 112180-1000 Reference: Acct. #: Harvest States CAISSE NATIONALE DE CREDIT AGRICOLE, as Bank Commitments: 364-Day Facility Commitment: $20,000,000 By: /s/ W. Leroy Startz Name: W. Leroy Startz Title: First Vice President Applicable Lending Office for Base and LIBOR Advances: 55 East Monroe Street Chicago, IL 60630-5702 Address for Notices: 55 East Monroe Street Chicago, IL 60630-5702 Attention: Leroy Startz Telephone No.: (312) 917-7455 Telecopy No.: (312) 372-3455 Telex No.: ________________ Answerback: _____________ Bank's Office: 55 East Monroe Street Chicago, IL 60630-5702 Payment Instructions: Bank Name: Morgan Guaranty Tr. Co., NY ABA No. 021 000 238 Account Name: CNCA Chicago Branch Account No.: 630 00 205 Reference: Acct. #: Harvest States COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. "RABOBANK NEDERLAND", NEW YORK BRANCH, as Bank Commitments: 364-Day Facility Commitment: $20,000,000 By: /s/ Ot Quast Name: Ot Quast Title: Vice President By: /s/ Barbara A. Hyland Name: Barbara A. Hyland Title: Senior Vice President Applicable Lending Office for Base and LIBOR Advances: 245 Park Avenue New York, NY 10167 Address for Notices: 245 Park Avenue New York, NY 10167 Attention: Nancy J. O'Connor Telephone No.: (212) 916-7843 Telecopy No.: (212) 916-3731 Telex No.: 424337 Answerback: RABONY Bank's Office: 245 Park Avenue New York, NY 10167 Payment Instructions: Bank Name: BANK OF NEW YORK ABA No. 021000018 Account Name: RABOBANK NEDERLAND Account No.: 802-6002-533 Reference: Acct. #: Harvest States DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, as Bank Commitments: 364-Day Facility Commitment: $15,000,000 By: /s/ John L. Dean Name: John L. Dean Title: Senior Vice President By: /s/ Karen A. Brinkman Name: Karen A. Brinkman Title: Vice President Applicable Lending Office for Base and LIBOR Advances: 609 Fifth Avenue New York, NY 10017-1021 Address for Notices: 609 Fifth Avenue New York, NY 10017-1021 Attention: John L. Dean Telephone No.: (212) 745-1400 Telecopy No.: (212) 745-1556 Telex No.: ________________ Answerback: _____________ Bank's Office: 609 Fifth Avenue New York, NY 10017-1556 Payment Instructions: Bank Name: DG BANK Deutsche Genossenschaftsbank ABA No. 845 Account Name: DG BANK Account No.: N/A Reference: Acct. #: Harvest States FIRST BANK NATIONAL ASSOCIATION, as Bank Commitments: 364-Day Facility Commitment: $20,000,000 By: /s/ David Kopolow Name: David Kopolow Title: Vice President Applicable Lending Office for Base and LIBOR Advances: 601 Second Avenue South Minneapolis, MN 55402-4302 Address for Notices: 601 Second Avenue South Minneapolis, MN 55402-4302 Attention: David Kopolow Telephone No.: (612) 973-0516 Telecopy No.: (612) 973-0824 Telex No.: ________________ Answerback: _____________ Bank's Office: 601 Second Avenue South Minneapolis, MN 55402-4302 Payment Instructions: Bank Name: First Bank National Association ABA No. 091 0000 22 Account Name: Commercial Loan Operations Account No.: 30000472160600 Reference: Acct. #: Harvest States 3597573000 HARRIS TRUST AND SAVINGS BANK as Bank Commitments: 364-Day Facility Commitment: $25,000,000 By: _____________________________________ Name: Title: By: /s/ H. Glen Clarke Name: H. Glen Clarke Title: Vice President Applicable Lending Office for Base and LIBOR Advances: 111 West Monroe Chicago, IL 60690 Address for Notices: 111 West Monroe Chicago, IL 60690 Attention: Patrick S. Thornton Attention: Brian Moeller Telephone No.: (312) 461-2329 (Patrick Thornton) Telephone No.: (312) 461-2121 (Brian Moeller) Telecopy No.: (312) 765-8095 Telex No.: ________________ Answerback: _____________ Bank's Office: 111 West Monroe Chicago, IL 60690 Payment Instructions: Bank Name: Harris Trust and Savings Bank ABA No. 071000288 Account Name: Credit Services Operations Division Account No.: 109-215-4 Reference: Acct. #: Harvest States Cooperatives NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Bank Commitments: 364-Day Facility Commitment: $15,000,000 By: /s/ Mary D. Falck Name: Mary D. Falck Title: Vice President Applicable Lending Office for Base and LIBOR Advances: Sixth and Marquette Minneapolis, MN 55479-0085 Address for Notices: Sixth and Marquette Minneapolis, MN 55479-0085 Attention: Mary D. Falck Telephone No.: (612) 667-9674 Telecopy No.: (612) 667-4145 Telex No.: ________________ Answerback: _____________ Bank's Office: Sixth and Marquette Minneapolis, MN 55479-0085 Payment Instructions: Bank Name: Norwest Bank Minnesota, N.A. ABA No. 091000019 Account Name: Commercial Loan Clearing Acct Account No.: 840-165 Reference: Acct. #: Harvest States Cooperatives EX-10.10 13 AMENDED AND RESTATED MASTER LOAN AGREEMENT AMENDED AND RESTATED MASTER SYNDICATED LOAN AGREEMENT THIS MASTER SYNDICATED LOAN AGREEMENT (the "Agreement") is entered into as of this 28th day of October 1996, among HARVEST STATES COOPERATIVES (the "Company"), COBANK, ACB (successor to the National Bank for Cooperatives ("CoBank")), and the ST. PAUL BANK FOR COOPERATIVES ("St. Paul"). BACKGROUND From time to time CoBank and St. Paul (collectively, the "Banks") may make loans to the Company. In order to reduce the amount of paperwork associated with making such loans, the parties would like to enter into a master syndicated loan agreement. As contemplated by the parties, the master agreement would: (1) set forth the general terms and conditions governing all loans made by the Banks thereunder; and (2) provide for the issuance of supplements thereto to evidence the Banks' commitment to make a loan to the Company, as well as the specific terms and conditions applicable thereto. For such purpose, the parties are entering into this agreement. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: SECTION 1. SUPPLEMENTS. In the event the Company desires to borrow from the Banks under this Agreement and the Banks are willing to lend to the Company hereunder, the parties will enter into a supplement to this Agreement (a "Supplement"). Each Supplement will set forth the amount of the loan, the purpose of the loan, the manner in which the loan will be made available, the interest rate or rate options applicable to that loan, the repayment terms of the loan, and any other terms and conditions applicable to that particular loan. Each loan will be governed by the terms and conditions contained in this Agreement and in the Supplement relating to the loan. SECTION 2. CONDITIONS PRECEDENT. (A) CONDITIONS TO INITIAL LOAN. The Banks' obligation to extend credit under the first Supplement hereto is subject to the following conditions precedent: (1) DUE EXECUTION. That the Banks receive a duly executed copy of this Agreement and all instruments and documents contemplated hereby. (2) APPROVALS. That the Banks receive evidence satisfactory to them that all consents and approvals which are necessary for, or required as a condition of, the validity and enforceability of this Agreement and all instruments and documents contemplated hereby, have been obtained and are in full force and effect. (B) CONDITIONS TO EACH LOAN. The Banks' obligation to extend credit under each Supplement hereto, including the initial Supplement, is subject to the following conditions precedent: (1) DUE EXECUTION, ETC. That the Banks receive a duly executed copy of the Supplement relating to that loan, duly executed copies of promissory notes (one in favor of each Bank) in form and content acceptable to the Banks evidencing the Company's obligation to repay the loans made under the Supplement (the "Notes"), and all instruments and documents contemplated by the Supplement. (2) APPROVALS. That the Banks receive evidence satisfactory to them that all consents and approvals which are necessary for, or required as a condition of, the validity and enforceability of the Supplement, the Notes and all instruments and documents contemplated by the Supplement have been obtained and are in full force and effect. (3) PERFECTION AND PRIORITY OF LIENS. That the Banks receive evidence satisfactory to them that the Banks have, as of the date of the initial advance under the Supplement, a duly perfected first priority Lien on any security provided in the Supplement relating to such loan. (4) EVENT OF DEFAULT. That no Event of Default (as defined in Section 6 hereof), or event which with the giving of notice or the passage of time, or both, would become an Event of Default hereunder, exists. SECTION 3. REPRESENTATIONS AND WARRANTIES. The execution by the Company of each Supplement hereto shall constitute a representation and warranty by the Company that as of the date of the Supplement: (A) APPLICATION. All representations, warranties, and information set forth in, or furnished in connection with, any application submitted in connection with such Supplement are true and correct. (B) CONFLICTING AGREEMENTS, ETC. Neither this Agreement, any Supplement, nor any other instrument or document contemplated hereby or thereby conflicts with any agreement to which the Company is a party or with any provision of the Company's bylaws or articles of incorporation. (C) BINDING AGREEMENTS. This Agreement, all Supplements, and all other instruments and documents contemplated hereby or thereby constitute legal, valid, and binding obligations of the Company, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency and other Laws relating to creditors' rights. (D) COMPLIANCE. The Company is in compliance with the terms of this Agreement. SECTION 4. DEFINITIONS. As used herein or in any Supplement: "Affiliate" shall mean any person, firm or corporation which, directly or indirectly, Controls, or is Controlled By, or is under Common Control with, the Company. "Base Rate" shall mean, for any day, that rate defined as the "prime rate" as published from time to time in the Eastern Edition of The Wall Street Journal as the average Base Rate for corporate loans posted by at least seventy-five percent (75%) of the United States thirty (30) largest commercial banks, or if The Wall Street Journal shall cease publication or cease publishing the "prime rate" on a regular basis, such other regularly published average prime rate applicable to such commercial banks as is acceptable to Administrative Agent in its reasonable discretion with the consent of the Company which will not be unreasonably withheld. "Business Day" shall mean any day on which the Banks and the Federal Reserve Banks are generally open for business. "Capital Lease" shall mean any lease of Property (whether real, personal or mixed) by a Person which has been or should be, in accordance with generally accepted accounting principles, reflected on the balance sheet of such Person as a Capital Lease. "Cash Collateral" shall mean a deposit by the Company, made in immediately available funds, to the cash investment service at administrative agent and the execution of all documents and the taking of all steps required to give such administrative agent, for the benefit of each of the Banks issuing a Letter of Credit, a perfected first security interest in such investment. "Code" shall mean the Internal Revenue Code of 1986. "Consolidated Funded Debt" shall mean at all times the Funded Debt of the Company and its Subsidiaries on a consolidated basis. "Consolidated Members' and Patrons' Equity" shall mean at any time the amount of capital stock accounts plus (or minus in the case of a deficit) the amount of surplus and retained earnings accounts of the Company and its Subsidiaries, on a consolidated basis determined at such time, provided that the total amount of intangible assets of the Company and its Subsidiaries (including, without limitation, unamortized debt discount and expense, deferred charges and good will) included therein shall not exceed $30,000,000; all as determined in accordance with generally accepted accounting principles, but excluding therefrom any minority interests in any Subsidiaries without duplication of deduction if already deducted in determining retained earnings and surplus. "Consolidated Net Income" shall mean net income of the Company and its Consolidated Subsidiaries as determined in accordance with generally accepted accounting principles, consistently applied. "Consolidated Net Patronage Income" shall mean the Company's net income derived from business