-----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, TuJW5MZ8bIjJ+RCdmOWKEBktRctdlaLUg4ecn5iYl8jEZJ4FlaL/e2y94lvrhukO vOrNdp0OX4qYUYPkTOzvzg== 0000897101-97-000092.txt : 19970211 0000897101-97-000092.hdr.sgml : 19970211 ACCESSION NUMBER: 0000897101-97-000092 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970207 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARVEST STATES COOPERATIVES CENTRAL INDEX KEY: 0000823277 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FARM PRODUCT RAW MATERIALS [5150] IRS NUMBER: 410251095 STATE OF INCORPORATION: MN FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-17865 FILM NUMBER: 97521079 BUSINESS ADDRESS: STREET 1: 1667 NORTH SNELLING P O BOX 64594 CITY: ST PAUL STATE: MN ZIP: 55164 BUSINESS PHONE: 6126469433 MAIL ADDRESS: STREET 1: 1667 NORTH SNEFLLING P O BOX 64594 CITY: ST PAUL STATE: MN ZIP: 55164 S-1/A 1 Registration No. 333-17865 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 2 TO 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.) 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 St. Paul, Minnesota 55108 (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 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 FEBRUARY 7, 1997 HARVEST STATES COOPERATIVES [LOGO] Equity Participation Units 26,800,000 Units (Milling) 15,300,000 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 (see "EQUITY PARTICIPATION UNITS--Taxation") from operations of the applicable Business Unit as patronage refunds. (See "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL--Introduction"). 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 offered hereby 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 offered hereby 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. Subscriptions not accepted will be promptly returned upon rejection. 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, 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. The offering will not be continued beyond November 30, 1997. 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. The Units are being offered by the Company on a best efforts, continuous basis with no minimum amount of subscriptions required to close. No producer may subscribe for Units representing more than anticipated 1997 production, and the Subscription Agreement will require a representation to that effect. No subscription for less than 3,000 bushels of wheat or 1,500 bushels of soybeans will be accepted. Thereafter, subscriptions must be in multiples of 1,000 bushels of wheat or 500 bushels of soybeans. No one Defined Member may own more than 1% of the outstanding capacity of any one Business Unit. Upon any transfer of Units, the transferee will be required to certify as to eligibility and then current anticipated annual production and to sign an Agreement. In approving any transfer, the Board of Directors will require that such certificate show that the number of Units transferred does not exceed anticipated annual production of the transferee, that any transferee does not own more than 1% of the outstanding capacity of any one Business Unit, and that the Units held by each transferor retaining Units and transferee represent at least 3,000 bushels of wheat or 1,500 bushels of soybeans. If on April 15, 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 (except that subscriptions for the minimum amount will not be prorated) 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 (see "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL") for the payment of up to one-sixth of the purchase price. In addition, patrons of Affiliated Associations (see "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL") who wish to subscribe, if authorized by an Affiliated Association, generally may 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. Pending such authorization, cash payment will be required for the full purchase price for the Units. Upon such authorization, prior to May 31, 1998 and simultaneous redemption, cash equal to the patron's equities of such Association so authorized will be refunded. SEE "RISK FACTORS" COMMENCING ON PAGE___ 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 ................. $2.00 $ -- $2.00 Total .................... $53,600,000 $ -- $53,600,000 Processing and Refining Per Unit ................. $4.00 $ -- $4.00 Total .................... $61,200,000 $ -- $61,200,000
- --------------- (1) Units are being offered by the Company, and no discounts or commissions will be paid. (2) Assumes all Units are sold for cash; before deduction of expenses estimated to be $850,000. 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 Risk Factors Use of Proceeds Dividend Policy Capitalization Business Management Certain Transactions Membership in the Company and Authorized Capital Equity Participation Units Trading of Units Plan of Distribution 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 At its integrated crushing and refining facility in Mankato, Minnesota, the Oilseed Processing and Refining Division (also known as Honeymead Products Company) ("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. During the year ended May 31, 1996, the Processing and Refining Division processed 30,445,475 bushels of soybeans and 920,492,402 pounds of crude oil and had revenues of $400,706,709 and net earnings of $22,985,880. At May 31, 1996, it had total equity of $53,390,998. See "BUSINESS--PROCESSING AND REFINING DIVISION." The Milling Division The Wheat Milling Division (also known as Amber Milling Company) ("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 March 1997, the Division has broadened its markets to include bakery flour and significantly increased its capacity from 18,300,000 bushels per year to 41,700,000 bushels per year. During the year ended May 31, 1996, the Milling Division milled 19,376,000 bushels of durum and 3,013,000 bushels of spring wheat, had sales of $173,315,613 and net earnings of $2,892,823. At May 31, 1996, it had total equity of $27,797,072. See "BUSINESS--MILLING DIVISION." The Offering Through this Prospectus, the Company is offering an opportunity to participate in the patronage sourced income from its Processing and Refining Division and its 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 to the purchasers of the Units based on the number of bushels of wheat or soybeans delivered by holders of the Units relative to the total number of bushels of wheat or soybeans processed by the respective Business Unit. The Company is offering Equity Participation Units in its Milling Business Unit and its 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: Years Ended May 31, -------------------------------------------------------------------------- 1992 1993 1994 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 Processed grain ........... 460,088,193 501,297,427 593,116,553 708,219,307 819,863,541 Feed and farm supplies ........ 118,788,291 138,103,158 165,925,459 156,699,068 207,252,696 -------------- ------------- -------------- -------------- -------------- 3,437,234,539 3,432,807,772 3,845,573,441 5,056,583,910 8,154,339,644 Patronage dividends ........ 4,476,323 7,781,622 6,609,602 6,512,481 13,278,997 Other revenues .... 39,803,692 41,671,562 45,895,922 57,556,984 68,339,523 -------------- ------------- -------------- -------------- -------------- 3,481,514,554 3,482,260,956 3,898,078,965 5,120,653,375 8,235,958,164 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 Marketing, general, and admin- istrative ........ 48,266,596 52,545,022 60,847,099 69,509,491 70,054,248 Interest .......... 12,842,991 8,964,230 10,250,765 19,268,575 31,921,936 -------------- ------------- -------------- -------------- -------------- 3,445,488,427 3,446,146,252 3,857,434,628 5,070,598,338 8,178,049,510 -------------- ------------- -------------- -------------- -------------- Earnings before income taxes ...... 36,026,127 36,114,704 40,644,337 50,055,037 57,908,654 Income taxes ........ 5,000,000 3,725,000 5,500,000 5,100,000 6,900,000 -------------- ------------- -------------- -------------- -------------- Net earnings ........ $ 31,026,127 $ 32,389,704 $ 35,144,337 $ 44,955,037 $ 51,008,654 ============== ============== ============== ============== ==============
(WIDE TABLE CONTINUED FROM ABOVE) Six Months Ended November 30, --------------------- 1995 1996 ---- ---- (Unaudited) Revenues Sales: Grain ............ $3,329,958,581 $3,548,642,198 Processed grain ........... 403,716,340 396,378,362 Feed and farm supplies ........ 85,665,267 113,824,347 -------------- -------------- 3,819,340,188 4,058,844,907 Patronage dividends ........ 1,891,024 4,727,294 Other revenues .... 35,821,618 33,809,212 -------------- -------------- 3,857,052,830 4,097,381,413 Costs and expenses: Cost of goods sold ............. 3,779,651,094 4,029,924,953 Marketing, general, and admin- istrative ........ 39,251,639 36,927,696 Interest .......... 13,896,619 8,418,249 -------------- -------------- 3,832,799,352 4,075,270,898 -------------- -------------- Earnings before income taxes ...... 24,253,478 22,110,515 Income taxes ........ 3,050,000 2,600,000 -------------- -------------- Net earnings ........ $ 21,203,478 $ 19,510,515 ============== ==============
May 31, November 30, -------------------------------------------------------------------- -------------------------- 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 $ 83,527,483 $ 102,383,180 Net property, plant and equipment ...... 137,919,139 146,223,870 156,311,551 205,837,690 232,145,401 221,675,866 219,946,105 Total assets ....... 523,018,883 612,261,778 734,655,223 924,533,569 1,228,772,684 1,385,843,222 1,094,190,953 Long-term debt, including current maturities ......... 49,196,060 44,479,207 39,135,097 84,816,525 132,629,176 106,690,515 135,688,007 Total equity ........ 222,126,239 246,797,147 270,761,017 299,487,893 337,252,119 317,902,245 352,895,051
The Units Holders of the Units will have the right to participate in the patronage sourced income from the operations of the respective Business Units. The portion of patronage refunds to be paid in cash and the retirement policy with respect to the portion to be paid as Patrons' Equities is within the discretion the Board of Directors. Except in limited circumstances, holders of the Units do not have voting rights with respect to the Units, but will have voting rights as a Defined Member of the Company. Holders of Units do not have any right to cause the Company to redeem the Unit or exchange it for any other security. See "EQUITY PARTICIPATION UNITS." Plan of Distribution; Trading The Units are being offered by the Company on a best efforts, continuous basis with no minimum amount of subscriptions required to close. 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. The manner and circumstances under which such agreements will be accepted is shown on the cover of this Prospectus. The Company intends to create an electronic bulletin board to facilitate the purchase and sale of Units among Members. Any sale and purchase of Units will be subject to negotiation of price and other terms of purchase. The Company does not expect that a trading market will develop for the Units. The price at which a holder of Units will be able to resell is uncertain. See "TRADING OF UNITS." RISK FACTORS Company Subject to Supply and Demand Forces. 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 Price Declines and Fall in Demand. 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. According to a report dated January 10, 1997, published by the Foreign Agricultural Service (FAS) Division of the United States Department of Agriculture, worldwide wheat production for the year ended May 31, 1996, was 536.89 million metric tons and worldwide wheat production for the year ending May 31, 1997, is projected to be 579.59 million metric tons. According to the same report, exports for the year ended May 31, 1996, were 108.32 million metric tons and exports for the year ending May 31, 1997, are projected to be 102.97 million metric tons. The Freedom to Farm Act of 1996, enacted in April 1996, may affect crop production in several ways. The Act more narrowly defines what will qualify as environmentally sensitive acreage for purposes of the conservation reduction program, with the result that 3 to 4 million acres may be put back into agricultural production in the future from a present enrollment of 36.4 million acres. The Act also removes restrictions on the type of crops planted (other than fruit and vegetables), allowing farmers to plant crops having favorable prices and thereby increasing the production of those crops. Increased production may lower prices of certain crops but increase the amount available for export. However, the Act also reduces Export Enhancement Program subsidies, which may adversely affect the ability of U.S. exports to compete with those of other countries. However, the Company's operations depend more on the volume of grain handled than prices. Availability of grain and price should have little effect on either the Milling or the Processing and Refining Business Units, which are more dependent on manufacturing margins. Company Subject to Price Risks. 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. 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 Company's profitability is primarily derived from margins on grain merchandised and processed, not from hedging transactions. Hedging activities have not in the past had a significant impact on operating results, and management does not anticipate that its hedging activities will have a significant impact on operating results or liquidity of the Company or any Business Unit in the future. See "BUSINESS--GRAIN MARKETING--Price Risk and Hedging" and Note 1 to the Company's Consolidated Financial Statements. At any one time the Company's inventory and purchase contracts for delivery to the Company may be substantial. Processing and Refining Business Competition. 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. Media newsletters and other publications indicate that new crush plants and refinery operations are being constructed or under strong consideration. Should those facilities be constructed, the Company estimates that domestic crush capacity would increase from 10 to 15% and domestic refining capacity would increase from 20 to 30%. Unless exports increase or existing refineries are closed, this extra capacity is likely to put additional pressure on prices and erode margins, adversely affecting the profitability of the Processing and Refining Business Unit. Several competitors operate over various market segments and may be suppliers to or customers of other competitors. Milling Business Competition. The Company's 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 of Cooperatives Could Change. Although under Subchapter T of the Internal Revenue Code patronage refunds are excluded in determining taxable income of a cooperative and patronage refunds are taxable to the recipient, current income tax laws, regulations and interpretations pertaining to the receipt of patronage refunds could be changed. See "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL--Taxation" and "EQUITY PARTICIPATION UNITS--Taxation." Lack of Trading Market. The Company does not expect that a trading market will develop for the Units. The price at which a holder of Units will be able to resell is uncertain. See "TRADING OF UNITS." Management's Broad Discretion in Use of Proceeds from Offering. Except for approximately $38,800,000, which will be used for the construction of the Milling Division's proposed Pocono facility, proceeds of the offering will not inure to the benefit of either the Milling Division or the Refining and Processing Division, but instead will be used for other purposes by the Company. Management will have broad discretion in the use of the unallocated portion of the proceeds from this offering. See "USE OF PROCEEDS." Retained Rights of Board of Directors. Except for allocations, the Board of Directors has reserved the right to amend the resolutions creating the Business Units and the Units. See "EQUITY PARTICIPATION UNITS--Amendment of Board Resolutions." The portion of patronage refunds to be paid in cash and the retirement policy with respect to the portion to be paid as Patrons' Equities is within the discretion of the Board of Directors. Deferrals in the payment of patronage refunds would decrease the prospective return on the Units. See "DIVIDEND POLICY." The Board of Directors may reallocate any asset from a Business Unit to the Company or another Business Unit at fair market value. Dependence on Certain Customers. Each of the Milling Division and the Processing and Refining Division has certain major customers (See "BUSINESS--MILLING DIVISION--Customers" and "BUSINESS--REFINING AND PROCESSING DIVISION--Customers," respectively). Loss of or a decline in the business done with one or more of these customers could have a material adverse effect on the operations of the affected Division. The Milling Division would be adversely affected by a decline in pasta production in the United States. USE OF PROCEEDS The net proceeds from the sale of the Units offered hereby, if all are sold, are estimated to be $94,800,000, 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. Assuming net proceeds of the offering of $94,800,000, $38,800,000 will be used for construction of the proposed Pocono Mill (see "BUSINESS--WHEAT MILLING DIVISION--Facilities"), approximately $35,000,000 will be used for the redemption of Patrons' Equities (see "DIVIDEND POLICY") and the balance will be used as working capital (which will reduce the overall level of borrowings required by the Company for its operations). If the proceeds of the offering are less than $94,800,000, the proceeds will be used for the Pocono facility, then to the redemption of Patrons' Equities and working capital. Except for construction of the Pocono Mill, the proceeds will not inure to the benefit of either Business Unit. Until used for the stated purpose such proceeds will be used temporarily to reduce short-term borrowings or will be temporarily invested. 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 do not accrue interest, do not bear dividends, are not transferable without the consent of the Board of Directors and will not appreciate in value. Patrons' Equities are retired in accordance with policies established by the Board of Directors. The Board of Directors has authorized the redemption of Patrons' Equities held by patrons who are 72 years of age and those held by estates of deceased patrons. Through the additional capital achieved by the sale of the Units, the Board of Directors intends, over a period of years, to provide for the redemption of Patrons' Equities as low as age 65. However, the Company does not have demographic information on all of its members and cannot be certain as to the amount of Patrons' Equities held by those age 65 and over. Further, the Company's ability to reduce the age will depend on the amount of proceeds realized from the offering. Cash payments of dividends and redemption of Patrons' Equities are restricted by the Company's banking agreements. See "CAPITALIZATION." 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' goal is to distribute patronage refunds attributable to the Units in the form of 75% cash and 25% Patrons' Equities, and to retire Patrons' Equities on a revolving basis seven years after declaration. However, the decision as to the percentage of cash patronage will be made each fiscal year by the Board of Directors and will depend upon the cash and capital needs of the respective Business Units and is subject to the discretion of the Board of Directors. The redemption policy will also be subject to change in the discretion of the Board of Directors. The Company's Articles of Incorporation provide that the gains or losses from Defined Business Units shall not be netted against gains or losses from other divisions, functions or operations of the Company. If the overall operations of the Company generate a net loss so that no patronage refunds would be declared at the Company level, the Company expects to nevertheless distribute net patronage earnings, if any, of a particular Business Unit and to use available cash and borrowing capacity if necessary for that purpose. The right to receive patronage refunds either payable in cash or in Patrons' Equities is subject to the claims of general creditors of the Company. The obligation of the Company to pay any portion of patronage refunds payable as Patrons' Equities will be reflected by an entry on the Company's books. Holders of the Units will be notified annually of the amount allocated to their accounts. 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 proceeds therefrom (including temporary use of proceeds, for construction of the proposed Pocono mill) prior to costs of issuance.
November 30, 1996 ----------------- Outstanding As Adjusted ----------------- ----------------- Short-term debt: ................................... $ 88,000,000 (1) $ 27,333,333 ================= ================= 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 $ 69,675,333 CoBank, ACB (formerly National Bank for Cooperatives), with fixed and variable interest rates from 6.24% to 7.51%, due in installments through 2007..................................... 56,083,333 56,083,333 Industrial development revenues bonds, payable through July 2005, interest rate 7.4%....................................... 2,100,000 2,100,000 Capitalized lease obligations, with fixed and variable rates from 8.0% to 8.90%......................................... 5,979,743 5,979,743 Mortgages payable and other ....................... 1,849,598 1,849,598 ----------------- ---------------- 135,688,007 135,688,007 Equity Equity Participation Units....................... -- 114,800,000 Capital Equity Certificates...................... 273,609,733 219,476,400(2) Non-Patronage Certificates....................... 9,691,677 9,691,677 Capital reserve.................................. 54,683,126 54,683,126 Patronage dividends payable in cash ............. (4,600,000) (4,600,000) Net earnings..................................... 19,510,515 19,510,515 ----------------- ----------------- 352,895,051 413,561,718 ----------------- ----------------- Total capitalization.......................... $488,583,058 $549,249,725 ================= =================
(1) As of January 31, 1997. (2) Gives effect to the use of Capital Equity Certificates in payment of the purchase price and the redemption of Capital Equity Certificates with a portion of the proceeds of the offering. The Company has a $550,000,000 Revolving Credit Facility (the "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. The Facility prohibits the payment of cash patronage refunds that exceed 20% of the Company's consolidated net patronage income for the fiscal year preceding that in which the payment would be made, the redemption of equity and the cash distributions in respect of its equity unless no Event of Default or Default (as those terms are defined in the Facility) exists and after giving effect to such payment no Event of Default or Default would exist. Long-term debt is held by the St. Paul Bank for Cooperatives and CoBank, ACB, pursuant to the terms of an Amended and Restated Master Syndicated Loan Agreement ("Loan Agreement") dated as of October 28, 1996. The Loan Agreement prohibits the payment of cash patronage refunds that exceed 20% of the Company's Consolidated Net Patronage Income (as defined) for the fiscal year preceding that in which the payment would be made and the redemption of equity, unless no Event of Default or Potential Default (as those terms are defined in the Loan Agreement) exists and after giving effect to such payment no Event of Default or Potential Default would exist. 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 based on the number of bushels of wheat or soybeans delivered by holders of the Units relative to the total number of bushels of wheat or soybeans processed by the respective Business Unit. Information is presented in this Prospectus on the historical operations of the Company, including the Processing and Refining Division and the Milling Division. Audited consolidated financial statements of the Company, the Milling Division and the Processing and Refining Division for the years ended May 31, 1994, 1995 and 1996 and unaudited consolidated financial statements for the six months ended November 30, 1995 and 1996, are included in this Prospectus. In the future, the Company intends to furnish holders of the Units with annual reports containing financial statements of the Company and the Business Units audited by its independent public accountants. The Company does not intend to furnish interim reports. 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 as contemplated by Section 1388 of the Internal Revenue Code. In the patronage consent filed with the Company, the producer agrees to include both the cash and noncash portion of any patronage refund in taxable income for federal income 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 six-month periods ended November 30, 1995 and 1996, are unaudited. In management's opinion, the unaudited financial statements for the six-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 six-month period ended November 30, 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: Years Ended May 31, -------------------------------------------------------------------------- 1992 1993 1994 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 Processed grain ........... 460,088,193 501,297,427 593,116,553 708,219,307 819,863,541 Feed and farm supplies ........ 118,788,291 138,103,158 165,925,459 156,699,068 207,252,696 -------------- -------------- -------------- -------------- -------------- 3,437,234,539 3,432,807,772 3,845,573,441 5,056,583,910 8,154,339,644 Patronage dividends ........ 4,476,323 7,781,622 6,609,602 6,512,481 13,278,997 Other revenues .... 39,803,692 41,671,562 45,895,922 57,556,984 68,339,523 -------------- -------------- -------------- -------------- -------------- 3,481,514,554 3,482,260,956 3,898,078,965 5,120,653,375 8,235,958,164 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 Marketing, general, and admin- istrative ........ 48,266,596 52,545,022 60,847,099 69,509,491 70,054,248 Interest .......... 12,842,991 8,964,230 10,250,765 19,268,575 31,921,936 -------------- -------------- -------------- -------------- -------------- 3,445,488,427 3,446,146,252 3,857,434,628 5,070,598,338 8,178,049,510 -------------- -------------- -------------- -------------- -------------- Earnings before income taxes ...... 36,026,127 36,114,704 40,644,337 50,055,037 57,908,654 Income taxes ........ 5,000,000 3,725,000 5,500,000 5,100,000 6,900,000 -------------- -------------- -------------- -------------- -------------- Net earnings ........ $ 31,026,127 $ 32,389,704 $ 35,144,337 $ 44,955,037 $ 51,008,654 ============== ============== ============== ============== ==============
[WIDE TABLE CONTINUED FROM ABOVE] Six Months Ended November 30, ---------------------- 1995 1996 ---- ---- (Unaudited) Revenues Sales: Grain ............ $ 3,329,958,581 $ 3,548,642,198 Processed grain ........... 403,716,340 396,378,362 Feed and farm supplies ........ 85,665,267 113,824,347 --------------- --------------- 3,819,340,188 4,058,844,907 Patronage dividends ........ 1,891,024 4,727,294 Other revenues .... 35,821,618 33,809,212 --------------- --------------- 3,857,052,830 4,097,381,413 Costs and expenses: Cost of goods sold ............. 3,779,651,094 4,029,924,953 Marketing, general, and admin- istrative ........ 39,251,639 36,927,696 Interest .......... 13,896,619 8,418,249 --------------- --------------- 3,832,799,352 4,075,270,898 --------------- --------------- Earnings before income taxes ...... 24,253,478 22,110,515 Income taxes ........ 3,050,000 2,600,000 --------------- --------------- Net earnings ........ $ 21,203,478 $ 19,510,515 =============== ===============
Balance Sheet Data (at end of period): May 31, November 30, -------------------------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- ---- ---- Working capital ... $ 66,880,378 $ 69,550,702 $ 69,409,621 $ 66,904,085 $ 95,874,938 $ 83,527,483 $ 102,383,180 Net property, plant and equipment ..... 137,919,139 146,223,870 156,311,551 205,837,690 232,145,401 221,675,866 219,946,105 Total assets ...... 523,018,883 612,261,778 734,655,223 924,533,569 1,228,772,684 1,385,843,222 1,094,190,953 Long-term debt, including current maturities ........ 49,196,060 44,479,207 39,135,097 84,816,525 132,629,176 106,690,515 135,688,007 Total equity ...... 222,126,239 246,797,147 270,761,017 299,487,893 337,252,119 317,902,245 352,895,051
Pro Forma Information The table below shows the pro forma allocation of the Company's net income assuming that Equity Participation Units had comprised one-half of the bushel volume for the Processing and Refining and the Milling Business Units in each of the periods indicated. The Equity Participation Units offered hereby represent 50% of the estimated processing capacity of each Business Unit giving effect to the construction of additional capacity now in process and anticipated. Accordingly, if the Company is able to sell all Units in each Business Unit offered hereby, it expects that holders of Units would represent 50% of the wheat milled or soybeans crushed. The actual percentage milled or crushed will depend on production capacity, demand for products and the amount of grain delivered by Defined Members, and there can be no assurance that this assumption will be true.
