-----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, HPcCjXSj2syk6DUmOmYLlEKariquEsTzF6kKXcmf8xe3TymOr1zEHfKsfcI+gEIx 7bjbO0+ZSRnR5pkz6myXsQ== 0000897101-01-500408.txt : 20010704 0000897101-01-500408.hdr.sgml : 20010704 ACCESSION NUMBER: 0000897101-01-500408 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENEX 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: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-17865 FILM NUMBER: 1674876 BUSINESS ADDRESS: STREET 1: 5500 CENEX DRIVE CITY: INVER GROVE HEIGHTS STATE: MN ZIP: 55077 BUSINESS PHONE: 6129469433 MAIL ADDRESS: STREET 1: 5500 CENEX DRIVE CITY: INVER GROVE HEIGHTS STATE: MN ZIP: 55077 FORMER COMPANY: FORMER CONFORMED NAME: HARVEST STATES COOPERATIVES DATE OF NAME CHANGE: 19961212 10-Q 1 cenex012074_10q.txt CENEX HARVEST STATES COOPERATIVES FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q ----------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2001. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______. COMMISSION FILE NUMBER 333-17865 ----------------- CENEX HARVEST STATES COOPERATIVES (Exact name of registrant as specified in its charter) MINNESOTA 41-0251095 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5500 CENEX DRIVE, INVER GROVE HEIGHTS, MN 55077 (651) 451-5151 (Address of principal executive offices (Registrant's telephone number and zip code) including area code) ----------------- Include by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. NONE NONE ---- ---- (Class) (Number of shares outstanding at May 31, 2001) ================================================================================ INDEX PAGE NO. ---- PART I. FINANCIAL INFORMATION CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES Item 1. Financial Statements Consolidated Balance Sheets as of May 31, 2001 (unaudited), August 31, 2000 and May 31, 2000 (unaudited) ......................................... 2 Consolidated Statements of Operations for the three months and nine months ended May 31, 2001 and 2000 (unaudited) ............................ 3 Consolidated Statements of Cash Flows for the three months and nine months ended May 31, 2001 and 2000 (unaudited) ............................ 4 Notes to Consolidated Financial Statements (unaudited) .................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 18 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) Item 1. Financial Statements Balance Sheets as of May 31, 2001 (unaudited), August 31, 2000 and May 31, 2000 (unaudited) .................................................. 19 Statements of Operations for the three months and nine months ended May 31, 2001 and 2000 (unaudited) ......................................... 20 Statements of Cash Flows for the three months and nine months ended May 31, 2001 and 2000 (unaudited) ......................................... 21 Notes to Financial Statements (unaudited) ................................. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................... 23 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) Item 1. Financial Statements Balance Sheets as of May 31, 2001 (unaudited), August 31, 2000 and May 31, 2000 (unaudited) .................................................. 27 Statements of Operations for the three months and nine months ended May 31, 2001 and 2000 (unaudited) ......................................... 28 Statements of Cash Flows for the three months and nine months ended May 31, 2001 and 2000 (unaudited) ......................................... 29 Notes to Financial Statements (unaudited) ................................. 30 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................. 31 PART II. OTHER INFORMATION Items 1 through 3 have been omitted since all items are inapplicable or answers are negative Item 4. Submission of Matters to a Vote of Security Holders ............... 35 Item 5 has been omitted since the answer is negative Item 6. Exhibits and Reports on Form 8-K .................................. 35 SIGNATURE PAGE ............................................................. 36 i PART I. FINANCIAL INFORMATION SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. These factors include those set forth in Exhibit 99, under the caption "Cautionary Statement" to this Quarterly Report on Form 10-Q for the quarter ended May 31, 2001. 1 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS MAY 31, AUGUST 31, MAY 31, 2001 2000 2000 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED) CURRENT ASSETS Cash and cash equivalents .................................. $ 84,114 $ 56,393 $ 42,914 Receivables ................................................ 684,086 834,743 963,705 Inventories ................................................ 495,170 602,385 674,876 Other current assets ....................................... 83,897 37,777 58,620 ---------- ---------- ---------- Total current assets ..................................... 1,347,267 1,531,298 1,740,115 INVESTMENTS ................................................. 461,428 451,211 466,718 PROPERTY, PLANT AND EQUIPMENT ............................... 1,028,481 1,034,768 1,025,730 OTHER ASSETS ................................................ 191,060 155,403 135,023 ---------- ---------- ---------- Total assets ............................................. $3,028,236 $3,172,680 $3,367,586 ========== ========== ========== LIABILITIES AND EQUITIES CURRENT LIABILITIES Notes payable .............................................. $ 255,019 $ 217,926 $ 343,037 Current portion of long-term debt .......................... 26,517 30,173 20,602 Customer credit balances ................................... 44,550 36,779 36,427 Customer advance payments .................................. 58,929 131,935 138,404 Checks and drafts outstanding .............................. 61,058 84,086 58,726 Accounts payable ........................................... 401,854 624,772 758,682 Accrued expenses ........................................... 133,238 147,710 141,092 Patronage dividends and equity retirements payable ......... 59,530 43,694 29,828 ---------- ---------- ---------- Total current liabilities ................................ 1,040,695 1,317,075 1,526,798 LONG-TERM DEBT .............................................. 545,541 480,327 490,359 OTHER LIABILITIES ........................................... 92,481 84,929 79,808 MINORITY INTERESTS IN SUBSIDIARIES .......................... 86,776 125,923 121,851 COMMITMENTS AND CONTINGENCIES EQUITIES .................................................... 1,262,743 1,164,426 1,148,770 ---------- ---------- ---------- Total liabilities and equities ........................... $3,028,236 $3,172,680 $3,367,586 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 2 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- MAY 31, MAY 31, MAY 31, MAY 31, (DOLLARS IN THOUSANDS) 2001 2000 2001 2000 ---------- ---------- ---------- ---------- REVENUES: Net sales ..................................... $1,881,780 $2,288,771 $5,903,801 $6,227,645 Patronage dividends ........................... 4,373 3,495 5,621 5,019 Other revenues ................................ 27,168 34,258 94,519 83,360 ---------- ---------- ---------- ---------- 1,913,321 2,326,524 6,003,941 6,316,024 ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of goods sold ............................ 1,787,884 2,228,180 5,688,252 6,112,181 Marketing, general and administrative ......... 54,324 39,013 135,199 118,857 Interest ...................................... 16,211 16,051 49,283 43,008 Equity income from investments ................ (27,012) (29,848) (13,519) (21,238) Minority interests ............................ 13,311 13,653 25,517 4,487 ---------- ---------- ---------- ---------- 1,844,718 2,267,049 5,884,732 6,257,295 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE ............................. 68,603 59,475 119,209 58,729 Income taxes ................................... 4,313 8,313 (34,338) 2,576 ---------- ---------- ---------- ---------- NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ................... 64,290 51,162 153,547 56,153 Cumulative effect of accounting change, net of income tax benefit ......................... (3,263) ---------- ---------- ---------- ---------- NET INCOME ..................................... $ 64,290 $ 51,162 $ 150,284 $ 56,153 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 3 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- MAY 31, MAY 31, MAY 31, MAY 31, (DOLLARS IN THOUSANDS) 2001 2000 2001 2000 ---------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................ $ 64,290 $ 51,162 $ 150,284 $ 56,153 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of accounting change, net of income tax benefit ..................................... 3,263 Depreciation and amortization ........................... 33,168 22,724 82,795 66,697 Noncash net income from equity investments .............. (27,012) (29,848) (13,519) (21,238) Minority interests ...................................... 13,311 13,653 25,517 4,487 Noncash portion of patronage dividends received ......... (2,962) (2,294) (3,837) (3,368) Loss (gain) on sale of property, plant and equipment .............................................. 817 255 (13,599) (577) Other, net .............................................. 970 (968) 378 Changes in operating assets and liabilities: Receivables ............................................ 47,978 (256,548) 150,657 (354,411) Inventories ............................................ 127,040 (4,327) 52,816 (70,773) Other current assets and other assets .................. 48,311 121,162 (90,184) (28,728) Customer credit balances ............................... (21,298) (18,783) 7,771 (8,543) Customer advance payments .............................. (83,870) (105,509) (73,006) 10,649 Accounts payable and accrued expenses .................. (43,538) 121,506 (237,390) 330,272 Other liabilities ...................................... 2,133 1,442 5,045 (8,365) ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities .......................................... 159,338 (85,405) 45,645 (27,367) ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment .............. (24,669) (61,219) (73,205) (121,763) Proceeds from disposition of property, plant and equipment ................................................ 1,460 3,099 29,181 4,494 Investments ............................................... (1,768) (33,620) (13,372) (35,283) Equity investments redeemed ............................... 12,632 6,903 20,836 17,688 Investments redeemed ...................................... 551 278 1,186 2,519 Changes in notes receivable ............................... (1,251) 457 (1,643) (1,124) Acquisition of intangibles ................................ (9,250) (7,038) (9,250) Distribution to minority owners ........................... (583) (569) (13,108) (5,596) Other investing activities, net ........................... (1,419) (135) 4,190 255 ---------- ---------- ---------- ---------- Net cash used in investing activities ................ (15,047) (94,056) (52,973) (148,060) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in notes payable .................................. (130,899) 117,562 37,093 146,051 Long-term debt borrowings ................................. 55,000 45,000 116,809 45,000 Principal payments on long-term debt ...................... (41,425) (6,487) (55,251) (17,126) Changes in checks and drafts outstanding .................. 16,486 21,376 (23,028) 10,121 Retirements of equities ................................... (6,533) (10,360) (14,444) (23,452) Cash patronage dividends paid ............................. (154) 50 (26,130) (17,920) ---------- ---------- ---------- ---------- Net cash (used in) provided by financing activities .......................................... (107,525) 167,141 35,049 142,674 ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... 36,766 (12,320) 27,721 (32,753) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................................... 47,348 55,234 56,393 75,667 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................. $ 84,114 $ 42,914 $ 84,114 $ 42,914 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 4 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) NOTE 1. ACCOUNTING POLICIES The unaudited consolidated balance sheets as of May 31, 2001 and 2000, and the statements of operations and cash flows for the three months and nine months ended May 31, 2001 and 2000 reflect, in the opinion of management of Cenex Harvest States Cooperatives (the Company), all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim periods. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full year. The consolidated balance sheet data as of August 31, 2000 was derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and all of its' wholly-owned and majority-owned subsidiaries and limited liability companies. The effects of all significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the prior period's financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported net income or equity. These statements should be read in conjunction with the consolidated financial statements and footnotes for the year ended August 31, 2000, included in the Company's Annual Report on Form 10-K previously filed with the Securities and Exchange Commission on November 22, 2000. EQUITIES Effective September 1, 2000, the Company's Board of Directors approved a resolution to compute patronage distributions based on audited earnings for financial statement purposes rather than tax basis earnings. On December 1, 2000, the resolution was ratified by the Company's members and beginning in fiscal year 2001 patronage distributions will be based on audited financial statement earnings. The resolution prompted a change in the tax rate applied to the Company's cumulative temporary differences between earnings for financial statement purposes and tax basis earnings which resulted in an increase in deferred tax assets of approximately $34.2 million. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company adopted SFAS No. 133, as amended, a standard related to the accounting for derivative transactions and hedging activities, effective September 1, 2000. The effect of adoption was a loss of $3.6 million ($3.3 million net of income tax benefit) relating to the Energy segment. All of the Company's derivatives are designated as non-hedge derivatives. The futures, options, and forward contracts utilized by the Company are discussed below. Although the contracts are effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments. The Company, as part of its trading activity, utilizes futures and option contracts offered through regulated commodity exchanges to reduce risk. The Company is exposed to risk of loss in the market value of inventories and fixed or partially fixed purchase and sales contracts. To reduce that risk, the Company generally takes opposite and offsetting positions using future contracts or options. Certain commodities cannot be hedged with future or option contracts because such contracts are not offered for these commodities by regulated commodity exchanges. Inventories and purchase contracts for those commodities are hedged with forward sales contracts to the extent practical so as to arrive at a net commodity position within the formal position limits set by the Company and deemed prudent for each of those commodities. Commodities for which future contracts and options are available are also typically hedged first in this manner, with futures and options used to hedge within position limits that portion not covered by forward contracts. 5 Unrealized gains and losses on futures and options contracts used to hedge grain, oilseed and certain energy inventories, and fixed priced contracts, are recognized as a component of net income for financial reporting. Grain and oilseed inventories and fixed priced contracts are marked to market so that gains and losses on the derivative contracts are offset by gains and losses on inventories and fixed priced contracts during the same accounting period. Energy inventories are valued at the lower of cost or market, and energy fixed price contracts are marked to market through earnings. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" and is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The Company does not believe that adoption of this standard will have a material impact, if any, on its financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101 "Revenue Recognition in Financial Statements". The SAB summarizes certain of the SEC staff's views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements. In June 2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company does not believe that adoption of this SAB will materially impact its financial statements. Emerging Issues Task Force (EITF) Issue 00-10 "Accounting for Shipping and Handling Fees and Costs", is effective for all fiscal years beginning after December 15, 1999. EITF 00-10 states that all amounts billed to a customer in a sale transaction related to shipping and handling represent revenues earned for the goods provided and should be classified as revenue. The Company does not believe that adoption of EITF 00-10 will materially impact the financial statements. NOTE 2. RECEIVABLES
MAY 31, AUGUST 31, MAY 31, 2001 2000 2000 ---------- ---------- ---------- Trade ....................................... $ 682,585 $ 834,349 $ 972,865 Other ....................................... 26,235 23,643 15,002 ---------- ---------- ---------- 708,820 857,992 987,867 Less allowances for doubtful accounts ....... 24,734 23,249 24,162 ---------- ---------- ---------- $ 684,086 $ 834,743 $ 963,705 ========== ========== ==========
NOTE 3. INVENTORIES
MAY 31, AUGUST 31, MAY 31, 2001 2000 2000 ---------- ---------- ---------- Energy ...................................... $ 207,149 $ 286,276 $ 294,622 Grain and oilseed ........................... 176,656 215,570 208,948 Feed and farm supplies ...................... 81,368 63,909 65,447 Processed grain and oilseed ................. 25,929 32,993 21,551 Agronomy .................................... -- -- 80,684 Other ....................................... 4,068 3,637 3,624 ---------- ---------- ---------- $ 495,170 $ 602,385 $ 674,876 ========== ========== ==========
6 NOTE 4. INVESTMENTS The following provides summarized unaudited financial information for Ventura Foods, LLC and Agriliance, LLC for the three-month and nine-month periods as indicated below. VENTURA FOODS, LLC
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- ------------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2001 2000 2001 2000 ------------ ----------- ----------- ----------- Net sales ............ $226,932 $225,769 $686,367 $672,036 Gross profit ......... 44,165 44,018 109,697 106,909 Net income ........... 20,566 22,332 42,980 40,963
Effective January 1, 2000, Cenex Harvest States Cooperatives, Farmland Industries, Inc. and Land O'Lakes, Inc. created Agriliance, a distributor of crop nutrients, crop protection products and other agronomy inputs and services. At formation, Agriliance managed the agronomy marketing operations of Cenex Harvest States Cooperatives, Farmland Industries, Inc. and Land O'Lakes, Inc., with the Company exchanging the right to use its agronomy operations for 26.455% of the results of the jointly managed operations. In March 2000, the Company sold 1.455% of its economic interest in Agriliance, resulting in a gain of $7.4 million. In July 2000, the Company exchanged its ownership in the Cenex/Land O'Lakes Agronomy Company and in Agro Distribution, LLC for a 25% equity interest in Agriliance. The interests of the Company and Farmland Industries, Inc. are held through equal ownership in United Country Brands, LLC, a joint venture holding company, whose sole operations consist of the ownership of a 50% interest in Agriliance. In July 2000, Agriliance secured its own financing, which is without recourse to the Company. Agriliance then purchased the net working capital related to agronomy operations from each of its member owners, consisting primarily of trade accounts receivable and inventories, net of accounts payable. As of July 31, 2000, the Company recorded the results of its 25% ownership in Agriliance on the equity method. AGRILIANCE, LLC