activities with parties eligible under the Company's bylaws to receive patronage refunds. "Consolidated Net Working Capital" shall mean the excess for the Company and its Consolidated Subsidiaries of its Current Assets over its Current Liabilities. "Consolidated Subsidiary" shall mean any Subsidiary whose accounts are consolidated with those of the Company in accordance with generally accepted accounting principles. "Control" or "Controlled By" or "Under Common Control" shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract or otherwise); provided that, in the event any Person which beneficially owns, directly or indirectly, 10% or more (in number of votes) of the securities having ordinary voting power for the election of directors of a corporation shall be conclusively presumed to control such corporation. "Current Assets" of any Person shall mean the aggregate amount of assets of such Person which in accordance with generally accepted accounting principles may be properly classified as current assets after deducting adequate reserves where proper. "Current Liabilities" of any Person shall mean: (i) all Debt of such Person due on demand or within one year from the date of determination thereof; and (ii) all other items (including taxes accrued as estimated) which, in accordance with generally accepted accounting principles, may be properly classified as current liabilities. "Debt" of any Person shall mean as of any time the same is to be determined, the aggregate of (i) all liabilities, reserves and any other items which would be classified as a liability on a balance sheet of such Person in accordance with generally accepted accounting principles, (ii) all obligations of such Persons under Capital Leases, (iii) all indebtedness and liabilities secured by any Lien or any security interest on any Property or assets of such Person, whether or not the same would be classified as a liability on a balance sheet of such Person but excluding all general contingency reserves and reserves for deferred income taxes and investment credit. "Environmental Discharge" shall mean any discharge or release of any Hazardous Materials in violation of any applicable Environmental Law. "Environmental Law" shall mean any Law relating to pollution of the environment, including Laws relating to noise or to emissions, discharges, releases or threatened releases of Hazardous Materials into the workplace, the community or the environment, or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "Environmental Notice" shall mean any written complaint, order, citation, letter, inquiry, notice or other written communication from any Person: (1) affecting or relating to the Company's or any of its Subsidiaries' compliance with any Environmental Law in connection with any activity or operations at any time conducted by the Company or such Subsidiary, (2) relating to the occurrence or presence of or exposure to or possible or threatened or alleged occurrence or presence of or exposure to Environmental Discharges or Hazardous Materials at any of the Company's or such Subsidiary's locations or facilities, including, without limitation: (a) the existence of any contamination or possible or threatened contamination at any such location or facility; and (b) remediation of any Environmental Discharge or Hazardous Materials at any such location or facility or any part thereof; and (3) any violation or alleged violation of any applicable Environmental Law. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, including any rules and regulations promulgated thereunder. "ERISA Affiliate" shall mean any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company or is under common control (within the meaning of Section 414(c) of the Code) with the Company, provided, however, that for purposes of provisions herein concerning minimum funding obligations (imposed under Section 412 of the Code or Section 302 of ERISA), the term "ERISA Affiliate" shall also include any entity required to be aggregated with the Company under Section 414(m) or 414(o) of the Code. "Estimated Cost of Funds" shall mean the all-in cost (including debt placement fees but excluding overhead) that the Banks' estimate that they would likely incur to fund a loan bearing interest at a fixed rate through the issuance of an instrument by the Federal Farm Credit Banks Funding Corporation. "Event of Default" shall mean any event or condition identified as such in Section 6 hereof. "Funded Debt" shall mean, with respect to any Person, at any time, all Debt of such Person in each case maturing by its terms more than one year after the date of creation thereof, or which is renewable or extendable at the option of such Person for a period ending more than one year after the date of creation thereof, and shall include Debt of such maturity created or assumed by such Person either directly or indirectly, including obligations of such maturity secured by Liens upon Property of such Person and upon which such Person customarily pays the interest, and all obligations of such Person under Capital Leases of such maturity, and the net present value of obligations under Operating Leases as discounted by a rate which is 1.5% less than the Base Rate, and all obligations to reimburse any Bank with respect to all Letters of Credit which do not support long-term debt, with expiration dates in excess of one year from the date of issuance thereof. "Good Faith Contest" shall mean the contest of an item if: (1) the item is diligently contested in good faith by appropriate proceedings timely instituted; (2) either the item is: (a) bonded or (b) adequate reserves are established with respect to the contested item if and to the extent required in accordance with generally accepted accounting principles; (3) during the period of such contest, the enforcement of any contested item is effectively stayed; and (4) the failure to pay or comply with the contested item could not reasonably be expected to result in a Material Adverse Change. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranty" shall mean all endorsements, guaranties, and all other obligations, contingent or otherwise, which in effect guaranty any indebtedness, dividend or other obligation of any other Person in any manner, whether by agreement to purchase the indebtedness of any other Person or through the purchase of goods, supplies or services, or maintenance of working capital or other balance sheet covenants or conditions, or by way of stock purchase, capital contribution, advances or loans (except indebtedness or other obligation of any Subsidiary), but excluding endorsements and guaranties in the ordinary course of business of negotiable instruments for deposit and collection. "Hazardous Materials" shall mean any pollutant, effluents, emissions, contaminants, toxic or hazardous wastes or substances, as any of those terms are defined from time to time in or for the purposes of any applicable Environmental Law, including asbestos fibers and friable asbestos, polychlorinated biphenyls, and any petroleum or hydrocarbon-based products or derivatives. "Inventory" shall mean all raw materials, work in process, finished goods, and goods held for sale or lease or furnished or to be furnished under contracts of service in which the Company now has or hereafter acquires any rights. "Investment" means, with respect to any Person, (1) any loan or advance by such Person to any other Person, (2) the purchase or other acquisition by such Person of any capital stock, obligations or securities of, or any capital contribution to, or investment in, or the acquisition by such Person of all or substantially all of the assets of, or any interest in, any other Person, (3) the providing by such Person being the account party with respect to any performance or standby letter of credit where the proceeds of such letter of credit are to be used for the benefit of any other Person, (4) the agreement by such Person to make funds available for the benefit of another Person to either cover cost overruns incurred in connection with the construction of a project or facility, or to fund a debt service reserve account, (5) the agreement by such Person to assume, guarantee, endorse or otherwise be or become directly or contingently responsible or liable for the obligations or Debts of any other Person (other than by endorsement for collection in the ordinary course of business), (6) an agreement to purchase any obligations, stocks, assets, goods or services but excluding an agreement to purchase any assets, goods or services entered into in the ordinary course of business, (7) an agreement to supply or advance any funds, assets, goods or services, or (8) an agreement to maintain or cause such Person to maintain a minimum working capital or net worth or otherwise to assure the creditors of any Person against loss. "Law" shall mean any federal, state or local statute, law, rule, regulation, ordinance, order, code, or policy, now or hereafter in effect, and any judicial or administrative interpretation thereof by a Governmental Authority, including any judicial or administrative order, consent decree or judgment. "Letter of Credit" shall mean: (1) a documentary letter of credit or (2) a standby letter of credit. "Lien" shall mean with respect to any asset any mortgage, deed of trust, pledge, security interest, hypothecation, assignment for security purposes, encumbrance, lien (statutory or other), or other security agreement or charge, or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale, Capital Lease or other title retention agreement related to such asset). "Loan Documents" shall mean this Agreement, the Supplements, and all instruments and documents contemplated hereby or thereby or executed in connection herewith or therewith. "Material Adverse Change" shall mean either: (1) a material adverse change in the status of the business, assets, liabilities, results of operations, condition (financial or otherwise), Property or prospects of the Company and its Subsidiaries taken together; or (2) any event or occurrence of whatever nature which could reasonably be expected to have a material adverse effect on the Company's ability to perform its obligations under the Loan Documents. "Note" or "Notes" shall have the meaning set forth in Section 2(B)(1) hereof. "Operating Lease" shall mean any lease of Property (whether real, personal or mixed) by a Person under which such Person is lessee, other than a Capital Lease. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Plan" shall have the meaning set forth in Section 5(U) hereof. "Permitted Investments" means (1) marketable obligations issued or unconditionally guaranteed by the United States of America, or issued by any agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within one year from the date of acquisition thereof, (2) certificates of deposit maturing within one year from the date of acquisition thereof issued by (i) any Bank or (ii) any commercial bank with a short term credit rating of either of the two highest short term credit ratings provided by either S&P or Moody's, (3) commercial paper payable in the United States of America in Dollars and rated as at any date of determination A-1 or better (or comparably if the rating system is changed) by S&P or P-1 or better (or comparably if the rating system is changed) by Moody's, (4) payments of amounts required to satisfy patronage refunds or equity redemptions of the Company as determined by the Board of Directors of the Company, (5) Investments in CoBank and St. Paul Bank, (6) Investments in cooperatives in which the Company is a member made in the ordinary course of the Company's business, (7) marketable general obligations of a state, a territory or a possession of the United States or any political subdivision of any of the foregoing, or the District of Columbia, unconditionally secured by the full faith and credit of such state, territory, possession, political subdivision or district provided that such state, territory, possession, political subdivision or district has general taxing authority and the power to levy such taxes as may be required for the payment of principal and interest thereof; provided that such obligations are rated in either of the two top rating categories established by the national rating agencies for such obligations, and (8) repurchase, reverse repurchase agreements and security lending agreements collateralized by securities of the type described in subsection (1) above, provided that the Company or Subsidiary, as the case may be, which is a party to such arrangement shall hold (individually or through an agent) all securities relating thereto during the entire term of each such arrangement. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, cooperative association, institution, entity, party or government (whether national, federal, state, provincial, county, city, municipal, or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Potential Default" shall mean any event or condition which, with the lapse of time, or giving of notice, or both, would constitute an Event of Default. "Prohibited Transaction" shall mean any transaction prohibited under Section 406 of ERISA or Section 4975 of the Code. "Property" shall mean any interest in any kind of property or assets, whether real, personal or mixed, or tangible or intangible. "Reportable Event" shall mean any of the events set forth in Section 4043(b) of ERISA or in the regulations thereunder. "Subsidiary" shall mean collectively any corporation or other entity at least a majority of the outstanding voting shares of which is at the time owned directly or indirectly by the Company and/or its Subsidiaries. Any accounting term or the character or amount of any asset or liability or item of income or expense or any consolidation or other accounting computation required to be determined under this Agreement, shall be determined or made in accordance with generally accepted accounting principles at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of the Agreement. If there should be any material change in generally accepted accounting principles after the date hereof which materially affects the financial covenants in this Agreement, the parties hereto shall negotiate in good faith to revise such covenants. SECTION 5. COVENANTS. It is understood and agreed that so long as this Agreement is in effect, except to the extent compliance in any case or cases is waived in writing by the Banks: (A) MAINTENANCE OF PROPERTY. The Company will, and will cause each Subsidiary to, keep and maintain all of its Properties necessary or useful in its business in good condition, and make all renewals, replacements, additions, betterments and improvements which the Company deems necessary; provided, however, that subject to Sections 5(W) and 6(A)(7)(ii) hereof, nothing in this Section shall prevent the Company or any Subsidiary from discontinuing the operation and maintenance of any of its Properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business. (B) TAXES. The Company will, and will cause each Subsidiary to, duly pay and discharge all taxes, rates, assessments, fees and governmental charges upon or against the Company or such Subsidiaries or against its Properties in each case before the same becomes delinquent and before penalties accrue thereon unless and to the extent that the same is being contested in good faith and by appropriate proceedings. (C) MAINTENANCE OF INSURANCE. The Company will, and will cause each Subsidiary to, maintain insurance with insurers recognized as financially sound and reputable by prudent business persons in such forms and amounts and against such risks as are prudent in light of the nature and extent of the Company's business and operations; provided, however, that the Company may self insure, provided such self insurance is administered in accordance with prudent business practices. (D) STOCK INVESTMENT. The Company will purchase such stock of the Banks as may be designated, in such amounts according to each Banks' capitalization plan and bylaws. The Banks shall have a first Lien on all stock or other equities of the Company in the Banks as collateral for the payment of any indebtedness of the Company to the Banks. (E) EQUITY RETIREMENT POLICY. The Company shall not change its equity retirement policy without the written consent of the Banks, which consent shall not be unreasonably withheld; provided, however, that without the consent of the Banks, the Company may allocate non-patronage earnings to members and, subject to Section 5(S) hereof, may redeem or retire such equity. (F) FINANCIAL REPORTS. The Company will, and will cause each Subsidiary to, maintain a standard and modern system of accounting in accordance with sound accounting practice and will furnish with reasonable promptness to each Bank and its duly authorized representatives such information respecting the business and financial condition of the Company and its Subsidiaries as may be reasonably requested and, without any request, will furnish to each Bank: (1) as soon as available, and in any event within forty-five (45) days after the close of each monthly fiscal period of the company (except the last such period in each fiscal year), one copy of the consolidated balance sheet, the consolidated summary of earnings, individual statements of net operating earnings by division, and a consolidated statement of cash flows of the Company and its Consolidated Subsidiaries, all for such monthly period and the year to date of the Company and each Consolidated Subsidiary, and for the corresponding periods of the preceding fiscal year, all in reasonable detail, prepared by the Company and certified to by the Company's Group Vice President - Finance; (2) as soon as available, and in any event within one hundred twenty (120) days after the close of each fiscal year, one copy of the audit report for such year and accompanying consolidated financial statements (including all footnotes thereto), including a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of capital, and a consolidated statement of cash flows for the Company and its Consolidated Subsidiaries, showing in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared and certified by Deloitte and Touche, or other independent public accountants of nationally recognized standing selected by the Company and satisfactory to the Banks; (3) each of the financial statements furnished to the Banks pursuant to paragraphs (1) and (2) above shall be accompanied by a written statement of the Company signed by its Group Vice President - Finance (i) to the effect that the signer thereof has reexamined the terms and provisions of the Loan Documents and that to the best of his or her knowledge and belief no Potential Default or Event of Default has occurred during the period covered by such statements or, if any such Potential Default or Event of Default has occurred during such period, setting forth the description of such Potential Default of Event of Default and specifying the action, if any taken by the Company to remedy the same; and (ii) setting forth the information and computations (in sufficient detail) required to establish whether the Company was in compliance with the requirements of Subsections (J), (K), (L), (N), (O)(5) and (S) hereof during the period covered by the financial statements then being furnished; and (4) promptly after board approval thereof, copies of its annual budgets and forecasts of operations and capital expenditures including investments and a projection of cash flow by months for each fiscal year. (G) INSPECTION. The Company shall permit the Banks by their representatives and agents, to inspect any of the Properties, corporate books and financial records of the Company and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Company and each Subsidiary, and to discuss the affairs, finances and accounts of the Company and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times, during regular business hours and intervals as the Banks may designate. (H) MERGERS, ETC. The Company will not merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of related transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person, or acquire all or substantially all of the assets or the business of any Person (or enter into any agreement to do any of the foregoing); however, that the foregoing shall not prevent any consolidation or merger if after giving effect thereto: (1) The book value of the Company and its Subsidiaries does not increase due to all such mergers, consolidations or acquisitions by an aggregate amount in excess of $25,000,000 in any fiscal year of the Company; (2) The Company is the surviving entity; and (3) No Event of Default or Default shall have occurred and be continuing. (I) TRANSACTIONS WITH AFFILIATES. The Company will not, and it will not permit any Subsidiary to, enter into any transaction, including without limitation, the purchase, sale, lease or exchange of any Property, or the rendering of any service, with any Affiliate of the Company except in the ordinary course of and pursuant to the reasonable requirements of the Company's (and Subsidiaries') business and upon fair and reasonable terms which are not materially less favorable to the Company than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate of the Company. (J) CONSOLIDATED NET WORKING CAPITAL. The Company will maintain at all times Consolidated Net Working Capital in an amount not less than $100,000,000. (K) CONSOLIDATED MEMBERS' AND PATRONS' EQUITY. The Company will maintain at all times Consolidated Members' and Patrons' Equity in an amount not less than $275,000,000. (L) CONSOLIDATED FUNDED DEBT TO CONSOLIDATED MEMBERS' AND PATRONS' EQUITY RATIO. The Company will not permit the ratio of Consolidated Funded Debt of the Company and its Consolidated Subsidiaries to Consolidated Members' and Patrons' Equity to exceed at any time 0.8 to 1.0. (M) LIENS. The Company will not create, incur, assume or suffer to exist any Lien, upon or with respect to any of its real or personal Properties (including, without limitation, leasehold interests, leasehold improvements and any other interest in real Property or fixtures), now owned or hereafter acquired, except: (1) Liens for taxes or assessments or other charges or levies of any Governmental Authority, that are not delinquent or if delinquent: (i) are the subject of a Good Faith Contest but in no event past the time when a penalty would be incurred; and (ii) the aggregate amount of liabilities so secured (including interest and penalties) does not exceed $15,000,000 at any one time outstanding; (2) Liens imposed by Law, such as mechanic's, worker's, repairman's, miner's, agister's, attorney's, materialmen's, landlord's, warehousemen's and carrier's Liens and other similar Liens which are securing obligations incurred in the ordinary course of business for sums not yet due and payable or if due and payable which are the subject of a Good Faith Contest; (3) Liens under worker's compensation, unemployment insurance, social security or similar legislation (other than ERISA), or to secure payments of premiums for insurance purchased in the ordinary course of business, or to secure the performance of tenders, statutory obligations, surety and appearance bonds and bids, bonds for release of an attachment, stay of execution or injunction, leases, government contracts, performance and return-of-money bonds and other similar obligations, all of which are incurred in the ordinary course of business and not in connection with the borrowing of money; (4) any attachment or judgment Lien, the time for appeal of petition for rehearing of which shall not have expired or in respect of which the Company or the Subsidiary is protected in all material respects by insurance or for the payment of which adequate reserves have been provided; provided, that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are the subject of a Good Faith Contest, and provided further that the aggregate amount of liabilities of the Company and its Subsidiaries so secured (including interest and penalties) shall not be in excess of $5,000,000 at any one time outstanding; (5) easements, rights-of-way, restrictions, encroachments, covenants, servitudes, zoning, and other similar encumbrances which, in the aggregate, do not materially interfere with the occupation, use and enjoyment by the