Six Months Ended Years Ended May 31, November 30, ------------------- ------------ 1994 1995 1996 1995 1996 ----------- ----------- ----------- ----------- ----------- Patronage refunds to members other than Defined Members $24,975,363 $24,870,500 $33,013,187 $14,199,144 $10,952,844 Patronage refunds-Milling 1,063,366 522,758 1,504,171 665,085 1,860,786 Patronage refunds-Processing and Refining 7,094,307 11,217,558 9,801,641 3,558,467 4,138,131 Nonpatronage earnings, net of income taxes 2,011,301 8,344,221 6,689,655 2,780,782 2,558,754 ----------- ----------- ----------- ----------- ----------- Net earnings $35,144,337 $44,955,037 $51,008,654 $21,203,478 $19,510,515 =========== =========== =========== =========== ===========
Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Comparison of Six-Months Ended November 30, 1996 with 1995 The Company's consolidated net earnings for the six-month period ended November 30, 1996 of $19,500,000 declined $1,700,000 compared to 1995 due to a decline in grain volume at both its country and export facilities, partially offset by increases in both volume and gross margins from the Company's grain processing activities. Consolidated net sales of $4,059,000,000 increased by $240,000,000 (6%) during the six months ended November 30, 1996 compared to the same period in 1995. This increase is primarily attributable to an increase in the weighted average of all commodities sold of $5.03 per bushel compared to $3.86 per bushel in 1995. This increase in price per bushel was partially offset by a volume decline of 170,000,000 bushels, and a reduction in sales of $83,000,000 from the Company's consumer products packaging division which was transferred to a nonconsolidated joint venture on August 30, 1996. Patronage dividends received increased $2,800,000 (147%) for the six-month period ended November 30, 1996 compared to 1995 as a result of higher patronage earnings distributed by cooperative customers and suppliers. Other revenues decreased by $2,000,000 (6%) through November 30, 1996 compared to 1995 primarily due to a decrease in interest income of $2,800,000 and a decrease in storage income of $800,000, partially offset by an increase in service income of $800,000 and an increase in commission income of $700,000. Cost of goods sold of $4,030,000,000 for the six-month period ended November 30, 1996 increased $250,000,000 (7%) from the same period of 1995. This increase is attributable primarily to an increase in the weighted average cost per bushel of commodities of $4.99 in 1996 from $3.82 in 1995. This price increase per bushel was partially offset by a decline in volume from 867,000,000 bushels in 1995 to 695,000,000 in 1996, and a reduction in such cost of $77,500,000 incurred by the Company's consumer products packaging division which was transferred to a nonconsolidated joint venture on August 30, 1996. Marketing and administrative expenses declined by $2,400,000 (6%) through November 30, 1996 compared to the same period of 1995. This decrease in expense is attributable primarily to the transfer of the Company's consumer products packaging division into a nonconsolidated joint venture on August 30, 1996, which resulted in a $3,800,000 reduction, partially offset by expense increases in the Milling Division of $800,000 and Farm Marketing and Supply of $800,000. The Milling Division's increase is attributable to the operation of the Kenosha mill, which commenced operations in November 1995; Farm Marketing and Supply's increase is primarily attributable to an increase of approximately 25 facilities operated in 1996 compared to the same period in 1995. Other areas of the Company maintained approximately the same level of marketing and administrative expenses for the two periods. Interest expense decreased $5,500,000 (40%) for the 1996 period from 1995 attributable to a decline in working capital requirements. Income tax expense declined $450,000 for the six-month period ended November 30, 1996 which is reflective of slightly lower pretax earnings with effective tax rates of 11.8% and 12.6% for 1996 and 1995 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 expense of $5,100,000 and $5,500,000 for 1995 and 1994, respectively, results 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 $422,700,000 during the six months ended November 30, 1996, while operating activities used $157,700,000 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 balances declining and therefore contributing working capital of $396,700,000 in 1996. Working capital requirements increased and therefore used cash in the net amount of $183,000,000 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 used for the Company's investing activities were $11,900,000 and $22,100,000 for the six months ended November 30, 1996 and 1995, respectively. Acquisitions of property, plant and equipment comprised the principal use of this cash in each of the periods. Such expenditures totaled approximately $25,300,000 and $24,000,000 for the six month periods ended November 30, 1996 and 1995 respectively. During the six months ended November 30, 1996 the Company received cash totalling approximately $5,900,000 as proceeds for the redemption of investments. On August 30, 1996 the Company formed a joint venture with a regional consumer products packaging company, and contributed substantially all of the net assets of 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 approximately $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 $324,000,000 during the six months ended November 30, 1996 and increased such borrowings by $167,500,000 during that period in 1995. The Company borrowed on a long term basis $10,000,000 and $25,000,000 during the six month periods ended November 30, 1996 and 1995, respectively. 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 $10,000,000 and $25,000,000 during the six months ended November 30, 1996 and 1995, respectively and repaid long-term debt in the amounts of $6,900,000 and $3,800,000 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 six months ended November 30, 1996 and 1995. These amounts totaled $3,200,000 and $3,100,000, 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. Price Risk and Hedging To reduce the price change risks associated with holding fixed price commodity positions, the Company generally takes opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. 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 Company's profitability is primarily derived from margins on grain merchandised and processed, not from hedging transactions. Hedging arrangements do not protect against nonperformance of a contract. Management does not anticipate that its hedging activity will have a significant impact on future operating results or liquidity. At any one time the Company inventory and purchase contracts for delivery to the Company may be substantial. The Company 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 when any trader is outside of position limits and also triggers review by management if the Company is outside of its position limits. The position limits are reviewed at least annually by 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. 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. 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. Wheat and corn exports are expected to decline in the years ending May 31, 1997 and 1998, and August 31, 1997 and 1998, respectively, partially offset by an increase in soybean exports. Wheat exports have averaged 34.1 million metric tons in the past two years ending May 31, 1996, and are projected to decline to 25.9 million metric tons for the year ending May 31, 1997, and 26.1 metric tons for the year ending May 31, 1998. The U.S. is experiencing major competition from Canada, Australia, Argentina and the European Union (EU). Collectively, these countries are projected to increase their wheat exports 9.4 million metric tons from the year ended May 31, 1995, to the year ending May 31, 1997, due to increased production in Australia and Argentina and the use of export subsidies of $4 to 20 per ton by the EU. Soybean exports have averaged 23 million metric tons for the two years ended August 31 and are projected to increase slightly the next two years to an average of 24.6 million metric tons. The U.S. experiences competition mainly from Argentina and Brazil with exports varying from 6 to 9 million metric tons per year. Corn exports averaged 56.8 million metric tons for the two years ended August 31, 1996, with each of the years ending August 31, 1997 and 1998 projected at 50.5 million metric tons. This projected decrease is the result of increased competition from Argentina and substitution of other grains for feed usage due to price relationships. Argentina corn exports are projected to increase 2.5 million metric tons over the two years ended August 31, 1996 to 9 million metric tons per year. The Company expects that its export business will decline consistent with the decline of U.S. exports. Historical information and projections for the 1997 crop year are from information published by the United States Department of Agriculture. Projections for the 1998 crop year are based on industry sources that the Company believes to be reliable. Imports of grains into the U.S. consist mainly of wheat, oats and barley. The amounts imported do not have a material effect on grain merchandising. In the United States, grain merchandising involves the purchase of grain, sale for export or further domestic use and storage and transportation to export facilities or to users. Grain merchandising may be adversely affected by supply and demand relationships, both domestic and international. Supply is affected by weather conditions, disease, insect damage, acreage planted, government regulation and policies and commodity price levels. The business is also affected by transportation conditions, including rail, vessel, barge and truck. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, by population growth and increased or decreased per capita consumption of some products. 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. The following table shows the cash prices for certain grains on June 1 and January 31, 1997: June 1, January 31, Grain 1996 1997 ----- ------- ------------ Wheats $6.49 $4.24 Corn 4.69 2.50 Soybeans 7.51 7.14 Because the profitability of the Company is primarily determined by margins and the Company does not speculate, changes in grain prices do not directly impact the Company's income. However, grain prices may be reflective of the demand for grain (particularly grain to be exported) and to that extent a drop in the demand for grain would directly affect revenues of the Company. 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, may affect crop production in several ways. The Act more narrowly defines what will qualify as environmentally sensitive acreage for purposes of the conservation reduction program, with the result that 3 to 4 million acres may be put back into agricultural production in the future from a present enrollment of 36.4 million acres. The Act also removes restrictions on the type of crops planted (other than fruit and vegetables), allowing farmers to plant crops having favorable prices and thereby increasing the production of those crops. Increased production may lower prices of certain crops but increase the amount available for export. However, the Act also reduces Export Enhancement Program subsidies, which may adversely affect the ability of U.S. exports to compete with those of other countries. However, the Company's operations depend more on the volume of grain handled than prices. Availability of grain and price should have little effect on either the Milling or the Processing and Refining Business Units, which are more dependent on manufacturing margins. 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:
Six Months Ended Years Ended May 31, November 30, ------------------- ------------ 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- Member purchases ... 525,715,235 720,024,458 959,166,596 555,934,749 387,313,447 Total purchases .... 816,421,362 1,148,952,019 1,692,438,700 867,063,438 695,605,636 Percentage ......... 64.4% 62.7% 56.7% 64.1% 55.7%
Substantially all of the grain purchased by the Company is grown in the Midwest, Great Plains and Pacific Northwest. The Company also purchases grain grown in other parts of the United States and other countries. Grains Handled. The primary grains merchandised by the Company are corn, wheat and soybeans. The Company also merchandises barley, milo, sunflowers and oats as well as smaller quantities of canola, flax, rye, millet and others. The number of bushels of grain purchased by the Company for the periods indicated is set forth below:
Six Months Ended Years Ended May 31, November 30, ------------------- ------------ 1994 1995 1996 1995 1996 ------------- ------------- ------------- ------------- ------------- Wheat....... 445,201,610 457,684,648 505,606,729 266,072,324 262,969,628 Corn ....... 185,121,268 342,832,256 777,631,466 409,022,684 240,568,803 Soybeans ... 68,325,522 172,025,373 234,930,247 111,064,987 123,043,665 Barley ..... 82,842,737 93,699,078 75,225,773 36,546,744 31,489,811 Milo ....... 5,953,433 36,663,822 48,199,610 23,064,532 23,847,513 Sunflowers.. 12,322,105 28,929,026 25,952,855 4,142,697 1,746,406 Oats ....... 14,097,310 13,423,696 20,008,442 10,629,428 9,040,445 All other... 2,557,377 3,694,120 4,883,578 6,520,042 2,899,365 ----------- ------------- ------------- ----------- ----------- 816,421,362 1,148,952,019 1,692,438,700 867,063,438 695,605,636 ============= ============= ============= ============= =============
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. The Company expects sales volume (measured in bushels) to be down 25 to 30% in the year ending May 31, 1997, over the prior year. 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. Rail transportation is through independent railroads, although approximately 30% for the year ended May 31, 1996, of rail movement for Grain Merchandising was carried out through leased railcars (either directly or by use of pools in which such leased railcars participate). Vessel and truck transporation is carried out exclusively by third parties. Barge transportation is carried out by third parties, but the Company is a party to long-term affreightment agreements for approximately 20% of current needs. Virtually all grain sold domestically is sold by employees while approximately half of grain exported is sold by brokers or agents and the balance by employees. The Company has a small ownership position in Intrade, a company which owns part of a Germany-based marketing organization involved in trading grain and feedstuffs in Germany and international markets. The Company also has relationships with agents, brokers and marketing companies in other countries to assist it in export sales. Competition The Company competes for both the purchase and sale of grain. Competition is intense and margins are low. Some of the Company's competitors are integrated food producers, which may also be customers. Many competitors have substantially greater financial resources than the Company. In the purchase of grain from producers, location of a delivery facility is a prime consideration but producers are willing to truck grain for sale over increasingly longer distances. Grain prices are affected by reported trading prices on national markets, shipping costs and storage capabilities. Price is affected by the capabilities of the facility. For example, if it is cheaper to deliver to a customer by unit train than by truck, a facility with unit train capability provides a price advantage. The Company believes that its relationship with Individual Members serviced by local Agri-Service Centers and with 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. Of these employees, 149 at five locations are subject to collective bargaining agreements expiring at various times through 1999. PROCESSING AND REFINING DIVISION 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 an increase in meat exports. Soybean meal provides a ready source of protein with a 44% or higher protein content, compared to corn at 9%, wheat at 9.5% and barley at 11.5% Major competitors in the industry include the Company, Archer-Daniels-Midland (ADM), Cargill, Ag Processing, Inc. ("AGP"), Central Soya and Bunge. Competition is driven by price, transportation costs, service and product quality. The industry is highly competitive. These and other competitors are 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 six-month periods ended November 30, 1995 and 1996 are unaudited. In management's opinion, the unaudited financial statements for the six-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 six-month period ended November 30, 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.
Six Months Ended Years Ended May 31, November 30, ------------------- ------------ 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ Revenues: Processed Oilseed Sales...... $358,372,039 $398,095,108 $399,271,001 $197,863,256 $209,352,293 Other revenues .............. 1,349,484 1,162,518 1,435,708 1,399,030 576,487 ------------ ------------ ------------ ------------ ------------ 359,721,523 399,257,626 400,706,709 199,262,286 209,928,780 Costs and expenses Cost of goods sold .......... 334,968,474 366,407,451 371,424,566 186,027,862 195,305,454 Marketing and administrative ............ 4,722,900 5,137,663 4,544,763 2,445,721 2,441,463 Interest .................... 164,300 0 151,500 -- 35,500 ------------ ------------ ------------ ------------ ------------ ..................... 339,855,674 371,545,114 376,120,829 188,473,583 197,782,417 ------------ ------------ ------------ ------------ ------------ Earnings before income taxes ....................... 19,865,849 27,712,512 24,585,880 10,788,703 12,146,363 Income taxes .................. 1,650,000 1,500,000 1,600,000 1,200,000 1,200,000 ------------ ------------ ------------ ------------ ------------ Net earnings .................. $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 9,588,703 $ 10,946,363 ============ ============ ============ ============ ============ Operating Data: Quantities processed Soybeans (bu.) ............ 24,136,364 30,807,933 30,446,475 15,042,678 15,983,653 Crude oil (lb.) ........... 860,221,089 894,970,248 920,492,402 475,278,218 492,121,066 Production Meal (tons) ............... 588,873 741,190 728,435 386,765 368,245 Flour (tons) .............. 31,614 40,614 39,914 21,979 16,322 Refined oil (lbs.) ........ 799,908,000 835,396,000 858,240,000 460,708,555 484,111,157 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ Balance Sheet Data (at end of period): Working capital ............. $ 33,813,064 $ 32,980,590 $ 28,619,585 $ 30,668,911 $ 22,263,134 Net property, plant and equipment ............. 19,577,934 20,410,408 24,771,413 22,722,087 31,127,864 Total assets ................ 74,191,110 63,672,994 74,112,937 70,027,078 96,994,316 Long-term debt, including current maturities ........ -- -- -- -- -- Total equity ......... 53,390,998 53,390,998 53,390,998 53,390,998 53,390,998 Other Data (1): Pretax earnings ............. $ 19,865,849 $ 27,712,512 $ 24,585,880 $ 10,788,703 $ 12,146,363 Earnings from purchased oil.. (4,511,979) (4,680,813) (3,557,406) (2,315,669) (3,298,357) Non-patronage joint venture income...................... (1,300,427) (990,191) (1,353,708) (1,356,101) (571,744) Book to tax differences ..... 135,170 393,608 (71,485) ------------ ------------ ------------ ------------ ------------ Tax basis soybean earnings .. $ 14,188,613 $ 22,435,116 $ 19,603,281 $ 7,116,932 $ 8,276,262 ============ ============ ============ ============ ============ Bushels processed ........... 22,630,472 30,807,933 30,466,475 15,042,678 15,983,653 Earnings per bushel ......... $ 0.63 $ 0.73 $ 0.64 $ 0.47 $ 0.52
Pro Forma Information (2) Year Ended Six Months Ended May 31, November 30, 1996 1996 ----------- ---------- Equity Participation Units (bushels) 15,233,238 7,991,827 Patronage rate $ 0.64 $ 0.52 ----------- ---------- Earnings to holders $ 9,801,641 $4,138,131 =========== ========== (1) Because patronage dividends attributable to the Units will be allocated based on the number of bushels of soybeans delivered, information on earnings per bushel is believed by the Company to be the most relevant indicator of performance of the Processing and Refining Division. (2) Assuming that one-half of the bushels processed in each of the periods shown above had been attributable to Equity Participation Units, the earnings of the Processing and Refining Business Unit which would have been allocated to the Equity Participation Units are shown above under the caption "Pro Forma Information." The Equity Participation Units offered hereby represent 50% of the estimated crushing capacity of the Processing and Refining Business Unit. Accordingly, if the Company is able to sell all Units in the Processing and Refining Business Unit offered hereby, it expects that holders of Units would represent 50% of the soybeans crushed. The actual percentage crushed will depend on production capacity, demand for meal and oil and the amount of soybeans delivered by Defined Members, and there can be no assurance that this assumption will be true. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Certain operating information pertaining to the Processing and Refining Division is set forth below, as a percentage of sales, except processing margins.
Six Months Ended Years Ended May 31, November 30, ------------------- ------------ 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- Gross margin percentage ..... 6.91% 8.25% 7.33% 6.69% 6.98% Marketing and administrative . 1.32% 1.29% 1.14% 1.24% 1.16% Interest ......... 0.05% -- 0.04% -- -- Processing margins Crushing/bu .... $ .50 $ .59 $ .60 $ .46 $ .51 Refining/lb .... $.0132 $.0149 $.0154 $.0101 $.0121
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 Six Months Ended November 30, 1996 with 1995 The Processing and Refining Division's net earnings of $10,900,000 for the six months ended November 30, 1996 represent a $1,300,000 increase compared to the same period in 1995. This increase in net earnings is primarily attributable to improved gross margins on processed soybean products, along with slightly greater production quantities of both soymeal and refined oil, partially offset by a decrease in earnings from an oilseed joint venture, compared to the same period in 1995. Net sales of $209,400,000 for the six-month period ended November 30, 1996 increased by $11,500,000 (6%) compared to the same period in 1995. Volume increases of processed soybean products, primarily soymeal and soyflour, contributed $3,300,000 to sales and increased volumes of refined oil contributed $4,900,000. Increased sale prices for soymeal and soyflour contributed $29,000,000 to sales, offset by a decline in the average sales price for refined oils, which reduced sales by $25,700,000. 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 $195,300,000 increased $9,300,000 (5%) from 1995. Of this increase $5,700,000 is attributable to additional soybean processing volume (16,000,000 bushels in 1996 compared with 15,000,000 bushels in 1995) and $23,800,000 is the result of higher average cost per bushel. These costs were partially offset by a decline in the volume of purchased crude oil which reduced costs $2,300,000, as well as a decline in the average cost per pound of purchased crude oil, which reduced costs by $17,600,000. Plant expenses declined approximately $300,000. Marketing and administrative expenses were unchanged for the 1996 period compared to the 1995 period. Interest expense was essentially unchanged for the six-month period ended November 30, 1996 compared to the same period in 1995. Income tax expense of $1,200,000 for the six-month period ended November 30, 1996 results in an effective tax rate of 9.9%. Income tax expense of $1,200,000 for the same period in 1995 resulted in an effective tax rate of 11.1%. The decrease in the effective tax rate is the result of a slightly higher percentage of patronage income in 1996 to total income, compared with the same situation in 1995. Comparison of Year Ended May 31, 1996 with 1995 The Processing and Refining 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 Processing and Refining 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 Processing and Refining 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 six months ended November 30, 1996 and 1995, respectively, provided cash of $4,600,000 and $2,000,000 due to net earnings of $10,900,000 and $9,600,000, partially offset by increases in working capital requirements of $7,100,000 and $8,400,000. For the years ended May 31, 1996, 1995 and 1994, the Processing and Refining 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 $11,100,000, while a decrease in working capital requirements in 1995 added $16,900,000. Cash Flows Used for Investing The Division used $7,200,000 and $3,000,000 during the six months ended November 30, 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 $23,000,000 on November 30, 1996, an increase of $13,500,000 from May 31, 1996, which reflects working capital and fixed asset financing requirements. Debt outstanding and payable to the Company as of May 31, 1996 and 1994 was $9,500,000 and $11,000,000, respectively, whereas the Division had a receivable from the Company of $5,100,000 on May 31, 1995. These interest bearing balances reflect working capital and fixed asset financing requirements of the respective years. To reduce the price change risks associated with holding fixed price commodity positions, the Company generally takes opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. While hedging activities reduce the risk of loss from changing market values of oilseed, such activities also limit the gain potential which otherwise could result from changes in market prices of oilseeds. The Company's policy is to generally maintain hedged positions, but the Company can be long or short at any time. The Division's profitability is primarily derived from margins on oilseeds processed, not from hedging transactions. Management does not anticipate that its hedging activity will have a significant impact on future operating results or liquidity. Hedging arrangements do not protect against nonperformance of a contract. At any one time the Division's inventory and purchase contracts for delivery to the Division may be substantial. The Division 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 Division when any trader is outside of position limits and also triggers review by management of the Company if the Division is outside of its position limits. The position limits are reviewed at least annually with management of the Company. The Division monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, certain purchase and sale contracts are subject to credit approvals and appropriate terms and conditions. Supply The 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 Dakota, 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, North Dakota, South Dakota 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. Dependence on Customers. Other than Ventura Foods (see "VENTURA FOODS"), no customer accounted for more than 10% of the Processing and Refining Division's sales in the year ended May 31, 1996. 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 Processing and Refining Division has one facility located in Mankato, Minnesota, comprised of a crushing plant, a refinery, a soyflour plant and self contained utilities. A quality control lab with technically sophisticated equipment assures high quality standards. 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. The Company expects that such construction will be financed from long-term borrowings. 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. Certain production workers are subject to collective bargaining agreements with the American Federation of Grain Millers (131) expiring in 1998 and the Pipefitters' Union (2) expiring in 1997. 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 $27,000,000 as of August 30, 1996. Sales by the Processing and Refining Division to Ventura Foods and its predecessors in interest are shown below:
Honeymead's Sales to Holsum, Wilsey & Ventura Six Months Ended Years Ended May 31, November 30, ------------------- ------------ 1994 1995 1996 1995 1996 ----------- ----------- ------------ ----------- ----------- Sales ($) $80,425,000 $99,150,000 $111,650,000 $58,897,400 $60,341,000 Percentage of total refinery sales ........... 31% 35% 40% 42% 51%
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. MILLING DIVISION 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 March 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 six-month periods ended November 30, 1995 and 1996, are unaudited. In management's opinion, the unaudited financial statements for the six-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 six-month period ended November 30, 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.