FOR THE THREE FOR THE NINE MONTHS ENDED MONTHS ENDED MAY 31, 2001 MAY 31, 2001 ------------- ------------ Net sales .................................... $1,750,489 $3,079,767 Gross profit ................................. 153,229 262,590 Net income ................................... 53,836 5,069
NOTE 5. LONG-TERM DEBT In January 2001, the Company entered into a note purchase and private shelf agreement with Prudential Insurance Company. The 7.9% long-term note in the amount of $25.0 million will be repaid in equal annual installments of approximately $3.6 million, in the years 2005 through 2011. A subsequent 7.43% note for $55.0 million was issued in March 2001, related to the private shelf facility. The $55.0 million note will be repaid in equal annual installments of approximately $7.9 million, in the years 2005 through 2011. NOTE 6. COMPREHENSIVE INCOME During the three months ended May 31, 2001 and 2000, total comprehensive income amounted to $63.8 million and $51.8 million, respectively. For the nine months ended May 31, 2001 and 2000, total 7 comprehensive income amounted to $152.2 million and $55.7 million, respectively. Accumulated other comprehensive loss on May 31, 2001, August 31, 2000 and May 31, 2000 was $0.5 million, $2.4 million and $1.6 million, respectively. NOTE 7. LOSS ON ASSETS HELD FOR DISPOSAL In May of 2001, management, in efforts to consolidate its manufacturing facilities, approved and committed to a plan to cease operations and to dispose of the assets at its Huron, Ohio mill in the fiscal fourth quarter. These assets are included in the Wheat Milling Defined Business Unit within the Processed Grains and Foods segment. Initial discussions with potential buyers indicate that the carrying amount of the related assets exceed the estimated net realizable value and as such the financial statements reflect a loss on assets held for disposal of $7.5 million primarily related to identifiable intangible assets and goodwill. This charge is reflected as a component of marketing, general and administrative expenses. NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION Additional information concerning supplemental disclosures of cash flow activities for the nine-month period ended May 31, 2001 include a distribution of $54.4 million of inventories to a minority interest. NOTE 9. SEGMENT REPORTING Effective September 1, 2000, the Company's management reorganized the way its businesses are managed and internally reported. A new segment named Country Operations was created. This new segment includes the former Farm Marketing & Supply business previously included in the Grain Marketing and Farm Marketing & Supply segment, and also the Country Services, hedging and insurance services formerly included in Other. With the reorganization there are five business segments. These segments, which are based on products and services, include Agronomy, Energy, Grain Marketing, Country Operations, and Processed Grains and Foods. Reconciling Amounts represent the elimination of intracompany sales between segments. The prior periods segment information has been restated to reflect the change in segments. Intracompany sales from Country Operations to Grain Marketing were $162.6 million and $141.0 million for the three months ended May 31, 2001 and 2000, respectively, and $537.5 million and $486.5 million for the nine months ended May 31, 2001 and 2000, respectively. Intracompany sales from Energy to Country Operations were $16.1 million and $11.7 million for the three months ended May 31, 2001 and 2000, respectively, and $54.2 million and $34.0 million for the nine months ended May 31, 2001 and 2000, respectively. Intracompany sales from Agronomy to Country Operations were $26.1 million and $48.8 million for the three months and for the nine months ended May 31, 2000, respectively. Due to cost allocations and intersegment activity, management does not represent that these segments if operated independently, would report the income before income taxes and other financial information as presented. 8 Segment information for the three months and nine months ended May 31, 2001 and 2000 is as follows:
PROCESSED GRAIN COUNTRY GRAINS AND RECONCILING AGRONOMY ENERGY MARKETING OPERATIONS FOODS OTHER AMOUNTS TOTAL ---------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- FOR THE THREE MONTHS ENDED MAY 31, 2001 Net sales ................. $ 615,658 $ 825,506 $ 461,646 $ 157,629 $ (178,659) $1,881,780 Patronage dividends ....... $ (72) 626 255 3,066 339 $ 159 4,373 Other revenues ............ 313 5,288 19,957 25 1,585 27,168 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (72) 616,597 831,049 484,669 157,993 1,744 (178,659) 1,913,321 Cost of goods sold ........ 534,342 827,786 457,133 147,282 -- (178,659) 1,787,884 Marketing, general and administrative ........... 2,565 13,211 6,076 13,562 18,085 825 54,324 Interest .................. (1,131) 6,215 2,124 4,444 3,369 1,190 16,211 Equity (income) loss from investments ......... (18,070) (515) (594) (296) (10,085) 2,548 (27,012) Minority interests ........ 13,215 96 13,311 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes ............. $ 16,564 $ 50,129 $ (4,343) $ 9,730 $ (658) $ (2,819) $ -- $ 68,603 ========== ========== ========== ========== ========== ========== ========== ========== FOR THE THREE MONTHS ENDED MAY 31, 2000 Net sales ................. $ 349,666 $ 771,332 $ 777,684 $ 438,442 $ 130,450 $ (178,803) $2,288,771 Patronage dividends ....... 20 191 263 2,902 100 $ 19 3,495 Other revenues ............ 8,214 433 2,036 22,297 20 1,258 34,258 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 357,900 771,956 779,983 463,641 130,570 1,277 (178,803) 2,326,524 Cost of goods sold ........ 343,735 732,425 772,320 435,637 122,866 (178,803) 2,228,180 Marketing, general and administrative ........... 3,637 11,397 5,832 12,560 5,051 536 39,013 Interest .................. (1,533) 7,899 2,229 4,768 2,396 292 16,051 Equity income from investments ......... (18,238) (442) (941) (5) (10,222) (29,848) Minority interests ........ 13,620 33 13,653 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes ............. $ 30,299 $ 7,057 $ 543 $ 10,648 $ 10,479 $ 449 $ -- $ 59,475 ========== ========== ========== ========== ========== ========== ========== ==========
9
PROCESSED GRAIN COUNTRY GRAINS AND RECONCILING AGRONOMY ENERGY MARKETING OPERATIONS FOODS OTHER AMOUNTS TOTAL --------- ---------- ---------- ---------- ---------- ---------- ----------- ---------- FOR THE NINE MONTHS ENDED MAY 31, 2001 Net sales .................... $2,185,794 $2,665,893 $1,187,692 $ 456,104 $ (591,682) $5,903,801 Patronage dividends .......... $ 196 666 756 3,412 339 $ 252 5,621 Other revenues ............... 1,731 16,708 67,964 35 8,081 94,519 --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- 196 2,188,191 2,683,357 1,259,068 456,478 8,333 (591,682) 6,003,941 Cost of goods sold ........... 2,004,803 2,666,654 1,182,847 425,630 (591,682) 5,688,252 Marketing, general and administrative .............. 6,281 34,465 16,732 40,093 34,304 3,324 135,199 Interest ..................... (3,713) 20,117 6,449 12,192 10,541 3,697 49,283 Equity loss (income) from investments ................. 259 (859) (3,120) (45) (21,425) 11,671 (13,519) Minority interests ........... 25,301 216 25,517 --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- (Loss) income before income taxes and cumulative effect of accounting change ...................... $ (2,631) $ 104,364 $ (3,358) $ 23,765 $ 7,428 $ (10,359) $ -- $ 119,209 ========= ========== ========== ========== ========== ========= ========== ========== Total identifiable assets .. $ 223,789 $1,194,434 $ 251,774 $ 721,028 $ 410,229 $ 226,982 $ -- $3,028,236 ========= ========== ========== ========== ========== ========= ========== ========== FOR THE NINE MONTHS ENDED MAY 31, 2000 Net sales .................... $ 601,392 $2,105,664 $2,626,375 $1,066,581 $ 396,937 $ (569,304) $6,227,645 Patronage dividends .......... 131 279 810 3,549 100 $ 150 5,019 Other revenues ............... 8,214 1,382 11,550 57,022 155 5,037 83,360 --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- 609,737 2,107,325 2,638,735 1,127,152 397,192 5,187 (569,304) 6,316,024 Cost of goods sold ........... 572,279 2,058,640 2,615,479 1,063,411 371,676 (569,304) 6,112,181 Marketing, general and administrative .............. 13,688 35,312 16,178 36,723 14,269 2,687 118,857 Interest ..................... (1,786) 20,481 6,797 9,306 5,841 2,369 43,008 Equity loss (income) from investments ................. 3,922 (1,018) (6,128) (731) (17,303) 20 (21,238) Minority interests ........... 4,403 84 4,487 --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- Income (loss) before income taxes ................ $ 21,634 $ (10,493) $ 6,409 $ 18,359 $ 22,709 $ 111 $ -- $ 58,729 ========= ========== ========== ========== ========== ========= ========== ========== Total identifiable assets .. $ 465,891 $1,364,749 $ 332,712 $ 701,801 $ 377,846 $ 124,587 $ -- $3,367,586 ========= ========== ========== ========== ========== ========= ========== ==========
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Effective September 1, 2000, the Company's Board of Directors approved a resolution to compute patronage distributions based on audited earnings for financial statement purposes rather than tax basis earnings. On December 1, 2000, the resolution was ratified by the Company's members and beginning in fiscal year 2001 patronage distributions will be based on audited financial statement earnings. The Company adopted SFAS No. 133, as amended, a standard related to the accounting for derivative transactions and hedging activities, effective September 1, 2000. The effect of adoption was a loss of $3.6 million ($3.3 million net of income tax benefit) related to the Energy segment. All of the Company's derivatives are designated as non-hedge derivatives. The Company utilizes futures, options and forward contracts related to grain and certain energy inventories. Although the contracts are effective economic hedges of specified risks, they are not designated as and accounted for as hedging instruments. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MAY 31, 2001 AND 2000 Consolidated net income for the three months ended May 31, 2001 was $64.3 million compared to $51.2 million for the same three-month period in 2000, which represents a $13.1 million (26%) increase. This increase in profitability is primarily attributable to an increase of net income from the Company's Energy segment, which was partially offset by decreases from the Agronomy, Grain Marketing, Country Operations, Processed Grains and Foods and Other segments. Consolidated net sales of $1.9 billion for the three months ended May 31, 2001 decreased $407.0 million (18%) compared to the same three months ended in 2000. Company-wide grain and oilseed net sales of $883.0 million increased $39.3 million (5%) during the three months ended May 31, 2001 compared to the same three months ended in 2000. Sales for the three months ended May 31, 2001 were $825.5 million and $220.1 million from Grain Marketing and Country Operations segments, respectively. Sales for the three months ended May 31, 2000 were $777.7 million and $207.0 million from Grain Marketing and Country Operations segments, respectively. The Company eliminated all intracompany sales from the Country Operations segment to the Grain Marketing segment, of $162.6 million and $141.0 million, for the three months ended May 31, 2001 and 2000, respectively. The net increase in sales was primarily due to an increase in grain volume of 8%, which was partially offset by a decrease of $0.08 per bushel in the average sales price of all grain and oilseed marketed by the Company compared to the same three months ended in 2000. Energy net sales of $599.6 million decreased $160.0 million (21%) during the three months ended May 31, 2001 compared to the same period in 2000. Sales for the three months ended May 31, 2001 and 2000 were $615.7 million and $771.3 million, respectively. The Company eliminated all intracompany sales from the Energy segment to the Country Operations segment of $16.1 million and $11.7 million, respectively. The 21% decrease is primarily attributable to a volume decrease compared to the same three months ended in 2000 due to the dissolution of Cooperative Refining, LLC (CRLLC) effective December 31, 2000. The Company owned 58% of CRLLC through its 75% ownership in National Cooperative Refining Association (NCRA) and therefore consolidated CRLLC business activity up to the time of dissolution. The decrease related to the dissolution was offset by refined fuels rack sales increases of 10% in volume and $0.07 per gallon in the average sales price compared to the same three months ended in 2000. In addition, the average sales price of propane increased by $0.14 per gallon and volume increased by 82% compared to the same three months ended in 2000. The propane volume increases were primarily due to an acquisition in May 2000. The Company did not record Agronomy sales during the three months ended May 31, 2001 compared to net sales of $323.6 million for the same three-month period in 2000. Effective January 1, 2000, the Company exchanged its agronomy operations for an ownership interest in Agriliance, LLC (owned indirectly through United Country Brands, LLC). As of July 31, 2000, the Company recorded the results of its 25% ownership in Agriliance, LLC on the equity method, and as such, income or losses are reflected in equity income or loss from investments. 11 Country Operations farm supply sales of $241.5 million increased by $10.1 million (4%) during the three months ended May 31, 2001 compared to the same three months ended in 2000. This increase is primarily due to average price increases in agronomy and energy products and additional volumes from acquisitions. Processed Grains and Foods sales of $157.6 million increased $27.2 million (21%) during the three months ended May 31, 2001 compared to the same three months ended in 2000. This increase is primarily due to the acquisition of Sparta Foods, Inc. in June 2000 and the assets of Rodriguez Festive Foods, Inc. in February 2001, which increased sales by $17.9 million compared to the same three months ended in 2000. In addition, sales of processed wheat increased by $7.6 million compared to the same three months ended in 2000, primarily due to increased volumes from an acquisition. Sales of processed oilseed increased $1.7 million due to volume and price increases compared to the same three months ended in 2000. Patronage dividends of $4.4 million increased $0.9 million (25%) compared to the same three months ended in 2000. This increase is primarily due to increased patronage dividends from a cooperative bank. Other revenues of $27.2 million decreased $7.1 million (21%) during the three months ended May 31, 2001 compared to the same three months ended in 2000. The most significant change was the cash receipt and gain of $7.4 million from the sale of 1.455% of the Company's economic interest in Agriliance to Land O' Lakes, Inc. (LOL) in March 2000. Cost of goods sold of $1.8 billion decreased $440.3 million (20%) during the three months ended May 31, 2001, compared to the same three months ended in 2000. The decrease was primarily attributable to the impact of recording the Company's share of its agronomy operations on the equity method as previously discussed, which caused a reduction in cost of good sold of $343.7 million compared to the three months ended in 2000. In addition, during the three months ended May 31, 2001 the cost of goods sold of the Energy segment decreased 27%. The energy decrease is primarily due to a decrease in volume from the dissolution of CRLLC, which was partially offset by volume and price increases on refined fuels rack purchases and propane products. The cost of all grains and oilseed procured by the Company through its Grain Marketing and Country Operations segments increased 6% compared to the same three-month period ended in 2000 primarily due to an 8% increase in volume which was partially offset by $0.05 cost per bushel decrease. Country Operations farm supply cost of goods sold increased by 4% during the current three-month period compared to the same three-month period ended in the prior year, primarily due to increased purchases related to cost increases in agronomy and energy products and higher volumes due to acquisitions. Within the Company's Processed Grains and Foods segment cost of goods sold increased by $24.4 million (20%) primarily due to volume increases as a result of acquisitions. Marketing, general and administrative expenses of $54.3 million for the three months ended May 31, 2001 increased by $15.3 million (39%) compared to the same three months ended in 2000. This net increase is primarily due to a loss on assets held for disposal of $7.5 million related to the closing of a wheat mill and $4.4 million of additional expenses in the Processed Grains and Foods segment due to acquisitions compared to the same three months ended in 2000. Interest expense of $16.2 million for the three months ended May 31, 2001 was essentially unchanged compared to the same three months ended in 2000. Equity income from investments of $27.0 million for the three months ended May 31, 2001 decreased by $2.8 million (10%) compared to the same three months ended in 2000. The decrease was primarily attributable to technology equity investment losses of $2.6 million for the three months ended May 31, 2001. Minority interests in operations of $13.3 million for the three months ended May 31, 2001 was essentially unchanged compared to the same three months ended in 2000. Substantially all minority interests is related to NCRA. Income tax expense of $4.3 million for the three months ended May 31, 2001 has an effective tax rate of 27.9% attributable to estimated non-patronage business activities. This amount differs from the 12 federal and state statutory rate of 39.1% due to the non-deductibility of goodwill amortization in prior periods for which tax benefits have now been recognized. For the three months ended May 31, 2000 an income tax expense of $8.3 million was based on an effective tax rate of 38.9% applied to the taxable income attributable to estimated non-patronage business activities. The income tax benefit or expense and net effective tax rate varies from period to period based upon the Company's level of profitability and non-patronage business activity during each of the comparable periods. COMPARISON OF NINE MONTHS ENDED MAY 31, 2001 AND 2000 Consolidated net income for the nine months ended May 31, 2001 was $150.3 million compared to net income of $56.2 million for the same nine-month period in 2000, which represents a $94.1 million increase. The increase in profitability is primarily attributable to an increase in net income from the Company's Energy and Country Operations segments. In addition, a change in the tax rate applied to the Company's cumulative temporary differences between earnings for financial statement purposes and tax basis earnings resulted in an increase in deferred tax assets of approximately $34.2 million during the current nine-month period. The Company's calculation of its patronage distribution using audited earnings for financial statement purposes rather than tax earnings prompted the rate change. These increases were partially offset by decreases in the Agronomy, Grain