Company or any Subsidiary of the Property or assets encumbered thereby in the normal course of its business or materially impair the value of the Property subject thereto; (6) Liens arising in the ordinary course of business and created in connection with amounts on deposit in charge card and like accounts (such as Visa or MasterCard); (7) Liens on land, buildings and equipment existing at the time of their acquisition or Liens to secure the payment of all or any part of the purchase price of such land, buildings or equipment or to secure Funded Debt incurred prior to, at the time of, or within one hundred eighty (180) days after the acquisition of such Property for the purpose of financing all or any part of the purchase price thereof, provided that any such Liens shall not encumber any other Property of the Company or its Subsidiaries; (8) Liens assumed in connection with permitted mergers and acquisitions, but only to the extent that such Liens shall secure only Funded Debt and shall not encumber any other Property of the Company or any Subsidiary; (9) Liens on financed Property created or incurred in connection with leases, mortgages, conditional sales contracts, security interests or arrangements for the retention of title entered into by the Company or any of its Subsidiaries to secure "industrial revenue bonds" as defined in Section 103(b)(2) of the Code and treated as obligations described in legislation similar to the provisions of said sections of the Code enacted in any State of the United States or Puerto Rico, which are issued to finance Property useful and intended to be used in carrying on the business of the Company or any of its Subsidiaries, provided that upon creation of any such Lien the Company or such Subsidiary shall incur Funded Debt secured thereby in conformity with the provisions of Section 5(L) hereof. (10) Liens related to Letters of Credit, provided such Liens attach only to Property financed through such Letters of Credit; (11) Cash Collateral provided to secure letters of credit; (12) Liens on Property or assets of a Subsidiary to secure Debt of such Subsidiary to the Company or another Subsidiary; (13) Liens of CoBank, St. Paul and other cooperatives respectively, on Investments by the Company in the stock, participation certificates, or allocated reserves of CoBank, St. Paul or other cooperatives, respectively, owned by the Company; (14) all precautionary filings of financing statements under the Uniform Commercial Code which cover Property that is made available to or used by the Company or any Subsidiary pursuant to the terms of an Operating Lease or Capital Lease. (N) GUARANTIES. The Company will not, and it will not permit any Consolidated Subsidiary to, be or remain liable, whether as endorser, surety, guarantor or otherwise, for or in respect of any liability or indebtedness of any other Person than: (1) Guaranties under which the maximum aggregate amount of the guaranteed indebtedness, dividend or obligation can be mathematically determined on the date on which such guaranties are made; (2) the liability of the Company and its Subsidiaries arising out of the endorsement for deposit or collection of commercial paper received in the ordinary course of business; or (3) Guarantees made from time to time by the Company and its Consolidated Subsidiaries in the ordinary course of their respective business; provided, however, that the aggregate amount of all indebtedness guaranteed under Guaranties described in Section (1) and (3) above shall not exceed $100,000,000 in the aggregate. (O) DEBT. The Company will not, and it will not permit any Subsidiary to, create, incur, assume, or allow to exist, directly or indirectly, any Debt or liability for borrowed money or for the deferred purchase price of Property or services, except for: (1) indebtedness of the Company arising under this Agreement and the other Loan Documents; (2) trade payables arising in the ordinary course of business; (3) Capital Leases in existence from time to time; (4) current operating liabilities (other than for borrowed money) incurred in the ordinary course of business; (5) unsecured indebtedness of the Company and its Subsidiaries arising under uncommitted lines of credit; provided that the maximum principal amount that may be outstanding at any one time shall not exceed $15,000,000; (6) indebtedness of the Company and its Subsidiaries on the date hereof as set forth in Schedule A; (7) unsecured long-term indebtedness of the Company and its Subsidiaries; (8) documentary or standby letters of credit issued at the request of the Company or any Subsidiary by a financial institution other than a Bank, provided the aggregate principal amount outstanding under such letters of credit together with the principal outstanding under Letters of Credit do not exceed $50,000,000 and provided further that the aggregate principal amount outstanding under such letters of credit together with all advances, principal outstanding under Letters of Credit and unreimbursed obligations to Banks with respect to payments made by such Banks under Letters of Credit shall not exceed the Commitment; and (9) such other indebtedness agreed upon in writing between the Company and the Banks. (P)(A)INVESTMENTS. In any fiscal year the Company may make, or suffer to exist, any Investment except: (1) Permitted Investments; (2) Investments in Subsidiaries; (3) Investments permitted under Sections 5(H), 5(I) and 5(P)(B); and (4) Investments that are not Permitted Investments in an aggregate amount not exceeding $5,000,000 for each fiscal year of the Company. (P)(B)LOANS, ADVANCES AND ACQUISITIONS. The Company will not, and it will not permit any Subsidiary to, make or retain any investment (whether through the purchase of stock, obligations or otherwise) in or make any loan or advance to, any other Person, other than: (1) loans to Subsidiaries; (2) trade credit extended in the ordinary course of business; (3) loans made by the Company to its members on open account maintained by such members with the Company or made by the Company to its members pursuant to its Affiliate Financing CoBank Participation Program; provided that the aggregate principal amount of all such loans outstanding at any time shall not exceed $150,000,000; and (4) loans made by Fin-Ag, Inc. to agricultural producers, provided that the aggregate principal amount of all such loans outstanding at any time shall not exceed $35,000,000. (Q) SALE OF PROPERTY. The Company will not sell, lease, assign, transfer or otherwise dispose of (whether in one transaction or in a series of transactions) all or a material part of its Property to any other Person; provided, however, that so long as not Event of Default or Potential Default has occurred and is continuing, this Section shall not prohibit: (1) sales of Inventory by the Company in the ordinary course of business; and (2) sales or leases by the Company of its surplus, obsolete or worn-out land, plant, machinery and equipment; For the purposes of this Section, "material part" shall mean 5% or more of the lesser of the book or fair market value of the Property of the Company. (R) MAINTENANCE OF COMMODITY POSITION. The Company will, and will cause each Subsidiary to, protect its commodity Inventory holdings or commitments to buy or sell commodities against adverse price movements, including the taking equal and opposite positions in the cash and futures markets, to minimize loses and protect margins in commodity production, storage, processing and marketing as is recognized as financially sound and reputable by prudent business persons in the commodity business. (S) PATRONAGE REFUNDS AND CERTAIN OTHER RESTRICTED PAYMENTS. The Company will not in any fiscal year: (a) declare or pay any cash patronage refunds to patrons or members which in the aggregate exceed 20% of the Company's Consolidated Net Patronage Income for the fiscal year of the Company preceding the fiscal year in which such patronage refunds are to be paid; or (b) directly or indirectly redeem or otherwise retire its equity unless: (i) at the time of taking such action no Event of Default or Potential Default exists hereunder and (ii) after giving effect thereto no Event of Default or Potential Default would exist hereunder. (T) NOTICE OF SUIT, ADVERSE CHANGE IN BUSINESS OR DEFAULT. The Company shall, as soon as possible, and in any event within five (5) days after the Company learns of the following, give written notice to the Banks of: (i) any proceeding(s) being instituted or threatened to be instituted by or against the Company or any Subsidiary in any federal, state, local or foreign court or before any commission or other regulatory body (federal, state, local or foreign) which, if decided adversely to the Company or any Subsidiary, could have a material adverse effect on the business, Property, or condition, financial or otherwise, of the Company or any Subsidiary; (ii) any material adverse change in the business, Property, or condition, financial or otherwise, of the Company or any Subsidiary; and (iii) the occurrence of any Potential Default or Event of Default. (U) ERISA REPORTS. As soon as possible and in any event within twenty (20) days after the Company or any Subsidiary knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC or the Company or any Subsidiary has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, or that the Company, any Subsidiary or any ERISA Affiliate has completely or partially withdrawn from a Multiemployer Plan, or that a Plan which is a Multiemployer Plan is in reorganization (within the meaning of Section 4241 of ERISA), is insolvent (within the meaning of Section 4245 of ERISA) or is terminating, the Company or such Subsidiary will deliver to each of the Banks a certificate of the Group Vice President - Finance of the Company or such Subsidiary setting forth details as to such Reportable Event or Prohibited Transaction or Plan termination or withdrawal or reorganization or insolvency and the action the Company or such Subsidiary proposes to take with respect thereto, provided, however, that notwithstanding the foregoing, no reporting is required under this subsection (U) unless the matter(s), individually or in the aggregate, result, or could be reasonably expected to result, in aggregate obligations or liabilities of the Company and/or the Subsidiaries in excess of Five Million Dollars ($5,000,000). (V) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Company and its Subsidiaries, taken as a whole, will continue to engage in business of the same general type as now conducted by them, and the Company will preserve, renew and keep in full force and effect its corporate existence, its status as a cooperative association as defined in the Farm Credit Act of 1971, as amended, and all of its rights, privileges and franchises necessary or desirable in the normal conduct of business. (W) COMPLIANCE WITH LAW. The Company and its Subsidiaries will not violate any Law which, if violated, would result in a material adverse change in the Properties, financial condition, or operations of the Company or any Subsidiary. (X) NOTICE OF LITIGATION. Promptly after the commencement thereof, the Company will give notice to the Banks of all actions, suits, arbitration and any other proceedings before any Governmental Authority, affecting the Company or any Subsidiary which, if determined adversely to the Company or any Subsidiary, could reasonably be expected to require the Company or any Subsidiary to have to pay or deliver assets having a value of Five Million Dollars ($5,000,000) or more (whether or not the claim is covered by insurance) or could reasonably be expected to result in a Material Adverse Change. (Y) ENVIRONMENTAL NOTICES. As soon as possible and in any event within five (5) days after receipt, the Company will provide to the Banks copies of all Environmental Notices received by the Company or any Subsidiary which indicate a potential liability of Five Million Dollars ($5,000,000) or more for the Company and all its Subsidiaries taken together or which could be reasonably be expected to result in or has resulted in a Material Adverse Change. SECTION 6. EVENTS OF DEFAULT AND REMEDIES. (A) DEFINITIONS. Any