Six Months Ended Years Ended May 31, November 30, ------------------- ------------ 1994 1995 1996 1995 1996 ------------- ------------- ------------- ------------ ------------ Sales ........................$ 103,716,012 $ 119,725,183 $ 173,315,613 $ 71,811,039 $111,426,460 Costs and expenses Cost of goods sold ......... 97,206,374 112,690,679 161,293,430 66,979,513 102,375,248 Marketing and administrative ........... 2,415,155 3,834,289 4,471,563 1,655,748 2,503,655 Interest ................... 1,832,037 2,278,544 4,457,797 1,845,608 2,825,979 ------------- ------------- ------------- ------------ ------------ 101,453,566 118,803,512 170,222,790 70,480,869 107,704,882 Earnings before income: taxes ...................... 2,262,446 921,671 3,092,823 1,330,170 3,721,578 Income taxes ................. 150,000 125,000 200,000 125,000 250,000 ------------- ------------- ------------- ------------ ------------ Net earnings .................$ 2,112,446 $ 796,671 $ 2,892,823 $ 1,205,170 $ 3,471,578 ============= ============= ============= ============ ============ Operating Data: Wheat used (bu.) Durum .................... 15,763,000 16,058,000 19,376,000 8,723,941 11,393,680 Spring ................... 1,167,000 1,638,000 3,013,000 704,546 3,310,715 Shipments (cwt) Semolina/flour ........... 8,088,000 8,718,000 10,085,000 4,679,000 5,909,502 Baking flour ............. -- -- 634,000 -- 1,254,917 1994 1995 1996 1995 1996 ------------- ------------- ------------- ------------ ------------ Balance Sheet Data (at end of period): Working capital ............$ (4,703,152) $ 1,604,146 $ 3,338,206 $ 4,552,291 $ (14,671) Net property and equipment ................ 19,739,029 43,395,670 59,233,046 55,042,615 66,861,556 Total assets ............... 55,031,562 82,606,055 125,321,564 108,158,367 128,654,161 Long-term debt, including current maturities ....... 19,000,000 33,750,000 54,000,000 49,200,000 60,727,708 Total equity ............... 27,797,072 27,797,072 27,797,072 27,797,072 27,797,072 Other Data (1): Pretax earnings ............$ 2,262,446 $ 921,671 $ 3,092,823 $ 1,330,170 $ 3,721,578 Book to tax differences .... (135,715) 123,844 (84,481) ------------- ------------- ------------- ------------ ------------ Tax basis earnings .........$ 2,126,731 $ 1,045,515 $ 3,008,342 $ 1,330,170 $ 3,721,578 ============= ============= ============= ============ ============ Bushels milled ............. 16,930,702 17,696,689 22,390,011 9,428,487 14,704,395 ============= ============= ============= ============ ============ Earnings per bushel ........$ 0.13 $ 0.06 $ 0.13 $ 0.14 $ 0.25
Pro Forma Information (2)
Year Ended Six Months Ended May 31, November 30, 1996 1996 ----------- ---------- Equity Participation Units (bushels) 11,195,006 7,352,198 Patronage rate $ 0.13 $ 0.25 ----------- ---------- Earnings to holders $ 1,504,171 $1,860,789 =========== ==========
(1) Because patronage dividends attributable to the Units will be allocated based on the number of bushels of wheat delivered, information on earnings per bushel is believed by the Company to be the most relevant indicator of performance of the Milling Division. (2) Assuming that one-half of the bushels milled in each of the periods shown above had been attributable to Equity Participation Units, the earnings of the Milling Business Unit which would have been allocated to the Equity Participation Units are shown above under the caption "Pro Forma Information". The Equity Participation Units offered hereby represent 50% of the estimated processing capacity of the Milling Business Unit giving effect to the construction of additional capacity now in process and anticipated. Accordingly, if the Company is able to sell all Units in the Milling Business Unit offered hereby, it expects that holders of Units would represent 50% of the wheat milled. The actual percentage milled will depend on production capacity, demand for flour and the amount of wheat delivered by Defined Members, and there can be no assurance that this assumption will be true. 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.
Six Months Ended Years Ended May 31, November 30, ------------------- ------------ 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- Gross margin percentage ....... 6.28% 5.88% 6.94% 6.73% 8.12% Marketing and administrative ... 2.33% 3.20% 2.58% 2.31% 2.25% Interest ........... 1.80% 1.90% 2.57% 2.57% 2.53% Margins/cwt ........ $ .80 $ .81 $1.12 $ .94 $1.28
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 Six-Months Ended November 30, 1996 and 1995 The Division's net earnings of $3,500,00 for the six months ended November 30, 1996 represents a $2,300,000 increase from the same period in 1995 due to an increase in gross margins per hundred weight milled and an increase in volume of production. Net sales of $111,400,000 for the six months ended November 30, 1996 increased by $39,600,000 (55%) from the same period in 1995 due to an increase in shipments from 4,679,000 cwts to 7,165,000 cwts as the division's Kenosha mill came on line in late 1995, offset slightly by a decrease in average price per cwt from $14.51 to $14.11. Cost of goods sold of $102,400,000 for the six months ended November 30, 1996 increased by $35,400,000 (53%) from the same period in 1995. Raw material costs increased by $32,900,000 due to an increase in bushels milled (9,500,000 bushels in the 1995 period and 14,700,000 bushels in the 1996 period. The impact of this volume increase was offset partially by a decline in the average cost per bushel, from $6.55 in the 1995 period to $6.44 in the 1996 period. Plant expenses increased $2,500,000 in the 1996 period, all of which is attributable to the Kenosha mill, which commenced operations in November 1995. Marketing and administrative expenses were $2,500,000 for the six-month period ended November 30, 1996, compared to $1,700,000 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 $2,800,000 for the 1996 period increased by $1,000,000 compared to the same period in 1995. This increase is attributable to additional short-term borrowings necessary to carry increased inventories and receivables, resulting primarily from the production at 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 March 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 six months ended November 30, 1996 provided net cash of $10,800,000 due to net earnings of $3,500,000, a decrease in working capital requirements of $5,300,000 and non-cash expenses such as depreciation and amortization of $2,000,000. For the same period in 1995, operating activities used net cash of $7,800,000 due to increased working capital requirements of $10,400,000, offset by net earnings of $1,200,000 and non-cash expenses of $1,400,000. 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 six months ended November 30, 1996 and 1995 totaled $9,100,000 and $12,600,000 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 $26,100,000 on November 30, 1996, a decrease of $4,900,000 from May 31, 1996, primarily resulting from the decline in working capital requirements of $5,300,000. The Division incurred additional long-term debt during the six-month period ended November 30, 1996 in the amount of $10,000,000 to finance the construction of the Houston mill through that point in time. Short-term debt outstanding and payable to the Company as of May 31, 1996 and 1995 was $31,000,000 and $13,600,000, 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. Price Risk and Hedging To reduce the price change risks associated with holding fixed price commodity positions, the Company generally takes opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. Most of the grain volume handled by the Company can be hedged. Some grains, such as durum, 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 Division'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 Division's profitability is primarily derived from margins on grain processed, not from hedging transactions. Management does not anticipate that its hedging activity will have a significant impact on future operating results or liquidity. Hedging arrangements do not protect against nonperformance of a contract. At any one time the Division's inventory and purchase contracts for delivery to the Division may be substantial. The Division 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 Division when any trader is outside of position limits and also triggers review by management of the Company if the Division is outside of its position limits. The position limits are reviewed at least annually with management of the Company. The Division monitors current market conditions and may expand or reduce the purchasing program in response to changes in those conditions. In addition, certain purchase and sale contracts are subject to credit approvals and appropriate terms and conditions. Supply Most of the durum, spring and winter wheats processed by the 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 (represents 23.8% of sales) and Hershey (represents 15.0% of sales), 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 March 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 March 1997. Each facility includes a milling plant as well as an elevator to store grain. Information on the four mills plus the planned Pocono mill described below 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 Pocono, PA Durum 4,000 cwts/day Spring and winter wheat 14,000 cwts/day --------------- Total 76,500 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. Construction of the Pocono mill is expected to be financed from the proceeds of this offering. If such proceeds are insufficient, the Company expects to finance any deficiency through long-term borrowings. 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). Of these, 40 production workers at the Rush City Mill are subject to a collective bargaining agreement with the American Federation of Grain Millers expiring in 1998. 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 staggered three-year terms, expiring in November of the years listed in the table below. Each director has been an agriculture producer for the past five years.
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
Approximately one-third of the directors are elected annually by members acting through delegates. See "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL--Voting Rights." 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. THOMAS 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 and 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 Refining 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 Refining 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. On January 23, 1997, the Company entered into an Employment Agreement with John D. Johnson. The Employment Agreement provides for a rolling three-year period of employment commencing on January 23, 1997, at an initial base or fixed salary of at least $500,000, subject to annual review. Mr. Johnson's employment may be terminated by either party on at least 30 days' written notice, subject to the rights and obligations set forth in the Employment Agreement. The Company is obligated to pay Mr. Johnson a severance allowance for three years equal to Mr. Johnson's base or fixed salary and to continue family health insurance coverage for at least one year in the event Mr. Johnson's employment is terminated for any reason other than for cause (as such term is defined in the Employment Agreement), death, disability or voluntary termination. The Employment Agreement also contains covenants by Mr. Johnson not to compete with the Company and not to solicit the Company's customers or employees during the period that Mr. Johnson accepts the severance allowance. The Company and Mr. Johnson have also agreed that in the event of Mr. Johnson's voluntary termination the Company will not owe Mr. Johnson any severance allowance and Mr. Johnson will not compete against the Company for a period of three years. Either party may terminate the Employment Agreement and all of the rights and obligations of the parties thereunder, upon at least three years' written notice to the other party. 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 plans, paid vacations, paid leaves of absence and pay received if away from work due to a sickness or injury. The Pay Credits percentage received is determined on a yearly basis, based on the years of Benefit Service completed as of January 1 of each year. An employee receives one year of Benefit Service for every calendar year of employment in which the employee completed at least 1,000 hours of service. Effective January 1, 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: John D. Johnson .................. $180,334 Thomas F. Baker .................. 215,878 Michael H. Bergeland ............. 379,744 Garry A. Pistoria ................ 455,071 James Tibbetts ................... 2,258 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: John D. Johnson ...................... $94,772 Thomas F. Baker ...................... 62,161 Michael H. Bergeland ................. 556,251 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, which includes such director's spouse; parents; children; siblings; mothers and fathers-in-law; sons and daughters-in-law; and brothers and sisters-in-law) and the Company that exceeded $60,000 are shown below. Year Ended May 31, ------------------------------------------ Name 1994 1995 1996 - ------------- --------- --------- -------- William Zarak $153,218 $ 72,863 $303,125 Russell Twedt 46,673 94,704 121,257 Steve Carney 222,824 434,602 746,263 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. These net savings, when distributed, are referred to as "patronage dividends," regardless of whether distributed in cash or in Patrons' Equities. 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 the Company, as reported in its financial statements for the year, less patronage dividends paid with respect to the fiscal year may be distributed in the discretion of the Board of Directors to member patrons and to non-member "consenting patrons" (defined as cooperative associations meeting all requirements for membership in this Association other than transacting the minimum amount of business) on the basis of their patronage. Distributions may be in cash, property, Non-Patronage 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 the Company 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. As a membership cooperative, the Company is not authorized to issue capital stock. Under the Minnesota Cooperative Law, under which the Company is organized, a cooperative may be organized on a membership basis or a capital stock basis. A cooperative is organized on a capital stock basis if holding shares of common stock entitles the holder to vote. Membership is transferable only with the consent and approval of the Board of Directors. The Company may issue equity or debt securities, on a patronage basis or otherwise, but unless authorized in, or by the Board of Directors, pursuant to the Company's Bylaws, such securities shall not entitle the holders thereof to any voting, membership or other rights to participate in the affairs of the Company and are not 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 Defined Member Board has no other powers. While the Board of Directors has no present intention of doing so, the Company is authorized to retain a portion of the payments otherwise due to Defined Members for purchases of products from them. Such retention is referred to as a "unit retain." Unit retains would only be established by the Board of Directors to provide a source of cash for its immediate needs and would be limited to a small percentage of the payments due for purchase of products pursuant to the Agreement (see "EQUITY PARTICIPATION UNITS--Individual Member Marketing Agreement"). The imposition of unit retains would adversely affect a member's cash income and cash position. The Company has the option to treat any such unit retains as taxable to the Company or to treat the unit retains as nontaxable by declaring the unit retains as "qualified." Qualified unit retains are taxable to the Defined Member in the tax year when the Defined Member receives notification that a unit retain has been established. When a qualified unit retain is reimbursed or redeemed, the Defined Member reports no additional income. Unit retains may be called for payout at the lesser of their stated or book value at the discretion of the Board of Directors. The Company intends to establish a redemption schedule if it authorizes unit retains. Debt and Equity Instruments The Company is authorized to issue a variety of debt and equity instruments to its current members, patrons and to persons who are neither members nor patrons. The Company's outstanding capital (see "Capitalization") is represented by Capital Equity Certificates, non-patronage certificates and certain capital reserves. The Company's Bylaws provide the following securities may be issued to current or former members or patrons: Equity Participation Units. Equity Participation Units may be held only by Defined Members and have no voting rights. Defined Members have voting rights to elect a Defined Member Board. Capital Equity Certificates. Capital Equity Certificates may be issued by the Company in partial or complete distribution of patronage refunds. Capital Equity Certificates do not bear any interest or carry any dividends. They do not have a specified maturity date unless established by the Company's Board of Directors. Certificates of Indebtedness. The Board of Directors may issue Certificates of Indebtedness from time to time. Such Certificates will carry such terms and conditions as the Board of Directors establishes in its discretion. The Board may also establish the conditions upon which such Certificates of Indebtedness may be called for payment by the Company. Non-Patronage 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 Bylaws contain no restrictions on the issuance or the terms of such other debt or equity instruments. Voting rights arise by virtue of membership in the Company, not because of holding any instrument. The Board of Directors may issue "Preferred Equities" and other debt or equity instruments to individuals who are not members or patrons of the Company. The Board of Directors has the discretion to establish and designate one or more series of Preferred Equities and to fix the relative rights, preferences and privileges of such Preferred Equities. Any Preferred Equities will not carry voting rights. No such Preferred Equities are presently outstanding, and the Board of Directors has no present plan or intent to issue Preferred Equities. However, if it were to do so, it could establish rights, preferences and privileges relative to the holders of the Units and other securities of the Company. Such preferences could include provisions for priority in payment. The Board of Directors may authorize the issuance of Preferred Capital Certificates pertaining to a particular Defined Business Unit. If such Certificates were issued, they could have a preference in payment over patronage refunds of a particular Business Unit. Transfer of Patrons' Equities. Debt or equity instruments held by the Company's members and patrons, including Equity Participation Units, Capital Equity Certificates, Certificates of Indebtedness, Non-Patronage 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. See "DIVIDEND POLICY." 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 is under no restriction in modifying such policy, other than legal agreements to which the Company may be a party to from time to time. Members are not required to approve a change in such policy. The Board of Directors will establish a redemption policy for Patrons' Equities arising from Defined Business Units. See "DIVIDEND POLICY." 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 Earnings 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 Earnings 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 declares, by resolution adopted by a majority of the Board of Directors present and voting, that the amendment involves or is related to a hostile takeover, the proposed amendment must be adopted by the approval of 80% of the total voting power of the members of the Company. It is within the sole determination of the Board of Directors to declare that a transaction involves a "hostile takeover," which term is not further defined in the Minnesota cooperative law or the governing documents. Tax Treatment Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives and applies to both cooperatives exempt from taxation under Section 521 of the Internal Revenue Code and to nonexempt corporations operating on a cooperative basis. The Company is a nonexempt cooperative. As a cooperative, the Company is not taxed on amounts withheld from its members in the form of qualified unit retains or patronage dividends, or in the amount distributed in the form of patronage payments. Consequently, such amounts are taxed only at the patron level. However, the amounts of any non-qualified unit retains or patronage dividends are taxable to the Company when allocated. Upon redemption of any such non-qualified unit retains or patronage dividends, the amount is deductible to the Company and taxable at the member level. Income derived by the Company from non-patronage sources is not entitled to the "single tax" benefit of Subchapter T and is taxed to the Company at corporate income tax rates. EQUITY PARTICIPATION UNITS Equity Participation Units 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 Agreement" 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. Each Business Unit and the respective Equity Participation Units were created by resolutions (the "Resolutions") of the Board of Directors, acting pursuant to the governing documents, on January 11, 1997. The terms of the Units are governed by the governing documents (as discussed under "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL") and the Resolutions (which are more fully discussed below). The Resolutions may be amended by the Board of Directors, except in certain respects, without a vote of holders of the Units. See "Amendment of Board Resolutions" below. Holders of the Units have the rights and remedies provided by the Minnesota Cooperative Law. 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 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 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 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 consist of five persons, designated by the Board of Directors, to hold such office until the Company's November, 1997 Annual Meeting and 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, who will serve for staggered three-year terms. 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, giving effect to Units held and Units deemed to be held by the Company. 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 Business Unit. 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 consist of five persons, designated by the Board of Directors, to hold such office until the Company's November, 1997 Annual Meeting and 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, who will serve for staggered three-year terms. 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. Patronage sourced income from the operations of a Business Unit (except as set forth above with respect to the Processing and Refining Business Unit) will be allocated by the Company as patronage refunds based on the total amount of grain processed, giving effect to Units held and Units deemed to be held by the Company. As between holders of the Units, patronage sourced income will be allocated to each Defined Member proportionate to the number of bushels of grain delivered pursuant to the Agreement. Defined Members may also receive, upon allocation by the Board of Directors, nonpatronage income from operations of the Company, including operations of a Business Unit generating nonpatronage income. 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 at fair market value. Such determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant, and any such allocation and determination of fair market value shall be final and binding for all purposes whatsoever. The Company shall not enter into any agreement by which the net patronage sourced earnings of a Business Unit shall be allocated to any person except to a person who owns or is deemed to own Units proportionate to the patronage being so allocated. Additional Equity Participation Units; Sale The Board of Directors from time to time may authorize the sale by the Company of Units deemed owned by the Company for the account of the Company provided that sales shall be at a price 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 Business Unit. There are no limitations on the issuance or sale of additional Units in the governing documents or in any loan agreements or other agreements or instruments to which the Company is a party. Holders of Units shall have no preemptive rights to subscribe for or purchase additional Units or any other securities issued by a 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 Business Unit. Merger, Consolidation or Sale In connection with the merger, consolidation, liquidation or sale of all or substantially all of the assets of the Company as an entirety or upon the sale of all or substantially all of the assets of a Business Unit, all, but not less than all, Units of such Business Unit shall be redeemed by the Company at their original purchase price shown on the cover of this Prospectus, provided that the Preferred Capital Certificates or unit retains of such Business Unit not previously paid are also redeemed in connection therewith; that such payments include any prorata profit (or loss) associated with disposition of the assets of the 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; and that provision is made for the allocations of patronage sourced income arising prior to such transaction. Any determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant. A sale of more than 75% of the assets or earning power will be deemed "all or substantially all" of the assets of the Company or a Business Unit. 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. Abandonment or shutting down the operations of a Business Unit (other than on a temporary basis) will be considered sale of all of the assets of the Business Unit and will have the effect described under "--Merger, Consolidation or Sale." Amendment of Board Resolutions The resolutions adopted by the Board of Directors establishing the Milling Division Business Unit and the Processing and Refining Division Business Unit may be amended from time to time by the Board of Directors of the Company, except for those matters described under "Allocations Relating to Business Units" and "Merger, Consolidation or Sale," which may be amended only with the approval of a majority of Defined Members owning Units not held or deemed held by the Company. Member Marketing Agreement A Defined Member will be obligated to deliver during each delivery year one bushel of wheat or soybeans which is of merchantible quality, according to industry standards, to the Company for each applicable Unit held, subject to adjustment as described below, at delivery points designated by the Company; provided, however that, until the Pocono facility commences operation, a Defined Member contracting to deliver wheat shall only have the right and obligation to deliver 78% of the contracted bushels. 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 an 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 days' written notice from the party not in breach. The Agreement may be terminated by the Company upon sale, liquidation, dissolution or winding up of the applicable Defined Business Unit in accordance with the Company's Bylaws. The Company is obligated to take and pay for deliveries in accordance with the Agreement. The price to be paid is based on the prevailing price at the point of delivery agreed to between the Defined Member and the Company or its agent at the time of sale. The final settlement price must be established prior to the end of the processing year. In case of fire, explosions, interruption of power, strikes or other labor disturbances, lack of transportation facilities, shortage of labor or supplies, floods, action of the elements, riot, interference of civil or military authorities, enactment of legislation or any unavoidable casualty or cause beyond the control of the Company affecting the conduct of the Company's business to the extent of preventing or unreasonably restricting the receiving, handling, production, marketing or other operations, the Company shall be excused from performance during the period that the Company's business or operations are so affected. The Member shall not be liable for failure or delay in performance of the Agreement to the extent such failure or delay is caused by a crop failure due to an Act of God, such as drought or flood. The Company will pay to each Defined Member an annual patronage refund equal to the portion arising from the net savings of the applicable 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. Upon the termination of the operations of a Defined Business Unit, the Marketing Agreement will automatically terminate. See "--Operations." The Company is authorized to retain a portion of the payments otherwise due to Defined Members for purchases of products from them. Such retention is referred to as a "unit retain." The Company has the option to treat any such unit retains as taxable to the Company or to treat the unit retains as nontaxable by declaring the unit retains as "qualified." Qualified unit retains are taxable to the Defined Member in the tax year when the Defined Member receives notification that a unit retain has been established. When a qualified unit retain is reimbursed or redeemed, the Defined Member reports no additional income. Unit retains may be called for payout at the lesser of their stated or book value at the discretion of the Board of Directors. Taxation Patronage dividends arising under the Agreements with respect to the Units will have the same tax treatment as patronage currently payable to members. See "MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL -- Tax Treatment." Transfer of Equity Participation Units Upon any transfer of Units, the transferee will be required to certify as to eligibility and then current anticipated annual production and to sign an Agreement. In approving any transfer, the Board of Directors will require that such certificate show that the number of Units transferred does not exceed anticipated annual production, that any transferee does not own more than 1% of the outstanding capacity of any one Business Unit and that the Units held by each transferor retaining units and transferee represent at least 3,000 bushels of wheat or 1,500 bushels of soybeans. 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 for the purchase and sale of Units. The Company will contract with an outside vendor to include an interactive link available to patrons on the computerized network that the Company maintains with its elevators and the elevators of most Affiliated Associations. 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. PLAN OF DISTRIBUTION The Units are being offered by the Company on a best efforts, continuous basis with no minimum amount of subscriptions required to close. 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. The manner and circumstances under which such agreements will be accepted is shown on the cover of this Prospectus. The Company intends to offer the Units through a series of informational meetings conducted by officers or directors of the Company. Those meetings will be announced through newspapers and other publications. At the meetings, a copy of this Prospectus and a blank subscription agreement and marketing agreement will be provided to each attendee. Attendees will be asked to leave their name, address and telephone number, and agents of the Company will inquire, at a later time, whether the attendee has any interest in the investment. If the attendee has questions about the investment, the agent will inform the attendee that an employee of the Company will call the attendee to answer questions. Employees of the Company will not receive any special compensation for assistance in the offering. 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 November 30, 1996 (unaudited) F-3 Consolidated Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-4 Consolidated Statements of Capital for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1996 (unaudited) F-5 Consolidated Statements of Cash Flows for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-6 Notes to Consolidated Financial Statements for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 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 November 30, 1996 (unaudited) F-17 Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-18 Statements of Divisional Equity for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1996 (unaudited) F-19 Statements of Cash Flows for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-20 Notes to Financial Statements for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 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 November 30, 1996 (unaudited) F-29 Statements of Earnings for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-30 Statements of Divisional Equity for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1996 (unaudited) F-31 Statements of Cash Flows for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 1995 and 1996 (unaudited) F-32 Notes to Financial Statements for the Years Ended May 31, 1994, 1995, and 1996 and the Six Months Ended November 30, 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, -------------------------------- NOVEMBER 30, 1995 1996 1996 (UNAUDITED) ASSETS CURRENT ASSETS: Cash $ 11,656,677 $ 21,426,227 $ 94,766,678 Receivables (Note 2) 334,241,233 367,244,539 374,044,069 Inventories (Note 3) 247,538,620 434,507,118 220,531,059 Prepaid expenses and deposits 19,252,023 41,825,850 32,410,434 -------------- -------------- -------------- Total current assets 612,688,553 865,003,734 721,752,240 OTHER ASSETS: Investments (Note 4) 57,523,420 83,269,566 117,650,022 Other (Note 5) 48,483,906 48,353,983 34,842,586 -------------- -------------- -------------- Total other assets 106,007,326 131,623,549 152,492,608 PROPERTY, PLANT, AND EQUIPMENT (Notes 6 and 7) 205,837,690 232,145,401 219,946,105 -------------- -------------- -------------- $ 924,533,569 $1,228,772,684 $1,094,190,953 ============== ============== ============== LIABILITIES AND CAPITAL CURRENT LIABILITIES: Notes payable (Note 7) $ 200,000,000 $ 324,000,000 $ -- Patron credit balances 59,490,643 29,007,419 129,887,572 Advances received on grain sales 123,421,988 201,825,190 259,721,905 Drafts outstanding 17,581,091 23,837,715 30,599,660 Accounts payable and accrued expenses 127,569,277 163,435,268 176,354,870 Patronage dividends payable 11,000,000 13,100,000 4,600,000 Current portion of long-term debt (Note 7) 6,721,469 13,923,204 18,205,053 -------------- -------------- -------------- Total current liabilities 545,784,468 769,128,796 619,369,060 LONG-TERM DEBT (Note 7) 78,095,056 118,705,972 117,482,954 OTHER LIABILITIES 1,166,152 3,685,797 4,443,888 COMMITMENTS AND CONTINGENCIES (Notes 8 and 13) CAPITAL (Note 8) 299,487,893 337,252,119 352,895,051 -------------- -------------- -------------- $ 924,533,569 $1,228,772,684 $1,094,190,953 ============== ============== ============== See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS SIX MONTHS ENDED FOR THE YEARS ENDED NOVEMBER 30, ------------------------------------------------ ------------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) REVENUES: Sales: Grain and oilseed $3,086,531,429 $4,191,665,535 $7,127,223,407 $3,329,958,581 $3,548,642,198 Processed grain and oilseed 593,116,553 708,219,307 819,863,541 403,716,340 396,378,362 Feed and farm supplies 165,925,459 156,699,068 207,252,696 85,665,267 113,824,347 -------------- -------------- -------------- -------------- -------------- 3,845,573,441 5,056,583,910 8,154,339,644 3,819,340,188 4,058,844,907 Patronage dividends 6,609,602 6,512,481 13,278,997 1,891,024 4,727,294 Other revenues (Note 12) 45,895,922 57,556,984 68,339,523 35,821,618 33,809,212 -------------- -------------- -------------- -------------- -------------- 3,898,078,965 5,120,653,375 8,235,958,164 3,857,052,830 4,097,381,413 COSTS AND EXPENSES: Cost of goods sold 3,786,336,764 4,981,820,272 8,076,073,326 3,779,651,094 4,029,924,953 Marketing, general, and administrative 60,847,099 69,509,491 70,054,248 39,251,639 36,927,696 Interest 10,250,765 19,268,575 31,921,936 13,896,619 8,418,249 -------------- -------------- -------------- -------------- -------------- 3,857,434,628 5,070,598,338 8,178,049,510 3,832,799,352 4,075,270,898 -------------- -------------- -------------- -------------- -------------- EARNINGS BEFORE INCOME TAXES 40,644,337 50,055,037 57,908,654 24,253,478 22,110,515 INCOME TAXES (Note 11) 5,500,000 5,100,000 6,900,000 3,050,000 2,600,000 -------------- -------------- -------------- -------------- -------------- NET EARNINGS $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 21,203,478 $ 19,510,515 ============== ============== ============== ============== ============== DISTRIBUTION OF NET EARNINGS Cash to patrons $ 9,945,967 $ 10,992,918 $ 13,295,713 Patronage certificates 23,187,069 25,617,898 31,023,286 Nonpatronage certificates 1,832,136 7,912,297 6,175,689 Capital reserve 179,165 431,924 513,966 -------------- -------------- -------------- Net earnings $ 35,144,337 $ 44,955,037 $ 51,008,654 ============== ============== ============== 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 stated as capital 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 Distribution of patronage dividends payable for preceding year including cash payment of $13,295,173 (unaudited) (13,295,713) 31,023,286 (43,700,000) (618,999) Redemption of capital equity certificates (unaudited) (3,242,136) (3,193,664) (48,472) Equities issued (unaudited) 4,193,985 4,193,985 Other (unaudited) (23,719) 69,974 154 (93,847) Net earnings (unaudited) 19,510,515 15,400,000 4,110,515 Patronage dividends payable in cash, stated as a current liability (unaudited) (4,600,000) (4,600,000) ------------- ------------- ------------- ------------- ------------- BALANCE AT NOVEMBER 30, 1996 (UNAUDITED) $ 352,895,051 $ 273,609,733 $ 9,691,677 $ 10,800,000 $ 58,793,641 ============= ============= ============= ============= ============= See notes to consolidated financial statements.
HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED FOR THE YEARS ENDED NOVEMBER 30, ----------------------------------------- --------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 35,144,337 $ 44,955,037 $ 51,008,654 $ 21,203,478 $ 19,510,515 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 17,705,185 18,907,903 20,421,425 10,177,780 13,775,558 Noncash expense (income) from joint venture 277,340 (4,025,854) (12,517,993) (4,612,524) (4,306,933) Noncash portion of patronage dividends received (4,598,180) (4,622,221) (9,607,657) (1,505,559) (3,205,478) Loss (gain) on sale of property, plant, and equipment 273,843 (1,196,717) (853,024) 96,311 188,574 Change in assets and liabilities: Receivables (57,084,091) (103,580,123) (33,013,948) (216,781,596) (6,914,154) Inventories (36,647,598) (19,046,875) (186,968,498) (196,992,652) 213,976,059 Patron credit balances 8,493,415 23,282,391 (30,483,224) 4,606,224 100,880,153 Advances received on grain and oilseed sales (2,184,948) (1,264,842) 78,403,202 181,684,147 57,896,714 Accounts payable, accrued expenses, and drafts outstanding 16,534,719 4,852,493 43,477,378 74,330,938 20,595,349 Prepaid expenses, deposits, and other (11,119,894) (7,973,268) (25,590,317) (29,890,478) 10,306,262 ------------- ------------- ------------- ------------ ------------- Total adjustments (68,350,209) (94,667,113) (156,732,656) (178,887,409) 403,192,104 ------------- ------------- ------------- ------------ ------------- Net cash (used in) provided by operating activities (33,205,872) (49,712,076) (105,724,002) (157,683,931) 422,702,619 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposition of property, plant, and equipment 1,174,196 3,351,119 3,729,810 693,905 1,005,267 Investments redeemed 7,028,580 3,662,026 2,518,863 833,753 5,900,025 Acquisition of property, plant, and equipment (28,035,021) (69,314,689) (40,501,980) (23,956,766) (25,347,024) Payments on notes receivable 682,313 391,412 398,851 302,543 213,701 Investments (2,008,822) (1,843,097) (1,274,069) -- (1,252,156) Investments in joint ventures (6,650,000) (727,266) -- 7,215,059 Other (3,157,854) (1,004,755) (1,778,678) (14,770) 381,976 ------------- ------------- ------------- ------------ ------------- Net cash used in investing activities (24,316,608) (71,407,984) (37,634,469) (22,141,335) (11,883,152) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit agreements 79,500,000 87,000,000 124,000,000 167,500,000 (324,000,000) Long-term debt borrowings 1,160,000 51,000,000 57,961,058 25,361,058 10,000,000 Principal payments on long-term debt (5,869,940) (5,215,106) (10,546,075) (3,395,935) (6,398,286) Principal payments under capital lease obligations (634,170) (680,901) (739,884) (364,197) (542,881) Redemption of capital equity certificates (5,484,613) (5,728,997) (6,554,160) (3,145,246) (3,242,136) Cash patronage dividends paid (6,833,455) (9,945,967) (10,992,918) (10,934,809) (13,295,713) ------------- ------------- ------------- ------------ ------------- Net cash provided by (used in) financing activities 61,837,822 116,429,029 153,128,021 175,020,871 (337,479,016) ------------- ------------- ------------- ------------ ------------- INCREASE (DECREASE) IN CASH 4,315,342 (4,691,031) 9,769,550 (4,804,395) 73,340,451 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 $ 6,852,282 $ 94,766,678 ============= ============= ============= ============ =============
HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 1994, 1995, AND 1996 AND SIX MONTHS ENDED NOVEMBER 30, 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 activities 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 November 30, 1996, consolidated statements of earnings and cash flows for the six months ended November 30, 1995 and 1996, consolidated statement of capital for the six months ended November 30, 1996, and the interim information in the notes to consolidated financial statements as of November 30, 1996 and for the six months ended November 30, 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 processed grain and oilseed products are stated at market, including adjustment for open purchase, sales, and futures contracts. Feed and farm supply 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, for the years ended May 31, 1994, 1995, and 1996, were as follows: 1994 1995 1996 Africa 140,000,000 170,000,000 195,000,000 Asia 680,000,000 1,080,000,000 2,150,000,000 Europe 23,000,000 220,000,000 465,000,000 North America 12,000,000 85,000,000 205,000,000 South America 45,000,000 45,000,000 85,000,000 ------------ -------------- -------------- $900,000,000 $1,600,000,000 $3,100,000,000 ============ ============== ============== 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 - Effective June 1, 1996, the Company adopted 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. The adoption of this statement had no material impact on the Company's financial statements. 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, ---------------------------------- November 30, 1995 1996 1996 Trade $ 222,522,967 $ 297,112,614 $ 329,005,765 Elevator accounts 100,849,459 59,163,181 36,326,652 Other 15,293,807 18,003,744 15,923,543 --------------- --------------- ---------------- 338,666,233 374,279,539 381,255,960 Less allowance for losses (4,425,000) (7,035,000) (7,211,891) --------------- --------------- ---------------- $ 334,241,233 $ 367,244,539 $ 374,044,069 =============== =============== ================
3. INVENTORIES
May 31, ---------------------------------- November 30, 1995 1996 1996 Grain and oilseed $ 166,797,308 $ 351,504,342 $ 168,949,449 Processed grain and oilseed products 42,294,295 52,555,945 39,505,338 Feed and farm supplies 38,447,017 30,446,831 12,076,272 --------------- --------------- ---------------- $ 247,538,620 $ 434,507,118 $ 220,531,059 =============== =============== ================ 4. INVESTMENTS May 31, ---------------------------------- November 30, 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 2,818,571 Cenex 8,534,259 12,361,642 12,671,323 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 6,646,239 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 1,208,339 Joint Ventures: HSPV, L.L.C. 2,341,263 6,408,265 -- Tacoma Export Marketing Company 2,583,904 9,330,337 11,593,988 Ventura Foods, L.L.C. 4,152,815 4,651,933 39,595,682 Harvest States - Farmland Specialty Feed 1,007,139 954,678 933,351 Ag States Agency, L.L.C. 3,925,310 4,963,174 4,141,130 Farmland - Harvest States L.L.C. -- -- 1,140,000 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 2,464,582 --------------- --------------- ---------------- $ 57,523,420 $ 83,269,566 $ 117,650,022 =============== =============== ================
5. OTHER ASSETS
May 31, ---------------------------------- November 30, 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 $15,798,448 Notes receivable 1,245,992 1,780,474 1,681,399 Prepaid expenses and other assets 20,467,295 21,664,613 17,362,739 --------------- -------------- ----------- $ 48,483,906 $ 48,353,983 $34,842,586 =============== ============== ===========
6. PROPERTY, PLANT, AND EQUIPMENT
Estimated May 31, Useful Life ---------------------------------- November 30, in Years 1995 1996 1996 Grain terminals and country elevators 3 to 50 $ 195,019,102 $ 207,814,058 $ 211,313,639 Grain and oilseed processing plants 3 to 40 144,261,776 187,325,113 135,118,597 Feed plants 3 to 40 24,837,506 23,045,048 23,453,595 Corporate office facilities 3 to 40 11,031,357 11,510,344 12,046,342 Construction in progress 29,105,235 14,510,634 37,108,200 --------------- --------------- ---------------- 404,254,976 444,205,197 419,040,373 Less accumulated depreciation (198,417,286) (212,059,796) (199,094,268) --------------- --------------- ---------------- $ 205,837,690 $ 232,145,401 $ 219,946,105 =============== =============== ================ During the years ended May 31, 1994, 1995, and 1996 the Company capitalized interest of $0, $587,637 and $739,101, respectively.
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. The Company is also required to maintain investments in the St. Paul Bank for Cooperatives and the National Bank for Cooperatives based upon borrowing levels. Patronage allocations to the Company are used to maintain such required level of investment. No direct cash investment is required. LONG-TERM DEBT:
May 31, ---------------------------------- November 30, 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 $ 69,675,333 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 56,083,333 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 5,979,743 Mortgages payable and other 2,512,017 2,114,552 1,849,598 ----------------- --------------- -------------- 84,816,525 132,629,176 135,688,007 Less current portion (6,721,469) (13,923,204) (18,205,053) ----------------- --------------- -------------- $ 78,095,056 $ 118,705,972 $ 117,482,954 ================= =============== ==============
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. During the year ended May 31, 1995 several participants in a nonqualified supplemental defined benefit plan retired which resulted in an actuarial loss of a magnitude which required a settlement adjustment to be recorded. 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
Six Months Ended For the Years Ended May 31, November 30, ---------------------------------------- ------------------------ 1994 1995 1996 1995 1996 Storage and handling $ 8,665,157 $ 9,168,022 $ 8,722,537 $ 4,202,610 $ 3,432,000 Service revenues 13,695,050 15,942,394 20,572,679 12,802,646 13,627,860 Commission 8,023,254 6,722,261 6,837,272 3,727,785 4,383,449 Joint venture (loss) income (277,340) 4,025,854 12,517,993 4,612,521 4,306,937 (Loss) gain on sale of property, plant, and equipment (211,081) 1,196,717 853,024 (96,311) (188,574) Interest income 7,935,682 11,471,627 11,581,221 6,367,772 3,587,400 Other 8,065,200 9,030,109 7,254,797 4,204,595 4,660,140 ------------ ------------ ------------ ------------ ----------- $ 45,895,922 $ 57,556,984 $ 68,339,523 $ 35,821,618 $33,809,212 ============ ============ ============ ============ ===========
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. Such stored commodities and products are not the property of the Company and therefore are not included in the Company's inventory. 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 statements of the Company taken as a whole. 14. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION Additional information concerning supplemental disclosures of cash flow activities is as follows:
Six Months Ended For the Years Ended May 31, November 30, ------------------------------------------- -------------------------- 1994 1995 1996 1995 1996 Net cash paid for: Interest $ 10,149,452 $ 17,741,969 $ 31,836,722 $ 12,658,726 $ 10,626,889 Income taxes 5,610,503 7,054,563 3,934,688 3,897,074 2,256,355 Significant noncash transactions: Noncash patronage refunds issued $15,819,222 $23,187,069 $25,617,898 from prior year's earnings Noncash non-patronage certificates $ 1,832,136 $ 7,912,297 issued from prior year's earnings Capital Equity Certificates issued in exchange for elevator properties $ 3,249,624 $ 8,721,542
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 SIX MONTHS ENDED NOVEMBER 30, 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, ----------------------------- NOVEMBER 30, 1995 1996 1996 (UNAUDITED) ASSETS CURRENT ASSETS: Receivables (Note 2) $ 18,633,076 $ 43,749,134 $ 39,015,349 Inventories (Note 3) 7,006,187 9,308,275 10,178,201 Prepaid expenses and deposits 98,866 149,873 251,160 ------------ ------------ ------------ Total current assets 25,738,129 53,207,282 49,444,710 OTHER ASSETS (Note 4) 13,472,256 12,881,236 12,347,895 PROPERTY, PLANT, AND EQUIPMENT (Note 5) 43,395,670 59,233,046 66,861,556 ------------ ------------ ------------ $ 82,606,055 $125,321,564 $128,654,161 ============ ============ ============ LIABILITIES AND CAPITAL CURRENT LIABILITIES: Due to HSC (Note 6) $ 13,642,180 $ 31,044,150 $ 26,125,338 Accounts payable and accrued expenses 7,416,803 12,480,342 14,004,043 Current portion of long-term debt (Note 6) 3,075,000 6,344,584 9,330,000 ------------ ------------ ------------ Total current liabilities 24,133,983 49,869,076 49,459,381 LONG-TERM DEBT (Note 6) 30,675,000 47,655,416 51,397,708 COMMITMENTS AND CONTINGENCIES (Note 11) DIVISIONAL EQUITY (Note 7) 27,797,072 27,797,072 27,797,072 ------------ ------------ ------------ $ 82,606,055 $125,321,564 $128,654,161 ============ ============ ============ See notes to financial statements.
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF EARNINGS SIX MONTHS ENDED FOR THE YEARS ENDED NOVEMBER 30, ------------------------------------------- --------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) REVENUES - Processed grain sales $ 103,716,012 $ 119,725,183 $ 173,315,613 $ 71,811,039 $ 111,426,460 COSTS AND EXPENSES: Cost of goods sold 97,206,374 112,690,679 161,293,430 66,979,513 102,375,248 Marketing, general, and 2,415,155 3,834,289 4,471,563 1,655,748 2,503,655 administrative Interest 1,832,037 2,278,544 4,457,797 1,845,608 2,825,979 ------------- ------------- ------------- ------------ ------------- 101,453,566 118,803,512 170,222,790 70,480,869 107,704,882 ------------- ------------- ------------- ------------ ------------- EARNINGS BEFORE INCOME TAXES 2,262,446 921,671 3,092,823 1,330,170 3,721,578 INCOME TAXES (Note 10) 150,000 125,000 200,000 125,000 250,000 ------------- ------------- ------------- ------------ ------------- NET EARNINGS $ 2,112,446 $ 796,671 $ 2,892,823 $ 1,205,170 $ 3,471,578 ============= ============= ============= ============ ============= 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) 3,471,578 Divisional equity distributed (unaudited) (3,471,578) ------------ BALANCE AT NOVEMBER 30, 1996 (UNAUDITED) $ 27,797,072 ============ See notes to financial statements.
WHEAT MILLING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS SIX MONTHS ENDED FOR THE YEARS ENDED NOVEMBER 30, -------------------------------------------- ----------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 2,112,446 $ 796,671 $ 2,892,823 $ 1,205,170 $ 3,471,578 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 2,185,697 2,512,430 3,309,307 1,423,085 2,027,064 Change in assets and liabilities: Receivables (4,884,658) (3,781,655) (25,116,058) (5,406,322) 4,733,785 Inventories (8,459,257) 4,387,100 (2,302,088) (8,920,899) (869,926) Prepaid expenses, deposits, and other 82,151 55,168 (51,007) (95,628) (101,287) Accounts payable and accrued expenses 443,220 3,854,638 5,063,539 3,987,400 1,523,701 ------------ ------------ ------------ ------------ ------------ Total adjustments (10,632,847) 7,027,681 (19,096,307) (9,012,364) 7,313,337 ------------ ------------ ------------ ------------ ------------ Net cash (used in) provided by operating activities (8,520,401) 7,824,352 (16,203,484) (7,807,194) 10,784,915 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) (12,552,548) (9,122,234) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities (803,647) (30,747,536) (18,555,663) (12,552,548) (9,122,234) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) HSC 12,136,494 8,969,855 17,401,970 6,114,912 (4,918,811) Long-term debt borrowings 14,750,000 20,250,000 17,087,500 10,000,000 Principal payments on long-term debt (700,000) (1,637,500) (3,272,292) Divisional equity distributed (2,112,446) (796,671) (2,892,823) (1,205,170) (3,471,578) ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 9,324,048 22,923,184 34,759,147 20,359,742 (1,662,681) ------------ ------------ ------------ ------------ ------------ 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 SIX MONTHS ENDED NOVEMBER 30, 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. These Division's financial statements should be read in connection with the consolidated financial statements of HSC. 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 November 30, 1996, statements of earnings and cash flows for the six months ended November 30, 1995 and 1996, statement of divisional equity for the six months ended November 30, 1996, and the interim information in the notes to financial statements as of November 30, 1996 and for the six months ended November 30, 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 processed grain products are stated at market, including adjustment for 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, ------------------------------- November 30, 1995 1996 1996 Trade $ 18,504,796 $ 43,530,542 $ 39,120,449 Other 257,468 459,530 199,838 Less allowance for losses (129,188) (240,938) (304,938) --------------- -------------- --------------- $ 18,633,076 $ 43,749,134 $ 39,015,349 =============== ============== ===============
3. INVENTORIES
May 31, ------------------------------- November 30, 1995 1996 1996 Grain $ 6,799,010 $ 8,327,021 $ 3,990,528 Processed grain products (75,951) 629,647 5,854,163 Other 283,128 351,607 333,510 --------------- -------------- --------------- $ 7,006,187 $ 9,308,275 $ 10,178,201 =============== ============== ===============
4. OTHER ASSETS
May 31, ------------------------------- November 30, 1995 1996 1996 Goodwill, less accumulated amortization of $374,960, $781,635, and $984,975 respectively $ 5,249,445 $ 5,318,424 $ 5,115,084 Leasehold rights and other intangibles, less accumulated amortization of $3,788,723, $4,484,723, and $4,735,602 respectively 8,222,811 7,562,812 7,232,811 --------------- -------------- --------------- $ 13,472,256 $ 12,881,236 $ 12,347,895 =============== ============== ===============
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is as follows: Estimated May 31, Useful Life ------------------------------ November 30, 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) (16,171,595) ------------- ------------- --------------- 18,621,944 51,859,258 50,365,536 Construction-in-progress 24,773,726 7,373,788 16,496,020 ------------- ------------- -------------- $ 43,395,670 $ 59,233,046 $ 66,861,556 ============= ============= ==============
During the years ended May 31, 1994, 1995, and 1996 the Division capitalized interest of $0, $587,637, and $739,101, respectively. 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 $13,642,180 and $31,044,150 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, ------------------------------- November 30, 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 $ 58,627,708 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 2,100,000 --------------- -------------- --------------- 33,750,000 54,000,000 60,727,708 Less current portion (3,075,000) (6,344,584) (9,330,000) --------------- -------------- --------------- $ 30,675,000 $ 47,655,416 $ 51,397,708 =============== ============== ===============
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 statements of the Division taken as a whole. 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. All sales and purchases with related parties are made at prices which management believes represent market value. 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. Management believes that these charges represent a reasonable allocation of such expenses. 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. The portion of patronage dividends payable in cash and the portion payable in Patrons' Equities will be at the discretion of HSC's Board of Directors. 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 SIX MONTHS ENDED NOVEMBER 30, 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, --------------------------- NOVEMBER 30, 1995 1996 1996 (UNAUDITED) ASSETS CURRENT ASSETS: Receivables (Note 2) $20,387,921 $22,795,612 $33,928,343 Inventories (Note 3) 17,255,215 26,235,220 30,042,344 Prepaid expenses and deposits 524,151 310,692 1,895,765 Due from HSC 5,095,299 -- -- ----------- ----------- ----------- Total current assets 43,262,586 49,341,524 65,866,452 PROPERTY, PLANT, AND EQUIPMENT (Note 4) 20,410,408 24,771,413 31,127,864 ----------- ----------- ----------- $63,672,994 $74,112,937 $96,994,316 =========== =========== =========== LIABILITIES AND DIVISIONAL EQUITY CURRENT LIABILITIES: Due to HSC (Note 5) $ 9,482,351 $22,980,616 Accounts payable and accrued expenses $10,281,996 11,239,588 20,622,702 ----------- ----------- ----------- Total current liabilities 10,281,996 20,721,939 43,603,318 COMMITMENTS AND CONTINGENCIES (Note 10) DIVISIONAL EQUITY (Note 6) 53,390,998 53,390,998 53,390,998 ----------- ----------- ----------- $63,672,994 $74,112,937 $96,994,316 =========== =========== =========== See notes to financial statements.