Marketing, Processed Grains and Foods and Other segments. Consolidated net sales of $5.9 billion for the nine months ended May 31, 2001 decreased $323.8 million (5%) compared to the same nine months ended in 2000. Company-wide grain and oilseed net sales of $2.8 billion increased $53.1 million (2%) during the nine months ended May 31, 2001 compared to the same nine months ended in 2000. Sales for the nine months ended May 31, 2001 were $2,665.9 million and $691.9 million from Grain Marketing and Country Operations segments, respectively. Sales for the nine months ended May 31, 2000 were $2,626.4 million and $627.3 million from Grain Marketing and Country Operations segments, respectively. The Company eliminated all intracompany sales from the Country Operations segment to the Grain Marketing segment, of $537.5 million and $486.5 million, for the nine months ended May 31, 2001 and 2000, respectively. The increase in sales was primarily due to an increase in grain volume of approximately 4%, which was partially offset by a decrease of $0.06 per bushel in the average sales price of all grain and oilseed marketed by the Company compared to the same nine months ended in 2000. Energy net sales of $2.1 billion increased $59.9 million (3%) during the nine months ended May 31, 2001 compared to the same period in 2000. Sales for the nine months ended May 31, 2001 and 2000 were $2,185.8 million and $2,105.7 million, respectively. The Company eliminated all intracompany sales from the Energy segment to the Country Operations segment of $54.2 million and $34.0 million, respectively. This increase was primarily attributable to increases in propane volumes of 48% and the average sales price of $0.27 per gallon compared to the same nine months ended in 2000. These propane increases were primarily due to cold weather in the northern regions of the United States creating a higher demand which affected both volume and the average sales price, in addition to increased volumes due to an acquisition in May 2000. Also, the average rack sales price of refined fuels increased $0.19 per gallon. These increases were partially offset by volume decreases compared to the same nine months ended in 2000 due to the dissolution of CRLLC, as previously discussed. The Company did not record Agronomy sales during the nine months ended May 31, 2001 compared to net sales of $552.6 million for the same nine-month period in 2000. Effective January 1, 2000, the Company exchanged its agronomy operations for an ownership interest in Agriliance, LLC (owned indirectly through United Country Brands, LLC). As of July 31, 2000, the Company recorded the results of its 25% ownership in Agriliance, LLC on the equity method, and as such, income or losses are reflected in equity income or loss from investments. Country Operations farm supply sales of $495.8 million increased by $56.6 million (13%) during the nine months ended May 31, 2001 compared to the same nine months ended in 2000. This increase is primarily due to average sales price increases in agronomy and energy products and additional volumes from acquisitions. 13 Processed Grains and Foods sales of $456.1 million increased $59.2 million (15%) during the nine months ended May 31, 2001 compared to the same nine months ended in 2000. The acquisition of Sparta Foods, Inc. in June 2000 and the assets of Rodriguez Festive Foods, Inc. in February 2001 increased sales by $38.0 million compared to the same nine months ended in 2000. Sales of processed wheat increased by $17.0 million compared to the same nine months ended in 2000, primarily due to increased volumes from an acquisition. Sales of processed oilseed increased by $4.1 million due to volume and average sales price increases compared to the same nine months ended in 2000. Patronage dividends of $5.6 million increased $0.6 million (12%) compared to the same nine months ended in 2000. This increase is primarily due to increased patronage dividends from a cooperative bank. Other revenues of $94.5 million increased $11.2 million (13%) during the nine months ended May 31, 2001 compared to the same nine months ended in 2000. The most significant changes were gains from the sale of feed plants and other assets within the Country Operations segment and increased other revenues within the Grain Marketing segment. Cost of goods sold of $5.7 billion decreased $423.9 million (7%) during the nine months ended May 31, 2001, compared to the same nine months ended in 2000. The decrease was primarily attributable to the impact of recording the Company's share of its agronomy operation on the equity method as previously discussed, which caused a reduction in cost of goods sold of $572.3 million compared to the nine months ended in 2000. In addition, during the nine months ended May 31, 2001 the cost of goods of the Energy segment decreased 3%. The energy decrease is primarily due to a net decrease in volume from the dissolution of CRLLC, which was partially offset by volume and average purchase price increases on refined fuels rack and propane products. The cost of all grains and oilseed procured by the Company through its Grain Marketing and Country Operations segments increased 2% compared to the same nine-month period ended in 2000 due to a 4% increase in volume which was partially offset by $0.05 per bushel decrease. Country Operations farm supply cost of goods sold increased by 13% during the current nine-month period compared to the same nine-month period ended in the prior year, primarily due to purchase price increases in agronomy and energy products and higher volumes due to acquisitions. The Processed Grains and Foods segment cost of goods sold increased $54.0 million (15%) primarily due to increased volumes as the result of acquisitions and increased costs related to oilseed processing and refining. Marketing, general and administrative expenses of $135.2 million for the nine months ended May 31, 2001 increased by $16.3 million (14%) compared to the same nine months ended in 2000. This increase is primarily due to a loss on assets held for disposal of $7.5 million related to the closing of a wheat mill and $10.6 million of additional expenses from Processed Grains and Foods segment acquisitions compared to the same nine months ended in 2000. These increases were partially offset by a decrease in expenses of $7.4 million in the Agronomy segment. The Company currently records its 25% share of Agriliance, LLC, on the equity method as previously discussed. Interest expense of $49.3 million for the nine months ended May 31, 2001 increased by $6.3 million (15%) compared to the same nine months ended in 2000. The average level of short-term borrowings increased by approximately 22% during the nine months ended May 31, 2001 compared to the same period of a year ago. Equity income from investments of $13.5 million for the nine months ended May 31, 2001 decreased by $7.7 million (36%) compared to the same nine months ended in 2000. The decrease was primarily attributable to losses from technology investments of $11.7 million and decreased earnings of $3.0 million from grain marketing investments. These losses were partially offset by an increase in earnings from Processed Grains and Foods segment investments of $4.1 million and decreased losses from the Agronomy segment of $3.7 million. The Company currently records its 25% share of Agriliance, LLC, on the equity method as previously discussed. Minority interests in operations of $25.5 million for the nine months ended May 31, 2001 increased by $21.0 million compared to the same nine months ended in 2000. Substantially all minority interests is related to NCRA. This net change in minority interests during the current year was reflective of more 14 profitable operations within the Company's majority-owned subsidiaries as compared to the same nine months ended in 2000. An income tax benefit of $34.3 million and an income tax expense of $2.6 million were reported for the nine months ended May 31, 2001 and 2000, respectively. The income tax benefit for the nine months ended May 31, 2001 was primary the result of a change in the tax rate applied to the Company's cumulative temporary differences between income for financial statement purposes and income used for tax reporting purposes. The Company's calculation of its patronage distribution using audited earnings for financial statement purposes rather than tax basis earnings prompted the rate change. The income tax expense and benefit and effective tax rate varies from period to period based upon the profitability and non-patronage business activity during each of the comparable periods. A cumulative effect of an accounting change was incurred due to the adoption of SFAS No. 133, as amended, related to the Energy segment. The loss incurred was $3.6 million ($3.3 million net of income tax benefit). LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FROM OPERATIONS Operating activities of the Company provided net cash of $159.3 million and used net cash of $85.4 million for the three months ended May 31, 2001 and 2000, respectively. For the three-month period ended in 2001, net income of $64.3 million, net non-cash expenses of $18.3 million and decreased working capital requirements of $76.7 million provided cash from operating activities. For the three-month period ended May 31, 2000, net income of $51.2 million and net non-cash expenses of $4.5 million were offset by increased working capital requirements of $141.1 million. Operating activities of the Company provided net cash of $45.6 million and used net cash of $27.4 million for the nine months ended May 31, 2001 and 2000, respectively. For the nine-month period ended in 2001, net income of $150.3 million and net non-cash expenses of $79.6 million were partially offset by increased working capital requirements of $184.3 million. For the nine-month period ended May 31, 2000, net income of $56.2 million and net non-cash expenses of approximately $46.3 million were offset by increased working capital requirements of approximately $129.9 million. CASH FLOWS FROM INVESTING Investing activities of the Company used net cash of $15.0 million during the three-month period ended May 31, 2001. Expenditures for the acquisition of property, plant and equipment of $24.7 million, investments of $1.8 million, the changes in notes receivable of $1.3 million, and distributions to minority owners and other investing activities were partially offset by investments redeemed of $13.2 million and proceeds from the disposition of property, plant and equipment of $1.5 million. For the fiscal year ending August 31, 2001, the Company projects that total expenditures for the acquisition of property, plant and equipment will be approximately $104.3 million. Investing activities of the Company used net cash of $94.1 million during the three months ended May 31, 2000. Expenditures for the acquisition of property, plant and equipment of $61.2 million, investments of $33.6 million, acquisition of intangibles of $9.3 million, and distributions to minority owners and other investing activities were partially offset by, investments redeemed of $7.2 million, proceeds from the disposition of property, plant and equipment of $3.1 million and the changes in notes receivable. Investments for the three months ended May 31, 2000 included the purchase of an additional 10% interest in Ventura Foods, LLC for $25.6 million. Acquisition of intangibles for the same three-month period resulted from the purchase of the wholesale propane marketing business of Williams Energy Marketing and Trading Company. Investing activities of the Company used net cash of $53.0 million during the nine-month period ended May 31, 2001. Expenditures for the acquisition of property, plant and equipment of $73.2 million, investments of $13.4 million, acquisition of intangibles of $7.0 million, distributions to minority owners of $13.1 million and the changes in notes receivable, were partially offset by, proceeds from the disposition of property, plant and equipment of $29.2 million, investments redeemed of $22.0 million and other investing activities. 15 Investing activities of the Company used net cash of $148.1 million during the nine months ended May 31, 2000. Expenditures for the acquisition of property, plant and equipment of $121.8 million, investments of $35.3 million, acquisition of intangibles of $9.3 million, distributions to minority owners of $5.6 million and the changes in notes receivable were partially offset by, investments redeemed of $20.2 million, proceeds from the disposition of property, plant and equipment of $4.5 million and other investing activities. CASH FLOWS FROM FINANCING The Company finances its working capital needs through short-term lines of credit with a syndication of banks. In May 2001, the Company renewed and expanded its 364-day credit facility from $500.0 million to $550.0 million committed. In addition to this short-term line of credit, the Company has a 364-day credit facility dedicated to NCRA, with a syndication of banks in the amount of $30.0 million, all of which is committed. On May 31, 2001, August 31, 2000 and May 31, 2000, the Company had total short-term indebtedness on these various facilities and other short-term notes payable totaling $255.0 million, $217.9 million and $343.0 million, respectively. In June 1998, the Company established a five-year revolving credit facility with a syndication of banks, with $200.0 million committed. The Company had an outstanding balance of $45.0 million categorized as long-term debt on May 31, 2001, August 31, 2000 and May 31, 2000. The amount outstanding on August 31, 2000 and May 31, 2000 was drawn during the third quarter of the fiscal year ended August 31, 2000. In January 2001, an additional $35.0 million was drawn and then subsequently repaid in March 2001 with proceeds from a note purchase and private shelf agreement. The Company has financed its long-term capital needs, primarily for the acquisition of property, plant and equipment, with long-term loan agreements through the banks for cooperatives. In June 1998, the Company established a long-term credit agreement through the banks for cooperatives. This facility committed $200.0 million of long-term borrowing capacity to the Company, with repayments through fiscal year 2009. The commitment expired on May 31, 1999. The amount outstanding on this credit facility was $152.5 million on May 31, 2001, $157.4 million on August 31, 2000 and $159.1 million on May 31, 2000, respectively, with zero remaining available. Repayments of approximately $1.6 million and $4.9 million were made on this facility during each of the three months and nine months ended May 31, 2001 and 2000, respectively. Also in June 1998, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $225.0 million. Repayments will be made in equal installments of $37.5 million each in the years 2008 through 2013. In January 2001, the Company entered into a note purchase and private shelf agreement with Prudential Insurance Company. The long-term note in the amount of $25.0 million will be repaid in equal annual installments of approximately $3.6 million, in the years 2005 through 2011. Proceeds from the note were used to repay debt on the 364-day facility. A subsequent note for $55.0 million was issued in March 2001, related to the private shelf facility. The $55.0 million note will be repaid in equal annual installments of approximately $7.9 million, in the years 2005 through 2011. Proceeds from the March note were used to repay debt of $35.0 million on the five-year revolver and $20.0 million on the 364-day facility. On May 31, 2001 the Company had total long-term debt outstanding of $572.1 million, of which approximately $250.1 million was bank financing, $305.0 million was private placement debt and $17.0 million was industrial revenue bonds, capitalized leases and other notes payable. Long-term debt of NCRA represented $38.8 million of the total long-term debt outstanding on May 31, 2001. On August 31, 2000 and May 31, 2000, the Company had long-term debt outstanding of $510.5 million and $511.0 million, respectively. During the three-month periods ended May 31, 2001 and 2000, the Company repaid long-term debt of $41.4 million and $6.5 million, respectively, and had additional long-term borrowings of $55.0 million and $45.0 million, respectively, for the same three-month periods. During the nine-month periods ended May 31, 2001 and 2000, the Company repaid long-term debt of $55.3 million and $17.1 million, respectively, and had additional long-term borrowings of $116.8 million and $45.0 million, respectively, during the same nine-month periods. 16 In accordance with the by-laws 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. Effective September 1, 2000, patronage refunds are calculated based on audited earnings for financial statement purposes rather than based on amounts reportable for federal income tax purposes as had been the Company's practice prior to this date. This change was authorized through a by-law amendment at the Company's annual meeting on December 1, 2000. The patronage earnings from the fiscal year ended August 31, 2000 were distributed in January 2001. The cash portion of this distribution, deemed by the Board of Directors to be 75% for Equity Participation Units and 30% for other patronage earnings was $26.1 million. During the nine-month period ended May 31, 2000, the Company distributed cash patronage of $17.9 million from the patronage earnings of the fiscal year ended August 31, 1999. The current equity redemption policy, as authorized by the Board of Directors, allows for the redemption of capital equity certificates held by inactive direct members and patrons and active members and patrons at age 72 or death that were age 61 or older on June 1, 1998. For active direct members and patrons who were age 60 or younger on June 1, 1998 and member cooperatives, equities will be redeemed annually based on a prorata formula where, the numerator is dollars available for such purpose as determined by the Board of Directors, and the denominator is the sum of the patronage certificates held by such eligible members and patrons. Total redemptions related to the year ended August 31, 2000, to be distributed in the current fiscal year, are expected to be approximately $17.6 million, of which approximately $14.4 million was redeemed during the nine months ended May 31, 2001. During the nine months ended May 31, 2000 the Company redeemed $23.5 million of equity. Redemptions of equity by the Company during the three-month periods ended May 31, 2001 and 2000 were $6.5 million and $10.4 million, respectively. During the year ended May 31, 1997, the Company offered securities in the form of Equity Participation Units (EPUs) in its Wheat Milling and Oilseed Processing and Refining Defined Business Units. These EPUs give the holder the right and obligation to deliver to the Company a stated number of bushels in return for a prorata share of the undiluted grain based patronage earnings of these respective Defined Business Units. The offering resulted in the issuance of such equity with a stated value of $13,870,000 and generated additional capital and cash of $10,837,000, after issuance cost and conversion privileges. Conversion privileges allowed a member to elect to use outstanding patrons' equities for the payment of up to one-sixth the purchase price of the EPUs. The Company's Board of Directors adopted a resolution to issue, at no charge, to each Defined Member of the Oilseed Processing and Refining Defined Business Unit an additional 1/4 Equity Participation Unit (EPU) for each EPU held, due to increased crush volume. At the time of issuance, the Oilseed Processing and Refining EPUs were based on a normal annual crush of 30,500,000 bushels, and since the date of issuance, the actual crush has expanded and is projected to be 38,100,000 bushels in the fiscal year ending August 31, 2001. Holders of the EPUs will not be entitled to payment of dividends by virtue of holding such units. However, holders of the units will be entitled to receive patronage refunds attributable to the patronage-sourced income from operations of the applicable Defined Business Unit on the basis of wheat or soybeans delivered pursuant to the Member Marketing Agreement. The Board of Directors' goal is to distribute patronage refunds attributable to the EPUs in the form of 75% cash and 25% capital equity certificates, and to retire that capital equity certificates on a revolving basis seven years after declaration. However, the decision as to the percentage of cash patronage will be made each fiscal year by the Board of Directors and will depend upon the cash and capital needs of the respective Defined Business Units and is subject to the discretion of the Board of Directors. The redemption policy will also be subject to change at the discretion of the Board of Directors. EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS The Company's management believes that inflation and foreign currency fluctuations have not had a significant effect on its operations. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments 17 of Liabilities" and is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The Company does not believe that adoption of this standard will have a material impact, if any, on its financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". The SAB summarizes certain of the SEC staff's views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements. In June 2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company does not believe that adoption of this SAB will materially impact its financial statements. Emerging Issues Task Force (EITF) Issue 00-10 "Accounting for Shipping and Handling Fees and Costs", is effective for all fiscal years beginning after December 15, 1999. EITF 00-10 states that all amounts billed to a customer in a sale transaction related to shipping and handling represent revenues earned for the goods provided and should be classified as revenue. The Company does not believe that adoption of EITF 00-10 will materially impact its financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Effective September 1, 2000, unrealized gains and losses on futures contracts and options used to hedge certain energy inventories and fixed priced contracts are recognized as a component of net income for financial reporting. The inventories hedged with these derivatives are valued at the lower of cost or market, and the fixed priced contracts are marked to market. The effect of this change was a loss of $3.6 million ($3.3 million net of income tax benefit). There have been no other changes since the Company's fiscal year-end August 31, 2000 that are considered material. 18 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT ITEM 1. FINANCIAL STATEMENTS OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) BALANCE SHEETS
ASSETS MAY 31, AUGUST 31, MAY 31, 2001 2000 2000 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED) CURRENT ASSETS Receivables .................................................. $ 25,409 $ 30,011 $ 28,224 Inventories .................................................. 13,781 25,449 24,764 Other current assets ......................................... 646 18 20 -------- -------- -------- Total current assets ....................................... 39,836 55,478 53,008 PROPERTY, PLANT AND EQUIPMENT ................................. 45,216 40,270 39,750 OTHER ASSETS .................................................. 378 -------- -------- -------- Total assets ............................................... $ 85,430 $ 95,748 $ 92,758 ======== ======== ======== LIABILITIES AND DEFINED BUSINESS UNIT EQUITY CURRENT LIABILITIES Due to Cenex Harvest States Cooperatives ..................... $ 959 $ 15,891 $ 6,673 Accounts payable ............................................. 4,374 9,028 4,862 Accrued expenses ............................................. 7,394 5,976 5,848 -------- -------- -------- Total current liabilities .................................. 12,727 30,895 17,383 COMMITMENTS AND CONTINGENCIES DEFINED BUSINESS UNIT EQUITY .................................. 72,703 64,853 75,375 -------- -------- -------- Total liabilities and Defined Business Unit Equity ......... $ 85,430 $ 95,748 $ 92,758 ======== ======== ========
The accompanying notes are an integral part of the financial statements (unaudited). 19 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED -------------------- ---------------------- MAY 31, MAY 31, MAY 31, MAY 31, (DOLLARS IN THOUSANDS) 2001 2000 2001 2000 -------- -------- -------- -------- REVENUES: Processed oilseed sales ....................... $79,013 $77,319 $244,194 $240,075 Other revenues ................................ 170 232 187 811 ------- ------- -------- -------- 79,183 77,551 244,381 240,886 ------- ------- -------- -------- COSTS AND EXPENSES: Cost of goods sold ............................ 75,244 70,491 231,576 221,912 Marketing, general and administrative ......... 1,626 1,405 4,598 3,943 Interest ...................................... 85 517 ------- ------- -------- -------- 76,955 71,896 236,691 225,855 ------- ------- -------- -------- INCOME BEFORE INCOME TAXES ..................... 2,228 5,655 7,690 15,031 Provision (benefit) for income taxes ........... 495 335 (160) 850 ------- ------- -------- -------- NET INCOME ..................................... $ 1,733 $ 5,320 $ 7,850 $ 14,181 ======= ======= ======== ========
The accompanying notes are an integral part of the financial statements (unaudited). 20 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ---------------------- MAY 31, MAY 31, MAY 31, MAY 31, (DOLLARS IN THOUSANDS) 2001 2000 2001 2000 -------- -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .......................................... $ 1,733 $ 5,320 $ 7,850 $ 14,181 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ...................................... 700 631 2,088 1,876 Loss on sale of property, plant and equipment ..... 35 Changes in operating assets and liabilities: Receivables ...................................... 2,840 (3,590) 4,602 (3,574) Inventories ...................................... 8,101 (7,359) 11,668 (7,680) Other current assets and other assets ............ 3 3 (1,006) (20) Accounts payable and accrued expenses ............ (345) 493 (3,236) 715 -------- -------- --------- -------- Net cash provided by (used in) operating activities .................................... 13,032 (4,502) 21,966 5,533 -------- -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment ........ (3,609) (1,075) (7,034) (2,683) Proceeds from disposition of property, plant and Equipment .......................................... 23 23 -------- -------- --------- -------- Net cash used in investing activities .......... (3,609) (1,052) (7,034) (2,660) -------- -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in due to Cenex Harvest States Cooperatives ....................................... (9,423) 5,554 (14,932) (2,873) -------- -------- --------- -------- Net cash (used in) provided by financing activities .................................... (9,423) 5,554 (14,932) (2,873) -------- -------- --------- -------- NET INCREASE (DECREASE) IN CASH ...................... -- -- -- -- CASH AT BEGINNING OF PERIOD .......................... -- -- -- -- -------- -------- --------- -------- CASH AT END OF PERIOD ................................ $ -- $ -- $ -- $ -- ======== ======== ========= ========
The accompanying notes are an integral part of the financial statements (unaudited). 21 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) NOTE 1. ACCOUNTING POLICIES The unaudited balance sheets as of May 31, 2001 and 2000, and the statements of operations and cash flows for the three months and nine months ended May 31, 2001 and 2000 reflect, in the opinion of management of Cenex Harvest States Cooperatives (the Company), all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim periods. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full year. The balance sheet data as of August 31, 2000 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the financial statements and footnotes included in the Oilseed Processing and Refining Defined Business Unit financial statements for the year ended August 31, 2000, which are included in the Company's Annual Report on Form 10-K previously filed with the Securities and Exchange Commission on November 22, 2000. NOTE 2. RECEIVABLES
MAY 31, AUGUST 31, MAY 31, 2001 2001 2000 --------- ---------- ---------- Trade ....................................... $25,804 $30,406 $ 28,619 Less allowances for doubtful accounts ....... 395 395 395 ------- ------- -------- $25,409 $30,011 $ 28,224 ======= ======= ========
NOTE 3. INVENTORIES
MAY 31, AUGUST 31, MAY 31, 2001 2000 2000 --------- ---------- --------- Processed oilseed products .................. $12,021 $22,075 $18,921 Oilseed ..................................... 1,760 3,374 5,843 ------- ------- ------- $13,781 $25,449 $24,764 ======= ======= =======
22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's Board of Directors adopted a resolution to issue, at no charge, to each Defined Member of the Oilseed Processing and Refining Defined Business Unit an additional 1/4 Equity Participation Unit (EPU) for each EPU held, due to increased crush volume. At the time of issuance, the Oilseed Processing and Refining EPUs were based on a normal annual crush of 30,500,000 bushels, and since the date of issuance, the actual crush has expanded and is projected to be 38,100,000 bushels in the fiscal year ending August 31, 2001. See the Management's Discussion and Analysis for the Company in regard to new accounting pronouncements. RESULTS OF OPERATIONS Effective September 1, 2000, patronage distributions from the Oilseed Processing and Refining Defined Business Unit are calculated on the basis of audited financial statement earnings per bushel. Prior to September 1, 2000, patronage refunds from the Oilseed Processing and Refining Defined Business Unit were calculated on the basis of tax earnings per bushel. The Company believes the calculation below is an important measure of the Defined Business Unit's performance.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- -------------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2001 2000 2001 2000 ----------- ----------- ------------ ------------ (IN THOUSANDS EXCEPT PER BUSHEL INFORMATION) Income before income taxes ..................... $ 2,228 $ 5,655 $ 7,690 $ 15,031 Loss (income) from purchased oil ............... 205 (1,035) (871) (3,851) Non-patronage joint venture .................... -- (1) -- (154) Book to tax differences ........................ -- 24 -- 69 -------- -------- -------- -------- Patronage income from processed soybeans ...................................... $ 2,433 $ 4,643 $ 6,819 $ 11,095 ======== ======== ======== ======== Bushels processed .............................. 9,196 9,819 28,874 29,064 Patronage income per bushel .................... $ 0.265 $ 0.473 $ 0.236 $ 0.382
Certain operating information pertaining to the Oilseed Processing and Refining Defined Business Unit is set forth below, as a percentage of processed oilseed sales, except processing margins which are presented on a per unit basis. Because of the volatility of commodity prices, the Company believes that processing margins are a better measure of the Oilseed Processing and Refining Defined Business Unit's performance than gross margin percentages.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED -------------------------- -------------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2001 2000 2001 2000 ----------- ----------- ------------ ------------ Gross margin ................................... 4.77% 8.83% 5.17% 7.57% Marketing, general and administrative .......... 2.06% 1.82% 1.88% 1.64% Interest ....................................... 0.11% -- 0.21% -- Processing margins: Crushing/bushel ............................... $ 0.15 $ 0.28 $ 0.15 $ 0.20 Refining/pound ................................ $ .0085 $ .0152 $ .0101 $ .0155
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2001 AND 2000 The Oilseed Processing and Refining Defined Business Unit net income of $1.7 million for the three months ended May 31, 2001 represents a $3.6 million decrease (67%) compared to the three-month period ended May 31, 2000. Decreases in refined oil margin of $1.7 million and processed soybean margin of $1.4 million were the main factors in this unfavorable variance in net income for the three-month period ended May 31, 2001, compared to the three-month period ended May 31, 2000. Processed oilseed sales of $79.0 million for the three months ended May 31, 2001 increased by $1.7 million (2%) compared to the three months ended May 31, 2000. Increases in the average sales 23 price for refined oil of $0.01 per pound and refined oil volume of 4% were partially offset by decreases in processed soybean products volume of 5% and average sales price for processed soybeans of $6 per ton during the three-month period compared to the same period of a year ago. Other revenues decreased $62 thousand (27%) during the three months ended May 31, 2001 compared to the three months ended May 31, 2000. During the three months ended May 31, 2000, the Defined Business Unit recognized interest income of $210 thousand and during the three months ended May 31, 2001 the Defined Business Unit received a $166 thousand notice of patronage dividend, accounting for most of this net variance. Cost of goods sold of $75.2 million for the three months ended May 31, 2001 increased $4.8 million (7%) compared to the three months ended May 31, 2000. An increase in the cost of crude soybean oil averaging $0.08 per pound was partially offset by a decrease in cost for soybeans averaging $0.34 per bushel, and volume decreases in crush of 623 thousand bushels and refining of 2.2 million pounds during the three months ended May 31, 2001 compared to the three months ended May 31, 2000. Marketing, general and administrative expenses of $1.6 million for the three months ended May 31, 2001 increased $221 thousand (16%) compared to the three months ended May 31, 2000, and is primarily related to increases in administrative and technology expenses. The Oilseed Processing and Refining Defined Business Unit incurred $85 thousand of interest expense for the three-month period ended May 31, 2001, compared to interest income, included with other revenues, for the same period ended in 2000. This unfavorable variance is primarily attributable to additional average borrowings due to changes in working capital needs during this period in 2001, as compared to the same period in 2000. Income taxes of $495 thousand and $335 thousand for the three-month periods ended May 31, 2001 and May 31, 2000, respectively, is based upon an effective tax rate of 39.1% and 38.9%, respectively, attributable to estimated non-patronage business activities. The income tax benefit or expense and effective tax rate varies from period to period based upon the Defined Business Unit's profitability and non-patronage business activity during each of the comparable periods. COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2001 AND 2000 The Oilseed Processing and Refining Defined Business Unit net income of $7.9 million for the nine months ended May 31, 2001 represents a $6.3 million decrease (45%) compared to the nine-month period ended May 31, 2000. A $2.9 million increase in plant expenses, primarily related to higher energy prices, and lower margins in processing and refining of $2.6 million were the main factors in this unfavorable variance in net income for the nine-month period ended May 31, 2001, compared to the same period ended May 31, 2000. During the nine-month period ending May 31, 2001 there was also a change in the tax rate applied to the Oilseed Processing and Refining Defined Business Unit's cumulative temporary differences between earnings for financial statement purposes and tax basis earnings which resulted in an increase in deferred tax assets of $1.0 million. The Oilseed Processing and Refining Defined Business Unit's calculation of its patronage distribution using audited earnings for financial statement purposes rather than tax basis earnings prompted this rate change. Effective September 1, 2000, the Company's Board of Directors approved a resolution to compute patronage distributions based on audited earnings for financial statement purposes rather than tax basis earnings. The resolution was ratified by the members at the Company's December 2000, annual meeting. Processed oilseed sales of $244.2 million for the nine months ended May 31, 2001 increased by $4.1 million (2%) compared to the nine months ended May 31, 2000. An increase in the average sales price for processed soybeans of $7 per ton and a 2% increase of refined oil volumes were partially offset by $0.004 per pound reduction in the average sales price for refined oil and 1% net volume decrease in processed soybeans during the nine-month period compared to the same period of a year ago. Other revenues decreased $624 thousand during the nine months ended May 31, 2001 compared to the nine months ended May 31, 2000. During the nine months ended May 31, 2000, the Defined Business Unit recognized interest income of $654 thousand, accounting for most of this decrease. Cost of goods sold of $231.6 million for the nine months ended May 31, 2001 increased $9.7 million (4%) compared to the nine months ended May 31, 2000. An increase in crude soybean oil averaging 24 $0.02 per pound, refining net volume increase of 2% (8.7 million pounds) and higher plant expense of $2.9 million were partially offset by a decrease in cost for soybeans averaging $0.10 per bushel and soybean crush net volume decrease of 1% (190 thousand bushels) during the nine months ended May 31, 2001, compared to the nine months ended May 31, 2000. Marketing, general and administrative expenses of $4.6 million for the nine months ended May 31, 2001 increased $655 thousand (17%) compared to the nine months ended May 31, 2000, and is primarily related to increases in administrative and technology expenses. The Oilseed Processing and Refining Defined Business Unit incurred $517 thousand of interest expense for the nine-month period ended May 31, 2001, compared to interest income, included with other revenues, for the same period ended in 2000. This unfavorable variance is primarily attributable to additional average borrowings due to changes in working capital needs during this period in 2001 as compared to the same period in 2000. Income tax benefit of $160 thousand for the nine-month period ended May 31, 2001 was primarily due to a change in the tax rate applied to the Oilseed Processing and Refining Defined Business Unit's cumulative temporary differences between income for financial statement purposes and income used for tax reporting purposes. The Oilseed Processing and Refining Defined Business Unit's calculation of its patronage distribution using audited earnings for financial statement purposes rather than tax basis earnings prompted this rate change. The benefit was partially offset with tax expense for the nine-month period ending May 31, 2001 of $855 thousand, which compares to $850 thousand for the same period in 2000. The effective tax rates exclusive of the tax benefit during the nine-month period ended May 31, 2001 for estimated non-patronage business activities was 39.1% as compared to 38.9% for the nine-month period ended May 31, 2000. The income tax benefit or expense and effective tax rate varies from period to period based upon the Defined Business Unit's profitability and non-patronage business activity during each of the comparable periods. LIQUIDITY AND CAPITAL RESOURCES The Oilseed Processing and Refining Defined Business Unit's cash requirements relate primarily to capital improvements and a need to finance inventories and receivables based on raw material costs and levels. These cash needs are expected to be fulfilled by the Company. CASH FLOWS FROM OPERATIONS Operating activities for the three months ended May 31, 2001 provided net cash of $13.0 million. Net income of $1.7 million, decreased working capital requirements $10.6 million and non-cash expenses of $0.7 million generated this net cash provided by operating activities. For the three-month period ended May 31, 2000, operating activities used net cash of $4.5 million. During that period increased working capital requirements of $10.4 million was partially offset by net income of $5.3 million and non-cash expenses of $0.6 million and resulted in this net cash used in operating activities. Operating activities for the nine months ended May 31, 2001 provided net cash of $22.0 million. Net income of $7.9 million, a decrease in working capital requirements of $12.0 million and non-cash expenses of $2.1 million resulted in this net cash from operating activities. For the nine-month period ended May 31, 2000, operating activities provided net cash of $5.5 million. During that period, net income of $14.2 million and non-cash expenses of $1.9 million were partially offset by an increase in working capital requirements of $10.6 million provided this net cash from operating activities. CASH FLOWS FROM INVESTING During the three-month periods ended May 31, 2001 and 2000, the Oilseed Processing and Refining Defined Business Unit used cash for investing activities of $3.6 million and $1.1 million, respectively, primarily for the acquisition of property, plant and equipment. During the nine-month periods ended May 31, 2001 and 2000, the Oilseed Processing and Refining Defined Business Unit used cash for investing activities of $7.0 million and $2.7 million, respectively, primarily for the acquisition of property, plant and equipment. 