-----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, O9dRt2jpfgMCYUBuAJojzFmwQts+6r2W7Q317WKwRmvcMTv6j62QOunDzMhLJSEl G/hJgBLOK+mDT60eGehLpQ== 0000897101-99-000704.txt : 19990714 0000897101-99-000704.hdr.sgml : 19990714 ACCESSION NUMBER: 0000897101-99-000704 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990713 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: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-17865 FILM NUMBER: 99663338 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 ================================================================================ 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, 1999. [ ] 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, (651) 451-5151 INVER GROVE HEIGHTS, MN 55077 (Registrant's telephone number including (Address of principal executive offices area code) and zip 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, 1999) ================================================================================ INDEX
PAGE NO. ---- PART I. FINANCIAL INFORMATION CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES Item 1. Financial Statements (unaudited) Consolidated Balance Sheets as of August 31, 1998 and May 31, 1998 and 1999 .......... 2 Consolidated Statements of Operations for the three and nine months ended May 31, 1998 and 1999 ............................................................................. 3 Consolidated Statements of Cash Flows for the three and nine months ended May 31, 1998 and 1999 ............................................................................. 4 Notes to Consolidated Financial Statements ........................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................................ 6 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) Item 1. Financial Statements Balance Sheets as of August 31, 1998, May 31, 1998 and May 31, 1999 (unaudited) ...... 14 Statements of Operations for the three and nine months ended May 31, 1998 and 1999 (unaudited) ..................................................................... 15 Statements of Cash Flows for the three and nine months ended May 31, 1998 and 1999 (unaudited) ..................................................................... 16 Notes to Financial Statements (unaudited) ............................................ 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................................ 18 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) Item 1. Financial Statements Balance Sheets as of August 31, 1998, May 31, 1998 and May 31, 1999 (unaudited) ...... 22 Statements of Operations for the three and nine months ended May 31, 1998 and 1999 (unaudited) ..................................................................... 23 Statements of Cash Flows for the three and nine months ended May 31, 1998 and 1999 (unaudited) ..................................................................... 24 Notes to Financial Statements (unaudited) ............................................ 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................................ 26 PART II. OTHER INFORMATION Items 1 through 5 have been omitted since all items are inapplicable or answers are negative ......................................................................... 30 Item 6. Exhibits and Reports on Form 8-K ............................................. 30 SIGNATURE PAGE ........................................................................ 31
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. Factors that might cause such differences include, but are not limited to the following: SUPPLY AND DEMAND FORCES. The Company may be adversely affected by supply and demand relationships, both domestic and international. Supply may be affected by weather conditions, disease, insect damage, acreage planted, government regulation and policies and commodity price levels. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations, and substitution of commodities. The current monetary crisis in Asia has impacted, and is expected to continue to impact exports of U.S. agricultural products. 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. Demand may also be affected by changes in eating habits, population growth and increased or decreased per capita consumption of some products. 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. The Company is exposed to risk of loss in the market value of positions held, consisting of grain and petroleum inventory and purchase contracts at a fixed or partially fixed price, in the event market prices decrease. The Company is also exposed to risk of loss on its fixed price or partially fixed price sales contracts in the event market prices increase. To reduce the price change risks associated with holding fixed priced positions, the Company generally takes opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an option futures contract) on regulated commodity futures exchanges. OILSEED PROCESSING AND REFINING BUSINESS COMPETITION. This industry is highly competitive. Competitors are adding new plants and expanding capacity of existing plants. Unless exports increase or existing refineries are closed, this extra capacity is likely to put additional pressure on prices and erode margins, adversely affecting the profitability of the Oilseed Processing and Refining Defined Business Unit. MILLING BUSINESS COMPETITIVE TRENDS. Certain major 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. Commencing in June 1998, the Wheat Milling Defined Business Unit began conversion of a semolina line to bakery flour at the Huron mill. This conversion was operational in February 1999, and until the Wheat Milling Defined Business Unit increases its share of the bakery flour market, profits