OILSEED PROCESSING AND REFINING DIVISION (A DIVISION OF HARVEST STATES COOPERATIVES) STATEMENTS OF EARNINGS SIX MONTHS ENDED FOR THE YEARS ENDED NOVEMBER 30, ------------------------------------------ --------------------------- 1994 1995 1996 1995 1996 REVENUES: Processed oilseed sales $ 358,372,039 $ 398,095,108 $ 399,271,001 $197,863,256 $209,352,293 Other revenue 1,349,484 1,162,518 1,435,708 1,399,030 576,487 ------------- ------------- ------------- ------------ ------------- 359,721,523 399,257,626 400,706,709 199,262,286 209,928,780 COSTS AND EXPENSES: Cost of goods sold 334,968,474 366,407,451 371,424,566 186,027,862 195,305,454 Marketing, general, and 4,722,900 5,137,663 4,544,763 2,445,721 2,441,463 administrative Interest 164,300 151,500 -- 35,500 ------------- ------------- ------------- ------------ ------------- 339,855,674 371,545,114 376,120,829 188,473,583 197,782,417 ------------- ------------- ------------- ------------ ------------- EARNINGS BEFORE INCOME TAXES 19,865,849 27,712,512 24,585,880 10,788,703 12,146,363 INCOME TAXES (Note 9) 1,650,000 1,500,000 1,600,000 1,200,000 1,200,000 ------------- ------------- ------------- ------------ ------------- NET EARNINGS $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 9,588,703 $ 10,946,363 ============= ============= ============= ============ ============= 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) 10,946,363 Divisional equity distributed (10,946,363) (unaudited) BALANCE AT NOVEMBER 30, 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 SIX MONTHS ENDED FOR THE YEARS ENDED NOVEMBER 30, ---------------------------------------------- ----------------------------- 1994 1995 1996 1995 1996 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 18,215,849 $ 26,212,512 $ 22,985,880 $ 9,588,703 $ 10,946,363 Adjustments to reconcile net earnings to net cash flows: Depreciation and amortization 1,940,793 1,724,844 1,598,965 758,982 823,957 Gain (loss) on sale of property, plant, and equipment 40,721 (431) 31,765 (31,765) (11,732) Change in assets and liabilities: Receivables (116,143) (568,635) (2,407,691) (4,363,783) (11,132,731) Inventories (8,481,765) 16,861,993 (8,980,005) (3,800,097) (3,807,124) Prepaid expenses and deposits 303,248 152,531 213,459 (973,824) (1,585,073) Accounts payable and accrued expenses (2,821,112) 482,095 957,592 780,552 9,383,114 ------------ ------------ ------------ ------------ ------------ Total adjustments (9,134,258) 18,652,397 (8,585,915) (7,629,935) (6,329,589) ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities 9,081,591 44,864,909 14,399,965 1,958,768 4,616,774 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) (3,038,896) (7,168,676) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities (6,293,164) (2,556,886) (5,991,735) (3,038,896) (7,168,676) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) HSC 15,427,422 (16,095,511) 14,577,650 10,668,831 13,498,265 Divisional equity distributed (18,215,849) (26,212,512) (22,985,880) (9,588,703) (10,946,363) ------------ ------------ ------------ ------------ ------------ Net cash used in financing activities (2,788,427) (42,308,023) (8,408,230) 1,080,128 2,551,902 ------------ ------------ ------------ ------------ ------------ 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 SIX MONTHS ENDED NOVEMBER 30, 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's financial statements should be read in connection with the consolidated financial statements of HSC. 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 November 30, 1996, statements of earnings and cash flows for the six months ended November 30, 1995 and 1996, statement of divisional equity for the six months ended November 30, 1996, and the interim information in the notes to the financial statements as of November 30, 1996 and for the six months ended November 30, 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 processed oilseed products are stated at market, including adjustment for 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. 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 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, ------------------------------- November 30, 1995 1996 1996 Trade $ 20,782,921 $ 23,190,612 $ 34,323,343 Less allowance for losses (395,000) (395,000) (395,000) --------------- -------------- --------------- $ 20,387,921 $ 22,795,612 $ 33,928,343 =============== ============== ===============
3. INVENTORIES
May 31, ------------------------------- November 30, 1995 1996 1996 Oilseed $ 8,369,881 $ 17,141,111 $ 11,816,004 Processed oilseed products 8,885,334 9,094,109 18,226,340 --------------- -------------- --------------- $ 17,255,215 $ 26,235,220 $ 30,042,344 =============== ============== ===============
4. PROPERTY, PLANT, AND EQUIPMENT
Estimated Useful Life May 31, ------------------------------- November 30, 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 21,192,093 Machinery and equipment 5 to 18 37,924,258 41,077,104 41,060,860 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 63,361,471 Less accumulated depreciation (40,532,200) (42,310,640) (43,053,646) --------------- -------------- ----------------- 18,222,458 21,143,514 20,307,825 Construction-in-progress 2,187,950 3,627,899 10,820,039 --------------- -------------- ---------------- $ 20,410,408 $ 24,771,413 $ 31,127,864 =============== ============== ================
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 $9,482,351 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. Long-term debt has been allocated by HSC on a specified use basis to its divisions, generally for capital expenditures. The Division has had a relatively low level of capital expenditures in recent years, and all such expenditures have been financed through the cash flow generated by the Division and not long-term debt. 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 statements of the Division taken as a whole. 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. All sales and purchases with related parties are made at prices which management believes represents market value. 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. Management believes that these charges represent a reasonable allocation of such expenses. 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. The portion of patronage dividends payable in cash and the portion payable in Patrons' Equities will be at the discretion of HSC's Board of Directors. 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 SUBSCRIPTION AGREEMENT HARVEST STATES COOPERATIVES The undersigned ("Subscriber") subscribes and agrees to purchase: * _______ Equity Participation Units (Milling) at a price of $2.00 per unit. * _______ Equity Participation Units (Processing and Refining) at a price of $4.00 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. * Subscriber elects to use $_______ of Harvest States Capital Equity Certificates owned by Subscriber (not to exceed one-sixth of the total purchase price). * Subscriber is a member of an Affiliated Association named ___________ ______________ and has that cooperative's authorization to use simultaneous redemption of $____________ of Harvest States equities held by that Affiliated Association (authorization form attached). * Subscriber is a member of an Affiliated Association named __________ and intends that such Affiliated Association will simultaneously redeem $______ of Harvest States equities held by such Affiliated Association, but such redemption has not yet been authorized. Pending such authorization, the subscriber has paid the full cash purchase price, a portion of which will be refunded as provided in the Prospectus. This Subscription Agreement is accompanied by: * A Member Marketing Agreement signed by the Subscriber. * A check for $___________. 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 by and between HARVEST STATES COOPERATIVES, a Minnesota cooperative corporation and the undersigned Defined Member, a ________________________________ ("Member"). [insert "producer" or "cooperative"] 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 effective as of the date signed by Association indicated below. HARVEST STATES COOPERATIVES _____________________________________ MEMBER NAME (Print or Type) By: __________________________________ _____________________________________ Signature Its: __________________________________ _____________________________________ Date Date: ________________________________ ADDRESS: 1667 N. Snelling Avenue ADDRESS: _______________________ P.O. Box 64594 St. Paul, MN 55164 _________________________________ Attn: Patron Equities Department _________________________________ AUTHORIZED DELIVERY POINTS: _________________________________ _________________________________ _________________________________ _________________________________ _________________________________ WHEAT ____ OR SOYBEANS ____ NUMBER OF BUSHELS: __________ 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 wheat or soybeans, depending on which Defined Business Unit the Member belongs to, (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; provided, however, the delivery obligation and right under this Agreement for wheat will become fully effective for the fiscal year in which the Pocono facility begins operating. Defined Members will be notified. Until then, it will represent a right and obligation to deliver 78% of the wheat set forth herein. 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, with the first processing year commencing June 1, 1997. 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 will be produced by Member. 2. Price and Payment/Patronage Distribution. 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 agreed to by the parties at the time of sale at the authorized local elevator, Association's elevator, plant or receiving station ("Authorized Delivery Point"). This price must be mutually agreed to and established between the member and Association or its agent. Final settlement price shall be established prior to the end of the Processing Year. In addition, Member's share of any and all patronage distributions relating to the Defined Business Unit of which Member is a Defined Member (as such terms are defined in the Association's Bylaws), subject to necessary or appropriate accounting adjustments, shall be distributed by the Association to Member. 3. Delivery of Grain. The full legal title of and to Grain received by the Association shall pass to the Association, or its agent solely as agent for Association, contemporaneously with its delivery to the Authorized Delivery Point. Association shall provide Member with a list of Authorized Delivery Points for the Member's Grain, amendments to which shall be provided by Association if Authorized Delivery Points in Member's marketing area are added or deleted. Member shall select up to five (5) Authorized Delivery Points to which Member may deliver Grain. Member may change its Authorized Delivery Points upon five (5) days prior written notice to Association. The Association (directly or through its agent) may reject and refuse to accept delivery of any and all Grain which in its judgment does not conform to the Association's specifications and standards. Member shall receive credit for the quantity of Grain accepted for delivery. 4. Product Quality Standards/Grain Taxes or Fees. 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 standards, and be subject to such allowances, deductions and premiums, as may from time to time be determined by the Association or its agent, as well as any grain taxes or fees. 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 and its agent 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 Authorized Delivery Point, in writing, at or before delivery of the Grain, of any security interest it has granted in such Grain. The Authorized Delivery Point 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 or its agent affecting the conduct of their business to the extent of preventing or unreasonably restricting the receiving, handling, production, marketing, or other operations, the Association and its agent shall be excused from performance during the period that the Association's or agent's business or operations are so affected. The Association or its agent, in their judgment, may, during such period, accept such portion of the Grain as the Association or agent has informed Member it can economically handle. In any event, the Association (directly or through its agent) 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 or its agent 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 effective as of the date signed by Association for processing years beginning June 1, 1997 and shall continue in force indefinitely unless earlier terminated as follows: (i) The rights and obligations of Member under this Agreement may be terminated at any time by written agreement of Member and the Association incident to Member's transfer of equity participation units in the Association and assignment of this Agreement, which transfer and assignment must be approved by the Board of Directors of the Association as provided in the Bylaws; or (ii) This Agreement shall terminate within one year 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 written 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 sale, liquidation, dissolution or winding up of the Defined Business Unit in accordance with the Bylaws of the Association. 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 other than patronage earned prior to termination. 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 5 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 upon receipt. 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 13. 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 .......................... $ 34,788 Legal fees and expenses ........................ 194,400 Accounting fees and expenses .................. 119,800 Blue Sky fees and expenses ..................... 53,100 Printing and engraving expenses ................ 50,000 Selling expenses, including travel and meetings ............................ 318,300 Miscellaneous .................................. 79,612 ---------- Total ................................ $ 850,000 ========== ITEM 14. 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 the 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 Statutes 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 Statutes, as so amended. A cooperative has other rights, powers or privileges granted by the laws of Minnesota to other corporations, except those that are inconsistent with the express provisions of the Minnesota Cooperative Law. The Minnesota Business Corporation Act provides that a corporation shall provide indemnification to directors and officers if the person has not been indemnified by another organization, acted in good faith, received no improper personal benefit, in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful and reasonably believed that the conduct was in the best interests of the corporation (or in certain circumstances was not opposed to the best interests of the corporation). The Company maintains a standard policy of officers' and directors' liability insurance. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES There have been no sales of unregistered securities within the last three years. 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. 10.14* Employment Agreement between John D. Johnson and Harvest States Cooperatives dated January 23, 1997. 10.15 Lease Agreement between the Port of Houston Authority of Harris County, Texas, and Harvest States Cooperatives, dated October 3, 1995. 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. ---------------------------- * Previously filed. + 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(ii) 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 20% 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 Amendment No. 2 to 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 February 7, 1997. 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 Amendment No. 2 to Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on February 7, 1997. 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 - ------ ----------- ---- 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 10.15 Lease Agreement between the Port of Houston Authority of Harris County, Texas, and Harvest States Cooperatives, dated October 3, 1995. 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). - ------------------------- + 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-4.1 2 RESOLUTIONS OF THE BOARD OF DIRECTORS RESOLUTIONS of the BOARD OF DIRECTORS of HARVEST STATES COOPERATIVES --- CREATING the OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT and EQUITY PARTICIPATION UNITS (PROCESSING AND REFINING) RESOLVED, pursuant to the authority conferred by the Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws of the Association, as follows: Section 1. There is hereby created, as a separate defined business unit of the Association, the Oilseed Processing and Refining Defined Business Unit (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 to carry on the operations of the Processing and Refining Division. Section 2. The Processing and Refining Business Unit shall be created effective at the close of business on May 31, 1997, and on that date there shall be allocated to the Processing and Refining Business Unit the assets and liabilities, including commitments, contingencies and obligations, appropriately belonging to the Processing and Refining Division. The Association shall withdraw sufficient cash from the Processing and Refining Business Unit to bring its net worth to $53,400,000 (representing its equity at May 31, 1996). Section 3. There is hereby created an issue of up to 15,300,000 Equity Participation Units (Processing and Refining) (the "Units") having the rights, preferences and privileges set forth herein to be sold to Defined Members of the Processing and Refining Business Unit at a price of $4.00 per Unit in cash or partially in cash and partially upon conversion of outstanding Capital Equity Certificates. Units may be purchased and held only by Defined Members, who shall be either persons actually engaged in the production of agricultural products or associations of producers of agricultural products. The Association shall be deemed to hold Equity Participation Units equal to the capacity of the Processing and Refining Business Unit not held by Defined Members. Section 4. Prior to the sale of any Unit to any person, such person shall enter into a Member Marketing Agreement in substantially the form of Exhibit 1 hereto, 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 Defined Member. Section 5. With the approval of the Board of Directors, Units may be transferred only to other Members of the Association who enter into a Member Marketing Agreement equal to the number of Units being transferred. No producer may purchase Units representing more than such producer's current anticipated annual production of soybeans. No holder of a Unit may hold fewer than 1,500 Units. No one Defined Member may own more than 1% of the outstanding capacity of the Processing and Refining Business Unit. The officers of the Association are authorized to adopt processes, regulations and forms with respect to the transfer of Units. Section 6. Revenues from the sale of products of the Processing and Refining Business Unit shall be credited to the Processing and Refining Business Unit, and all direct expenses incurred by the Processing and Refining Business Unit shall be charged against the Processing and Refining Business Unit. Corporate, general and administrative expenses of the Association shall be allocated to the Processing and Refining Business Unit in a reasonable manner based on the utilization by the Processing and Refining Business Unit. Intracompany accounts shall be established for the advancements to, and the loan of funds by, the Processing and Refining Business Unit, with interest thereon imputed at prevailing rates. Income taxes shall be allocated to the Processing and Refining Business Unit as if it were a separate taxpayer. The Processing and Refining Business Unit shall perform and be responsible for commitments, contingencies and obligations allocated to the Processing and Refining Business Unit. Section 7. 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 Association as patronage refunds based on the total amount of soybeans processed, giving effect to Units held and Units deemed to be held by the Association. As between holders of the Units, patronage sourced income will be allocated to each Defined Member proportionate to the number of bushels of soybeans delivered pursuant to the Member Marketing Agreement. Defined Members 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. Section 8. With respect to each year, the total net income from the Processing and Refining Business Unit will be withdrawn by the Association from the Processing and Refining Business Unit, except to the extent that patronage dividends are not paid in cash and are retained in the Processing and Refining Business Unit as equity. The Association shall be responsible for the allocation of net income arising from operations of the Processing and Refining Business Unit between Defined Members and the remainder of the Association's operations. Section 9. Upon the acquisition by the Association from a third party of any assets (whether by means of an acquisition of assets or stock, merger, consolidation or otherwise) reasonably related to the Processing and Refining Business Unit, such assets and related liabilities, including commitments, contingencies and obligations, shall be allocated to the Processing and Refining Business Unit and the aggregate cost or fair market value of such assets and liabilities shall be paid by the Processing and Refining 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. Section 10. Upon any sale, transfer, assignment or other disposition by the Association of any or all assets of the Processing and Refining 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 Processing and Refining 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. Section 11. The Board of Directors may from time to time reallocate any asset from the Processing and Refining Business Unit to the Association or any other Business Unit of the Association at fair market value. Such determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant, and any such allocation and determination of fair market value shall be final and binding for all purposes whatsoever. Section 12. The Association shall not enter into any agreement by which the net patronage sourced earnings of the Processing and Refining Business Unit shall be allocated to any person except to a person who owns or is deemed to own Units proportionate to the patronage being so allocated. Section 13. In connection with the merger, consolidation, liquidation or sale of all or substantially all of the assets of the Association as an entirety or upon the sale of all or substantially all of the assets of the Processing and Refining Business Unit, all, but not less than all, Units of the Processing and Refining Business Unit shall be redeemed at their original purchase price of $4.00, provided that the Preferred Capital Certificates or unit retains of the Processing and Refining Business Unit not previously paid are also redeemed in connection therewith; that such payments include any pro rata profit (or loss) associated with disposition of the assets of the Processing and Refining Business Unit as though the assets, subject to the liabilities, of the Processing and Refining Business Unit had been sold in connection with such event at their fair market value; and that provision is made for the allocation of patronage sourced income arising prior to such transaction. Any determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant. For purposes of this Section 13, sale of more than 75% of the assets or earning power will be deemed "all or substantially all" of the assets of the Company or the Processing and Refining Business Unit. Section 14. The Board of Directors is authorized to establish and designate one or more series of Preferred Capital Certificates of the Association that may have a priority in payment over the Units and to fix (and to increase and decrease) the amount, the designations, and the relative powers, rights, preferences and limitations of such series. Section 15. Defined Members who hold Units of the Processing and Refining Business Unit shall have the right to elect a Defined Member Board comprised of between five and ten individuals. The members of the 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 Processing and Refining Business Unit; provided, however, no employee of the Association may serve as a member of the Defined Member Board. The initial Defined Member Board shall consist of five persons designated by the Company's Board of Directors and shall hold such office until the Association's 1997 Annual Meeting and until their successors are duly elected and qualified. Thereafter the Defined Member Board shall be elected by the Defined Members of the Processing and Refining Business Unit on a one Defined Member/one vote basis. The Chairperson shall be selected by and from the Association's Board of Directors. Individuals serving on a Defined Member Board shall serve staggered three-year terms, divided into classes as nearly equal in number as possible. The terms of two members of the Defined Member Board elected at the 1997 Annual Meeting shall expire in 2000, two in 1999 and one in 1998, to be determined by lot. The 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 Association's Board of Directors. Section 16. Holders of Units shall have no voting rights except as Members of the Association and as provided in Sections 15 and 21. Section 17. The Board of Directors from time to time may authorize the sale by the Association of Units deemed owned by the Association for the account of the Association provided that sales shall be at fair market value determined by the Board of Directors taking into account such matters as the Board of Directors and its financial advisers, if any, deem relevant. Section 18. The Association 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 the Processing and Refining Business Unit. Units purchased for the account of the Association shall be deemed outstanding Units of the Processing and Refining Business Unit. Units purchased by the Processing and Refining Business Unit shall be cancelled and shall no longer be deemed outstanding by the Processing and Refining Business Unit. Section 19. 