25 CASH FLOWS FROM FINANCING The Oilseed Processing and Refining Defined Business Unit's financing activities are coordinated through the Company's cash management department. Cash from the Oilseed Processing and Refining Defined Business Unit's operations is deposited with the Company's cash management department and disbursements are made centrally. As a result, the Oilseed Processing and Refining Defined Business Unit maintains 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 the cash requirements of all other Company operations. Working capital requirements for a Defined Business Unit of the Company are reviewed on a periodic basis, and could potentially be restricted based upon management's evaluation of the prevailing business conditions and availability of funds. The Oilseed Processing and Refining Defined Business Unit had debt outstanding to the Company of $1.0 million on May 31, 2001 compared to $15.9 million on August 31, 2000 and $6.7 million on May 31, 2000. These interest-bearing balances reflect working capital and fixed asset financing requirements at the end of the respective periods. 26 WHEAT MILLING DEFINED BUSINESS UNIT ITEM 1. FINANCIAL STATEMENTS WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) BALANCE SHEETS
ASSETS MAY 31, AUGUST 31, MAY 31, 2001 2000 2000 ------------- ------------ ------------ (DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED) CURRENT ASSETS Receivables .................................................. $ 32,221 $ 33,737 $ 31,631 Inventories .................................................. 21,582 19,537 18,691 Other current assets ......................................... 3,458 83 144 -------- -------- -------- Total current assets ....................................... 57,261 53,357 50,466 PROPERTY, PLANT AND EQUIPMENT ................................. 125,521 128,151 128,745 OTHER ASSETS .................................................. 419 8,348 8,614 -------- -------- -------- Total assets ............................................... $183,201 $189,856 $187,825 ======== ======== ======== LIABILITIES AND DEFINED BUSINESS UNIT EQUITY CURRENT LIABILITIES Due to Cenex Harvest States Cooperatives ..................... $ 75,820 $ 67,956 $ 81,488 Current portion of long-term debt ............................ 7,233 7,410 10,005 Accounts payable ............................................. 4,513 5,201 8,686 Accrued expenses ............................................. 4,061 3,462 4,210 -------- -------- -------- Total current liabilities .................................. 91,627 84,029 104,389 LONG-TERM DEBT ................................................ 35,452 40,100 21,194 COMMITMENTS AND CONTINGENCIES DEFINED BUSINESS UNIT EQUITY .................................. 56,122 65,727 62,242 -------- -------- -------- Total liabilities and Defined Business Unit Equity ......... $183,201 $189,856 $187,825 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 27 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ------------------------- MAY 31, MAY 31, MAY 31, MAY 31, (DOLLARS IN THOUSANDS) 2001 2000 2001 2000 ------------ ------------ ----------- ----------- REVENUES: Processed grain sales ......................... $ 60,719 $ 53,132 $ 173,908 $156,862 --------- --------- --------- -------- COSTS AND EXPENSES: Cost of goods sold ............................ 58,832 52,290 166,793 149,678 Marketing, general and administrative ......... 2,570 2,124 6,995 6,793 Loss on assets held for disposal .............. 7,548 7,548 Interest ...................................... 1,927 1,805 6,022 4,874 --------- --------- --------- -------- 70,877 56,219 187,358 161,345 --------- --------- --------- -------- LOSS BEFORE INCOME TAXES ....................... (10,158) (3,087) (13,450) (4,483) Income tax benefit ............................. (3,020) (255) (3,845) (385) --------- --------- --------- -------- NET LOSS ....................................... $ (7,138) $ (2,832) $ (9,605) $ (4,098) ========= ========= ========= ========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 28 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- --------------------------- MAY 31, MAY 31, MAY 31, MAY 31, (DOLLARS IN THOUSANDS) 2001 2000 2001 2000 ------------ -------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................ $ (7,138) $ (2,832) $ (9,605) $ (4,098) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization ..................... 2,085 1,687 6,077 5,065 Loss on assets held for disposal .................. 7,548 7,548 Loss on sale of property, plant and equipment ..... 36 Changes in operating assets and liabilities: Receivables ...................................... 1,085 5,190 1,516 (671) Inventories ...................................... 1,427 (584) (2,045) (4,352) Other current assets and other assets ............ (3,000) (5) (3,794) 66 Accounts payable and accrued expenses ............ (4,084) (566) (89) 1,218 -------- ---------- -------- --------- Net cash (used in) provided by operating activities .................................... (2,077) 2,890 (356) (2,772) -------- ---------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment ........ (561) (21,305) (2,683) (22,462) -------- ---------- -------- --------- Net cash used in investing activities .......... (561) (21,305) (2,683) (22,462) -------- ---------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in due to Cenex Harvest States Cooperatives ....................................... 4,438 20,854 7,864 32,550 Long-term debt borrowings ........................... 566 Principal payments on long-term debt ................ (1,800) (2,439) (5,391) (7,316) -------- ---------- -------- --------- Net cash provided by financing activities ...... 2,638 18,415 3,039 25,234 -------- ---------- -------- --------- NET INCREASE (DECREASE) IN CASH ...................... -- -- -- -- CASH AT BEGINNING OF PERIOD .......................... -- -- -- -- -------- ---------- -------- --------- CASH AT END OF PERIOD ................................ $ -- $ -- $ -- $ -- ======== ========== ======== =========
The accompanying notes are an integral part of the consolidated financial statements (unaudited). 29 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) NOTE 1. ACCOUNTING POLICIES The unaudited balance sheets as of May 31, 2001 and 2000, and the statements of operations and cash flows for the three months and nine months ended May 31, 2001 and 2000 reflect, in the opinion of management of Cenex Harvest States Cooperatives (the Company), all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim periods. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full year. The balance sheet data as of August 31, 2000 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Certain reclassifications have been made to the prior period's financial statements to conform to the current year presentation. These reclassifications had no effect on the Wheat Milling Defined Business Unit net income or equity. These statements should be read in conjunction with the financial statements and footnotes included in the Wheat Milling Defined Business Unit financial statements for the year ended August 31, 2000, which are included in the Company's Annual Report on Form 10-K previously filed with the Securities and Exchange Commission on November 22, 2000. NOTE 2. RECEIVABLES
MAY 31, AUGUST 31, MAY 31, 2001 2000 2000 --------- ----------- --------- Trade ......................................... $33,175 $34,576 $32,253 Other ......................................... 875 810 626 ------- ------- ------- 34,050 35,386 32,879 Less allowances for doubtful accounts ......... 1,829 1,649 1,248 ------- ------- ------- $32,221 $33,737 $31,631 ======= ======= =======
NOTE 3. INVENTORIES
MAY 31, AUGUST 31, MAY 31, 2001 2000 2000 --------- ----------- --------- Grain ......................................... $10,505 $ 9,610 $15,450 Processed grain products ...................... 10,139 9,288 2,630 Other ......................................... 938 639 611 ------- ------- ------- $21,582 $19,537 $18,691 ======= ======= =======
NOTE 4: LOSS ON ASSETS HELD FOR DISPOSAL In May of 2001, management, in efforts to consolidate its manufacturing facilities, approved and committed to a plan to cease operations and to dispose of the assets at its Huron, Ohio mill in the fiscal fourth quarter. Initial discussions with potential buyers indicate that the carrying amount of the related assets exceed the estimated net realizable value and as such the financial statements reflect a loss on assets held for disposal of $7.5 million, primarily related to identifiable intangible assets and goodwill. 30 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See the Management's Discussion and Analysis for the Company in regard to new accounting pronouncements. RESULTS OF OPERATIONS Effective September 1, 2000, patronage distributions from the Wheat Milling Defined Business Unit are calculated on the basis of audited financial statement earnings per bushel. Prior to September 1, 2000, patronage refunds from the Wheat Milling Defined Business Unit were calculated on the basis of tax earnings per bushel. The Company believes the calculation below is an important measure of the Defined Business Units performance.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ----------------------------- ----------------------------- MAY 31, MAY 31, MAY 31, MAY 31, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- (IN THOUSANDS EXCEPT PER BUSHEL INFORMATION) Loss before income taxes ................... $ (10,158) $ (3,087) $ (13,450) $ (4,483) Book to tax differences .................... -- 102 -- 304 --------- --------- --------- --------- Patronage loss ............................. $ (10,158) $ (2,985) $ (13,450) $ (4,179) ========= ========= ========= ========= Bushels processed .......................... 11,674 10,957 34,808 31,785 Patronage loss per bushel .................. $ (0.870) $ (0.272) $ (0.386) $ (0.131)
Certain operating information pertaining to the Wheat Milling Defined Business Unit is set forth below, as a percentage of sales.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED MAY 31, MAY 31, MAY 31, MAY 31, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Gross margin ............................... 3.11% 1.58% 4.09% 4.58% Marketing, general and administrative ...... 4.23% 4.00% 4.02% 4.33% Interest ................................... 3.17% 3.40% 3.46% 3.11%
COMPARISON OF THREE MONTHS ENDED MAY 31, 2001 AND 2000 The Wheat Milling Defined Business Unit incurred a net loss of $7.1 million for the three months ended May 31, 2001 compared to a net loss of $2.8 million for the three months ended May 31, 2000, which resulted in a net loss variance of $4.3 million. This net loss variance in operating results is primarily attributable to a loss on assets held for disposal of $7.5 million during the three months ended May 31, 2001 related to the closing of the Huron, Ohio mill. Net sales of $60.7 million for the three months ended May 31, 2001 increased $7.6 million (14%) compared to the three months ended May 31, 2000. This increase is attributable to a 7% net increase in volume, resulting primarily through business generated at the Fairmount, North Dakota mill, which was acquired in April 2000. The average sales price per hundred-weight of all products increased $0.57 per hundred weight in the three months ended May 31, 2001 compared to the same period in 2000. Cost of goods sold of $58.8 million for the three months ended May 31, 2001 increased $6.5 million (13%) compared to the three months ended May 31, 2000. An increase in bushels volume of 717 thousand (7%) and a $0.26 per bushel increase in the average price for these bushels accounted for this increase as compared with the business activity conducted during the three months ended May 31, 2000. Marketing, general and administrative expenses of $2.6 million for the three months ended May 31, 2001 increased $446 thousand (21%) compared to the same period ended in 2000. This increase is primarily attributable to increases in administrative expenses. In May of 2001, management, in efforts to consolidate its manufacturing facilities, approved and committed to a plan to cease operations and to dispose of the assets at its Huron, Ohio mill in the fiscal fourth quarter. Initial discussions with potential buyers indicate that the carrying amount of the related 31 assets exceed the estimated net realizable value and as such the financial statements reflect a loss on assets held for disposal of $7.5 million for the three months ended May 31, 2001, primarily related to identifiable intangible assets and goodwill. Interest expense of $1.9 million for the three months ended May 31, 2001 increased $122 thousand (7%) compared to the three months ended May 31, 2000. Most of this increase is attributable to the interest on the long-term debt used to finance the acquisition of the Fairmount mill, purchased in April 2000 for $19.9 million. An income tax benefit of $3.0 million for the three months ended May 31, 2001 has an effective tax rate of 91% attributable to estimated non-patronage business activities. This amount exceeds the federal and state statutory rate of 39.1% due to the non-deductibility of goodwill amortization in prior periods for which tax benefits have now been recognized. For the three months ended May 31, 2000 an income tax benefit of $255 thousand was based on an effective tax rate of 38.9% applied to the taxable losses attributable to estimated non-patronage business activities. The income tax benefit or expense and net effective tax rate varies from period to period based upon the Defined Business Unit's level of profitability and non-patronage business activity during each of the comparable periods. COMPARISON OF NINE MONTHS ENDED MAY 31, 2001 AND 2000 The Wheat Milling Defined Business Unit reported a net loss of $9.6 million for the nine months ended May 31, 2001 compared to a net loss of $4.1 million for the nine months ended May 31, 2000, for a net loss variance of $5.5 million. This net loss variance in operating results is primarily attributable to a loss on assets held for disposal of $7.5 million during the third quarter ended May 31, 2001 related to the closing of the Company's Huron, Ohio mill. Also during the nine-month period ending May 31, 2001 there was a change in the tax rate applied to the Wheat Milling Defined Business Unit's cumulative temporary differences between earnings for financial statement purposes and tax basis earnings which resulted in an increase in deferred tax assets of $406 thousand. The Wheat Milling Defined Business Unit's calculation of its patronage distribution using audited earnings for financial statement purposes rather than tax basis earnings prompted this rate change. Effective September 1, 2000, the Company's Board of Directors approved a resolution to compute patronage distributions based on audited earnings for financial statement purposes rather than tax basis earnings. The resolution was ratified by the members at the Company's December 2000, annual meeting. Net sales of $173.9 million for the nine months ended May 31, 2001 increased $17.0 million (11%) compared to the nine months ended May 31, 2000. This increase is attributable to a 9% net increase in volume, resulting primarily through business generated at the Fairmount, North Dakota mill, which was acquired in April 2000 and an average sales price per hundred-weight of all products increase of $0.14 per hundred weight in the nine months ended May 31, 2001 compared to the same period in 2000. Cost of goods sold of $166.8 million for the nine months ended May 31, 2001 increased $17.1 million (11%) compared to the nine months ended May 31, 2000. An increase in bushel volume of 3.0 million (10%) and a $0.06 per bushel increase in the average price for these bushels accounted for this increase as compared with the business activity conducted during the nine months ended May 31, 2000. The milling expense increase of $2.7 million (13%) in the nine months ended May 31, 2001 compared to the same period in 2000 was mostly attributable to the additional volume primarily at the Fairmount mill. Marketing, general and administrative expenses of $7.0 million for the nine months ended May 31, 2001 increased $202 thousand (3%) compared to the same period ended in 2000. In May of 2001, management, in efforts to consolidate its manufacturing facilities, approved and committed to a plan to cease operations and to dispose of the assets at its Huron, Ohio mill in the fiscal fourth quarter. Initial discussions with potential buyers indicate that the carrying amount of the related assets exceed the estimated net realizable value and as such the financial statements reflect a loss on assets held for disposal of $7.5 million for the nine months ended May 31, 2001, primarily related to identifiable intangible assets and goodwill. Interest expense of $6.0 million for the nine months ended May 31, 2001 increased $1.1 million (24%) compared to the nine months ended May 31, 2000. Most of this increase is attributable to the 32 interest on the long-term debt used to finance the acquisition of the Fairmount mill, purchased in April 2000 for $19.9 million. The income tax benefit of $3.8 million for the nine months ended May 31, 2001 included a change in the tax rate applied to the Wheat Milling Defined Business Unit cumulative temporary differences between income for financial statement purposes and income used for tax reporting purposes. The Wheat Milling Defined Business Unit's calculation of its patronage distribution using audited financial statement earnings rather than tax basis earnings prompted this rate change. An additional tax benefit for the nine-month period in 2001 of $3.4 million was recorded based on a taxable loss attributable to estimated