will be negatively impacted. YEAR 2000. Although the Company's management believes that the Company has in place an effective program to address the Year 2000 issue in a timely manner, it also recognizes that failure to sufficiently resolve all aspects of the Year 2000 issue in a timely fashion presents substantial risks for the Company, including disruption of normal business processes and additional costs or loss of revenue. Considerable work remains to be accomplished and unforeseen difficulties could arise which might adversely affect the Company's ability to complete its program on schedule. Furthermore, there is no guarantee that the systems of other companies on which this Company relies will be remediated in a timely fashion to avoid having a material adverse affect on the Company's operations or its financial results. The forward-looking statements herein are qualified in their entirety by the cautions and risk factors set forth in Exhibit 99, under the caption "Cautionary Statement" to this Quarterly Report on Form 10-Q for the quarter ended May 31, 1999. 1 CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CENEX HARVEST STATES COOPERATIVES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents .................................. $ 120,008 $ 83,532 $ 44,760 Receivables ................................................ 471,516 564,185 678,963 Inventories ................................................ 479,734 523,019 513,815 Other current assets ....................................... 37,707 36,996 86,231 ---------- ---------- ---------- Total current assets ...................................... 1,108,965 1,207,732 1,323,769 OTHER ASSETS: Investments ................................................ 347,334 346,214 367,369 Other ...................................................... 97,034 96,485 114,423 ---------- ---------- ---------- Total other assets ........................................ 444,368 442,699 481,792 PROPERTY, PLANT AND EQUIPMENT ............................... 915,770 893,531 956,068 ---------- ---------- ---------- $2,469,103 $2,543,962 $2,761,629 ========== ========== ========== LIABILITIES AND EQUITIES CURRENT LIABILITIES: Notes payable .............................................. $ 475 $ 53,500 $ 170,000 Current portion of long-term debt .......................... 13,855 39,548 19,627 Patrons' credit balances ................................... 41,324 42,876 37,514 Patrons' advance payments .................................. 148,021 108,488 115,680 Drafts outstanding ......................................... 26,367 33,569 19,314 Accounts payable ........................................... 383,161 494,049 501,341 Book cash overdraft ........................................ 28,375 49,314 50,917 Accrued expenses ........................................... 119,373 98,417 103,226 Patronage dividends and equity retirements payable ......... 63,562 60,019 16,894 ---------- ---------- ---------- Total current liabilities ................................. 824,513 979,780 1,034,513 LONG-TERM DEBT .............................................. 442,986 375,200 466,281 OTHER LIABILITIES ........................................... 75,801 72,113 80,326 MINORITY INTERESTS IN SUBSIDIARIES .......................... 59,926 58,603 62,256 COMMITMENTS AND CONTINGENCIES ............................... EQUITIES .................................................... 1,065,877 1,058,266 1,118,253 ---------- ---------- ---------- $2,469,103 $2,543,962 $2,761,629 ========== ========== ==========
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, ------------------------ -------------------------- 1998 1999 1998 1999 --------- --------- ---------- ---------- (DOLLARS IN THOUSANDS) REVENUES: Net sales: Grain and oilseed ............................ $ 824,878 $ 625,002 $3,617,773 $2,656,966 Energy ....................................... 336,905 323,590 1,151,196 908,224 Processed grain and oilseed .................. 157,619 137,548 484,279 409,358 Feed and farm supplies ....................... 202,340 176,145 414,330 383,679 Agronomy ..................................... 332,834 254,260 607,724 481,547 --------- --------- ---------- ---------- 1,854,576 1,516,545 6,275,302 4,839,774 Patronage dividends ........................... 3,851 4,108 39,494 8,010 Other revenues ................................ 20,290 29,177 78,476 82,165 --------- --------- ---------- ---------- 1,878,717 1,549,830 6,393,272 4,929,949 --------- --------- ---------- ---------- COSTS AND EXPENSES: Cost of goods sold ............................ 1,763,633 1,447,824 6,127,149 4,714,477 Marketing, general and administrative ......... 43,329 43,111 109,182 119,381 Interest ...................................... 10,361 11,509 28,499 31,481 Minority interests ............................ 3,322 4,411 143 3,655 --------- --------- ---------- ---------- 1,820,645 1,506,855 6,264,973 4,868,994 --------- --------- ---------- ---------- INCOME BEFORE INCOME TAXES ..................... 58,072 42,975 128,299 60,955 INCOME TAX EXPENSE ............................. 5,840 4,340 13,865 5,375 --------- --------- ---------- ---------- NET INCOME ..................................... $ 52,232 $ 38,635 $ 114,434 $ 55,580 ========= ========= ========== ==========