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 Units shall be allocated to the Processing and Refining Business Unit. Section 20. Holders of Units shall have no preemptive rights to subscribe for or purchase additional Units or any other securities issued by the Processing and Refining Business Unit or the Association. Section 21. The operations of the Processing and Refining Business Unit shall be carried out by the Association through the Board of Directors, officers and management of the Association. The capital assets of the Processing and Refining Business Unit may be disposed of in the ordinary course of business and the disposition of any substantial portion of the assets of the Processing and Refining 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 the Processing and Refining Business Unit or to abandon or shut down the operations of the Processing and Refining Business Unit. Abandonment or shutting down the operations of a Business Unit (other than on a temporary basis) will be considered sale of all of the assets of the Business Unit. Abandonment or shutting down the operations of a Business Unit (other than on a temporary basis) will be considered sale of all of the assets of the Business Unit. Section 22. These resolutions may be amended from time to time by the Board of Directors of the Association, except for Sections 6 through 13, which may be amended only with the approval of a majority of Defined Members owning Units not held or deemed held by the Association. EX-4.2 3 RESOLUTIONS OF THE BOARD OF DIRECTORS RESOLUTIONS OF THE BOARD OF DIRECTORS OF HARVEST STATES COOPERATIVES --- CREATING THE WHEAT MILLING DEFINED BUSINESS UNIT AND EQUITY PARTICIPATION UNITS (MILLING) RESOLVED, pursuant to the authority conferred by the Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws of the Association, as follows: Section 1. There is hereby created, as a separate defined business unit of the Association, the Wheat Milling Defined Business Unit (the "Milling Business Unit") for the purpose of purchasing wheat (including durum) and the processing and sale thereof into flour and various byproducts to carry on the operations of the Wheat Milling Division. Section 2. The Milling Business Unit shall be created effective at the close of business on May 31, 1997, and on that date there shall be allocated to the Milling Business Unit the assets and liabilities, including commitments, contingencies and obligations, appropriately belonging to the Wheat Milling Division. The Association shall contribute sufficient cash to the Milling Business Unit to bring its net worth to $66,597,072 (representing its equity of $27,797,072 at May 31, 1996 plus $38,800,000) so that construction of the Pocono facility can be financed from equity capital. Section 3. There is hereby created an issue of up to 26,800,000 Equity Participation Units (Milling) (the "Units") having the rights, preferences and privileges set forth herein to be sold to Defined Members of the Milling Business Unit at a price of $2.00 per Unit in cash or partially in cash and partially upon conversion of outstanding Capital Equity Certificates. Units may be purchased and held only by Defined Members, who shall be either persons actually engaged in the production of agricultural products or associations of producers of agricultural products. The Association shall be deemed to hold Equity Participation Units equal to the capacity of the Milling Business Unit not held by Defined Members. Section 4. Prior to the sale of any Unit to any person, such person shall enter into a Member Marketing Agreement in substantially the form of Exhibit 1 hereto, 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 Defined Member. The delivery right and obligation for the Milling Business Unit will become fully effective for the fiscal year in which the Pocono facility begins operating. Initially and until the Member Marketing Agreement becomes fully effective, it will represent a right and obligation to deliver 78% of the wheat set forth therein. Section 5. With the approval of the Board of Directors, Units may be transferred only to other Members of the Association who enter into a Member Marketing Agreement equal to the number of Units being transferred. No producer may purchase Units representing more than such producer's current anticipated annual production of wheat. No holder of a Unit may hold fewer than 3,000 Units. No one Defined Member may own more than 1% of the outstanding capacity of the Milling Business Unit. The officers of the Association are authorized to adopt processes, regulations and forms with respect to the transfer of Units. Section 6. Revenues from the sale of products of the Milling Business Unit shall be credited to the Milling Business Unit, and all direct expenses incurred by the Milling Business Unit shall be charged against the Milling Business Unit. Corporate, general and administrative expenses of the Association shall be allocated to the Milling Business Unit in a reasonable manner based on the utilization by the Milling Business Unit. Intracompany accounts shall be established for the advancements to, and the loan of funds by, the Milling Business Unit, with interest thereon imputed at prevailing rates. Income taxes shall be allocated to the Milling Business Unit as if it were a separate taxpayer. The Milling Business Unit shall perform and be responsible for commitments, contingencies and obligations allocated to the Milling Business Unit. Section 7. Patronage sourced income from the operations of the Milling Business Unit will be allocated by the Association as patronage refunds based on the total amount of wheat processed, giving effect to Units held and Units deemed to be held by the Association. As between holders of the Units, patronage sourced income will be allocated to each Defined Member proportionate to the number of bushels of wheat delivered pursuant to the Member Marketing Agreement. Defined Members 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. Section 8. With respect to each year, the total net income from the Milling Business Unit will be withdrawn by the Association from the Milling Business Unit, except to the extent that patronage dividends are not paid in cash and are retained in the Milling Business Unit as equity. The Association shall be responsible for the allocation of net income arising from operations of the Milling Business Unit between Defined Members and the remainder of the Association's operations. Section 9. Upon the acquisition by the Association from a third party of any assets (whether by means of an acquisition of assets or stock, merger, consolidation or otherwise) reasonably related to the Milling Business Unit, such assets and related liabilities, including commitments, contingencies and obligations, shall be allocated to the Milling Business Unit and the aggregate cost or fair market value of such assets and liabilities shall be paid by the Milling 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. Section 10. Upon any sale, transfer, assignment or other disposition by the Association of any or all assets of the Milling 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 Milling 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. Section 11. The Board of Directors may from time to time reallocate any asset from the Milling Business Unit to the Association or any other Business Unit of the Association at fair market value. Such determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant, and any such allocation and determination of fair market value shall be final and binding for all purposes whatsoever. Section 12. The Association shall not enter into any agreement by which the net patronage sourced earnings of the Milling Business Unit shall be allocated to any person except to a person who owns or is deemed to own Units proportionate to the patronage being so allocated. Section 13. In connection with the merger, consolidation, liquidation or sale of all or substantially all of the assets of the Association as an entirety or upon the sale of all or substantially all of the assets of the Milling Business Unit, all, but not less than all, Units of the Milling Business Unit shall be redeemed at their original purchase price of $2.00, provided that the Preferred Capital Certificates or unit retains of the Milling Business Unit not previously paid are also redeemed in connection therewith; that such payments include any pro rata profit (or loss) associated with disposition of the assets of the Milling Business Unit as though the assets, subject to the liabilities, of the Milling Business Unit had been sold in connection with such event at their fair market value; and that provision is made for the allocation of patronage sourced income arising prior to such transaction. Any determination of fair market value shall be made by the Board of Directors taking into account such matters as the Board of Directors and its advisers, if any, deem relevant. For purposes of this Section 13, sale of more than 75% of the assets or earning power will be deemed "all or substantially all" of the assets of the Company or the Milling Business Unit. Section 14. The Board of Directors is authorized to establish and designate one or more series of Preferred Capital Certificates of the Association that may have a priority in payment over the Units and to fix (and to increase and decrease) the amount, the designations, and the relative powers, rights, preferences and limitations of such series. Section 15. Defined Members who hold Units of the Milling Business Unit shall have the right to elect a Defined Member Board comprised of between five and ten individuals. The members of the 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 Milling Business Unit; provided, however, no employee of the Association may serve as a member of the Defined Member Board. The initial Defined Member Board shall consist of five persons designated by the Company's Board of Directors and shall hold such office until the Association's 1997 Annual Meeting and until their successors are duly elected and qualified. Thereafter the Defined Member Board shall be elected by the Defined Members of the Milling Business Unit on a one Defined Member/one vote basis. The Chairperson shall be selected by and from the Association's Board of Directors. Individuals serving on a Defined Member Board shall serve staggered three-year terms, divided into classes as nearly equal in number as possible. The terms of two members of the Defined Member Board elected at the 1997 Annual Meeting shall expire in 2000, two in 1999 and one in 1998, to be determined by lot. The 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 Association's Board of Directors. Section 16. Holders of Units shall have no voting rights except as Members of the Association and as provided in Sections 15 and 21. Section 17. The Board of Directors from time to time may authorize the sale by the Association of Units deemed owned by the Association for the account of the Association provided that sales shall be at fair market value determined by the Board of Directors taking into account such matters as the Board of Directors and its financial advisers, if any, deem relevant. Section 18. The Association 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 the Milling Business Unit. Units purchased for the account of the Association shall be deemed outstanding Units of the Milling Business Unit. Units purchased by the Milling Business Unit shall be cancelled and shall no longer be deemed outstanding by the Milling Business Unit. Section 19. 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 Units shall be allocated to the Milling Business Unit. Section 20. Holders of Units shall have no preemptive rights to subscribe for or purchase additional Units or any other securities issued by the Milling Business Unit or the Association. Section 21. The operations of the Milling Business Unit shall be carried out by the Association through the Board of Directors, officers and management of the Association. The capital assets of the Milling Business Unit may be disposed of in the ordinary course of business and the disposition of any substantial portion of the assets of the Milling 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 the Milling Business Unit or to abandon or shut down the operations of the Milling Business Unit. Abandonment or shutting down the operations of a Business Unit (other than on a temporary basis) will be considered sale of all of the assets of the Business Unit. Abandonment or shutting down the operations of a Business Unit (other than on a temporary basis) will be considered sale of all of the assets of the Business Unit. Section 22. These resolutions may be amended from time to time by the Board of Directors of the Association, except for Sections 6 through 13, which may be amended only with the approval of a majority of Defined Members owning Units not held or deemed held by the Association. EX-5.1 4 OPINION RE: LEGALITY Harvest States Cooperatives 1667 North Snelling Avenue St. Paul, MN 55108 Re: Registration Statement on Form S-1 SEC File No. 333-17865 Ladies and Gentlemen: We have acted as counsel to Harvest States Cooperatives, a Minnesota cooperative (the "Company"), in connection with a Registration Statement on Form S-1 (the "Registration Statement") relating to the sale by the Company of up to 26,800,000 Equity Participation Units in its Wheat Milling Defined Business Unit and 15,300,000 Equity Participation Units in its Oilseed Processing and Refining Defined Business Unit (collectively, the "Equity Participation Units"). We have examined such documents and have reviewed such questions of law as we have considered necessary and appropriate for the purposes of our opinions set forth below. In rendering our opinions set forth below, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect to all parties to agreements or instruments relevant hereto other than the Company, that such parties had the requisite power and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. As to questions of fact material to our opinions, we have relied upon certificates of officers of the Company and of public officials. We have also assumed that the Equity Participation Units will be issued and sold as described in the Registration Statement. Based on the foregoing, we are of the opinion that the Equity Participation Units have been duly authorized by all requisite corporate action and, upon issuance and payment therefor as described in the Registration Statement, will be validly issued, fully paid and nonassessable. Our opinions expressed above are limited to the laws of the State of Minnesota. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the heading "Validity of Units" in the Prospectus constituting part of the Registration Statement. Dated: February 7, 1997 Very truly yours, /s/Dorsey & Whitney LLP WBP EX-10.15 5 LEASE AGREEMENT LEASE AGREEMENT THIS LEASE AGREEMENT is entered as of the date set forth on the signature page hereof between the PORT OF HOUSTON AUTHORITY OF HARRIS COUNTY, TEXAS, a body politic and a governmental subdivision of the State of Texas (the "Landlord"), and HARVEST STATES COOPERATIVES (the "Tenant"). Recitals By Minute 11 of its meeting of September 27, 1995, the Port Commission of the Port of Houston Authority, Landlord authorized the execution of this Lease with Tenant for the leasing of approximately 2.8 acres, in Harris County, Texas, more specifically described in Exhibit "A," which Exhibit is incorporated herein and made a part hereof for all purposes. In this regard, Landlord and Tenant are desirous of entering into this Lease to set forth the terms and conditions of the leasing of the Leased Premises by Landlord to Tenant. Agreements NOW, THEREFORE, in consideration of the mutual agreements herein set forth, Landlord and Tenant agree as follows: Article 1. Definitions. As used in this Lease, the following terms (in addition to the terms defined elsewhere herein), and whether singular or plural thereof, shall have the following meanings when used herein with initial capital letters: "Award" shall mean any payment or other compensation received or receivable from or on behalf of any governmental authority or any person or entity vested with the power of eminent domain for or as a consequence of any Taking. "Additional Rent" shall have the meaning ascribed to it in Section 5.02. "Base Rent" shall have the meaning ascribed to it in Section 5.01. "Business Day" shall mean a day other than a Saturday, Sunday or legal holiday recognized in Landlord's Tariffs. "Commencement Date" shall mean October 1, 1995. "Completion Date" shall mean the date that the Project is complete, commissioned and ready for operation in accordance with its specifications or August 31, 1996, which ever date is earlier. "Elevator" shall mean the Houston Public Grain Elevator No. 2 Facility owned by Landlord and located adjacent to the Project. "Excluded Property" shall mean the machinery and equipment described on Exhibit "B-1", including all replacements, enhancements, accessions or substitutives thereof or thereto and all other personal property, office supplies, moveable office furniture and other property constituting trade fixtures not attached to or constituting a part of the Leased Premises. "Force Majeure" shall mean: (a) acts of God, landslides, lightning, earthquakes, hurricanes, tornadoes, blizzards , fires, explosions, floods, acts of a public enemy, wars, blockades, insurrections, riots or civil disturbances; (b) labor disputes, strikes, work slowdowns, or work stoppages (excluding, however, those of Tenant's or Landlord's employees); and (c) any other similar cause or event, provided that the foregoing is beyond the reasonable control of the party claiming Force Majeure. "Grain" shall mean wheat. "Hazardous Materials" shall have the meaning ascribed to it in Section 4.03 hereof. "Impositions" shall mean (a) all real estate, personal property, rental, water, sewer, transit, use, occupancy and other taxes, assessments, charges, excises and levies which are imposed upon or with respect to (i) the Leased Premises or any portion thereof, or the sidewalks, streets or alley ways adjacent thereto, or the ownership, use, occupancy or enjoyment thereof or (ii) this Lease and the Rent payable hereunder; and (b) all charges for any easement, license, permit or agreement maintained for the benefit of the Leased Premises. "Landlord" shall mean the Port of Houston Authority of Harris County, Texas, the body politic and governmental subdivision identified in the opening recital of this Lease, and its successors and assigns and subsequent owners of the Leased Premises. "Landlord's Tariffs" shall mean the rates, rules, regulations, policies and tariffs issued, by Landlord and in effect as of the effective date of this Lease and any amendments, modifications or changes thereto. In the event the Landlord issues new tariff provisions on flour milling, flour milling's related processed products, or the conveyance of such products, other than the conveyance across Landlord's wharves, then the Tenant and the Project shall be exempt from such new tariff provisions during the term of this Lease unless otherwise agreed to in writing by Tenant. "Lease" shall mean this Lease as amended in accordance with Section 22.08. "Leased Premises" shall mean (a) the property leased by Tenant described in Exhibit "A" hereto. "Legal Requirements" shall mean any and all (a) judicial decisions, orders, injunctions, writs, statutes, rulings, rules, regulations, promulgations, directives, permits, certificates or ordinances of any governmental authority in any way applicable to Tenant or the Leased Premises, including zoning, environmental and utility conservation matters, (b) Landlord's Tariffs, (c) insurance requirements and (d) other documents, instruments or agreements (written or oral) relating to the Leased Premises or to which the Leased Premises may be bound or encumbered. "Permitted Use" shall mean Grain milling and the products and the byproducts thereof, and the manufacture of any products using milled products, byproducts and additives, together with all other related business uses. "Project" shall mean the mill, warehouse and other improvements to be constructed by Tenant as further described in Exhibit "B" hereto together with all alterations, improvements and additions to and replacements of such improvements, and shall include the Excluded Property. "Rent" shall mean Base Rent, Additional Rent and all other amounts provided for under this Lease to be paid by Tenant, whether as additional rent or otherwise. "Taking" shall mean the taking, damaging or destroying of all or any portion of the Leased Premises or the Elevator by or on behalf of any governmental authority or any other person or entity pursuant to its power of eminent domain. "Total Taking" shall mean any Taking of all or substantially all of the Leased Premises or the Elevator, or of so much of the Leased Premises or the Elevator that the portion remaining cannot, in Tenant's or Landlord's good faith judgment reasonably exercised, be economically restored. "Partial Taking" shall mean any Taking of less than all of the Leased Premises or the Elevator such that the portion remaining can, in Tenant's or Landlord's good faith judgment reasonably exercised, be economically restored. "Tenant" shall mean the tenant identified in the opening recital of this Lease and its permitted Transferees which succeed to the leasehold estate created hereby. "Tenant Grain" shall mean wheat purchased or owned by or under the control of Tenant for use in the Project and put through the Elevator. "Term" shall mean the effective period of this Lease, as described in Article 3 hereof. "Transfer" shall mean (a) an assignment (direct or indirect, absolute or conditional, by operation of law or otherwise) by Tenant of all or any portion of Tenant's interest in this Lease or the leasehold estate created hereby, (b) a sublease of all or any portion of the Leased Premises or (c) the grant or conveyance by Tenant of any concession or license within the Leased Premises. If Tenant is a corporation then any transfer of this Lease by merger, consolidation or dissolution. "Transferee" shall mean the assignee, sublessee, pledgee, concessionee, licensee or other transferee of all or any portion of Tenant's interest in this Lease, the leasehold estate created hereby or the Leased Premises. Article 2. Leased Premises. Subject to the provisions of this Lease, Landlord hereby leases, demises and lets to Tenant, and Tenant hereby leases from Landlord, the Leased Premises. Article 3. Term. The Term of this Lease shall commence on the Commencement Date and shall (subject to earlier termination as herein provided) continue for a period of thirty (30) years thereafter. Tenant may extend the term of this Lease for four (4) additional terms of five (5) years each (the "Renewal Terms"). Said extension shall be exercised by written notice by Tenant to Landlord no less than six (6) months prior to the end of the term then in effect. Article 4. Use. Section 4.01. Permitted Use: Continuous Operation. (a) Tenant will occupy and use the Leased Premises solely for the Permitted Use and in strict compliance with all Legal Requirements. (b) Tenant shall not cease business operations at the Leased Premises for periods in excess of three (3) consecutive months during any twelve (12) month period during the term of this Lease. The covenants of this Section 4.01(b) are material to this Lease and should Tenant fail to satisfy such covenants, Landlord (as its sole remedy for such failure) shall have the right to terminate this Lease by giving Tenant at least sixty (60) days prior written notice of such termination, in which event Tenant shall pay to Landlord all Rent and other amounts accrued hereunder to the effective date of termination. Section 4.02. Specifically Prohibited Use. Tenant will not (a) use, occupy or permit the use or occupancy of the Leased Premises for any purpose or in any manner which is or may be, directly or indirectly, (i) inconsistent with the requirements of Section 4.01 hereof, (ii) violative of any of the Legal Requirements, (iii) dangerous to life, health, the environment or property, or a public or private nuisance or (iv) disruptive to the activities any other tenant or occupant of property adjacent to the Leased Premises, (b) commit or permit to remain any waste to the Leased Premises or (c) commit, or permit to be committed, any action or circumstance in or about the Leased Premises which, directly or indirectly, would or might justify any insurance carrier in cancelling the insurance policies maintained by Tenant or Landlord on the Leased Premises or the Elevator and improvements thereon. Section 4.03. Environmental Restrictions. Tenant shall not cause or permit any Hazardous Materials to be generated, treated, stored on or about the Leased Premises or transferred to the Leased Premises in contravention of Landlord's Tariffs or any other Legal Requirement. Any use of Hazardous Materials by any person on the Leased Premises shall be in strict conformance with all Legal Requirements and shall not cause the Leased Premises to be subject to remedial obligations to protect health or the environment. The term "Hazardous Materials" shall mean any flammables, explosives, radioactive materials, hazardous waste, toxic substances or related materials, including substances defined as "hazardous substances," "hazardous materials," "toxic substances" or "solid wastes" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sec. 1801, et seq.; the Resources Conservation and Recovery Act, 42 U.S.C. Sec. 6901, et seq.; the Toxic Substance Control Act, as amended, 15 U.S.C. Sec. 2601 et seq.; Landlord's Tariffs; the Texas Solid Waste Disposal Act, Tex. Rev. Civ. Stat. Ann. Art. 4477-7; or any other Legal Requirement. Article 5. Rent. Section 5.01. Base Rent. In consideration of Landlord's leasing the Leased Premises to Tenant, Tenant shall pay to Landlord, commencing as of the Commencement Date, Base Rent of NINETY DOLLARS ($90.00) per acre per month up to the Completion Date. Commencing as of the Completion Date, Tenant shall pay to the Landlord Base Rent of NINE HUNDRED AND NO/100 DOLLARS ($900.00) per acre of Lease Premises for each calendar month during the Term (the "Base Rent"). Landlord and Tenant agree that the Leased Premises consists of approximately plus/minus (3) three acres. The Base Rent shall be adjusted every five (5) years during the Term of this Lease (including Renewal Terms) to equal the usual and ordinary rent per acre per month charged by the Landlord on similar property at the time of such adjustment. The value and the use of the Project and the Excluded Property shall be excluded in determining the Base Rent and the Base Rent shall be based upon the rent charged by Landlord for bare land. Section 5.02. Additional Rent. Tenant shall pay Landlord, as Additional Rent hereunder, any and all rates, charges and amounts called for and provided to be paid to Landlord under Landlord's Tariffs. Section 5.03. Payment of Rent. Except as otherwise expressly provided in this Lease, all Base Rent shall be due and payable in advance monthly installments on the first day of each calendar month during the Term. The Additional Rent shall be due and payable in accordance with Landlord's Tariffs, and all other Rent shall be due and payable ten (10) days after Landlord provides Tenant with a written invoice therefor. Rent shall be paid to Landlord at its address for notice hereunder or to such other person or at such other address in Harris County, Texas, as Landlord may from time to time designate in writing. Rent shall be paid in legal tender of the United States of America (or in legal tender of any other nationality acceptable to Landlord) without notice, demand, abatement, deduction or offset. Section 5.04. Delinquent Payments and Handling Charge. All Rent and other payments required of Tenant hereunder shall bear interest from the date due until the date paid at the rate of interest specified in Section 22.13. In no event, however, shall the charges permitted under Section 5.03, Section 22.13 hereof, or elsewhere in this Lease, to the extent any or all of the same are considered to be interest under applicable law, exceed the maximum rate of interest allowable under applicable law. Section 5.05. Prepaid Rent. Tenant shall provide to Landlord contemporaneously with the execution of this Lease, the sum of NINETY AND NO/100 DOLLARS ($90.00) per acre repre senting (a) the first monthly installment of Base Rent paid in advance, to be applied to the Base Rent for the first month of the Term when due. Landlord may apply any or all of any installment of Rent hereunder towards the payment of any sum or the performance of any obligation which Tenant was obligated, but failed, to pay or perform hereunder. Article 6. Construction, Ownership and Operation of the Project . Section 6.01. The Project . Subject to delays caused by Force Majeure (as specified in Section 22.18 hereof), Tenant shall complete, at its sole cost and expense, the Project . Tenant shall construct the Project in a good and workmanlike manner and in accordance with plans and specifications approved in writing in advance by Landlord and in compliance with any applicable building code and all applicable Legal Requirements. Tenant shall test all fill used in construction of Project for the presence of Hazardous Materials. Tenant shall not use fill that contains Hazardous Materials. Tenant shall provide a copy of all test results to Landlord. Section 6.02 Alterations and Improvements. (a) Tenant shall have the right to make alterations, additions, or improvements to the Leased Premises or the Project, including constructing or improving buildings. Such alterations, additions and improvements shall be done at Tenant's cost and expense and in a good and workmanlike manner. Plans for such alterations, additions and improvements shall be submitted to and approved by Landlord, which approval shall not be unreasonably withheld. Landlord acknowledges and agrees that, subject to a mutual agreement being reached between Landlord and Tenant, Tenant may use the warehouse facilities owned by Landlord adjacent to the Leased Premises. Tenant would intend to construct a conveyor system or pneumatic piping from the Project to such warehouse for transportation of finished product. Landlord agrees to cooperate with Tenant in the location and construction of such system, subject to reaching a mutually satisfactory agreement as set out above. Tenant acknowledges that the warehouse is and will remain a transit shed for water-bourne cargo. Tenant further acknowledges that this Section 6.02 is not to be construed as limiting Landlord's ability to enter into leases or freight handling assignments with third parties with respect to the warehouse or other portion of Landlord's property at the Woodhouse Terminal. (b) Tenant agrees to pay for in advance or to build or otherwise provide, at Tenant's election, any government-required improvements to the Elevator needed to support the Project. Section 6.03. Permits. Tenant shall obtain and maintain in effect at all times during the Term all permits, licenses and consents required or necessary for the construction, installation, maintenance, use and operation of the Project and Tenant's use and occupancy of and operations at the Leased Premises. Section 6.04. Ownership and Removal of the Excluded Property . The Project (excluding the Excluded Property) shall constitute Tenant improvements and shall be the property of Tenant, and provided that the Project (excluding the Excluded Property) shall be surrendered with the Leased Premises as part thereof at the expiration or earlier termination of the Term without any payment, reimbursement or compensation therefor or at Landlord's sole option, be removed from the Leased Premises within 240 days after the expiration or earlier termination of the Term and Tenant shall repair any damages caused by such removal. Tenant shall remove the Excluded Property upon the expiration or earlier termination of the Term and Tenant shall repair all damage to the Leased Premises caused by such removal. If Tenant fails to remove the Excluded Property within 240 days following the expiration or earlier termination of the Term, then, at Landlord's election, (x) Tenant's rights, title and interest in and to such Excluded Property shall be vested in Landlord (without the necessity of executing any conveyance instruments) or (y) Landlord shall be entitled to remove and store such Excluded Property as specified in Article 17 hereof. Section 