non-patronage business activities which includes a tax benefit related to a loss on assets held for disposal. This amount exceeds the federal and state statutory rate of 39.1% due to the non-deductibility of goodwill in prior periods for which tax benefits have now been recognized. This compares to a $385 thousand tax benefit for the same period in 2000 on losses attributable to estimated non-patronage business activities. The income tax benefit or expense and effective tax rate varies from period to period based upon the Defined Business Unit's profitability and non-patronage business activity during each of the comparable periods. LIQUIDITY AND CAPITAL RESOURCES The Wheat Milling Defined Business Unit's cash requirements relate primarily to capital improvements and a need to finance inventories and receivables based on raw material costs and levels. These cash needs are expected to be fulfilled by the Company. CASH FLOWS FROM OPERATIONS Operating activities for the three months ended May 31, 2001 used net cash of $2.1 million. Net loss of $7.1 million and an increase in working capital requirements of $4.6 million were partially offset by non-cash expenses of $9.6 million to generate this net cash used in operating activities. Included in the non-cash expenses of the three and nine months ended May 31, 2001 was $7.5 million attributable to a loss on assets held for disposal associated with the closing of the Huron, Ohio mill. For the three-month period ended May 31, 2000, operating activities provided net cash of $2.9 million. During that period, a net loss of $2.8 million was exceeded by decreased working capital requirements of $4.0 million and non-cash expenses of $1.7 million, resulting in the net cash provided by operating activities. Operating activities for the nine months ended May 31, 2001 used net cash of $0.4 million. Net loss of $9.6 million and increased working capital requirements $4.4 million were partially offset by non-cash expenses of $13.6 million to generate this net cash used in operating activities. For the nine-month period ended May 31, 2000, operating activities used net cash of $2.8 million. During that period, a net loss of $4.1 million and increased working capital requirements of $3.7 million were partially offset by non-cash expenses of $5.0 million which resulted in this net cash used in operating activities. CASH FLOWS FROM INVESTING During the three-month periods ended May 31, 2001 and 2000, the Wheat Milling Defined Business Unit used cash for investing activities of $0.6 million and $21.3 million, respectively, for the acquisition of property, plant and equipment. In April 2000 the Company acquired a mill near Fairmount, North Dakota at a total cost of $19.9 million. During the nine-month periods ended May 31, 2001 and 2000, the Wheat Milling Defined Business Unit used cash for investing activities of $2.7 million and $22.5 million, respectively, for the acquisition of property, plant and equipment. CASH FLOWS FROM FINANCING The Wheat Milling Defined Business Unit's financing activities are coordinated through the Company's cash management department. Cash from the Wheat Milling Defined Business Unit's operations is deposited with the Company's cash management department and disbursements are made centrally. As a result, the Wheat Milling Defined Business Unit maintains 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 the cash requirements of all other Company operations. 33 Working capital requirements for a Defined Business Unit of the Company are reviewed on a periodic basis, and could potentially be restricted based upon management's evaluation of the prevailing business condition and availability of funds. The Wheat Milling Defined Business Unit had short-term debt outstanding and payable to the Company of $75.8 million, $68.0 million and $81.5 million on May 31, 2001, August 31, 2000 and May 31, 2000, respectively. The increase from August 31, 2000 is primarily attributable to the Wheat Milling Defined Business Unit operating loss in combination with increased working capital requirements. The Wheat Milling Defined Business Unit had long-term debt outstanding to the Company of $42.7 million on May 31, 2001 compared with $47.5 million on August 31, 2000 and $31.2 million on May 31, 2000. On May 31, 2001, the Defined Business Unit had $7.2 million due to the Company within the next twelve months. During the three-month and nine-month periods ended May 31, 2001 the Wheat Milling Defined Business Unit made principal payments to the Company of $1.8 million and $5.4 million, respectively. During this same period the Company, on behalf of the Wheat Milling Defined Business Unit assumed an 'interest free' Rural Economic Development Loan in conjunction with the Fairmount, North Dakota mill acquisition totaling $450 thousand. This non-interest bearing loan, payable in monthly installments over nine years, has been discounted at 8% to reflect a present value principal balance due of $320 thousand and a fix quote interest discount of $130 thousand. The Company also incurred long-term debt during the first quarter of 2001 on behalf of the Defined Business Unit in the amount of $116 thousand, payable to the Minnesota Department of Transportation quarterly over 120 months at 5.7% interest for the purpose of rail track rehabilitation at the Rush City mill. 34 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT DESCRIPTION ------- -------------------------------------------------------------- 10.1 Third Amendment to Credit Agreement (Revolving Loan) dated May 23, 2001 among Cenex Harvest States Cooperatives, CoBank, ACB, Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A., SunTrust Bank, BNP Paribas and the Syndication Parties 10.2 Third Amendment to Credit Agreement (Term Loan) dated May 23, 2001 among Cenex Harvest States Cooperatives, CoBank, ACB and the Syndication Parties 10.3 Syndication Adoption Agreement dated May 22, 2001 between CoBank, ACB and the Adopting Parties 99 Cautionary Statement (b) Reports on Form 8-K None. 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENEX HARVEST STATES COOPERATIVES ------------------------------------------- (Registrant) NAME TITLE DATE ---- ----- ---- /s/ John Schmitz Executive Vice President and July 3, 2001 - -------------------- Chief Financial Officer John Schmitz 36 EX-10 2 cenex012074_ex10-1.txt EXHIBIT 10.1 THIRD AMDMT TO CRED AGMT -REV LOAN EXHIBIT 10.1 THIRD AMENDMENT TO CREDIT AGREEMENT (REVOLVING LOAN) THIS THIRD AMENDMENT TO CREDIT AGREEMENT (Revolving Loan) ("AMENDMENT AGREEMENT") is made May 23, 2001 to be effective as of the Effective Date, by and among Cenex Harvest States Cooperatives, a Minnesota cooperative corporation ("BORROWER"), CoBank, ACB ("COBANK") as the Bid Agent and as the Administrative Agent for the benefit of the present and future Syndication Parties (in that capacity "ADMINISTRATIVE AGENT"), Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank International", New York Branch ("RABOBANK"), as Co-Lead Arranger, SunTrust Bank ("SUNTRUST") as Co-Lead Arranger, BNP Paribas as Documentation Agent, and the Syndication Parties signatory hereto, including CoBank, Rabobank, SunTrust, and BNP Paribas, in such capacity, (each a "SYNDICATION PARTY" and collectively, the "SYNDICATION PARTIES"). RECITALS A. Borrower, CoBank, St. Paul Bank for Cooperatives, and certain of the present Syndication Parties entered into a Credit Agreement (Revolving Loan) (as amended "CREDIT AGREEMENT") dated as of June 1, 1998. The Credit Agreement provided for a 364-Day Facility and a 5-Year Facility. B. The Credit Agreement was amended by the First Amendment to Credit Agreement (Revolving Loan) effective as of May 28, 1999 ("FIRST AMENDMENT") and by the Second Amendment to Credit Agreement (Revolving Loan) dated as of May 23, 2000 ("SECOND AMENDMENT"). C. CoBank, as Administrative Agent, gave written notification ("RENEWAL NOTICE") to those Syndication Parties which had an Individual 364-Day Commitment seeking (i) a renewal of their respective Individual 364-Day Commitments and (ii) consent to an extension of the 364-Day Maturity Date pursuant to the provisions of Section 16.9 of the Credit Agreement. D. Certain of the Syndication Parties have provided the Administrative Agent with written notice of their agreement to continue to maintain Individual 364-Day Commitments, and one or more institutions, which were not Syndication Parties prior to the date hereof, have agreed to become Syndication Parties as indicated on Schedule A hereto and by their execution of this Amendment Agreement and by their execution of a Syndication Adoption Agreement. E. The parties hereto desire to amend the Credit Agreement to renew the 364-Day Facility and to make certain other changes to the Credit Agreement as hereinafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, including the mutual promises and agreements contained herein, the parties hereto hereby agree as follows: 1. DEFINITIONS. Capitalized terms used herein without definition shall have the definition given to them in the Credit Agreement if defined therein. 2. RENEWAL OF INDIVIDUAL 364-DAY COMMITMENTS. The Syndication Parties hereby agree to renew or agree to acquire their respective Individual 364-Day Commitments in the amounts set forth beneath their names and signatures on the signature pages hereto and as set forth in Schedule 1 hereto. 3. AMENDMENTS TO CREDIT AGREEMENT. The parties hereto agree that the Credit Agreement shall be amended as follows as of the Effective Date: 3.1 Subsection 1.11 shall be amended in its entirety to read as follows: 1.11 AGGREGATE 364-DAY COMMITMENT: $550,000,000.00, subject to reduction as provided in Section 2.8 hereof. 3.2 Subsection 1.156 shall be amended in its entirety to read as follows: 1.156 364-DAY MATURITY DATE: May 22, 2002. 3.3 Subsection 5.2.3 is amended in its entirety to read as follows: 5.2.3 FEES. Borrower shall pay at the time of issuance or reissuance of each Committed Letter of Credit (a) to the Administrative Agent the Committed Letter of Credit Fee, which the Administrative Agent shall distribute to the Syndication Parties (i) in accordance with their Individual 5-Year Pro Rata Share if the Committed Letter of Credit is issued under the 5-Year Facility, or (ii) in accordance with their Individual 364-Day Pro Rata Share if the Committed Letter of Credit is issued under the 364-Day Facility, in each case as in effect on the date of such issuance or reissuance, and (b) to the Letter of Credit Bank the Issuance Fee for each such Committed Letter of Credit. 3.4 Section 13.4 is amended in its entirety to read as follows: 13.4 SALE OF ASSETS. Borrower shall not (nor shall it permit any of its Restricted Subsidiaries to) sell, convey, assign, lease or otherwise transfer or dispose of, voluntarily, by operation of law or otherwise, any material part of its now owned or hereafter acquired assets during any twelve (12) month period commencing 2 June 1, 1998 and each June 1 thereafter through June 30, 2000, and, thereafter, during any twelve (12) month period commencing September 1, 2000 and each September 1 thereafter, except: (a) the sale of inventory, equipment and fixtures disposed of in the ordinary course of business, (b) the sale or other disposition of assets no longer necessary or useful for the conduct of its business, and (c) leases of assets to an entity in which Borrower has at least a fifty-percent (50%) interest in ownership, profits, and governance. For purposes of this Section, "material part" shall mean ten percent (10%) or more of the lesser of the book value or the market value of the assets of Borrower or such Restricted Subsidiary as shown on the balance sheets thereof as of the May 31 or August 31, as applicable, immediately preceding each such twelve (12) month measurement period. 3.5 Section 13.6 is amended in its entirety to read as follows: 13.6 LOANS. Borrower shall not (nor shall it permit any of its Restricted Subsidiaries to) lend or advance money, credit, or property to any Person, except for (a) loans to Restricted Subsidiaries, (b) trade credit extended in the ordinary course of business, (c) loans made by Borrower to its members on open account maintained by such members with Borrower or made by Borrower to its members pursuant to its Affiliate Financing CoBank Participation Program; provided that the aggregate principal amount of all such loans outstanding at any time shall not exceed $150,000,000.00, and (d) loans made by Fin-Ag, Inc. to agricultural producers, provided that (i) the aggregate outstanding principal amount of all such loans at any time shall not exceed $125,000,000.00, (ii) at all times prior to December 1, 2001, the aggregate outstanding principal amount of all such loans retained by Fin-Ag, Inc. shall not exceed $38,000,000.00, and (iii) at all times on and after December 1, 2001, the aggregate outstanding principal amount of all such loans retained by Fin-Ag, Inc. shall not exceed $25,000,000.00. 3.6 Clauses (f), (h), and (j) of Section 13.8 (and only those clauses), are amended in their entirety to read as follows: (f) Investments made prior to the Closing Date in Persons, which are not Restricted Subsidiaries, identified on Exhibit 13.8(f) hereto; (h) Investments (by Borrower) subsequent to May 31, 1998 and prior to May 23, 2001 in the Persons identified, including the book value of each such Investment, on Exhibit 13.8(h) hereto; (j) Investments, in addition to those permitted by clauses (a) through (i) above, in an aggregate amount not exceeding $91,011,352.00. 3.7 Section 16.31 is amended in its entirety to read as follows 16.31 WITHHOLDING TAXES. Each Syndication Party represents that under the applicable law in effect as of the date it becomes a Syndication Party, it is 3 entitled to receive any payments to be made to it hereunder without the withholding of any tax and will furnish to the Administrative Agent and to Borrower such forms, certifications, statements and other documents as the Administrative Agent or Borrower may request from time to time to evidence such Syndication Party's exemption from the withholding of any tax imposed by any jurisdiction or to enable the Administrative Agent or Borrower, as the case may be, to comply with any applicable laws or regulations relating thereto. Without limiting the effect of the foregoing, if any Syndication Party is not created or organized under the laws of the United States of America or any state thereof, such Syndication Party will furnish to the Administrative Agent and Borrower IRS Form 4224 or Form 1001, or such other forms, certifications, statements or documents, duly executed and completed by such Syndication Party, as evidence of such Syndication Party's exemption from the withholding of United States tax with respect thereto. Notwithstanding anything herein to the contrary, Borrower shall not be obligated to make any payments hereunder to such Syndication Party until such Syndication Party shall have furnished to the Administrative Agent and Borrower the requested form, certification, statement or document. 3.8 Subsections 17.4.2 and 17.4.3 are amended in their entirety to read as follows 17.4.2 ADMINISTRATIVE AGENT: CoBank, ACB 5500 South Quebec Street Greenwood Village, Colorado 80111 FAX: (303) 694-5830 Attention: Administrative Agent 17.4.3 BID AGENT: CoBank, ACB 5500 South Quebec Street Greenwood Village, Colorado 80111 FAX: (303) 740-4021 Attention: Bid Agent 3.9 Section 17.13 is amended in its entirety to read as follows: 17.13 CAPITAL REQUIREMENTS. In the event that the introduction of or any change in: (a) any law or regulation; or (b) the judicial, administrative, or other governmental interpretation of any law or regulation; or (c) compliance by any Syndication Party or any corporation controlling any such Syndication Party with any guideline or request from any governmental authority (whether or not having the force of law) has the effect of requiring an increase in the amount of capital required or expected 4 to be maintained by such Syndication Party or any corporation controlling such Syndication Party, and such Syndication Party certifies that such increase is based in any part upon such Syndication Party's obligations hereunder with respect to the 364-Day Facility and/or the 5-Year Facility, and other similar obligations, Borrower shall pay to such Syndication Party such additional amount as shall be certified by such Syndication Party to the Administrative Agent and to Borrower to be the net present value (discounted at the Base Rate) of (a) the amount by which such increase in capital reduces the rate of return on capital which such Syndication Party could have achieved over the period remaining until the 364-Day Maturity Date or the 5-Year Maturity Date, as applicable (depending upon which Facility or Facilities such claim to increase costs is based), but for such introduction or change, (b) multiplied by (i) such Syndication Party's Individual 364-Day Commitment or (ii) such Syndication Party's Individual 5-Year Commitment, as applicable. The Administrative Agent will notify Borrower of any event occurring after the date of this Credit Agreement that will entitle any such Syndication Party to compensation pursuant to this Section as promptly as practicable after it obtains knowledge thereof and of such Syndication Party's determination to request such compensation. The Administrative Agent shall include with such notice, a certificate from such Syndication Party setting forth in reasonable detail the calculation of the amount of such compensation. Determinations by any Syndication Party for purposes of this Section of the effect of any increase in the amount of capital required to be maintained by any such Syndication Party and of the amount of compensation owed to any such Syndication Party under this Section shall be conclusive absent manifest error, provided that such determinations are made on a reasonable basis. 3.10 Exhibit 1.138 is replaced by Exhibit 1.138 hereto. 3.11 Schedule 1 is replaced in its entirety by the Schedule 1 attached hereto. 4. BORROWER'S REPRESENTATIONS. Borrower hereby represents and warrants that, after giving effect to this Amendment Agreement and the transactions contemplated hereby, no Potential Default or Event of Default has occurred and is continuing under the Credit Agreement or other Loan Documents. 5. EFFECTIVE DATE. This Amendment Agreement shall become effective on May 23, 2001 ("EFFECTIVE DATE"), so long as on or before that date the Administrative Agent receives (a) an original copy of this Amendment Agreement (or original counterparts thereof) duly executed by each party hereto, (b) a Syndication Adoption Agreement (or original counterparts thereof) duly executed by each party identified on Schedule A hereto, (c) each required new or replacement Promissory Note, (d) a copy of a resolution of Borrower's board of directors, certified to by Borrower's corporate secretary, which authorizes execution of this Amendment Agreement; and (e) payment by wire transfer of (i) the fees described in Section 6 hereof and (ii) reimbursement for each of the costs, expenses described in Section 7 hereof. Upon the satisfaction of all conditions precedent hereto, the Administrative Agent will notify each party hereto in writing and will provide copies of all appropriate documentation in connection herewith. 5 6. UP-FRONT FEE. Borrower agrees to pay to the Administrative Agent, for distribution among the Syndication Parties, the Up-Front Fee calculated in the manner previously disclosed to Borrower by the Administrative Agent, based on Individual 364-Day Commitments as shown on the signature pages hereto. 7. COSTS; EXPENSES AND TAXES. Borrower agrees to reimburse the Administrative Agent on demand for all out-of-pocket costs, expenses and charges (including, without limitation, all fees and charges of external legal counsel for the Administrative Agent) incurred by the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Amendment Agreement and any other instruments and documents to be delivered hereunder. 