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, ----------------------- ------------------------ 1998 1999 1998 1999 ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................ $ 52,232 $ 38,635 $ 114,434 $ 55,580 ---------- ---------- ---------- ---------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ....................... 18,360 20,377 55,052 60,523 Noncash income from joint ventures .................. (12,716) (15,728) (6,670) (16,995) Noncash portion of patronage dividends received ..... (1,681) (3,356) (32,830) (6,822) Gain on sale of property, plant and equipment ....... (1,293) (314) (2,609) (1,635) Adjustment of inventories to market value ........... 1,236 (14,946) 20,845 (10,117) Other ............................................... (227) 3,593 (3,193) 2,603 Changes in operating assets and liabilities: Receivables ........................................ 10,225 (136,791) (16,027) (207,880) Inventories ........................................ (54,938) 7,450 (66,344) (23,964) Other current assets and other assets .............. 103,029 38,265 17,457 (70,572) Patrons' credit balances ........................... (78,755) (15,557) (2,313) (3,810) Patrons' advance payments .......................... (77,027) (45,828) (45,520) (32,341) Accounts payable and accrued expenses .............. 156,592 179,236 58,874 102,033 Drafts outstanding and other liabilities ........... 12,232 (719) 9,239 (2,517) ---------- ---------- ---------- ---------- Total adjustments ................................ 75,037 15,682 (14,039) (211,494) ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities ...................................... 127,269 54,317 100,395 (155,914) ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment .......... (42,917) (23,782) (101,104) (94,725) Proceeds from disposition of property, plant and equipment ............................................ 3,061 1,496 19,559 6,348 Investments ........................................... 2,482 6,702 (5,746) (4,510) Investments redeemed .................................. 11,367 3,707 15,335 9,131 Changes in notes receivable ........................... (7,102) (176) 1,802 2,475 Other investing activities, net ....................... (3,053) 18 (2,067) (47) ---------- ---------- ---------- ---------- Net cash used in investing activities ............ (36,162) (12,035) (72,221) (81,328) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in notes payable .............................. (110,020) (77,000) 24,731 169,525 Long-term debt borrowings ............................. 44,993 30,000 68,583 40,565 Principal payments on long-term debt .................. (7,029) (4,514) (20,080) (11,771) Changes in book cash overdraft ........................ 38,818 14,923 28,783 22,542 Retirements of equity ................................. (20,144) (4,518) (39,158) (15,117) Cash patronage dividends paid ......................... (29,117) (67) (42,505) (43,750) ---------- ---------- ---------- ---------- Net cash (used in) provided by financing activities ...................................... (82,499) (41,176) 20,354 161,994 ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... 8,608 1,106 48,528 (75,248) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................... 74,924 43,654 35,004 120,008 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................. $ 83,532 $ 44,760 $ 83,532 $ 44,760 ========== ========== ========== ==========
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 statements of operations and cash flows for the three and nine months ended May 31, 1998 and 1999, reflect, in the opinion of management of Cenex Harvest States Cooperatives (the Company), all normal, recurring adjustments necessary for a fair statement of the results of operations and cash flows for the interim periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. The consolidated balance sheet data as of May 31, 1998 and August 31, 1998 were derived from audited consolidated financial statements but does not include all disclosures required by generally accepted accounting principles. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Reclassifications have been made to the prior year's financial statements to conform to the current year presentation. NOTE 2. RECEIVABLES
AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- ---------- ---------- Trade ........................................ $474,454 $564,737 $689,535 Other ........................................ 20,376 23,635 12,672 -------- -------- -------- 494,830 588,372 702,207 Less allowance for doubtful accounts ......... 23,314 24,187 23,244 -------- -------- -------- $471,516 $564,185 $678,963 ======== ======== ========
NOTE 3. INVENTORIES
AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- ---------- ---------- Energy products .............................. $178,792 $208,055 $202,322 Grain and oilseed ............................ 171,099 166,925 135,463 Agronomy ..................................... 80,030 82,168 85,626 Feed and farm supplies ....................... 30,064 46,871 75,594 Processed grain and oilseed products ......... 19,749 19,000 14,810 -------- -------- -------- $479,734 $523,019 $513,815 ======== ======== ========
NOTE 4. COMPREHENSIVE INCOME As of June 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting of Comprehensive Income". SFAS 130 establishes new rules for the reporting of comprehensive income and its components. The adoption of SFAS 130 had no impact on the Company's net income. SFAS 130 requires unrealized gains and losses on the Company's available-for- sale securities as well as the Company's charge to equity related to its pension liability to be included as components of other comprehensive income. During the three months ended May 31, 1998 and 1999, total comprehensive income amounted to $52,146 and $37,549 respectively. Total comprehensive income was $114,348 and $55,810 for the nine months ended May 31, 1998 and 1999, respectively. Accumulated other comprehensive (loss) income at August 31, 1998, May 31, 1998 and May 31, 1999 was $(99), $1,195 and $130, respectively. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives (Harvest States) combined through merger on June 1, 1998 (the Combination) with Harvest States the surviving corporation. In accordance with the Plan of Combination, the Articles of Incorporation and Bylaws of Harvest States Cooperatives were restated and the name Harvest States Cooperatives was changed to "Cenex Harvest States Cooperatives" (the Company). This Combination has been accounted for as a pooling of interests and as a result all comparative financial information has been restated to include the financial statements of Harvest States and Cenex. In addition, the Company changed its fiscal year to August 31, and is filing this Quarterly Report on Form 10-Q representing the first nine months and third quarter of the Company's new fiscal year. In February 1999, the Company announced that it had entered into discussions with Farmland Industries, Inc., a farm supply, grain marketing and food processing cooperative headquartered in Kansas City, Missouri for the purpose of exploring potential joint ventures in petroleum refining and grain marketing. In May 1999, the Company and Farmland Industries, Inc. announced the intention to work towards a merger of the two companies. This transaction is subject to due diligence, development of a definitive merger agreement and a favorable vote by the memberships of both companies. In June 1999, the Cenex/Land O'Lakes Agronomy Company, of which the Company owns 50%, purchased approximately 310 retail agronomy facilities from Terra International, Inc. at a price of approximately $350 million. The Company contributed capital of $55 million in cash to partially finance this transaction. Financing arrangements for this business, to be managed by the Cenex/Land O'Lakes Agronomy Company, are without recourse to the Company. Thomas F. Baker, Executive Vice President of Finance and Administration and Chief Financial Officer of the Company announced his retirement effective May 31, 1999. John Schmitz, previously Vice President, Finance has been appointed as Senior Vice President and Chief Financial Officer effective June 1, 1999. Debra Thornton, Senior Vice President and General Counsel, has assumed some additional administrative duties effective June 1, 1999. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of an Enterprise and Related Information, which relates to financial reporting of operating or business segments of a company. The new standard is effective for fiscal years beginning after December 15, 1997. Disclosures relative to SFAS No.131 are not required for interim periods in the initial year of application. Management is currently evaluating this new standard and has not yet determined its applicability or impact on the presentation of the Company's financial statements. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which relates to the accounting for derivative transactions and hedging activities. This new standard is effective for years beginning after June 15, 1999. In July 1999, the FASB issued SFAS No. 137 which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. While management does not believe this standard will materially impact the financial position and results of operations of the Company, it is currently evaluating the reporting requirements under this new standard. YEAR 2000 The Year 2000 issue is the result of computer systems being written using two digits rather than four to define the applicable year. Any of the computer programs used by the Company that have date-sensitive software may recognize a date using "00" for the Year 1900 rather than as the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations including an inability to process transactions or engage in similar normal business activities. Furthermore, should other companies or entities with whom the Company has a supplier or a customer relationship 6 encounter business disruption because of the Year 2000 issue, the Company in turn could experience disruption of normal business processes and as a result incur additional costs or loss of revenue. In preparation for the Year 2000, the Company reviewed the primary internally-developed software programs used within the divisions and defined business units comprising Harvest States before the June 1, 1998 merger with Cenex. Appropriate changes were made to that software to accommodate the Year 2000. In addition, the Company has engaged an information technology consulting firm for the purpose of appraising the Company's Year 2000 readiness, identifying critical software applications which are not Year 2000 compliant, remediating such applications, testing corrections to software, developing contingency plans in the event that all software problems are not corrected by the Year 2000, and assisting with certifications of key supplier's Year 2000 readiness. This Year 2000 plan and action program encompasses all areas of the Company. The Company will also assess, to the extent practical, embedded technology in its processing equipment. The Company has completed the assessment phase of the project, and has identified software deemed mission critical which must be remediated or replaced. In addition to this corrective activity, software previously remediated is currently under testing for Year 2000 compliance. The Company has also identified mission critical operations of the Company which may depend upon embedded technology and has collected or is in the process of collecting certification of Year 2000 compliance from equipment manufacturers. It is anticipated that the remediation phase of the project for mission critical systems will be substantially completed by August 31, 1999. Management believes that the total cost to the Company to review and correct its own computer systems will not exceed $2 million, of which approximately $1.3 million was expended through May 31, 