one or more of the following shall constitute an Event of Default: (1) Default in the payment five days after the date due of any principal of or interest on the Notes, or in the payment five days after the due date thereof of any costs, expenses, fees or capital requirements under this Agreement; (2) Default in the observance or performance of any covenant, condition, agreement or provision in the Agreement or in any of the other Loan Documents and, in the case of each such covenant, condition, etc. other than Section 5(T)(iii) hereof, such default shall continue for five days after written notice thereof to the Company by the Banks; (3) Default shall occur under any evidence of indebtedness issued or assumed or guaranteed by the Company or any Subsidiary or under any mortgage, agreement or similar instrument under which the same may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of maturity of any indebtedness evidenced thereby or outstanding thereunder without the Company securing a waiver of any such default; (4) Any representation or warranty made by the Company herein or in any statement, certificate or application furnished by it pursuant hereto or in connection with any Supplement proves untrue and any material respect as of the date of the issuance or making thereof; (5) Any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes in the aggregate amount in excess of $1,000,000 shall be entered or filed against the Company or any Subsidiary or against any of its Property or assets and remains unpaid, unvacated, unbonded or unstayed for a period of ninety (90) days from the date of its entry. (6) Any Reportable Event which constitutes grounds for the termination of any Plan or for the appointment of a trustee to administer or liquidate any such Plan, shall have occurred and be continuing for thirty (30) days after written notice to such effect shall have been given to the Company; or any such Plan shall be terminated; or a trustee shall be appointed to administer any such Plan; or the PBGC shall institute proceedings to administer or terminate any such Plan; (7) INSOLVENCY, ETC. The Company: (i) shall become insolvent or shall generally not, or shall be unable to, or shall admit in writing its inability to pay its debts as they come due; or (ii) shall suspend it business operations or a material part thereof or make an assignment for the benefit of creditors; or (iii) shall apply for, consent to, or acquiesce in the absence of such application, consent, or acquiesce, a trustee, receiver, or other custodian is so appointed; or (iv) shall commence or have commenced against it any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or liquidation Law or statute of any jurisdiction and in the case of any such proceeding being commenced against it, such proceeding is not dismissed within 60 days of the date thereof. SECTION 7. SUSPENSION OF COMMITMENT DURING GRACE PERIOD. During the continuance of any Potential Default, either Bank may, without notice to the Company, suspend the unused portion of its commitment(s) to the Company. SECTION 8. REMEDIES UPON DEFAULT. Upon the occurrence of and during the continuance of each and every Event of Default: (A) TERMINATION, ETC. Either Bank may, without notice to the Company, suspend the unused portion of its commitment(s) and, upon notice to the Company, may terminate its commitment(s) and declare the entire unpaid principal balance of its Notes, all accrued interest thereon, and all other amounts payable to that Bank under this Agreement, all Supplements, and all other agreements between the Bank and the Company to be immediately due and payable, without protest, presentment, demand, or further notice of any kind, all of which are hereby expressly waived by the Company. Upon such a declaration and notwithstanding anything to the contrary contained herein or in any Supplement, interest shall automatically accrue at 2% (two percent) per annum in excess of the rates that would otherwise be in effect. (B) ENFORCEMENT. Either Bank may proceed to protect exercise, and enforce such rights and remedies as may be provided by agreement or under Law. Each and every one of such rights and remedies shall be cumulative and may be exercised from time to time, and no failure on the part of the Banks to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof, and no single or partial exercise of any right or remedy shall preclude any other or future exercise thereof, or the exercise of any other right. Without limiting the foregoing, CoBank may hold and/or set off and apply against the Company's indebtedness, any and all cash, accounts, securities, or other Property of the Company in CoBank's possession or under its control. (C) APPLICATION OF FUNDS. All amounts received by the Banks shall be applied to the amounts owing under the Loan Documents in whatever order and manner as the Banks shall elect in their sole discretion. SECTION 9. COMPLETE AGREEMENT, AMENDMENTS. The Loan Documents are intended by the parties to be a complete and final expression of their agreement. No amendment, modification, or waiver of any provision hereof or thereof, and no consent to any departure of the Company herefrom or therefrom, shall be effective unless approved by CoBank and contained in a writing signed by or on behalf of the Banks, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. In the event this Agreement is amended or restated, each such amendment or restatement shall be applicable to all Supplements hereto. SECTION 10. APPLICABLE LAW. Except to the extent governed by applicable federal Law, the Loan Documents shall be governed by and construed in accordance with the Laws of the State of Minnesota, without reference to choice of Law doctrine. SECTION 11. NOTICES. All notices hereunder shall be in writing and shall be deemed to be duly given upon delivery, if personally delivered or sent by telegram or facsimile transmission, or three (3) days after mailing if sent by express, certified or registered mail, to the parties at the following addresses (or such other address for a party as shall be specified by like notice): If to the Banks, as follows: If to the Company, as follows: CoBank, ACB Harvest States Cooperatives, Inc. 1415 Olive Street 1667 North Snelling Avenue St. Louis, Missouri 63103 St. Paul, Minnesota 55108 Attention: Vice President - Credit Attention: Financial Services Telephone Number: (314) 342-3200 Telephone Number: (612) 641-3736 Fax Number: (314) 342-3348 Fax Number: (612) 641-6423 St. Paul Bank for Cooperatives 375 Jackson Street St. Paul, Minnesota 55101 Attention: Chief Credit Officer Telephone Number: (612) 282-8800 Fax Number: (612) 282-8201 SECTION 12. PREPAYMENT SURCHARGE. Notwithstanding any provision contained in any Supplement giving the Company the right to repay any loan or advance prior to the date when it would otherwise be due and payable, the Company agrees that in the event it repays any loan or advance bearing interest at a fixed rate prior to the last day of the fixed rate period (whether such payment is made voluntarily, as a result of an acceleration, or otherwise), the Company will pay to the Bank a prepayment surcharge equal to the present value of the difference between: (i) the amount of interest that would have accrued at the non-default rate during the remaining fixed rate period had such balance not been paid; less (ii) the amount of interest that would accrue on the balance being prepaid if such balance accrued interest at the Banks' Estimated Cost of Funds on the prepayment date for a period equal to the remaining fixed rate period. In calculating present value, the discount rate shall be the rate determined pursuant to (ii) hereof plus 25 basis points. SECTION 13. AGREEMENT AMONG BANKS. The Banks agree to cooperative to the fullest extend possible in making and administering loans hereunder. Without limiting the foregoing, the Banks agree to: (i) share all pertinent information related to the Company; (ii) timely discuss and, if possible, mutually agree on, all matters requiring the consent of the Banks or the exercise of any rights and remedies belonging to the Banks; and (iii) coordinate their visits to the Company under Section 5(G) hereof. In addition, to the extent necessary to collect the loans, the Banks agree to appoint one of the Banks as agent for the other and to share in all extraordinary costs and expenses (including legal fees) which the agent may incur in fulfillment of its responsibilities as agent or either one of the Banks shall incur with the consent of the other. In the event collection becomes necessary, the Banks will meet to discuss the impact of any loans made by either Bank to the Company outside of this Agreement of the Banks' pro rata rights to proceeds. SECTION 14. EFFECTIVENESS AND SEVERABILITY. This Agreement shall continue in effect until: (i) all indebtedness and obligations of the Company under the Loan Documents shall have been repaid; (ii) all Supplements hereto have been terminated; and (iii) either party sends notice to the other that it considers this agreement to be terminated. Any provision of this Agreement, or the other Loan Documents which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or thereof. SECTION 15. SUCCESSORS AND ASSIGNS. This Agreement and each Supplement shall be binding upon and inure to the benefit of the Company and the Banks and their respective successors and assigns, except that the Company may not assign or transfer its rights or obligations under this Agreement or any Supplement without the prior written consent of the Banks. St. Paul may sell a participation in loans made by it under any Supplement to CoBank. SECTION 16. COSTS AND EXPENSES. To the extent allowed by Law, the Company agrees to pay to each Bank on demand, all out-of-pocket costs and expenses incurred by each Bank (including the reasonable fees and expenses of counsel) in connection with the enforcement of the terms of this Agreement, each Supplement and all instruments and documents executed in connection herewith or the collection of any amounts owing hereunder or thereunder, including any of the foregoing actions taken or done in any proceeding for relief of debtors under the Bankruptcy Code. In addition, the Company agrees to reimburse each Bank for all expenses incurred in connection with perfecting, maintaining, determining the priority of and releasing any security provided for under this Agreement and the Supplements. SECTION 17. NON-SYNDICATED LOANS. Nothing contained in this Agreement shall be deemed to prohibit either Bank from making and/or maintaining non-syndicated loans or relationships with the Company. In the event the Company and any Bank having such a separate relationship desire to have this Agreement govern that relationship, then the Company and that Bank may enter into a separate Supplement to this Agreement entitled "CoBank Supplement" or St. Paul Supplement," as the case may be. For each such supplement, this agreement shall be construed as if only that Bank and the Company were parties to this Agreement. CoBank and St. Paul shall notify each other prior to executing any separate Supplement under this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the date shown above. COBANK, ACB HARVEST STATES COOPERATIVES, INC. By: /s/ Daniel Malan By: /s/ T.F. Baker ------------------------------- ------------------------------- T.F. Baker Title: VP Title: Group Vice President - Finance ------------------------------- ------------------------------- By: /s/ Joanne Burmeister ------------------------------- Joanne Burmeister Title: Assistant Secretary ------------------------------- ST. PAUL BANK FOR COOPERATIVES By: /s/ Marvin L. Lindo ------------------------------- Marvin L. Lindo Title: Senior Vice President ------------------------------- EX-10.11 14 FOURTH SUPPLEMENT TO MASTER LOAN AGREEMENT FOURTH SUPPLEMENT TO MASTER SYNDICATED LOAN AGREEMENT THIS FOURTH SUPPLEMENT to the Master Syndicated Loan Agreement is entered into as of October 28, 1996, by and among HARVEST STATES COOPERATIVES (the "Company"), COBANK, ACB (successor to the National Bank for Cooperatives ("CoBank")) and the ST. PAUL BANK FOR COOPERATIVES ("St. Paul") (collectively, the "Banks") SECTION 1. THE COMMITMENTS. On the terms and conditions set forth in this Supplement and the Amended and Restated Master Syndicated Loan Agreement dated October 28, 1996, (the "MLA"), the Banks agree to make loans to the Company during the period commencing on October 31, 1996, and ending on but not including October 31, 1997, in an aggregate principal amount for each Bank not to exceed $25,000,000 (the "Commitments"). Loans will be made directly by each Bank to the Company in the manner set forth below. However, all loans will be made on a pro rata basis so that at all times each Bank shall have the same amount outstanding hereunder. Amounts borrowed under the Commitments and later repaid may not be reborrowed. SECTION 2. PURPOSE. The purpose of the Commitments is to finance 1997 and a portion of 1998 fixed asset expenditures to be made by the Company. SECTION 3. AVAILABILITY. Subject to Section 1 hereof, loans will be made available on any Business Day upon the telephonic or written request of an authorized employee of the Company. Requests for loans must be received by the Banks no later than 12:00 noon, Company's local time on the day the loan is desired. Unless otherwise agreed, all loans will be made available by wire transfer of immediately available funds. Wire transfers will be made to such account(s) as the Company may authorize from time to time on forms supplied by the Banks. In making loans on telephonic request, each Bank shall be entitled to rely on (and shall incur no liability to the Company in acting upon) any request made by a person identifying himself or herself as one of the persons authorized by the Company to request loans hereunder. SECTION 4. INTEREST AND FEES. (A) INTEREST RATE OPTIONS. The Company agrees to pay interest on the unpaid principal balance of the loans in accordance with one or more of the following options, as selected by the Company in accordance with the terms hereof: (i) VARIABLE RATE OPTION. At a rate per annum equal at all times to the rate of interest announced by CoBank from time to time as its National Variable Rate which Rate is intended by CoBank to be a reference rate and not its lowest rate. The National Variable Rate will change on the date established by CoBank as the effective date of any change therein and CoBank agrees to notifiy the Company and St. Paul promptly after any such change. (ii) FIXED RATE OPTION. At a fixed rate per annum equal to: (1) in the case of rates fixed on or before August 30, 1997, 90 basis points above the Banks' Estimated Cost of Funds for periods ranging from 30 days to the life of the loan, as selected by the Company; and (2) in the case of rates fixed after August 30, 1997, at a rate to be quoted by the Banks in their sole discretion in each instance. Upon the expiration of any fixed rate period, interest shall automatically accrue at the variable rate provided for above unless the amount fixed is repaid or fixed for an additional period. Interest shall be calculated on the actual number of days each loan is outstanding on the basis of a year consisting of 360 days and shall be payable monthly in arrears by the 20th day of the following month. (B) ARRANGEMENT FEE. In consideration of the Commitment, the Company agrees to pay to the Banks an arrangement fee on the amount of the Commitment at the rate of .125% per annum payable in equal quarterly installments by November 20, 1996; February 20, 1997; May 20, 1997, and August 20, 1997. If any installment due date is not a Business Day, then such installment shall be payable on the next Business Day. SECTION 5. REPAYMENT. The loans made by each Bank shall be repaid in thirty-two (32) equal consecutive quarterly installments, with the first installment due on November 20, 1997, and the last installment due on August 20, 2005. If any installment due date is not a Business Day, then such installment shall be payable on the next Business Day. SECTION 6. PREPAYMENT. The loans may be prepaid on any Business Day on one Business Days' prior written notice. Unless the Banks otherwise agree, all prepayments will be applied pro rata to principal installments owing to each Bank in the inverse order of their maturity and to the various fixed and variable rate balances outstanding on the loans in the following order: (i) first, to any balances fixed for the periods being prepaid; and (ii) next, to such balances, fixed or variable, as the Company may elect; provided, however, that the Company may not elect to apply prepayments in such a manner as to cause the Company to have to repay any fixed rate balance prior to the last day of its fixed rate period in order to pay any scheduled installment of principal. Notwithstanding the foregoing, the Company's right to prepay any fixed rate balance shall be conditioned upon the payment of a prepayment surcharge calculated in accordance with Section 12 of the MLA. SECTION 7. MANNER AND TIME OF PAYMENT. All payments shall be made by wire transfer of immediately available funds to: (i) in the case of CoBank, ABA #30-70-88754 for advice to and credit of CoBANK; and (ii) in the case of St. Paul, ABA #296090471 (or to such other account as either CoBank or St. Paul may designate by notice). The Company shall give the Banks telephonic notice no later than 12:00 noon, Company's local time, of its intent to pay by wire transfer. Wire transfers received after 3:00 p.m., Company's local time, shall be credited on the next business day. IN WITNESS WHEREOF, the parties have caused this Supplement to be executed by their duly authorized officers as of the date shown above. COBANK, ACB HARVEST STATES COOPERATIVES By: /s/ J. Daniel Malan By: /s/ T.F. Baker ------------------------------- T.F. Baker Title: VP Title: Group Vice President - Finance ------------------------------ ------------------------------- ST. PAUL BANK FOR COOPERATIVES By: /s/ Marvin L. Lindo ------------------------------ Marvin L. Lindo Title: Senior Vice President ------------------------------ EX-10.11(A) 15 PROMISSORY NOTE PROMISSORY NOTE Loan No. 35100 Note of Harvest States Cooperatives St. Paul, Minnesota Dated: October 28, 1996 $25,000,000.00 For value received, the undersigned promises to pay to St. Paul Bank for Cooperatives ("Payee"), or order, at the times set forth in that certain Fourth Supplement to Amended and Restated Master Syndicated Loan Agreement dated October 28, 1996, as that Supplement may be amended to restated from time to time (the " Fourth Supplement"), the principal sum of up to TWENTY-FIVE MILLION DOLLARS (25,000,000.00). The undersigned also promises to pay interest on such sum at the times and rates, or in accordance with the rate options, set forth in the Fourth Supplement. This note is given for one or more advances to be made by the Payee to the undersigned pursuant to the Fourth supplement and the Amended and Restated Master Syndicated Loan Agreement under which it was issued, as that Amended and Restated Master Syndicated Loan Agreement may be restated from time to time, all of the terms and provisions of which (including provisions regarding the manner of payment, default interest and acceleration) are hereby incorporated by reference. Advances, accrued interest, and payments shall be posted by the Payee upon an appropriate accounting record, which record (and all computer printouts thereof) shall constitute prima facie evidence of the outstanding principal and interest on the advances. The makers or endorsers hereof waive presentment for payment, demand, protest, and notice of dishonor and nonpayment of this note, and all defenses on the ground of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof to them or either of them or to anyone who has assumed the payment of this note, and it is specifically agreed that the obligations of said makers and endorsers shall not be in anywise affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity. Except to the extent governed by applicable federal law, this note shall be governed by and construed in accordance with the laws of the state of Minnesota, without reference to choice of law doctrine. HARVEST STATE COOPERATIVES By /s/ T.F. Baker T.F. Baker Title Group Vice President - Finance EX-10.11(B) 16 PROMISSORY NOTE PROMISSORY NOTE Loan No. ML0154T3 Note of Harvest States Cooperatives St. Paul, Minnesota Dated: October 28, 1996 $25,000,000.00 For value received, the undersigned promises to pay to CoBank, ACB ("Payee"), or order, at the times set forth in that certain Fourth Supplement to Amended and Restated Master Syndicated Loan Agreement dated October 28, 1996, as that Supplement may be amended to restated from time to time (the "Fourth Supplement"), the principal sum of up to TWENTY-FIVE MILLION DOLLARS ($25,000,000.00). The undersigned also promises to pay interest on such sum at the times and rates, or in accordance with the rate options, set forth in the Fourth Supplement. This note is given for one or more advances to be made by the Payee to the undersigned pursuant to the Fourth Supplement and the Amended and Restated Master Syndicated Loan Agreement under which it was issued, as that Amended and Restated Master Syndicated Loan Agreement may be restated from time to time, all of the terms and provisions of which (including provisions regarding the manner of payment, default interest and acceleration) are hereby incorporated by reference. Advances, accrued interest, and payments shall be posted by the Payee upon an appropriate accounting record, which record (and all computer printouts thereof) shall constitute prima facie evidence of the outstanding principal and interest on the advances. The makers or endorsers hereof waive presentment for payment, demand, protest, and notice of dishonor and nonpayment of this note, and all defenses on the ground of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof to them or either of them or to anyone who has assumed the payment of this note, and it is specifically agreed that the obligations of said makers or endorsers shall not be in anywise affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity. Except to the extent governed by applicable federal law, this note shall be governed by and construed in accordance with the laws of the State of Minnesota, without reference to choice of law doctrine. HARVEST STATES COOPERATIVES By /s/ T.F. Baker Title Group Vice President - Finance EX-10.12 17 THIRD SUPPLEMENT TO MASTER LOAN AGREEMENT ML0154T2 THIRD SUPPLEMENT TO MASTER SYNDICATED LOAN AGREEMENT THIS SUPPLEMENT to the Master Syndicated Loan Agreement dated August 30, 1994 (the "MLA"), is entered into as of December 15, 1995, by and among HARVEST STATES COOPERATIVES (the "Company"), COBANK, ACB (successor to the National Bank for Cooperatives ("CoBank")) and the ST. PAUL BANK FOR COOPERATIVES ("St. Paul") (collectively, the "Banks"). SECTION 1. THE REVOLVING TERM LOAN COMMITMENT. On the terms and conditions set forth in the MLA and this Supplement, each Bank agrees to make loans to the Company during the period commencing on December 15, 1995, and ending on but not including November 1, 1996, in an aggregate principal amount for each Bank not to exceed $10,000,000.00 (the Commitments"). Loans will be made directly by each Bank to the Company in the manner set forth below. However, all loans will be made on a pro rata basis so that at all times each Bank shall have the same amount outstanding hereunder. Within the limits of the Commitments, the Company may borrow, prepay and reborrow. SECTION 2. PURPOSE. The purpose of the Commitments is to provide working capital. SECTION 3. TERM. The term of the Commitments shall be from December 15, 1995, up to but not including November 1, 1996, or such later date as the Banks may, in their sole discretion, authorize in writing. SECTION 4. INTEREST AND FEES. (A) INTEREST. The unpaid principal balance of each loan shall bear interest at a rate per annum equal at all times to the rate of interest established by CoBank from time to time as its National Variable Rate, which Rate is intended by CoBank to be a reference rate and not its lowest rate. The National Variable Rate will change on the date established by CoBank as the effective date of any change therein and CoBank agrees to notify the Company