8. GENERAL PROVISIONS. 8.1 The Credit Agreement, except as expressly modified herein, shall continue in full force and effect and be binding upon the parties thereto. 8.2 Borrower agrees to execute such additional documents as the Administrative Agent may require, including, without limitation, new and/or replacement Notes, to carry out or evidence the purposes of this Amendment Agreement. 8.3 The execution, delivery and effectiveness of this Amendment Agreement shall not operate as a waiver of any right, power or remedy of the Administrative Agent or any Syndication Party under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents, and the Credit Agreement, as expressly modified hereby, and each of the other Loan Documents, are hereby ratified and confirmed and shall continue in full force and effect and be binding upon the parties thereto. Any direct or indirect reference in the Loan Documents to the "Credit Agreement" shall be deemed to be a reference to the Credit Agreement as amended by this Amendment Agreement. Any direct or indirect reference in the Loan Documents to a "Syndication Party" or to the "Syndication Parties" shall be deemed to be a reference to the Syndication Parties shown on Schedule 1 to this Amendment Agreement. 9. GOVERNING LAW. This Amendment Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 10. COUNTERPARTS. This Amendment Agreement may be executed in any number of counterparts and by different parties to this Amendment Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Telefax copies of documents or signature pages bearing original signatures, and executed documents or signature pages delivered by telefax, shall, in each such instance, be deemed to be, and shall constitute and be treated as, an original signed document or counterpart, as applicable. [EXECUTION PAGES BEGIN ON THE NEXT PAGE] 6 IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to Credit Agreement (Revolving Loan) to be executed by their duly authorized officers as of the Effective Date. BORROWER: CENEX HARVEST STATES COOPERATIVES, a cooperative corporation formed under the laws of the State of Minnesota By: ________________________________ Name: John Schmitz Title: Chief Financial Officer ADMINISTRATIVE AGENT, AND BID AGENT: COBANK, ACB By: ________________________________ Name: Greg E. Somerhalder Title: Vice President CO-LEAD ARRANGER: COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A., "RABOBANK INTERNATIONAL", NEW YORK BRANCH By: ________________________________ Name: ______________________________ Title: _____________________________ By: ________________________________ Name: ______________________________ Title: _____________________________ CO-LEAD ARRANGER: SUNTRUST BANK By: ________________________________ Name: ______________________________ Title: _____________________________ 7 SYNDICATION PARTIES: COBANK, ACB By: __________________________________________ Name: Greg E. Somerhalder Title: Vice President Contact Name: Greg E. Somerhalder Title: Vice President Address: 5500 So. Quebec Street Greenwood Village, CO 80111 Phone No.: 303/694-5838 Fax No.: 303/694-5830 Individual 364-Day Commitment: $181,200,000.00 Individual 5-Year Commitment: $61,666,667.00 Payment Instructions: CoBank, ACB ABA #: 307088754 Acct. Name: CoBank, ACB Account No.: 22274433 Attn: Marshall Allen Reference: Cenex Harvest States 8 SYNDICATION PARTIES: INTESABCI S.p.A., f/k/a BANCA INTESA SpA By: _________________________________________ Name: _______________________________________ Title: ______________________________________ By: _________________________________________ Name: _______________________________________ Title: ______________________________________ Contact Name: Anthony Giobbi Title: First Vice President Address: 10 East 53rd Street New York, NY 10022 Phone No.: 212/527-8737 Fax No.: 212/527-8777 Individual 364-Day Commitment: $20,000,000.00 Individual 5-Year Commitment: $8,333,333.00 Payment Instructions: Citibank - New York ABA# - 021000089 For account of Banc Intesa Account No.: 36152989 Attn: M. Greene Ref: Cenex Harvest States Cooperatives 9 SYNDICATION PARTIES: CREDIT AGRICOLE INDOSUEZ By: __________________________________ Name: Title: By: __________________________________ Name: Title: Contact Name: Theodore D. Tice Title: Vice President Address: 55 E. Monroe Street Chicago, IL 60603-5702 Phone No.: 312/917-7463 Fax No.: 312/372-3455 Individual 364-Day Commitment: $35,000,000.00 Individual 5-Year Commitment: $16,666,667.00 Payment Instructions: Citibank - New York, New York ABA# - 021-000-089 Acct. Name: Credit Agricole Indoseuz Chgo Branch Account No.: 36023853 Swift Code: CITIUS33 Ref: Cenex Harvest States 10 SYNDICATION PARTIES: SUNTRUST BANK By: _________________________________________ Name: _______________________________________ Title: Director By: _________________________________________ Name: _______________________________________ Title: Director Contact Name: Kurt Morris Title: Director Address: 303 Peachtree Street N.E. Third Floor Atlanta, GA 30308 Phone No.: 404/532-0232 Fax No.: 404/658-4807 Individual 364-Day Commitment: $47,200,000.00 Individual 5-Year Commitment: $8,333,333.00 Payment Instructions: SunTrust Bank ABA# - 061000104 Acct. Name: Corporate Banking Operations General Ledger Account Account No.: 9088000112 Ref: Cenex Harvest States Cooperatives 11 SYNDICATION PARTIES: BNP PARIBAS By: _____________________________________________ Name: Guillaume de la Ville Title: Vice President By: _____________________________________________ Name: Marcie Weiss Title: Managing Director Contact Name: Guillaume de la Ville Title: Vice President Address: 919 Third Avenue New York, NY 10022 Phone No.: 212/841-2067 Fax No.: 212/841-2536 Individual 364-Day Commitment: $47,200,000.00 Individual 5-Year Commitment: $13,333,333.00 Payment Instructions: BNP Paribas - New York ABA# - 026-007-689 Acct. Name: Loan Servicing Clearing Account Account No.: 1 03 13 000 103 Reference: Cenex Harvest States Operations Contact: Pedro Rivera Phone: 212/471-6631 Fax: 212/471-6695 12 SYNDICATION PARTIES: COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK INTERNATIONAL", NEW YORK BRANCH By: ___________________________________________ Name: Title: By: ___________________________________________ Name: Title: Contact Name: Tom Kelly Title: Vice President Address: 300 South Wacker Drive Suite 3500 Chicago, IL 60606-6610 Phone No.: 312/408-8222 Fax No.: 312/408-8240 Individual 364-Day Commitment: $47,200,000.00 Individual 5-Year Commitment: $13,333,333.00 Payment Instructions: The Bank of New York (New York, NY 10167) ABA# - 021 000 018 Acct. Name: Rabobank Nederland Account No.: 802 6002 533 Attn: Clemencia Stewart Ref: Cenex Harvest States 13 SYNDICATION PARTIES: THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH By: _________________________________________ Name: Patrick McCue Title: Vice President & Manager Contact Name: Patrick McCue Title: Vice President & Manager Address: 601 Carlson Parkway, Suite 370 Minnetonka, MN 55305 Phone No.: 952/473-5090 Fax No.: 952/473-5152 Loan Administration Contact Name: Janice Hennig Address: 227 West Monroe Street Suite 2300 Chicago, Illinois 60606 Phone No.: 312/696-4710 Fax No.: 312/696-4532 Individual 364-Day Commitment: $20,000,000.00 Individual 5-Year Commitment: $8,333,333.00 Payment Instructions: The Federal Reserve Bank of Chicago ABA# - 071002341 Acct. Name: The Bank of Tokyo- Mitsubishi, Ltd. Attention: Loan Administration Ref: Cenex Harvest States Cooperatives 14 SYNDICATION PARTIES: CREDIT LYONNAIS CHICAGO BRANCH By: _________________________________________ Name: Julie T. Kanak Title: Vice President Contact Name: Title: Address: 227 W. Monroe Street Suite 3800 Chicago, IL 60606 Phone No.: 312/220-7302 Fax No.: 312/641-0527 Individual 364-Day Commitment: $35,000,000.00 Individual 5-Year Commitment: $0.00 Payment Instructions: Credit Lyonnais New York ABA# - 0260-0807-3 A/C #: 01.00688.0001.00 Acct. Name: Attention: Ref: 15 SYNDICATION PARTIES: WELLS FARGO BANK, NATIONAL ASSOCIATION, f/k/a NORWEST BANK MINNESOTA, N.A. By: _________________________________________ Name: _______________________________________ Title: ______________________________________ By: _________________________________________ Name: _______________________________________ Title: ______________________________________ Contact Name: Allison Gelfman Title: Vice President Address: Sixth and Marquette MAC-N9305-031 Minneapolis, MN 55479-0085 Phone No.: 612/316-1402 Fax No.: 612/667-2276 Individual 364-Day Commitment: $20,000,000.00 Individual 5-Year Commitment: $8,333,333.00 Payment Instructions: Wells Fargo Bank National Association ABA# - 091000019 Acct. Name: Commercial Loan Clearing Account Account No.: 840165 Ref: Cenex Harvest States 16 SYNDICATION PARTIES: DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, AG, CAYMAN ISLAND BRANCH By: ________________________________________ Name: ______________________________________ Title: ____________________________________ By: ________________________________________ Name: ______________________________________ Title: ____________________________________ Contact Name: Mark Connelly Title: Vice President Address: 609 Fifth Avenue New York, NY 10017 Phone No.: 212/745-1560 Fax No.: 212/745-1556 Individual 364-Day Commitment: $0.00 Individual 5-Year Commitment: $13,333,333.00 Payment Instructions: (1) CHIPS Payments: Bank of New York for Account of DG Bank, NY Account No. 8900433876 Ref: Cenex Harvest States (2) Federal Reserve Payments: Bank of New York ABA #021000018 Account Name: DG Bank, NY Account No. 8900433876 Ref: Cenex Harvest States 17 SYNDICATION PARTIES: U.S. BANK NATIONAL ASSOCIATION By: ___________________________________________ Name: _________________________________________ Title: ________________________________________ Contact Name: Kathi L. Hatch Title: Commercial Banking Associate Address: %U.S. Bancorp Ag Credit, Inc. 950 17th Street, #330 Denver, CO 80202 Phone No.: 303/585-4926 Fax No.: 303/585-4732 Individual 364-Day Commitment: $20,000,000.00 Individual 5-Year Commitment: $8,333,333.00 Payment Instructions: U.S. Bank National Association St. Paul, MN ABA# - 091000022 Acct. Name: U.S. Bancorp Ag Credit, Inc. Account No.: 160234431437 Attn: Ref: Cenex Harvest States Cooperatives 18 SYNDICATION PARTIES: AGFIRST, FCB By: ________________________________________________ Name: Bruce B. Fortner Title: Vice President Contact Name: Bruce B. Fortner Title: Vice President Address: 1401 Hampton Street, P.O. Box 1499 Columbia, SC 29201 Phone No.: 803/799-5000 x457 Fax No.: 803/254-4219 Individual 364-Day Commitment: $47,200,000.00 Individual 5-Year Commitment: $8,333,333.00 Payment Instructions: AgFirst Farm Credit Bank ABA# - 053905974 Acct. Name: AgFirst FCB Account No.: N/A Attn: N/A Ref: Cenex Harvest States Coop 19 SYNDICATION PARTIES: NATEXIS BANQUES POPULAIRES, NEW YORK BRANCH, f/k/a NATEXIS BANQUE By: _________________________________________ Name: Cliff A. Niebling Title: Vice President, Commodities Group Contact Name: Cliff A. Niebling Title: Vice President, Commodities Group Address: 1251 Avenue of the Americas New York, NY 10020 Phone No.: 212/872-5133 Fax No.: 212/872-5162 Individual 364-Day Commitment: $30,000,000.00 Individual 5-Year Commitment: $0.00 Payment Instructions: Chase Manhattan Bank, NY, NY ABA# - 021-000-021 Acct. Name: Natexis Banques Populaires, New York Branch Account No.: 544-7-75330 Attn: Lordes Nieves Ref: Cenex Harvest States Cooperatives 20 SYNDICATION PARTIES: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ________________________________________ Name: Edward L. Cooper, III Title: Vice President Contact Name: Edward L. Cooper, III Title: Vice President Address: 231 South La Salle Street Chicago, IL 60697 Phone No.: 312/828-1273 Fax No.: 312/828-1974 Individual 364-Day Commitment: $0.00 Individual 5-Year Commitment: $31,666,667.00 Payment Instructions: Bank of America National Trust and Savings Association ABA - 071000039 Acct. Name: Attention: Cash Book 418 Loan Department Attention: Laura A. Ikens Ref: Cenex Harvest States Cooperatives 21 EX-10 3 cenex012074_ex10-2.txt EXHIBIT 10.2 THIRD AMDMT TO CREDIT AGMT-TERM LOAN EXHIBIT 10.2 THIRD AMENDMENT TO CREDIT AGREEMENT (TERM LOAN) THIS THIRD AMENDMENT TO CREDIT AGREEMENT (Term Loan) ("AMENDMENT AGREEMENT") is made May 23, 2001, to be effective as of the Effective Date ,by and among Cenex Harvest States Cooperatives, a Minnesota cooperative corporation ("BORROWER"), CoBank, ACB ("COBANK") as Lead Arranger, and as the Administrative Agent for the benefit of the present and future Syndication Parties (in that capacity "ADMINISTRATIVE AGENT"), and the Syndication Parties signatory hereto, including CoBank in such capacity (each a "SYNDICATION PARTY" and collectively, the "SYNDICATION PARTIES"). RECITALS A. Borrower, CoBank, St. Paul Bank for Cooperatives ("ST. PAUL BANK"), and the Syndication Parties entered into a Credit Agreement (Term Loan) (as amended, the "CREDIT AGREEMENT") dated as of June 1, 1998. B. The Credit Agreement was amended by the First Amendment to Credit Agreement (Term Loan) effective as of May 31, 1999 ("FIRST AMENDMENT") and by the Second Amendment to Credit Agreement (Term Loan) effective as of May 23, 2000 ("SECOND AMENDMENT"). C. CoBank is the successor by merger to the interests and obligations of St. Paul Bank under the Credit Agreement. D. The parties hereto desire to amend the Credit Agreement as hereinafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, including the mutual promises and agreements contained herein, the parties hereto hereby agree as follows: 1. DEFINITIONS. Capitalized terms used herein without definition shall have the definition given to them in the Credit Agreement if defined therein. 2. AMENDMENTS TO CREDIT AGREEMENT. The parties hereto agree that the Credit Agreement shall be amended as follows as of the Effective Date: 2.1 Section 10.4 is amended in its entirety to read as follows: 10.4 SALE OF ASSETS. Borrower shall not (nor shall it permit any of its Restricted Subsidiaries to) sell, convey, assign, lease or otherwise transfer or dispose of, voluntarily, by operation of law or otherwise, any material part of its now owned or hereafter acquired assets during any twelve (12) month period commencing June 1, 1998 and each June 1 thereafter through June 30, 2000, and, thereafter, during any twelve (12) month period commencing September 1, 2000 and each September 1 thereafter, except: (a) the sale of inventory, equipment and fixtures disposed of in the ordinary course of business, (b) the sale or other disposition of assets no longer necessary or useful for the conduct of its business, and (c) leases of assets to an entity in which Borrower has at least a fifty-percent (50%) interest in ownership, profits, and governance. For purposes of this Section, "material part" shall mean ten percent (10%) or more of the lesser of the book value or the market value of the assets of Borrower or such Restricted Subsidiary as shown on the balance sheets thereof as of the May 31 or August 31, as applicable, immediately preceding each such twelve (12) month measurement period. 2.2 Section 10.6 is amended in its entirety to read as follows: 10.6 LOANS. Borrower shall not (nor shall it permit any of its Restricted Subsidiaries to) lend or advance money, credit, or property to any Person, except for (a) loans to Restricted Subsidiaries, (b) trade credit extended in the ordinary course of business, (c) loans made by Borrower to its members on open account maintained by such members with Borrower or made by Borrower to its members pursuant to its Affiliate Financing CoBank Participation Program; provided that the aggregate principal amount of all such loans outstanding at any time shall not exceed $150,000,000, and (d) loans made by Fin-Ag, Inc. to agricultural producers, provided that (i) the aggregate outstanding principal amount of all such loans at any time shall not exceed $125,000,000.00, (ii) at all times prior December 1, 2001, the aggregate outstanding principal amount of all such loans retained by Fin-Ag, Inc. shall not exceed $38,000,000.00, and (iii) at all times on and after December 1, 2001, the aggregate outstanding principal amount of all such loans retained by Fin-Ag, Inc. shall not exceed $25,000,000.00. 2.3 Clauses (f), (h), and (j) of Section 10.8 (and only those clauses), are amended in their entirety to read as follows: (f) Investments made prior to the Closing Date in Persons, which are not Restricted Subsidiaries, identified on Exhibit 10.8(f) hereto; (h) Investments (by Borrower) subsequent to May 31, 1998 and prior to May 23, 2001 in the Persons identified, including the book value of each such Investment, on Exhibit 10.8(h) hereto; (j) Investments, in addition to those permitted by clauses (a) through (i) above, in 2 an aggregate amount not exceeding $91,011,352.00. 2.4 Subsection 14.4.2 is amended in its entirety to read as follows 14.4.2 ADMINISTRATIVE AGENT: CoBank, ACB 5500 South Quebec Street Greenwood Village, Colorado 80111 FAX: (303) 694-5830 Attention: Administrative Agent 2.5 Exhibit 1.93 is replaced by Exhibit 1.93 hereto. 3. BORROWER'S REPRESENTATIONS. Borrower hereby represents and warrants that, after giving effect to this Amendment Agreement and the transactions contemplated hereby, no Potential Default or Event of Default has occurred and is continuing under the Credit Agreement or other Loan Documents. 4. EFFECTIVE DATE. This Amendment Agreement shall become effective on May 23, 2001 ("EFFECTIVE DATE"), so long as on or before that date the Administrative Agent receives (a) an original copy of this Amendment Agreement (or original counterparts thereof) duly executed by each party hereto, (b) a copy of a resolution of Borrower's board of directors, certified to by Borrower's corporate secretary, which authorizes execution of this Amendment Agreement; and (c) payment by wire transfer of each of the costs, expenses described in Section 6 hereof. Upon the satisfaction of all conditions precedent hereto, the Administrative Agent will notify each party hereto in writing and will provide copies of all appropriate documentation in connection herewith. 5. COSTS; EXPENSES AND TAXES. Borrower agrees to reimburse the Administrative Agent on demand for all out-of-pocket costs, expenses and charges (including, without limitation, all fees and charges of external legal counsel for the Administrative Agent) incurred by the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Amendment Agreement and any other instruments and documents to be delivered hereunder. 6. GENERAL PROVISIONS. 6.1 The Credit Agreement, except as expressly modified herein, shall continue in full force and effect and be binding upon the parties thereto. 6.2 Borrower agrees to execute such additional documents as the Administrative Agent may require to carry out or evidence the purposes of this Amendment Agreement. 6.3 The execution, delivery and effectiveness of this Amendment Agreement shall not 3 operate as a waiver of any right, power or remedy of the Administrative Agent or any Syndication Party under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents, and the Credit Agreement, as expressly modified hereby, and each other Loan Document are hereby ratified and confirmed and shall continue in full force and effect and be binding upon the parties thereto. Any direct or indirect reference in the Loan Documents to the "Credit Agreement" shall be deemed to be a reference to the Credit Agreement as amended by this Amendment Agreement. 