1999. The Company's management believes that the Company has in place an effective program to address the Year 2000 issue in a timely manner and that it is taking the steps reasonably necessary to resolve this issue with respect to matters within its control. However, it also recognizes that failure to sufficiently resolve all aspects of the Year 2000 issue in a timely fashion presents substantial risks to the Company. Considerable work remains to be accomplished and unforeseen difficulties could arise which might adversely affect the Company's ability to complete its program on schedule. Furthermore, while the Company has taken, and will continue to take, steps to determine the extent of remediation efforts being undertaken by key customers and suppliers, there is no guarantee that the systems of other companies on which this Company relies will be remediated in a timely fashion to avoid having a material adverse effect on the Company's operations or its financial results. Contingency plans are being discussed, but have not been completed as of this time. Such plans will be developed as the Company fully identifies those systems requiring remediation and works toward completion of its remediation efforts. RESULTS OF OPERATIONS During the last 18 months there has been a decline in U.S. exports due to the Asian monetary crisis which has resulted in lower grain prices. This in turn, has affected the farmer producers' ability and willingness to purchase crop inputs such as fertilizer, chemicals and petroleum products. In addition, the increased production capacity of nitrogen fertilizer, flour and processed oilseed products has depressed prices and gross margins for those products. COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998 The Company's consolidated net income for the three months ended May 31, 1999 and 1998 was $38.6 million and $52.2 million, respectively, which represents a $13.6 million (26%) decrease during the current three-month period. This decrease for the quarter is related to the decline in income from wholesale agronomy and food processing operations and an investment impairment, offset by a patronage dividend received by the farm supply operations and increases in income from grain operations and the Company's consumer products packaging joint venture. In wholesale agronomy operations timing differences resulted in the recognition of chemical rebates for the three-month period in 1998 that were not recognized in the current three-month period, resulting in a decrease in income of $7.7 million. In addition, the gross margin for plant food declined $1.30 per ton for the current quarter ended May 31, 1999 compared to the same period a year ago. Within the Wheat Milling Defined Business Unit reduced volume at the Huron mill produced a $2.0 million dollar decrease in income for the three months ended May 31, 1999. In addition, bad debt 7 expense of $1.1 million was recognized during the current quarter due to the notification of bankruptcy received from two customers of which recovery is unlikely. The balance of the decline in income for the quarter ended May 31, 1999 is primarily attributable to a decline in average gross margins of approximately 33 cents per hundred-weight for all products. Within the Oilseed Processing and Refining Defined Business Unit, the decrease in income is primarily attributable to lower gross margins for soymeal and other processed soybean products. The average gross margin for such products declined approximately $12 per ton during the three months ended May 31, 1999 compared to the same three-month period of a year ago. During the three months ended May 31, 1999 the Company recorded an impairment to its St. Paul Bank for Cooperatives investment in the amount of $3.1 million due to losses incurred by the bank. Income for the current three-month period included a patronage dividend received by farm supply operations in the amount of $3.2 million dollars. In the prior three-month period the patronage dividend was not received until the following quarter. Included in income from grain operations for the three months ended May 31, 1999 was a harbor maintenance tax refund of approximately $1.0 million which was the result of a Supreme Court ruling that the tax was unconstitutional. The Company's share of income from its consumer products packaging joint venture increased approximately $6.5 million during the current three-month period compared to the same period ended in 1998. Net operating results produced by the Company's energy operations for the three months ended May 31, 1999 were not significantly different in total from the results produced during the same period ended a year ago. Consolidated net sales of $1.5 billion decreased approximately $338 million (18%) during the three-month period ended May 31, 1999 compared to the same period ended in 1998. The average sales price for all grain and oilseeds marketed by the Company declined $.83 per bushel, which was the primary factor in a reduction in grain sales during the 1999 period of approximately $200 million (24%). Grain volume of approximately 231 million bushels for the three-month period ended May 31, 1999 was essentially unchanged compared to the same period in 1998. Sales of energy products declined approximately $13 million (4%) during the three-month period ended May 31, 1999 compared with the same period in 1998. Although the average price for refined fuels was 8 cents per gallon higher during the current three-month period than that of a year ago, the primary reason for the decline was a 6% reduction in refined fuel volume. Processed grain and oilseed sales decreased approximately $20 million (13%) during the three months ended May 31, 1999 compared to the same period in 1998. This