and St. Paul promptly after any such change. Notwithstanding the foregoing, from time to time at the request of the Company, the rate of interest charged hereunder may be fixed on such balances, for such periods, and at such rates as may be quoted by the Banks in their sole and absolute discretion in each instance. Upon the expiration of any fixed rate period, interest shall automatically accrue at the variable rate provided for above unless the amount fixed is repaid or fixed for an additional period. Interest shall be calculated on the actual number of days each loan is outstanding on the basis of a year consisting of 360 days and shall be payable monthly in arrears by the 20th day of the following month. (B) COMMITMENT FEE. In consideration of the Commitment, the Company agrees to pay to the Banks a commitment fee on the average daily unused portion of the Commitment at the rate of plus 25 basis points (calculated on a 360 day basis), payable quarterly in arrears by the 20th day following each calendar quarter. Such fee shall be payable for each quarter (or portion thereof) occurring during the original or any extended term of the Commitment. SECTION 5. PROMISSORY NOTE. The Company promises to repay the loans that are outstanding at the time the Commitments expire in 32 equal, consecutive quarterly installments with the first such installment due on November 20, 1997, and the last such installment due on August 20, 2005. SECTION 6. PREPAYMENT. The loans may be prepaid in whole or in part on one Banks' business day's prior written notice. During the term of the Commitment, prepayments shall be applied to such balances, fixed or variable, as the Company shall specify. After the expiration of the term of the Commitments, prepayments shall, unless the Banks otherwise agree, be applied to principal installments in the inverse order of their maturity and to such balances, fixed or variable, as the Banks shall specify. SECTION 7. MANNER AND TIME OF PAYMENT. All payments shall be made by wire transfer of immediately available funds to St. Paul, ABA #296090471 (or to such other account as St. Paul may designate by notice). The Company shall give St. Paul telephonic notice no later than 12:00 noon, Company's local time, of its intent to pay by wire transfer. Wire transfers received after 3:00 p.m., Company's local time, shall be credited on the next business day. SECTION 8. CONDITION PRECEDENT. The Banks' obligation to make the initial advance of this Revolving Term Loan is contingent upon Loan No. ML0154T1 being fully drawn, all payments of principal and interest thereon being current and that there be no defaults under any loan provisions of Loan No. ML0154T1. IN WITNESS WHEREOF, the parties have caused this Supplement to be executed by their duly authorized officers as of the date shown above. COBANK, ACB HARVEST STATES COOPERATIVES By: /s/ J. Daniel Malan By: /s/ T.F. Baker ------------------------------- ------------------------------ T.F. Baker Title: Vice President Title: Group Vice President - Finance ------------------------------- ------------------------------ ST. PAUL BANK FOR COOPERATIVES By: /s/ Lee Estenson ------------------------------- Title: Vice President ------------------------------- EX-10.12(A) 18 PROMISSORY NOTE PROMISSORY NOTE Loan No. ML0154T2 Note of Harvest States Cooperatives St. Paul, MN Dated: December 15, 1995 $10,000,000.00 For value received, on the Maturity Date as set forth in that certain Master Syndicated Loan Agreement dated August 30, 1994, and numbered ML0154, or in any amendments thereto ("Master Syndicated Loan Agreement Supplement"), the undersigned promises to pay to ST. PAUL BANK FOR COOPERATIVES ("Payee"), or order, at the times and in the manner set forth in the Master Syndicated Loan Agreement Supplement, the sum of up to TEN MILLION DOLLARS ($10,000,000). The undersigned also promises to pay interest on the unpaid principal balance hereof at such rate or rates and at such times as is provided for in the Master Syndicated Loan Agreement Supplement. This note is given for one or more advances to be made by the Payee to the undersigned from time to time in accordance with the terms and conditions of the Loan No. ML0154T2, all the terms and conditions of which are incorporated herein by reference. Advances, accrued interest, and payments shall be posted by the Payee upon an appropriate accounting record, which record shall constitute prima facie evidence of the outstanding principal and interest on the advances. The total of such advances may exceed the face amount of this note but the unpaid principal balance shall not at any time exceed the face amount. Any amount of principal hereof which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest from the date when due until said principal amount is paid in full, payable on demand, at a rate per annum set forth in the Master Syndicated Loan Agreement Supplement. The makers or endorsers hereof hereby waive presentment for payment, demand, protest, and notice of dishonor and nonpayment of this note, and all defenses on the ground of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof to them or either of them or to anyone who has assumed the payment of this note, and it is specifically agreed that the obligations of said makers or endorsers shall not be in anywise affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity. Should this note be placed in the hands of an attorney for collection or the services of any attorney become necessary in connection with enforcing its provisions, the undersigned agrees to pay reasonable attorneys' fees, together with all costs and expenses incident thereto, to the extent allowed by law. Except to the extent governed by applicable federal law, this note shall be governed by and construed in accordance with the laws of the State of Minnesota, without reference to choice of law doctrine. HARVEST STATES COOPERATIVES By: /s/ T. F. Baker T.F. Baker Title: Group Vice President - Finance EX-10.12(B) 19 PROMISSORY NOTE PROMISSORY NOTE Loan No. ML0154T2 Note of Harvest States Cooperatives St. Paul, MN Dated: December 15, 1995 $10,000,000.00 For value received, on the Maturity Date as set forth in that certain Master Syndicated Loan Agreement dated August 30, 1994, and numbered ML0154, or in any amendments thereto ("Master Syndicated Loan Agreement Supplement"), the undersigned promises to pay to COBANK, ACB ("Payee"), or order, at the times and in the manner set forth in the Master Syndicated Loan Agreement Supplement, the sum of up to TEN MILLION DOLLARS ($10,000,000). The undersigned also promises to pay interest on the unpaid principal balance hereof at such rate or rates and at such times as is provided for in the Master Syndicated Loan Agreement Supplement. This note is given for one or more advances to be made by the Payee to the undersigned from time to time in accordance with the terms and conditions of the Loan No. ML0154T2, all the terms and conditions of which are incorporated herein by reference. Advances, accrued interest, and payments shall be posted by the Payee upon an appropriate accounting record, which record shall constitute prima facie evidence of the outstanding principal and interest on the advances. The total of such advances may exceed the face amount of this note but the unpaid principal balance shall not at any time exceed the face amount. Any amount of principal hereof which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest from the date when due until said principal amount is paid in full, payable on demand, at a rate per annum set forth in the Master Syndicated Loan Agreement Supplement. The makers or endorsers hereof hereby waive presentment for payment, demand, protest, and notice of dishonor and nonpayment of this note, and all defenses on the ground of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof to them or either of them or to anyone who has assumed the payment of this note, and it is specifically agreed that the obligations of said makers or endorsers shall not be in anywise affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity. Should this note be placed in the hands of an attorney for collection or the services of any attorney become necessary in connection with enforcing its provisions, the undersigned agrees to pay reasonable attorneys' fees, together with all costs and expenses incident thereto, to the extent allowed by law. Except to the extent governed by applicable federal law, this note shall be governed by and construed in accordance with the laws of the State of Minnesota, without reference to choice of law doctrine. HARVEST STATES COOPERATIVES By /s/ T.F. Baker Title: Group Vice President - Finance EX-10.13 20 SUPPLEMENT TO MASTER SYNDICATED LOAN AGREEMENT FIRST SUPPLEMENT TO MASTER SYNDICATED LOAN AGREEMENT THIS FIRST SUPPLEMENT to the Master Syndicated Loan Agreement is entered into as of the 30th day of August, 1994, by and among HARVEST STATES COOPERATIVES (the "Company"), the NATIONAL BANK FOR COOPERATIVES (`CoBank"), and the ST. PAUL BANK FOR COOPERATIVES ("St. Paul") (collectively, the "Banks"). SECTION 1. THE COMMITMENTS. On the terms and conditions set forth in this Supplement and the Master Syndicated Loan Agreement dated August 30, 1994, (the "MLA"), each Bank agrees to make loans to the Company during the period commencing on August 30, 1994, and ending on but not including August 30, 1995, in an aggregate principal amount for each Bank not to exceed $42,500,000 (the "Commitments"). Loans will be made directly by each Bank to the Company in the manner set forth below. However, all loans will be made on a pro rata basis so that at all times each Bank shall have the same amount outstanding hereunder. Amounts borrowed under the Commitments and later repaid may not be reborrowed. SECTION 2. PURPOSE. The purpose of the Commitments is to finance capital expenditures to be made by the Company pursuant to its 1995 board approved budget. SECTION 3. AVAILABILITY. Subject to Section 1 hereof, loans will be made available on any Business Day upon the telephonic or written request of an authorized employee of the Company. Requests for loans must be received by the Banks no later than 12:00 noon, Company's local time on the day the loan is desired. Unless otherwise agreed, all loans will be made available by wire transfer of immediately available funds. Wire transfers will be made to such account(s) as the Company may authorize from time to time on forms supplied by the Banks. In making loans on telephonic request, each Bank shall be entitled to rely on (and shall incur no liability to the Company in acting upon) any request made by a person identifying himself or herself as one of the persons authorized by the Company to request loans hereunder. SECTION 4. INTEREST. (A) INTEREST RATE OPTIONS. The Company agrees to pay interest on the unpaid principal balance of the loans in accordance with one or more of the following options, as selected by the Company in accordance with the terms hereof: (i) VARIABLE RATE OPTION. At a rate per annum equal at all times to the rate of interest announced by CoBank from time to time as its National Variable Rate (the "Variable Rate Option"). The National Variable Rate will change on the date established by CoBank as the effective date of any such change and CoBank agrees to notify the Company and St. Paul promptly after any change in the National Variable Rate. (ii) FIXED RATE OPTION. At a fixed rate per annum equal to: (i) in the case of rates fixed on or before August 30, 1997, 90 basis points above the Banks' Estimated Cost of Funds for periods ranging from 30 days to the life of the loan, as selected by the Company; and (ii) in the case of rates fixed after August 30, 1997, at a rate to be quoted by the Banks in their sole discretion in each instance (collectively the "Fixed Rate Option"). Under this option, rates may be fixed on individual, non-amortizing balances of $100,000 or more (for each Bank). However, unless the Banks otherwise agree in their sole discretion in each instance, rates may not be fixed in such a manner as to require the Company to have to repay any fixed rate balance prior to the last day of its fixed rate period in order to pay any