6.05. Condition of Leased Premises. Tenant acknowledges that Tenant has independently and personally inspected the Leased Premises and that Tenant has entered into this Lease based upon such examination and inspection. Tenant acknowledges that Landlord has provided to it the environmental site assessment referred to in Article 16. Tenant accepts the Leased Premises in its present condition, "AS IS, WITH ALL FAULTS, IF ANY, AND WITHOUT ANY WARRANTY WHATSOEVER, EXPRESS OR IMPLIED," specifically (without limiting the generality of the foregoing) without any warranty of (a) the nature or quality of any construction, structural design or engineering of any improvements currently located at or constituting a portion of the Leased Premises, (b) the quality of the labor and materials included in any such improvements, or (c) soil and environmental conditions existing at the Leased Premises and the suitability of the Leased Premises for any particular purpose or developmental potential. Landlord shall not be required to make any improvements to the Leased Premises or to repair any damages to the Leased Premises. Section 6.06. Repair and Maintenance. (a) Tenant shall maintain the Leased Premises at all times during the Term in a good, clean, and operable condition to the standards prevailing for comparable flour mills in the United States, and will not commit or allow to remain any waste or damage to any portion of the Leased Premises. (b) Landlord shall maintain and keep the Elevator and Landlord's roads leading up to the Project in good, clean, and operable condition to the standards prevailing for export grain elevators in the United States. Section 6.07. Laborers and Mechanics. Tenant shall pay for all labor and services performed for, materials used by or furnished to Tenant, or used by or furnished to any contractor employed by Tenant with respect to the Leased Premises and hold Landlord and the Leased Premises harmless and free from any liens, claims, encumbrances or judgments created or suffered by Tenant. If Tenant elects to post a payment or performance bond or is required to post an improvement bond with a public agency in connection with the above, Tenant agrees to include Landlord as an additional obligee thereunder. Article 7. Landlord's Contribution to Project. Landlord agrees to reimburse Tenant in the manner set out below the costs incurred by Tenant for infrastructure improvements for the benefit of the Project, solely in the manner set out below, up to a maximum of Five Hundred Thousand Dollars ($500,000). Infrastructure improvements shall include the following: (i) road construction and improvement; (ii) construction of utilities to serve the Project (including, without limitation, electrical, sanitary sewer, storm sewer or drainage, water, natural gas) and the purchase of any equipment in connection therewith; (iii) rail or rail-related purchase and construction; and (iv) purchase and construction of a conveyor system between the Elevator and the Project. Landlord shall reimburse Tenant for such amount by crediting to Tenant all of the Base Rent or put-through fees due to Landlord under this Lease until such reimbursement has been paid in full. Landlord shall never be required to pay Tenant any money in fulfillment of its obligation under this section of the Lease, but only to provide credit from revenues due Landlord from Tenant under the Lease. Not withstanding the foregoing, Tenant shall pay all water, gas electricity, telephone, sewage treatment and drainage and any other utilities or similar service charges or fees used in or on the Leased Premises. Tenant shall pay the same promptly as such charges accrue, and agrees to protect, indemnify and hold Landlord harmless from and against any and all liability for any such costs or charges. To the extent Landlord provides any such services to the Leased Premises or pays the cost for any such services, Tenant shall pay to Landlord the cost of such services as Rent hereunder upon receiving an invoice therefor pursuant to Section 5.03 hereof. Article 8. Impositions. During the Term, Tenant shall pay or cause to be paid as and when the same shall become due, all Impositions. Impositions that are payable by Tenant for the tax year in which Commencement Date occurs as well as during the year in which the Term ends shall be apportioned so that Tenant shall pay its proportionate share of the Impositions payable for such periods of time. Where any Imposition that Tenant is obligated to pay may be paid pursuant to law in installments, Tenant may pay such Imposition in installments as and when such installments become due. Tenant shall deliver to Landlord evidence of payment of all Impositions Tenant is obligated to pay hereunder, concurrently with the making of such payment. Tenant shall, within 60 days after payment of any Imposition, deliver to Landlord copies of the receipted bills or other evidence reasonably satisfactory to Landlord showing such payment. Article 9. Transfer by Tenant. Section 9.01. General. Tenant shall not effect or suffer any Transfer without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Any attempted Transfer without such consent shall be void and of no effect. If Tenant desires to effect a Transfer, it shall deliver to Landlord written notice thereof in advance of the date on which Tenant proposes to make the Transfer, together with all of the terms of the proposed Transfer and the identity of the proposed Transferee. Landlord shall have 45 days following receipt of the notice and information within which to notify Tenant in writing whether Landlord elects (a) to refuse to consent to the Transfer and to continue this Lease in full force and effect as to the entire Leased Premises or (b) to permit Tenant to effect the proposed Transfer. If Landlord fails to notify Tenant of its election within said 45 day period, Landlord shall be deemed to have elected option (b). The consent by Landlord to a particular Transfer shall not be deemed a consent to any other Transfer. If a Transfer occurs without the prior written consent of Landlord as provided in this Section 9.01, Landlord may nevertheless collect rent from the Transferee and apply the net amount collected to the Rent payable hereunder, but such collection and application shall not constitute a waiver of the provisions hereof or a release of Tenant from the further performance of its obligations hereunder. Notwithstanding the foregoing, Tenant may, without Landlord's consent, effect or suffer a Transfer to any person or entity in which Tenant maintains at least a 50% interest in the equity or voting rights thereof, provided that in case of such Transfer, Tenant shall not be relieved of its obligations under this Lease. Section 9.02. Conditions. The following conditions shall automatically apply to each Transfer, without the necessity of same being stated in or referred to in Landlord's written consent: (a) Tenant shall execute, have acknowledged and deliver to Landlord, and cause the Transferee to execute, have acknowledged and deliver to Landlord, an instrument in form and substance acceptable to Landlord in which (i) the Transferee adopts this Lease and assumes and agrees to perform, jointly and severally with Tenant, all of the obligations of Tenant hereunder, as to the space transferred to it, (ii) the Transferee grants Landlord an express first and prior contract lien and security interest in its improvements located upon and property brought into the transferred premises to secure its obligations to Landlord hereunder, (iii) Tenant subordinates to Landlord's statutory lien, contract lien and security interest any liens, security interests or other rights which Tenant may claim with respect to any property of the Transferee, (iv) Tenant agrees with Landlord that, if the rent or other consideration due by the Transferee exceeds the Rent for the transferred space, then Tenant shall pay Landlord as Rent hereunder all such excess rent and other consideration immediately upon Tenant's receipt thereof, (v) the Transferee agrees to use and occupy the transferred space solely for the purposes permitted under Article 4 and otherwise in strict accordance with this Lease and (vi) Tenant and acknowledges and agrees in writing that, notwithstanding the Transfer, Tenant remains directly and primarily liable for the performance of all the obligations of Tenant hereunder (including, without limitation, the obligation to pay all Rent), and Landlord shall be permitted to enforce this Lease against Tenant or the Transferee, or either of them, without prior demand upon or proceeding in any way against any other persons, and (b) Tenant shall deliver to Landlord a counterpart of all instruments relative to the Transfer executed by all parties to such transaction (except Landlord). Section 9.03. Liens. Without in any way limiting the generality of the foregoing, Tenant shall not grant, place or suffer, or permit to be granted, placed or suffered, against all or any part of the Leased Premises or Tenant's leasehold estate created hereby, any lien, security interest, pledge, conditional sale contract, claim, charge or encumbrance (whether constitutional, contractual or otherwise) and if any of the aforesaid does arise or is asserted, Tenant will, promptly upon demand by Landlord and at Tenant's expense, cause same to be released. Article 10. Access by Landlord. In accordance with procedures agreed upon in writing between Tenant and Landlord, Landlord, its employees, contractors, agents and representatives, shall have the right (and Landlord, for itself and such persons and firms, hereby reserves the right) to enter the Leased Premises at all hours (a) to inspect the Leased Premises (b) to determine whether Tenant is performing its obligations hereunder and, if it is not, to perform same at Landlord's option and Tenant's expense, or (c) for emergency purposes, provided that Landlord shall not unreasonably or unduly interfere with Tenant's business operations. Article 11. Landlord's Services. Section 11.01. Handling of Tenant Grain. Landlord agrees to unload, store in the Elevator and assist Tenant to transfer to the Project Tenant Grain. Tenant shall be responsible for any overtime charges associated with such transfer. Landlord shall unload Tenant Grain inbound by truck and shall further unload Tenant Grain inbound by vessel if such service is or becomes available from Landlord at a handling fee mutually acceptable to Landlord and Tenant. Tenant agrees to give Landlord at least two (2) Business days advance notice of inbound rail shipments of Tenant Grain and at least ten (10) days advance notice of inbound vessel shipments of Tenant Grain. When inbound vessels of Tenant Grain are loaded for Tenant, Tenant shall thereupon promptly notify Landlord of the vessel's estimated time of arrival at the Elevator. Landlord shall unload Tenant Grain as expeditiously as possible. If as a result of Landlord's failure to unload Tenant Grain from any train in a timely manner (that is, unloading 52 cars per 24 hours after constructive placement of the cars, non-Business Days excluded, provided that Saturdays shall not be excluded if Saturdays are not demurrage free days for the railroad delivering the rails cars and provided further that Tenant shall be responsible for any overtime charges for unloading cars on a Saturday if Tenant has requested that Landlord unload cars on a Saturday), and only when Tenant's space allocation as set forth in Section 11.02(a) and (b) has not been exceeded, if as a result of Landlord's failure to unload cars in a timely manner, Tenant loses rebates or allowances negotiated by Tenant with the rail carrier, or if Tenant is charged any demurrage costs, expenses, or penalties as a result of Landlord's failure to unload a train in a timely manner, then Landlord shall reimburse Tenant as provided below for the amount of such rebates, allowances, demurrage costs, expenses or penalties lost or paid as a direct result of Landlord's failure to unload timely as provided above. Notwithstanding anything else to the contrary in this Section, Landlord's liability to Tenant for failure to unload a train in a timely manner shall not exceed $2,000 per calendar month and further provided that Landlord's liability to Tenant under this Section shall be reduced by any credits or reimbursements Tenant obtains from the rail carrier for that train. Losses and credits shall be documented in writing before the Landlord is liable to pay any money under this section. Landlord agrees that it will unload cars in accordance with its usual and customary practice and that it will not intentionally defer unloading Tenant's cars so as to avoid demurrage liability to a third party. Tenant shall take a sample of Grain from each car carrying inbound Tenant Grain and shall provide grades to the Landlord. Sampling shall be conducted by a third party firm or agency approved by Landlord. To the extent Landlord performs such services, Landlord shall take samples of Grain from each truck carrying inbound Tenant Grain and shall provide grades to Tenant. If Landlord ceases to provide such services, Tenant shall take samples from trucks and provide grades to Landlord. Landlord shall immediately notify Tenant if Landlord believes that Tenant Grain appears off-grade or abnormal in any other respect and immediately stop unloading such grain until Tenant advises otherwise. Section 11.02. Storage; Transfer of Grain. (a) All Tenant Grain stored at the Elevator by Landlord shall be stored on an identity-preserved basis. Landlord agrees to have available for Tenant at all times on an exclusive basis during the Term hereof sufficient space for storage of 550,000 bushels of Tenant Grain. Landlord shall provide a minimum of nine (9) separations. In the event the Tenant is not using space; Landlord may use the empty bins; provided that 550,000 bushels of storage shall be available when needed by Tenant for Tenant Grain. (b) If Tenant requires additional storage space for Tenant Grain at any time during the Term hereof because of expansion of Tenant's milling capacity, Landlord agrees to provide 40,000 bushels of dedicated identity-preserved storage for each addition of 1,000 cwt. per 24 hours of expanded milling capacity, provided that the additional storage capacity shall not exceed 180,000 bushels. Landlord agrees to provide for Tenant Grain one (1) additional separation for each 60,000 bushels of expanded storage capacity dedicated to the Project. (c) Landlord agrees to transfer Tenant Grain from storage to the Project at Tenant's request on Business Days during normal business hours. Tenant will notify Landlord at least 24 hours prior to each required transfer with the quantities and specific storage bins where those quantities are stored. Landlord will transfer Tenant Grain from storage to the Project from those bins specified by Tenant. During the transfer of Tenant Grain, Tenant will work with Landlord to avoid slowing, shutting down or otherwise, negatively affecting Landlord's export grain operations. The Project shall include an automated conveyor system to permit transfer of Tenant Grain from the Elevator to the Project by Tenant, which system is acceptable to Landlord and Tenant. Section 11.03 Overtime. If requested by Tenant, Landlord shall provide the services to Tenant specified in this Article 11 on a non-Business Day; provided that Tenant shall reimburse Landlord for the additional costs and expenses incurred by Landlord as a result thereof. Section 11.04. Outbound Shipments; Access for Truck and Rail Service. Tenant shall be solely responsible for shipment of outbound products, including designation of and contracting with carriers. To the extent within Landlord's control, Landlord shall provide continued uninterrupted access to the Project for truck and rail service for inbound wheat and outbound product necessary for the efficient operation of the Project. Section 11.05. Handling and Storage Restrictions. (a) All shrink in excess of .25% shall be for the account of Landlord and Landlord shall reimburse Tenant for all losses resulting therefrom. Landlord agrees that it shall use the same standard of care when handling and storing Tenant Grain as it uses when Landlord handles other Grain in the Elevator, including, without limitation, periodically monitoring the temperature of and, at Tenant's request, the turning of any stored Tenant Grain at the charge provided in Landlord's Tariff No, 18. (b) Landlord assumes no responsibility and shall have no liability to Tenant hereunder if Tenant Grain is received at the Elevator in condition or of a quality different from the condition or quality which Tenant expects or is entitled to receive. Landlord agrees to give access to Tenant and its agents for the purpose of making reasonable inspection of inbound Tenant Grain shipments. (c) Landlord shall provide daily inventory bin reports based upon inbound Tenant Grain received and Tenant Grain provided to the Project for the previous day. Landlord agrees to give Tenant monthly inventory reports based upon soundings of the Tenant's bins. If Tenant objects to any inventory report made by Landlord and the parties cannot resolve the differences, then the disputed quantities of Tenant 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. Landlord shall provide Tenant with house unload and house transfer weights of all Tenant Grain handled by Landlord for Tenant. All transfers and unload weights will be received in writing within 24 hours. Each car and truck shall be weighed individually. At least once each year during the term of this Lease, Landlord shall conduct a weigh-up of all Tenant Grain owned by the Tenant and stored in the Elevator and shall provide Tenant with a report of the results of such weigh-ups. (d) Tenant shall provide to Landlord the grade, quantity, quality, and car number at least two (2) working days prior to arrival of Tenant's Grain. Section 11.06. Through-Put Fee. (a) Tenant shall pay Landlord a through-put fee (the "Fee") of three cents per bushel for each bushel of Tenant Grain transferred by Landlord from or through the Elevator to the Project, provided that the Fee shall not exceed the through-put fee (if lower) charged by Landlord for Grain of lesser or equal volumes and the Fee shall be reduced to such lesser fee during the time the lesser fee is in effect. In determining the volume of Grain put through the Elevator by the Tenant for the purpose of calculating a reduction in the Fee for Tenant Grain, all Grain put through the Elevator by Tenant (including all of its affiliates, parent and its parent's divisions or subsidiaries) shall be considered. (b) The Fee in effect from time to time shall be increased or decreased every five (5) years during the Term of this Lease (including Renewal Terms) by the increase or decrease in the Consumer Price Index Urban - Houston, Texas, as calculated at the time of such increase or decrease, from the first day of the preceding five-year period until the last day of such period, provided however that the Fee should never be less than zero cents (0(cent)). (c) The Fee shall be computed and invoiced by Landlord to Tenant in arrears. The Fee shall be paid by Tenant within thirty (30) days following receipt of the invoice. Section 11.07. Minimum Bushels. Tenant hereby guarantees Landlord that a minimum of 5,000,000 bushels of Tenant Grain will be through-put the Elevator for the Project annually; provided that such volume requirement shall be phased-in as follows: (a) 70% of such requirement shall be met during the first fourteen (14) months commencing with the Completion Date. (b) 100 % of such requirement shall be met every twelve (12) months thereafter. (c) Tenant shall pay to Landlord the difference between the Fee actually paid during the time period specified in Section 11.07 (a) and (b) above and the Fee that would have been paid during that period had Tenant met its minimum tonnage commitments as set out in this section. Section 11.08. Independent Operations. It is understood and agreed by the parties that Tenant is acting entirely as an independent contractor and not in any respect as an agent, employee, representative, partner or co-venturer with Landlord. As such, Tenant shall, without interference by or on behalf of Landlord, have full authority over the operation of its business on the Leased Premises, including without limitation the authority to establish prices for its goods and services. Article 12. Insurance. Tenant shall obtain and maintain throughout the Term the following policies of insurance: (a) Insurance on the Project and improvements to or constituting a part of the Leased Premises (including boiler and machinery insurance, as applicable) sufficient to provide coverage for the full insurable value thereof; and the policy for such insurance shall have a replacement cost endorsement or similar provision. "Full insurable value" shall mean actual replacement value, and such full insurable value shall be confirmed from time to time (but not more frequently than the dates of renewals of such policy) at the request of Landlord by one of the insurers or (at the option of Landlord) by an insurance appraiser; (b) Commercial general liability, covering claims for personal injury, death and property damage occurring in or about the Leased Premises; such insurance to afford protection to the limits of $1,000,000 combined single limit each occurrence for bodily injury and property damage, subject to a $2,000,000 general aggregate limit; (c) Wharfingers' and Warehousemans' legal liability. (d) Vehicle liability insurance, including coverage for all owned or leased vehicles, such insurance to afford protection to the limits of at least $500,000 combined single limit each accident for bodily injury and property damage; (e) Umbrella liability insurance having limits of not less than $1,000,000 (over and above the limits of liability on the underlying policies specified in clauses (b) and (d) above) with respect to bodily injury or death to any number of persons in any one accident or occurrence; (f) Workers' compensation insurance with limits required by the Workers' Compensation Laws of the State of Texas. The minimum insurance protection amounts set forth in clauses (b), (d), and (e) above shall be increased from time to time upon request by Landlord to an amount which is reasonable at the time. Tenant shall deliver to Landlord, prior to the Commencement Date, certificates of the insurance described in this Article 12, or such other proof of insurance as shall be deemed acceptable by the Authority and shall, at all times during the Term, deliver to Landlord upon request true and correct copies of said insurance policies. The policies of such insurance shall (w) (except for the workers' compensation insurance) name Landlord as an additional insured, (x) provide that it will not be can celled or reduced in coverage without 30 days' prior written notice to Landlord, (y) be primary coverage, so that any insurance coverage obtained by Landlord shall be in excess thereto and (z) permit deductible or self-insured retention limits up to a maximum of $500,000.00. Tenant shall deliver to Landlord certificates of renewal prior to the expiration date of each such policy and copies of new policies prior to terminating any such policies. All policies of insurance required to be obtained and maintained by Tenant shall be subject to the approval of Landlord as to terms, coverage, deductibles and issuer, which approval shall not be unreasonably withheld. Article 13. Tenant Indemnity. Tenant agrees to indemnify and hold Landlord 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 Tenant's acts or omissions as lessee, occupant or operator of or at the Leased Premises. Article 14. Casualty Loss. Section 14.01. Obligation to Restore. (a) If all or any part of the improvements located on (or constituting a part of) the Leased Premises are destroyed or damaged by any casualty during the Term, Tenant shall promptly commence and thereafter prosecute diligently to completion the restoration of the same to the condition in which the destroyed or damaged portion existed prior to the casualty. Tenant will perform such restoration with at least as good workmanship and quality as the improvements being restored, and in compliance with the provisions of Article 6 hereof. Notwithstanding the foregoing provisions of this subparagraph (a) to the contrary, if all of such improvements are wholly destroyed by any casualty, or are so damaged or destroyed that, in Tenant's sole judgment it would be uneconomical to cause the same to be restored (and Tenant shall give written notice of such determination to Landlord within 90 Business Days after the date the casualty occurred), then Tenant shall not be obligated to restore such improvements and this Lease shall terminate as of the date of the casualty or its discovery. (b) If all or any part of the Elevator serving the Project is damaged by any casualty during the Term, Landlord shall promptly commence and thereafter prosecute diligently to completion the restoration of the same to the condition in which the destroyed or damaged portion existed prior to the casualty. Notwithstanding the foregoing provisions of this subparagraph (b) to the contrary, if the Elevator is wholly destroyed by any casualty, or if it is so damaged or destroyed that in Landlord's sole judgment it would be uneconomical to cause the same to be restored (and Landlord shall give written notice of such determination to Tenant within 90 Business Days after the date the casualty occurred or is discovered), the Landlord shall not be obligated to restore the Elevator and this Lease shall terminate as of the date of the casualty or its discovery. (c) If a casualty loss affecting the Leased Premises occurs, all insurance proceeds arising from policies maintained by Tenant for the damages arising from such casualty and which is attributed to the Project (including the Excluded Property) shall be distributed and paid directly to Tenant. Section 14.02. Notice of Damage. Tenant shall immediately notify Landlord of any destruction of or damage to the Leased Premises. Article 15. Condemnation. Section 15.01. Total Taking. If a Total Taking of the Leased Premises or Elevator occurs, then this Lease shall terminate as of the date the condemning authority takes lawful possession of the Leased Premises or Elevator and Tenant shall be entitled to receive and retain the Award for the Taking of the Project (including the Excluded Property) and Landlord shall be entitled to receive and retain the Award for the Taking of the balance of the Leased Premises and for the Elevator. Section 15.02. Partial Taking. If a Partial Taking of the Leased Premises or Elevator occurs and both Land and Tenant desire to continue the Lease, (a) this Lease shall continue in effect as to the portion of the Leased Premises or Elevator not Taken, and (b) Tenant shall promptly commence and thereafter prosecute diligently to completion the restoration of the remainder of the Project located in (or constituting a part of) the Leased Premises to an economically viable unit with at least as good workmanship and quality as existed prior to the Taking. In the event a Partial Taking occurs, either Landlord or Tenant may terminate this Lease by giving 90 Business Days written notice to the other. In the event of a Partial Taking of the Leased Premises, Tenant shall be entitled to receive and retain the Award for the portion of the Project Taken and the Landlord shall be entitled to receive and retain the Award for the balance of the Leased Premises Taken. In addition, upon a Partial Taking, the Base Rent payable during the remainder of the Term (after the condemning authority takes lawful possession of the portion Taken) shall be reduced proportionally giving due regard to the relative value of the portion of the Leased Premises (excluding the Project) Taken as compared to the remainder thereof. Section 15.03. Notice of Proposed Taking. Tenant and Landlord shall immediately notify the other of any Proposed Taking of any portion of the Leased Premises. Section 15.04. Tenant's Option Upon Casualty Loss or Total or Partial Taking. If a casualty loss to or a Total or Partial Taking of the Elevator occurs as described in Sections 14.01 (b), 15.01 or 15.02 and as a result thereof Landlord has determined in its sole judgment that it would be uneconomical to cause the Elevator to be restored, and has notified Tenant of its intention to terminate this Lease as provided in those sections, Tenant shall have the option, at Tenant's sole cost and expense, exercised by written notice to Landlord by Tenant within ninety (90) days after Landlord's written notice to Tenant that it will not restore the elevator and intends to terminate this Lease, to: (a) Restore the Elevator to the extent necessary to continue to serve and operate the Project; or (b) Construct new grain storage, rail unloading facilities and rail on the Project-restoration site shown on Exhibit "A" to this Lease to the extent necessary to continue to operate the Project. If Tenant exercises its option pursuant to this Section 15.04 then: (y) Landlord shall have been deemed to have elected to close the Elevator and the provisions, terms and conditions of Section 22.21 shall apply, including without limitation the terms of Section 22.21(c); and (z) The improvements shall be constructed by Tenant in accordance with Section 6.02. Article 16. Landlord's Representations and Warranties. Landlord has provided Tenant with Phase I, Phase II and Phase III Environmental Site assessments obtained by Landlord from HBJ and Associates. Tenant may perform its own environmental site assessments