7. GOVERNING LAW. This Amendment Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 8. COUNTERPARTS. This Amendment Agreement may be executed in any number of counterparts and by different parties to this Amendment Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Telefax copies of documents or signature pages bearing original signatures, and executed documents or signature pages delivered by telefax, shall, in each such instance, be deemed to be, and shall constitute and be treated as, an original signed document or counterpart, as applicable. [EXECUTION PAGES BEGIN ON THE NEXT PAGE]. 4 IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to Credit Agreement (Term Loan) to be executed by their duly authorized officers as of the Effective Date. BORROWER: CENEX HARVEST STATES COOPERATIVES, a cooperative corporation formed under the laws of the State of Minnesota By: ________________________________ Name: John Schmitz Title: Chief Financial Officer ADMINISTRATIVE AGENT: COBANK, ACB By: ________________________________ Name: Greg E. Somerhalder Title: Vice President SYNDICATION PARTY: COBANK, ACB By: ________________________________ Name: Greg E. Somerhalder Title: Vice President 5 EX-10 4 cenex012074_ex10-3.txt EXHIBIT 10.3 SYNDICATION ADOPTION AGMT EXHIBIT 10.3 SYNDICATION ADOPTION AGREEMENT This Syndication Adoption Agreement entered into this 22nd day of May, 2001 ("EFFECTIVE DATE") by and between CoBank, ACB, in its capacity as the Administrative Agent under the Credit Agreement (as defined below) (in such role, "ADMINISTRATIVE AGENT"), and each of the other parties signatory hereto ("ADOPTING PARTIES"). RECITALS A. Pursuant to the Credit Agreement (Revolving Loan) by and between Administrative Agent, St. Paul Bank for Cooperatives, the Syndication Parties named therein, and Cenex Harvest States Cooperatives ("BORROWER"), dated June 1, 1998, and amended by the First Amendment to Credit Agreement (Revolving Loan) effective as of May 28, 1999, the Second Amendment to Credit Agreement (Revolving Loan) dated May 23, 2000, and the Third Amendment to Credit Agreement (Revolving Loan) dated May 22, 2001 (collectively "CREDIT AGREEMENT"), the Syndication Parties thereto have agreed to provide, limited to their respective Individual Commitments and Pro Rata Shares, financing to Borrower in the maximum aggregate amount of $550,000,000.00 through the 364-Day Facility and $200,000,000.00 through the 5-Year Facility, to be used for the purposes set forth in the Credit Agreement. B. The Adopting Parties wish to become Syndication Parties under the Credit Agreement with respect to the Individual 364-Day Commitment amounts set forth beneath their signatures on this Syndication Adoption Agreement ("SYNDICATION INTEREST"). AGREEMENT For good and valuable consideration, the receipt and sufficiency of which the parties hereto hereby acknowledge, and each to induce the others to enter into this Syndication Adoption Agreement ("AGREEMENT"), the parties hereto hereby agree as follows: DEFINITIONS Capitalized terms used herein without definition shall have the meaning given them in the Credit Agreement, if defined therein. 1. ACQUISITION OF SYNDICATION INTEREST. 1.1. Each Adopting Party agrees to, as of the Effective Date, and at all times thereafter, comply with all of the obligations of a Syndication Party holding an Individual 364-Day Commitment in the amount shown beneath its signature below, as such obligations are set forth in the Credit Agreement. 2. REPRESENTATIONS, WARRANTIES, AND AGREEMENTS. 2.1. Each Adopting Party represents and warrants that: (a) the making and performance of this Agreement including its agreement to be bound by the Credit Agreement is within its power and has been duly authorized by all necessary corporate and other action by it; (b) entering into this Agreement and performance of its obligations hereunder and under the Credit Agreement will not conflict with nor constitute a breach of its charter or by-laws nor any agreements by which it is bound, and will not violate any judgment, decree or governmental or administrative order, rule, law, or regulation applicable to it; (c) no approval, authorization or other action by, or declaration to or filing with, any governmental or administrative authority or any other Person is required to be obtained or made by it in connection with the execution, delivery and performance of its duties under this Agreement and the Credit Agreement; (d) this Agreement has been duly executed by it, and, this Agreement and the Credit Agreement, constitute its legal, valid, and binding obligation, enforceable in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and general equitable principles (regardless of whether such enforceability is considered in a proceeding at law or in equity); and (e) the act of entering into and performing its obligations under this Agreement and the Credit Agreement have been approved by its credit committee at an authorized meeting thereof (or by written consent in lieu of a meeting) and such action was duly noted in the written minutes of such meeting, and it will, if requested by Administrative Agent, furnish Administrative Agent with a certified copy of such minutes or an excerpt therefrom reflecting such approval. 2.2. Each Adopting Party further represents that under the applicable law in effect as of the date hereof, it is entitled to receive any payments to be made to it under the Credit Agreement without the withholding of any tax and will furnish to Administrative Agent and to Borrower such forms, certifications, statements and other documents as Administrative Agent or Borrower may request from time to time to evidence such Adopting Party's exemption from the withholding of any tax imposed by any jurisdiction or to enable Administrative Agent or Borrower, as the case may be, to comply with any applicable laws or regulations relating thereto. Without limiting the effect of the foregoing, if such Adopting Party is not created or organized under the laws of the United States of America or any state thereof, such Adopting Party will furnish to Administrative Agent and Borrower IRS Form 4224 or Form 1001, or such other forms, certifications, statements or documents, duly executed and completed by Adopting Party, as evidence of such Adopting Party's exemption from the withholding of United States tax with respect thereto. Notwithstanding anything herein to the contrary, Borrower shall not be obligated to make any payments to or for the benefit of Adopting Party until Adopting Party shall have furnished to Administrative Agent and Borrower the requested form, certification, statement or document. 2.3. Adopting Party acknowledges receipt of true and correct copies of all Loan Documents and agrees and represents that: (a) it has relied upon its independent review (i) of the Loan Documents, and (ii) any information independently acquired by it from Borrower or otherwise in making its decision to acquire an interest in the Loan independently and without reliance on any Syndication Party or Administrative Agent; (b) it has obtained such information as it deems necessary (including any information it independently obtained from Borrower or others) prior to making its decision to acquire the Syndication Interest; (c) it has made its own independent analysis and appraisal of and investigation into Borrower's authority, business, operations, financial and other condition, creditworthiness, and ability to perform its obligations under the Loan 2 Documents and has relied on such review in making its decision to acquire the Syndication Interest, and will continue to rely solely upon its independent review of the facts and circumstances related to Borrower, and without reliance upon any Syndication Party or Administrative Agent, in making future decisions with respect to all matters under or in connection with the Loan Documents and its participation in the Loan as a Syndication Party. 2.4. Adopting Party acknowledges and agrees that: (a) neither Administrative Agent nor any Syndication Party has made any representation or warranty, except as expressly stated in this Agreement or the Credit Agreement, nor do they assume any responsibility with respect to the due execution, validity, sufficiency, enforceability or collectibility of the Loan, the Loan Documents or the Notes or with respect to the accuracy and completeness of matters disclosed, represented or warranted in the Loan Documents by Borrower (including financial matters); (b) neither Administrative Agent nor any Syndication Party assumes any responsibility for the financial condition of Borrower or for the performance of Borrower's obligations under the Loan Documents; (c) except as otherwise expressly provided in this Agreement or the Credit Agreement, neither any Syndication Party nor Administrative Agent nor any other Syndication Party shall have any duty or responsibility to furnish to any other Syndication Parties any credit or other information concerning Borrower which may come into its or their possession. 2.5. Adopting Party: (a) represents that it has acquired and is retaining the Syndication Interest it is acquiring in the Loan for its own account in the ordinary course of its banking or financing business; (b) agrees that it will not sell, assign, convey or otherwise dispose of ("TRANSFER"), or create or permit to exist any lien or security interest on, all or any part of its Syndication Interest in the Loan without compliance with all of the terms and conditions of the Credit Agreement, including Section 16.27 thereof. 2.6. Adopting Party: 2.6.1 Irrevocably consents and submits to the non-exclusive jurisdiction of the courts of the State of Colorado and the United States District Court for the District of Colorado and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Agreement or the Credit Agreement or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or the Credit Agreement or the transactions related hereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agrees that any dispute with respect to any such matters shall be heard only in the courts described above. 2.6.2 With respect to litigation concerning this Agreement or the Credit Agreement within the jurisdiction of the courts of the State of Colorado or the United States District Court for the District of Colorado: (a) in the event it shall not maintain a duly appointed agent for service of summons in Colorado, it hereby waives personal service of any and all process 3 upon it and consents that all such service or process may be made by certified mail (return receipt requested) directed to its address set forth in Section 17.4 of the Credit Agreement (as provided herein) and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at the option of the party making such service, by service in any other manner provided under the rules of any such courts; and (b) within thirty (30) days after such service, Adopting Party shall appear in answer to such process, failing which it shall be deemed in default and judgment may be entered against it for the amount of the claim and other relief requested. 2.6.3 HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER THIS AGREEMENT OR THE CREDIT AGREEMENT OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR THE CREDIT AGREEMENT OR THE TRANSACTIONS RELATED THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH ADOPTING PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ADMINISTRATIVE AGENT OR ANY SYNDICATION PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF ADOPTING PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. 3. GENERAL. 3.1. Adopting Party's address for notice under Section 17.4 of the Credit Agreement shall be as set forth beneath its signature below. IN WITNESS HEREOF, the parties hereto have caused this Syndication Adoption Agreement to be executed as of the Effective Date by their duly authorized representatives. Administrative Agent (as Administrative Agent): COBANK, ACB By ____________________________________ Name: Greg Somerhalder Title: Vice President 4 ADOPTING PARTY: CREDIT LYONNAIS CHICAGO BRANCH By: _________________________________________ Name: Julie T. Kanak Title: Vice President Contact Name: Title: Address: 227 W. Monroe Street Suite 3800 Chicago, IL 60606 Phone No.: 312/220-7302 Fax No.: 312/641-0527 Individual 364-Day Commitment: $35,000,000.00 Individual 5-Year Commitment: $0.00 Payment Instructions: Credit Lyonnais New York ABA# - 0260-0807-3 A/C #: 01.00688.0001.00 Acct. Name: Attention: Ref: 5 BORROWER'S CONSENT Borrower hereby signifies its consent to acquisition of Individual 364-Day Commitment by each Adopting Party as described above. CENEX HARVEST STATES COOPERATIVES By ______________________________ Name John Schmitz Title Chief Financial Officer 6 EX-99 5 cenex012074_ex99.txt EXHIBIT 99 CAUTIONARY STATEMENT EXHIBIT 99 CAUTIONARY STATEMENT Cenex Harvest States Cooperatives (the Company), or persons acting on behalf of the Company, or outside reviewers retained by the Company making statements on behalf of the Company, or underwriters, from time to time, may make, in writing or orally, "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995 (the Act). This Cautionary Statement is for the purpose of qualifying for the "safe harbor" provisions of the Act and is intended to be a readily available written document that contains factors which could cause results to differ materially from those projected in such forward-looking statements. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. The following matters, among others, may have a material adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of the Company. Reference to this Cautionary Statement in the context of a forward-looking statement shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those which might be projected, forecasted, estimated or budgeted by the Company in such forward-looking statement or statements: 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 substitutions of commodities. Demand may also be affected by changes in eating habits, by population growth and increased or decreased per capita consumption of some products. The Freedom to Farm Act of 1996 (the Farm Act), enacted in April of 1996, may affect crop production in several ways. The Farm Act more narrowly defines what will qualify as environmentally sensitive acreage for purposes of the conservation reduction program, with the result that acres were put back into agricultural production. The Farm 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 volumes available for export. However, the Farm Act also reduces Export Enhancement Program subsidies, which may adversely affect the ability of the U.S. exports to compete with those of other countries. Reduced demand for U.S. agricultural products may also adversely affect the demand for fertilizer, chemicals, and petroleum products sold by the Company and used to produce crops. Congress is in the process of debating and enacting new legislation for the 2002 Farm Bill. The 2002 Farm Bill will likely maintain a market orientation, allowing producers to retain planting flexibility similar to the Freedom to Farm Act of 1996. However, it will likely place more emphasis on conservation practices, risk management and counter-cyclical programs. Production agriculture has been extremely dependent on emergency and program payments the last two to three years due to low prices, currency fluctuations and global trade issues. Production agriculture has also been, and will continue to be, dependent on government payments until the market is able to provide better returns. COMPANY SUBJECT TO PRICE RISKS. Upon purchase, the Company has risks of carrying grain and petroleum, 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 risks of loss in the market value of positions held, consisting of grain and petroleum inventories and purchase contracts at a fixed or partially fixed price, in the event market prices decrease. The Company is also exposed to risk of loss on its fixed price or partially fixed price sales contracts in the event market prices increase. To reduce the price change risks associated with holding fixed price positions, the Company generally takes opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges. While hedging activities reduce the risk of loss from changing market values, such activities also limit the gain potential which otherwise could result from changes in market prices. Hedging arrangements do not protect against nonperformance of a contract. The Company's policy is to generally maintain hedged positions in grain and petroleum, which are hedgeable, but the Company can be long or short at any time. The Company's profitability is primarily derived from margins on products merchandised and processed, not from hedging transactions. At any one time, the Company's inventory and purchase contracts for delivery to the Company may be substantial. COMPETITION. Many of our competitors are larger, better known and have substantially greater marketing, financial, personnel and other resources, including established reputations and working relationships than the Company. OILSEED 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. Media newsletters and other publications indicate that construction of new crush plants are under strong consideration. The Company estimates that U.S. crushing capacity has increased by about 30% to 35% between 1994 and 1999. Refining capacity has increased by an estimated 25% to 30% between 1996 and 1999. 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 Oilseed Processing and Refining Defined Business Unit. Several competitors operate over various market segments and may be suppliers to, or customers of, other competitors. WHEAT MILLING BUSINESS COMPETITIVE TRENDS. Certain major durum milling competitors of the Wheat Milling Defined Business Unit have developed long-term relationships with customers by locating plants adjacent to pasta manufacturing plants. This trend could potentially decrease the future demand for semolina from nonintegrated millers. In addition, the growth in demand for baking and bread flour is marginal during a period when the milling industry has been expanding, which will continue to put pressure on gross margins. 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. DEPENDENCE ON CERTAIN CUSTOMERS. Each of the Wheat Milling Defined Business Unit and the Oilseed Processing and Refining Defined Business Unit has certain major customers. 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 defined business unit. In addition, the Wheat Milling Defined Business Unit would be adversely affected by a decline in pasta production in the United States. CONCERNS WITH THE SAFETY AND QUALITY OF FOOD PRODUCTS. The Company could be adversely affected if consumers lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, such as the recent publicity about genetically modified organisms and "mad cow disease" in Europe, whether or not valid, may discourage consumers from buying certain products. If the Company's food products become adulterated or misbranded, the Company would need to recall those items and may experience product liability claims if consumers are injured as a result. A widespread product recall or a significant product liability judgement could cause products to be unavailable for a period of time and a loss of consumer confidence in food products, and could have a material adverse effect. OIL AND NATURAL GAS PRICES ARE VOLATILE. Revenues and profitability in the Company's energy segment and manufacturing operations depend on prevailing prices for oil and natural gas. Historically, prices for oil and natural gas have been volatile and are likely to continue to be volatile in the future. Oil and natural gas prices, while at historically high levels at the present time, declined significantly in 1997 and 1998 and, for an extended period of time, remained substantially below prices obtained in previous years. The foregoing review of factors pursuant to the Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of the Act. -----END PRIVACY-ENHANCED MESSAGE-----