installment of principal. First Supplement The Company shall select the applicable option at the time it obtains a loan hereunder and may, by 12:00 noon, Company's local time on any Business Day, elect to convert qualifying amounts outstanding under the Variable Rate Option to the Fixed Rate Option. In addition, by 12:00 noon, Company's local time on the last day of any fixed rate period, the Company may elect to fix a rate for an additional period or convert the balance to the Variable Rate Option. In the absence of any such election, interest shall automatically accrue at the Variable Rate Option. Notwithstanding the foregoing, the Company shall exercise its options hereunder in such a manner as to ensure that loans made by each Bank are accruing interest at the same rates for the same periods. (B) CALCULATION AND PAYMENT. Interest shall be calculated on the actual number of days each loan is outstanding on the basis of a year consisting of 360 days, and shall be payable monthly in arrears by the 20th day of the following month. In calculating interest, the date each loan is made shall be included and the date each loan is repaid shall, if received before 3:00 p.m., Company's local time, be excluded. SECTION 5. REPAYMENT. The loans made by each Bank shall be repaid in 120 equal consecutive monthly installments, with the first installment due on August 20, 1996, and the last installment due on July 20, 2006. If any installment due date is not a Business Day, then such installment shall be payable on the next Business Day. SECTION 6. PREPAYMENT. The loans may be prepaid on any Business Day on one Business Days' prior written notice. Unless the Banks otherwise agree, all prepayments will be applied pro rata to principal installments owing to each Bank in the inverse order of their maturity and to the various fixed and variable rate balances outstanding on the loans in the following order: (i) first, to any balances fixed for the periods being prepaid; and (ii) next, to such balances, fixed or variable, as the Company may elect; provided, however, that the Company may not elect to apply prepayments in such a manner as to cause the Company to have to repay any fixed rate balance prior to the last day of its fixed rate period in order to pay any scheduled installment of principal. Notwithstanding the foregoing, the Company's right to prepay any fixed rate balance shall be conditioned upon the payment of a prepayment surcharge calculated in accordance with Section 12 of the MLA. SECTION 7. MANNER AND TIME OF PAYMENT. All payments shall be made by wire transfer of immediately available funds to: (i) in the case of CoBank, ABA #30-70-88754 for advice to and credit of NATL BK COOP ENGWD; and (ii) in the case of St. Paul, ABA #296090471 (or to such other accounts as either CoBank or St. Paul may designate by notice). The Company shall give the Banks telephonic notice no later than 12:00 noon, Company's local time, of its intent to pay by wire transfer. Wire transfer received after 3:00 p.m., Company's local time, shall be credited on the next business day. IN WITNESS WHEREOF, the parties have caused this Supplement to be executed by their duly authorized officers as of the date shown above. NATIONAL BANK FOR COOPERATIVES HARVEST STATES COOPERATIVES By: /s/ Elizabeth L. Hund By: /s/ T.F. Baker Title: Vice President Title: Group Vice President ST. PAUL BANK FOR COOPERATIVES By: /s/ Lee Estenson Title: Vice President EX-10.13(A) 21 PROMISSORY NOTE PROMISSORY NOTE Loan No. 36500 Note of Harvest States Cooperatives St. Paul, Minnesota Dated: August 30, 1994 $42,500,000.00 For value received, the undersigned promises to pay to the St. Paul Bank for Cooperatives ("Payee"), or order, at the times set forth in that certain First Supplement To Master Syndicated Loan Agreement dated August 30, 1994, as that Supplement may be amended or restated from time to time (the "First Supplement"), the principal sum of up to FORTY TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($42,500,000.00). The undersigned also promises to pay interest on such sum at the times and rates, or in accordance with the rate options, set forth in the First Supplement. This note is given for one or more advances to be made by the Payee to the undersigned pursuant to the First Supplement and the Master Syndicated Loan Agreement under which it was issued, as that Master Syndicated Loan Agreement may be amended or restated from time to time, all of the terms and provisions of which (including provisions regarding the manner of payment, default interest and acceleration) are hereby incorporated by reference. Advances, accrued interest, and payments shall be posted by the Payee upon an appropriate accounting record, which record (and all computer printouts thereof) shall constitute prima facie evidence of the outstanding principal and interest on the advances. The makers or endorsers hereof hereby waive presentment for payment, demand, protest, and notice of dishonor and nonpayment of this note, and all defenses on the ground of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof to them or either of them or to anyone who has assumed the payment of this note, and it is specifically agreed that the obligations of said makers or endorsers shall not be in anywise affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity. Except to the extent governed by applicable federal law, this note shall be governed by and construed in accordance with the laws of the State of Minnesota, without reference to choice of law doctrine. HARVEST STATES COOPERATIVES By /s/ T.F. Baker Title: Group Vice President EX-10.13(B) 22 PROMISSORY NOTE PROMISSORY NOTE Loan No. ML0154T-1 Note of Harvest States Cooperatives St. Paul, Minnesota Dated: August 30, 1994 $42,500,000.00 For value received, the undersigned promises to pay to the National Bank for Cooperatives ("Payee"), or order, at the times set forth in that certain First Supplement To Master Syndicated Loan Agreement dated August 30, 1994, as that Supplement may be amended or restated from time to time (the "First Supplement"), the principal sum of up to FORTY TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($42,500,000.00). The undersigned also promises to pay interest on such sum at the times and rates, or in accordance with the rate options, set forth in the First Supplement. This note is given for one or more advances to be made by the Payee to the undersigned pursuant to the First Supplement and the Master Syndicated Loan Agreement under which it was issued, as that Master Syndicated Loan Agreement may be amended or restated from time to time, all of the terms and provisions of which (including provisions regarding the manner of payment, default interest and acceleration) are hereby incorporated by reference. Advances, accrued interest, and payments shall be posted by the Payee upon an appropriate accounting record, which record (and all computer printouts thereof) shall constitute prima facie evidence of the outstanding principal and interest on the advances. The makers or endorsers hereof hereby waive presentment for payment, demand, protest, and notice of dishonor and nonpayment of this note, and all defenses on the ground of delay or of any extension of time for the payment hereof which may be hereafter given by the holder or holders hereof to them or either of them or to anyone who has assumed the payment of this note, and it is specifically agreed that the obligations of said makers or endorsers shall not be in anywise affected or altered to the prejudice of the holder or holders hereof by reason of the assumption of payment of the same by any other person or entity. Except to the extent governed by applicable federal law, this note shall be governed by and construed in accordance with the laws of the State of Minnesota, without reference to choice of law doctrine. HARVEST STATES COOPERATIVES By: /s/ T.F. Baker Title: Group Vice President EX-21.1 23 SUBSIDIARIES OF HARVEST STATES COOPERATIVES SUBSIDIARIES OF HARVEST STATES COOPERATIVES STATE OF INCORPORATION/ SUBSIDIARY/ADDRESS ORGANIZATION The Terminal Agency, Inc. Minnesota 1667 North Snelling Avenue P.O. Box 64594 St. Paul, MN 55164 Country Hedging, Inc. Delaware 1667 North Snelling Avenue P.O. Box 64594 St. Paul, MN 55164 Fin-Ag, Inc. South Dakota 4001 South Westport Avenue P.O. Box 88808 Sioux Falls, SD 57105 Harvest States Cooperatives - N.D. North Dakota P.O. Box 108 Norma, North Dakota 58746 Harvest States Cooperatives - Montana Montana P.O. Box B Circle, Montana 59215 Harvest States Cooperatives - Idaho, Inc. Idaho 1200 Snake River Avenue Lewiston, Idaho 83501 Harvest States Cooperatives - Minnesota Northwest Grain, Inc. 1667 North Snelling Avenue St. Paul, MN 55108 PGG/HSC Feed Company, L.L.C. Oregon 300 West Feedville Road Hermiston, Oregon 97838 Ag States Agency, LLC Minnesota 1667 North Snelling Avenue P.O. Box 64594 St. Paul, Minnesota 55164 Harvest States Farmland Specialty Feed Minnesota 800 24th Avenue NW P.O. Box 493 Owatonna, MN 55060-0493 Tacoma Export Marketing Company Washington 222 SW Columbia Street Koin Tower, Suite 1100 Portland, OR 97201 subs EX-23.1 24 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Harvest States Cooperatives on Form S-1 of our reports on the consolidated financial statements of Harvest States Cooperatives, the Oilseed Processing and Refining Division (a division of Harvest States Cooperatives), and the Wheat Milling Division (a division of Harvest States Cooperatives) dated August 19, 1996, December 10, 1996, and December 11, 1996, respectively, appearing in the prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such prospectus. /s/ Deloitte & Touche LLP Minneapolis, Minnesota December 11, 1996 EX-24 25 POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John D. Johnson, T. F. Baker and Debra A. Thornton, and each of them, his or her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign a Registration Statement on Form S-1 under the Securities Act of 1933, as amended, of Harvest States Cooperatives, and any and all amendments thereto, including post-effective amendments, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or the substitutes for such attorneys-in-fact and agents, may lawfully do or cause to be done by virtue hereof.
Name Title Date ---- ----- ---- /s/John D. Johnson President and Chief Executive Officer December 4, 1996 - - - - ------------------------------- (principal executive officer) John D. Johnson /s/T.F. Baker Group Vice President Finance December 4, 1996 - - - - ------------------------------- (principal financial officer) T. F. Baker /s/John Schmitz Vice President Corporate Accounting December 4, 1996 - - - - ------------------------------- (principal accounting officer) John Schmitz /s/Steven Burnet Chairman of the Board of Directors December 4, 1996 - - - - ------------------------------- Steven Burnet /s/Steve Carney Director December 4, 1996 - - - - ------------------------------- Steve Carney /s/Sheldon Haaland Director December 4, 1996 - - - - ------------------------------- Sheldon Haaland /s/Jerry C. Hasnedl Director December 4, 1996 - - - - ------------------------------- Jerry C. Hasnedl /s/Edward Hereford Director December 4, 1996 - - - - ------------------------------- Edward Hereford /s/Gerald Kuster Director December 4, 1996 - - - - ------------------------------- Gerald Kuster /s/Tyrone A. Moos Director December 4, 1996 - - - - ------------------------------- Tyrone A. Moos /s/Duane G. Risan Director December 4, 1996 - - - - ------------------------------- Duane G. Risan /s/William J. Zarak, Jr. Director December 4, 1996 - - - - ------------------------------- William J. Zarak, Jr. /s/Edward Ellison Director December 4, 1996 - - - - ------------------------------- Edward Ellison /s/Leonard D. Larsen Director December 4, 1996 - - - - ------------------------------- Leonard D. Larsen /s/Duane Stenzel Director December 4, 1996 - - - - ------------------------------- Duane Stenzel /s/ Russell W. Twedt Director December 4, 1996 - - - - ------------------------------- Russell W. Twedt /s/Merlin Van Walleghen Director December 4, 1996 - - - - ------------------------------- Merlin Van Walleghen
-----END PRIVACY-ENHANCED MESSAGE-----