and install any monitoring wells needed. Should the results of Tenant's environmental site assessment show, in Tenant's sole judgement, that the Leased Premises are not suited for Tenant's purposes, Tenant shall have the right upon written notice to Landlord to cancel this Lease, provided, however, Tenant shall exercise its right to cancel this Lease pursuant to this section no later than February 1, 1996. Article 17.00. Quiet Enjoyment. Tenant, on paying the Rent and all other sums called for herein and performing all of Tenant's other obligations contained herein, shall and may peaceably and quietly have, hold, occupy, use and enjoy the Leased Premises during the Term subject to the provisions of this Lease. Landlord agrees to warrant and forever defend Tenant's right to occupancy of the Leased Premises against the claims of any and all persons whomsoever lawfully claiming the same or any part thereof, by, through or under Landlord (but not otherwise), subject to the provisions of this Lease, all matters of record in the Official Public Records of Real Property of Harris County, Texas, and any unrecorded easements or licenses executed by Landlord to the extent the foregoing are validly existing and applicable to the Leased Premises. Article 18. Default by Tenant. Section 18.01. Events of Default. Each of the following occurrences shall constitute an "Event of Default" by Tenant under this Lease: (a) The failure of Tenant to pay Rent as and when due hereunder and the continuance of such failure for a period of fifteen (15) days after written notice of default is sent by Landlord to Tenant; (b) The failure of Tenant to perform, comply with or observe any other agreement, obligation or undertaking of Tenant, or any other term, condition or provision, in this Lease, and the continuance of such failure for a period of 45 days after written notice from Landlord to Tenant specifying the failure; provided, however that if a failure other than failure to pay Rent cannot reasonably be cured within the 45-day time period, Tenant shall not be in default if Tenant commences to cure within the 45-day period and thereafter pursues curing the failure diligently until completion. (c) The filing of a petition by or against Tenant (the term "Tenant" meaning, for the purpose of this clause (c), shall include any Guarantor) (i) in any bankruptcy or other insolvency proceeding, (ii) seeking any relief under the Code or any similar debtor relief law, (iii) for the appointment of a liquidator or receiver for all or substantially all of Tenant's property or for Tenant's interest in this Lease or (iv) to reorganize or modify Tenant's capital structure; and (d) The admission by Tenant in writing that it cannot meet its obligations as they become due or the making by Tenant of an assignment for the benefit of its creditors. Section 18.02. Remedies of Landlord. Upon any Event of Default, Landlord may, at Landlord's option and in addition to all other rights, remedies and recourse afforded Landlord hereunder or by law or equity, terminate this Lease by the giving of written notice of termination to Tenant, in which event Tenant shall pay to Landlord upon demand the sum of (i) all Rent and other amounts accrued hereunder to the date of termination, (ii) all amounts due under Section 18.03 and (iii) damages in an amount equal to (A) the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value at a discount rate reasonably designated by Landlord minus (B) the then present fair rental value of the Leased Premises for such period. If Tenant cures the Event or Events of Default within 20 days after receipt of the notice of termination, Landlord may rescind such notice by giving a written notice to Tenant. Section 18.03. Payment by Tenant. Upon any Event of Default, Tenant shall also pay to Landlord all costs and expenses incurred by Landlord, including court costs and reasonable attorneys' fees, in (a) retaking or otherwise obtaining possession of the Leased Premises, (b) removing and storing Tenant's or any other occupant's property, (c) repairing, restoring, altering, remodeling or otherwise putting the Leased Premises into its original condition, (d) reletting all or any part of the Leased Premises, (e) paying or performing the underlying obligation which Tenant failed to pay or perform and (f) enforcing any of Landlord's rights, remedies or recourses arising as a consequence of the Event of Default. Section 18.04. Reletting. Upon termination of this Lease, Landlord may, but shall not be obligated to, attempt to relet the Leased Premises. If Landlord does elect to relet, Landlord may relet such portion of the Leased Premises, for such period, to such tenant, and for such use and purpose as Landlord, in the exercise of its sole discretion, may choose. Tenant shall not be entitled to the excess of any rent obtained by reletting over the Rent herein reserved. Section 18.05. Landlord's Right to Pay or Perform. If Tenant fails to perform or observe any of its covenants, agreements, or obligations hereunder for a period of 10 days after notice of such failure is given by Landlord, then in addition to all other rights of Landlord provided herein Landlord shall have the right, but not the obligation, at its sole election (but not as its exclusive remedy), to perform or observe the covenants, agreements, or obligations which are asserted to have not been performed or observed at the expense of Tenant and to recover all costs or expenses incurred in connection therewith as Rent hereunder by delivering an invoice therefor to Tenant pursuant to Section 5.03 hereof. Any performance or observance by Landlord pursuant to this Section 18.05 shall not constitute a waiver of Tenant's failure to perform or observe. Section 18.06. Injunctive Relief; Remedies Cumulative. Landlord may restrain or enjoin any Event of Default or threatened Event of Default by Tenant hereunder without the necessity of proving the inadequacy of any legal remedy or irreparable harm. The rights, remedies and recourses of Landlord for an Event of Default shall be cumulative and no right, remedy or recourse of Landlord, whether exercised by Landlord or not, shall be deemed to be in exclusion of any other. Section 18.07. No Waiver; No Implied Surrender. Provisions of this Lease may not be waived orally or impliedly, but only by the party entitled to the benefit of the provision evidencing the waiver in writing. Thus, neither the acceptance of Rent by Landlord following an Event of Default (whether known to Landlord or not), nor any other custom or practice followed in connection with this Lease, shall constitute a waiver by Landlord of such Event of Default or any other Event of Default. Further, the failure by Landlord to complain of any action or inaction by Tenant, or to assert that any action or inaction by Tenant constitutes (or would constitute, with the giving of notice and the passage of time) an Event of Default, regardless of how long such failure continues, shall not extinguish, waive or in any way diminish the rights, remedies and recourses of Landlord with respect to such action or inaction. No waiver by Landlord of any provision of this Lease or of any breach by Tenant of any obligation of Tenant hereunder shall be deemed to be a waiver of any other provision hereof, or of any subsequent breach by Tenant of the same or any other provision hereof. Landlord's consent to any act by Tenant requiring Landlord's consent shall not be deemed to render unnecessary the obtaining of Landlord's consent to any subsequent act of Tenant. No act or omission by Landlord (other than Landlord's execution of a document acknowledging such surrender) or Landlord's agents, including the delivery of the keys to the Leased Premises, shall constitute an acceptance of a surrender of the Leased Premises. Article 19. Defaults by Landlord. Landlord shall not be in default under this Lease, and Tenant shall not be entitled to exercise any right, remedy or recourse against Landlord or otherwise as a consequence of any alleged default by Landlord under this Lease, unless and until Landlord fails to perform any of its obligations hereunder and said failure continues for a period of 90 days after Tenant gives Landlord written notice thereof specifying, with reasonable particularity, the nature of Landlord's failure; provided, however, that if the failure cannot reasonably be cured within the 90 day time period, Landlord shall not be in default hereunder if Landlord commences to cure the failure within the 90 days and thereafter pursues the curing of same diligently to completion. If Landlord in curing its default hereunder is required to advertise for public bids for the work to complete such cure, then Landlord shall be deemed to have commenced such cure upon commencement of preparation of specifications to be used in advertising such public bids. If Landlord defaults under this Lease and, as a consequence of the default, Tenant recovers a money judgment against Landlord, the judgment, which must be final, shall be satisfied only out of, and Tenant hereby agrees to look solely to, any money due by Tenant to Landlord under this Lease and the interest of Landlord in the Leased Premises as the same may then be encumbered, and Landlord shall not be liable for any deficiency. In no event shall Tenant have the right to levy execution against any property of Landlord other than its interest in the Leased Premises. Tenant's remedies for a default by Landlord hereunder shall be limited to claims for damages, specific performance and injunctive relief; and in no event shall Tenant be entitled to rescind or terminate this lease or Tenant's obligations hereunder as a consequence of such default by Landlord. Landlord shall not be obligated to impose taxes or any special assessments to satisfy its obligations hereunder. Article 20. Right of Reentry. Upon the expiration or termination of the Term, Tenant shall immediately, quietly and peaceably surrender to Landlord possession of the Leased Premises in the condition and state of repair required under Section 6.05 hereof and Tenant shall remove the Removable Property in accordance with Section 6.04 hereof. If Tenant fails to surrender possession as herein required, Landlord may initiate any and all legal action as Landlord may elect to dispossess Tenant and all of its Excluded Property, and all persons or firms claiming by, through or under Tenant and all of their Excluded Property, from the Leased Premises, and may remove from the Leased Premises and store (without any liability for loss, theft, damage or destruction thereto) any such Excluded Property at Tenant's cost and expense. For so long as Tenant remains in possession of the Leased Premises after such expiration, termination or exercise by Landlord of its re-entry right, Tenant shall be deemed to be occupying the Leased Premises as a tenant-at-sufferance, subject to all of the obligations of Tenant under this Lease, except that the daily Base Rent shall be twice the per day Base Rent in effect immediately prior to such expiration, termination or exercise by Landlord. No such holding over shall extend the Term. If Tenant fails to surrender possession of the Leased Premises in the condition herein required, Landlord may, at Tenant's expense, restore the Leased Premises to such condition. Article 21. Conditions Precedent to Tenant's Obligations. The obligations and liabilities of Tenant arising under this Lease are subject to and contingent upon the following: Section 21.01 Tax Abatement. Tenant shall have received the approval of all applicable governmental authorities to tax abatement status for the Project from property taxes levied by county and local taxing authorities, which abatement shall be upon terms and conditions reasonably acceptable to Tenant. Section 21.02. Rail Service Contracts. Tenant shall have obtained rail service contracts to service the Project upon terms and conditions reasonably acceptable to Tenant. Section 21.03. Permits and Approvals. Tenant shall have obtained all federal, state, county and local platting, subdivision, permits and other approvals required for the Project. Section 21.04. Construction Contracts. Tenant shall have executed construction, engineering and equipment supply contracts for construction and operation of the Project upon terms and conditions reasonably acceptable to Tenant. Section 21.05. Utility Service Contracts. Tenant shall have obtained power, water, sewer, natural gas and other service contracts required for operation of the Project upon terms and conditions reasonably acceptable to Tenant. Section 21.06. Environmental Audit; Engineering Tests. Tenant shall have obtained and completed an environmental review and environmental audit of the Leased Premises, along with any other engineering tests, including soil tests, necessary for construction of the Project, the results of which shall be reasonably satisfactory Tenant. The foregoing conditions shall be satisfied, or waived in writing by Tenant in its sole discretion, on or before February 1, 1996, or either party may, upon ten (10) days prior written notice to the other, elect to terminate this Lease. Upon such termination, neither party shall have any further rights or obligations to the other. If Landlord elects to terminate this Lease as provided in the preceding paragraph then, within such ten (10) day notice period, Tenant may waive in writing any conditions remaining unsatisfied, in which event this Lease shall remain in full force and effect. Article 22. Miscellaneous. Section 22.01. Time of Essence. Time is of the essence with respect to each date or time specified in this Lease by which an event is to occur. Section 22.02. Applicable Law. This Lease shall, insofar as relevant, be governed by the Constitution and laws of the State of Texas, and including the Texas Tort Claims Act. Section 22.03. Estoppel Certificates. From time to time at the request of Landlord, Tenant will promptly and without compensation or consideration execute, have acknowledged and deliver a certificate stating (a) the rights (if any) of Tenant to extend the Term or to expand the Leased Premises, (b) the Rent (or any components of the Rent) currently payable hereunder, (c) whether this Lease has been amended in any respect and, if so, submitting copies of or otherwise identifying the amendments, (d) whether, within the knowledge of Tenant after due investigation, there are any existing breaches or defaults by Landlord hereunder and, if so, stating the defaults with reasonable particularity and (e) such other information pertaining to this Lease as Landlord may reasonably request. Section 22.04. Signs. Tenant shall be permitted to install any signs, placards or other advertising or identifying marks upon the Leased Premises or upon the exterior of any improvements to or constituting a part of the Leased Premises provided that such signs have been approved in writing in advance by Landlord, which approval shall not be unreasonably withheld. Tenant agrees to remove promptly (at Tenant's sole cost and expense) upon the expiration or earlier termination of the Term any and all such signs, placards or other advertising or identifying marks. Section 22.05. Relation of the Parties. Nothing in this Lease shall be construed to make the parties partners or joint venturers or to render either party liable for any obligation of the other. Section 22.06. Public Disclosure. Landlord is a governmental authority subject to the requirements of the Texas Open Meetings Act and the Texas Open Records Act (Texas Government Code Chapters 551 and 552), and as such Landlord is required to disclose to the public (upon request) this Lease and certain other information and documents relating to the consummation of the transactions contemplated hereby. In this regard, Tenant agrees that the disclosure of this Lease or any other information or materials related to the consummation of the transactions contemplated hereby to the public by Landlord as required by the Texas Open Meetings Act, Texas Open Records Act, or any other Legal Requirement will not expose Landlord (or any party acting by, through or under Landlord) to any claim, liability or action by Tenant. Section 22.07. Notices. All notices and other communications given pursuant to this Lease shall be in writing and shall either be mailed by first class United States mail, postage prepaid, registered or certified with return receipt requested, and addressed as set forth in this Section or delivered in person to the intended addressee, or sent by prepaid telegram, cable or telex followed by a confirmatory letter. Notice mailed in the aforesaid manner shall become effective three business days after deposit; notice given in any other manner, and any notice given to Landlord, shall be effective only upon receipt by the intended addressee. For the purposes of notice, the address of (a) Landlord shall be: Port of Houston Authority 111 East Loop North Post Office Box 2562 Houston, Texas 77252-2562 Attention: Executive Director and (b) Tenant shall be: Harvest States Cooperatives 1667 Snelling Avenue North Post Office Box 64594 St. Paul, Minnesota 55164-0594 Attention: Mr. Patrick Kluempke Each party shall have the continuing right to change its address for notice hereunder by the giving of 15 days' prior written notice to the other party in accordance with this Section 22.07; provided, however, if Tenant vacates the location that constitutes its address for notice hereunder without changing its address for notice pursuant to this Paragraph 22.07, then Tenant's address for notice shall be deemed to be the Leased Premises. Section 22.08. Entire Agreement, Amendment and Binding Effect. This Lease constitutes the entire agreement between Landlord and Tenant relating to the subject matter hereof and all prior agreements relative hereto which are not contained herein are terminated. This Lease may be amended only by a written document duly executed by Landlord and Tenant, and any alleged amendment which is not so documented shall not be effective as to either party. The provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors and assigns; provided, however, that this Section 22.08 shall not negate, diminish or alter the restrictions on Transfers applicable to Tenant set forth elsewhere in this Lease. Section 22.09. Severability. This Lease is intended to be performed in accordance with and only to the extent permitted by all Legal Requirements. If any provision of this Lease or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, but the extent of the invalidity or unenforceability does not destroy the basis of the bargain between the parties as contained herein, the remainder of this Lease and the application of such provision to other persons or circumstances shall not be affected thereby, but rather shall be enforced to the greatest extent permitted by law. Section 22.10. Construction. Unless the context of this Lease clearly requires otherwise, (a) pronouns, wherever used herein, and of whatever gender, shall include natural persons and corporations and associations of every kind and character; (b) the singular shall include the plural wherever and as often as may be appropriate; (c) the term "includes" or "including" shall mean "including without limitation"; (d) the word "or" has the inclusive meaning represented by the phrase "and/or"; and (e) the words "hereof" or "herein" refer to this entire Lease and not merely the Section or Article number in which such words appear. Article and Section headings in this Lease are for convenience of reference and shall not affect the construction or interpretation of this Lease. Any reference to a particular "Article" or "Section" shall be construed as referring to the indicated article or section of this Lease. Section 22.11. Attorneys' Fees. If either party initiates any litigation against the other relating to this Lease, the party that prevails in such litigation shall be entitled to recover, in addition to all damages allowed by law and other relief, all court costs and reasonable attorneys' fees incurred in connection with such litigation. Section 22.12. Brokers. Tenant hereby warrants and represents unto Landlord that it has not incurred or authorized any brokerage commission, finder's fees or similar payments in connection with this Lease, and agrees to defend, indemnify and hold Landlord harmless from and against any claim for brokerage commission, finder's fees or similar payment arising by virtue of authorization by, through or under Tenant in connection with this Lease. Section 22.13. Interest on Tenant's Obligations. Any amount due from either party to the other which is not paid when due shall bear interest at the maximum rate allowed by law (or, if there is no maximum rate, at twenty percent per annum) from the date such payment is due until paid, but the payment of such interest shall not excuse or cure the default in payment. Section 22.14. Dollars. As used in this Lease, the symbol "$" shall mean United States dollars, the lawful currency of the United States. Section 22.15. Authority. The person executing this Lease on behalf of Tenant personally warrants and represents unto Landlord that (a) Tenant is a duly organized and existing legal entity, in good standing in the State of, and authorized to do business in, Texas, (b) Tenant has full right and authority to execute, deliver and perform this Lease, (c) the person executing this Lease on behalf of Tenant was authorized to do so and (d) upon request of Landlord, such person will deliver to Landlord satisfactory evidence of his or her authority to execute this Lease on behalf of Tenant. Section 22.16. Recording. Landlord agrees that this Lease (including any Exhibit hereto) or any memorandum hereof may be recorded by Tenant. Section 22.17. Incorporation by Reference. Exhibits "A" and "B" and "B-1" hereto are incorporated herein for any and all purposes. Section 22.18. Force Majeure. Landlord and Tenant shall be entitled to rely upon Force Majeure as an excuse for timely performance hereunder only as expressly provided herein and shall not be entitled to rely upon Force Majeure as an excuse for timely performance unless the party seeking to rely on Force Majeure (a) uses its good faith efforts to overcome the effects of the event of Force Majeure, (b) gives written notice to the other party within 5 days after the occurrence of the event describing with reasonable particularity the nature thereof, (c) commences performance of its obligation hereunder immediately upon the cessation of the event and (d) gives written notice to the other party within 5 days after the cessation of the event advising the other party of the date upon which the event ceased to constitute an event of Force Majeure. Section 22.19. Interpretation. Both Landlord and Tenant and their respective legal counsel have reviewed and have participated in the preparation of this Lease. Accordingly, no presumption will apply in favor of either Landlord or Tenant in the interpretation of this Lease or in the resolution of the ambiguity of any provision hereof. Section 22.20. Assignment by Landlord. Landlord shall have the right to assign, in whole or in part, any or all of its rights, titles or interests in and to the Leased Premises or this Lease; provided that, as a condition of such assignment the Assignee shall agree in writing to become bound by the terms and conditions of this Lease. Further, any purchaser acquiring the Elevator shall agree in writing to be bound by the terms and conditions of this Lease as a condition to purchasing the Elevator from the Landlord. Section 22.21 Closure of the Elevator. (a) Closure Period. Upon not less than six (6) months prior written notice to Tenant from Landlord, Landlord may close the Elevator (the period of time during which the elevator is thus closed is referred to herein as a "Closure Period"). The closure date specified in such notice shall be deemed to be the beginning of the relevant Closure Period. During such Closure Period, Landlord's obligations under this Lease for operation and maintenance of the Elevator shall be suspended including specifically those in Articles 6 and 11; Upon not less than thirty (30) calendar days' prior written notice to Tenant from Landlord, Landlord may resume operations at the Elevator and end any then-current Closure Period, provided that: (i) Landlord's obligations pursuant to Article 11 and Section 6.06 (b) hereof shall resume as of the end of the Closure Period. (ii) If the period of notice provided to Tenant by Landlord to end a Closure Period is less than six (6) months, then Landlord shall reimburse Tenant for any out-of-pocket expenses reasonably incurred by Tenant with regard to the winding up of Tenant's operations at the Elevator and transfer of the operations of the Elevator back to Landlord, including without limitation any liabilities pursuant to the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Section 2101 et seq., provided Landlord's liability under this subsection shall never exceed $5,000.00. (iii) Landlord purchases from Tenant all of the capital improvements made by Tenant to the Elevator or the Elevator site during the Closure Period which were reasonably necessary for continued operation of the Project at the net book value of such capital improvements on Tenant's books as of the end of the Closure Period, provided Landlord has prior approval over those capital improvements, which approval shall not be unreasonably withheld. (b) Operation of Elevator During any Closure Period. During any Closure Period, Tenant shall have the right and option, at Tenant's cost and expense, to operate the Elevator for the benefit of the Project, including fulfilling Landlord's obligations for operation of the Elevator under this Lease, including specifically those in Articles 6 and 11. If Tenant operates the Elevator, Tenant shall use the Elevator only to maintain and operate the Project and shall indemnify and defend the Landlord from any loss, claim, damage or injury resulting from Tenant's use. Tenant shall continue to pay Rent during the Closure Period, except for through-put charges due to Landlord under this Lease. (c) Landlord's Sale or Lease of the Elevator. Upon Landlord's sale or lease of the Elevator during the Closure Period, Landlord shall provide written notice ("Landlord's Notice") thereof to Tenant at least thirty (30) days prior to such sale or lease. The Closure Period shall be deemed to end upon such sale or lease of the Elevator by Landlord and all terms and conditions of this Lease shall be in full force and effect, binding upon the purchaser or lessee of the Elevator. If Landlord's Notice is less than six months prior to the effective date of the sale or lease of the Elevator, the terms of Section 22.21(a) (ii) shall apply. Section 22.22. Multiple Counterparts. This Lease may be executed in two or more counterparts, each of which shall be an original, but all of which shall constitute but one instrument. EXECUTED as of October 3, 1995. ATTEST/SEAL: HARVEST STATES COOPERATIVES Nanci L. Lilja By /s/ Patrick Kluempke - ------------------------------- ------------------------------- Assistant Secretary Name Patrick Kluempke ----------------------------- (Type or Print) (Affix Corporate Seal Here) Title Senior Vice President ---------------------------- PORT OF HOUSTON AUTHORITY By /s/ H.T. Kornegay -------------------------------- Executive Director APPROVED AS TO FORM: APPROVED AS TO REAL ESTATE /s/ Martha T. Williams /s/ Brenda McDonald - ------------------------------- ----------------------------------- Counsel Manager EXHIBIT "A" [MAP OMITTED] EXHIBIT "B" This exhibit consists of plans and specifications for construction of a flour mill pursuant to the Lease, which specifications are on file in the office of Tenant and Landlord's Real Estate Manager. EXHIBIT B-1 EXCLUDED PROPERTY MECHANICAL EQUIPMENT: Scourers Rollstands & Hammer Mills Pin Mills Blowers Separators De-stoners /Classifiers Disc Separators Indented Cylinder Machines Tempering Equipment and Electronics Variable Speed Drives Single Speed Drives Magnets and Metal Detection Devices Aspirators Concentrators Wheat Heaters Gravity Tables Paddy Separators Spiral Separators Detachers Sifters (All Types) Purifiers Dusters (All Types) Disrupters Filters (Baghouses) Fans (Hi & Lo Pressure) Bucket Elevators Spouting Electric Motors Camera and Monitors & Related Equipment Line Shafts (Including Bearings, Pulleys and Hangers) Airlocks & Hoppers Feed-in Hoppers and Related Equipment Scales and Scale Feeders Lift Pickups Cyclone Receivers Filter Receives Bin Gates and Related Equipment Surge Hoppers and Feeders Vibro Bin Bottoms and Feeders Product Valves (All Types) Level Sensors, Flow Sensors, Heat Sensors & Motion Sensors Conveyors (All Types) Boiler & Associated Equipment Maint. Shop Equipment Office Equipment and Furniture Packing System Equipment (Packer, Closer, Stitcher, Palletizer, etc.) Entolators (Infestation Destroyer) Water Chlorinating Equipment Ingredient Feeders/Mixers Air Makeup Unit Systems ELECTRICAL: Breakers Starters Enclosures/Panels Power Factor Correction Equipment Relays I.O. Panels P.L.C. Equipment Computers EX-21.1 6 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 Tillamook/GTA Feeds, LLC Oregon 4000 Blimp Boulevard Tillamook, Oregon 97141 EX-23.1 7 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 Registration Statement No. 333-17865 of Harvest States Cooperatives 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, and to the reference to us under the headings "Selected Financial Data" and "Experts" in such prospectus. /s/ Deloitte & Touche LLP Minneapolis, Minnesota February 7, 1997 -----END PRIVACY-ENHANCED MESSAGE-----