decrease is primarily attributable to a $19 per ton reduction in the average sales price of soymeal, a decline of approximately 6 cents per pound for refined oil partially offset by a 12% increase in refining volume and a reduction of approximately $2.85 per hundred-weight for milled wheat products partially offset by an 829 thousand hundred-weight volume increase. Sales of feed and farm supplies decreased approximately $26 million (13%) for the three-month period ended May 31, 1999, and is primarily attributable to a decline in volume of approximately 10% due to wet weather conditions during the current quarter. Wholesale agronomy product sales decreased $78.6 million (24%) during the current three-month period ended May 31, 1999. This was primarily the result of a 19% decline in plant food volume at an average price of approximately $22 per ton less than that of a year ago. Patronage dividends received increased $.3 million (7%) during the three months ended May 31, 1999 compared to the same period in 1998. A patronage dividend in the amount of $3.2 million was received during the current three-month period, but a year ago it was received in the following quarter. 8 Offsetting this was a patronage dividend received from the St. Paul Bank for Cooperatives in the three-month period ended May 31, 1998, but not in the current three-month period due to the bank's losses. Other revenues of $29.2 million increased $8.9 million (44%) for the three months ended May 31, 1999 compared to the same period in 1998. While there were some changes in revenue volumes among the recurring categories of divisional service income, the primary reason for the change was an increase in the Company's share of income from its consumer products packaging joint venture and grain marketing joint ventures of approximately $6.5 million and $1.7 million, respectively, during the current three-month period. Cost of goods sold of $1.4 billion decreased approximately $316 million (18%) during the three months ended May 31, 1999 compared to the same period in 1998. During the three months ended May 31, 1999, the average cost per bushel for all grains and oilseeds procured by the Company through its grain marketing and country elevator system decreased $1.12 compared to the same period ended in 1998. The average cost per gallon for refined fuels increased 1/2 a cent during the three-month period ended May 31, 1999 compared to 1998. Within the Company's food processing operations, the average cost for wheat declined $1.51 per bushel, and the average cost for soybeans declined $1.50 per bushel, both compared to purchases made during the same three-month period ended in the previous year. Marketing, general and administrative expenses of $43.1 million for the three months ended May 31, 1999 decreased $0.2 million (1%) compared to the same three months ended in 1998. During the three-month period ended in 1999, the Company expended approximately $0.7 million as part of its Year 2000 computer compliance program. Interest expense of $11.5 million increased $1.1 million (11%) for the three months ended May 31, 1999 compared to the same period in 1998. Long-term borrowings since May 31, 1998 to finance the acquisition of property, plant and equipment generated most of this additional expense. Minority interests in operations for the three-month period ended May 31, 1999 increased approximately $1.1 million compared to the same period in 1998. Substantially all of the minority interest is related to National Cooperative Refinery Association (NCRA), which operates a refinery near McPherson, Kansas. The Company owns approximately 75% of NCRA. This change in minority interests during the current three-month period is reflective of more profitable operations within the partially owned subsidiaries compared to the same period a year ago. Income tax expense of $4.3 million and $5.8 million for the three months ended May 31, 1999 and 1998, respectively, resulted in an effective tax rate of 10.1% for both periods. Non-patronage income as a percentage of total income was approximately the same for both periods. COMPARISON OF NINE MONTHS ENDED MAY 31, 1999 AND 1998 The Company's consolidated net income for the nine months ended May 31, 1999 and 1998 was $55.6 million and $114.4 million, respectively, which represents a $58.8 million (51%) decrease during the current nine-month period. This decline in profitability is primarily attributable to the absence of an agronomy product patronage refund of approximately $32.9 million which the Company had received during the previous year's nine-month period, and depressed gross margins in the Company's food processing and energy operations. During the nine-month period ended May 31, 1998, the Company received a patronage dividend of approximately $32.9 million on plant food purchases from its primary supplier of such products. During the current nine-month period, the Company did not receive a patronage dividend due to depressed earnings in that particular industry. Grain volume of approximately 830 million bushels was essentially unchanged during the nine months ended May 31, 1999 when compared with the same period in 1998. The average sales price for all grain and oilseeds marketed by the Company, however, declined $1.12 per bushel, which was the primary factor in a reduction in grain and oilseed sales during the 1999 period of approximately $961 million (27%). 9 Sales of energy products declined approximately $243 million (21%) during the nine-month period ended May 31, 1999 compared with the same period in 1998. This was primarily the result of an 8% decline in refined fuel volume at an average price 10 cents per gallon less than that of a year ago. Processed grain and oilseed sales decreased approximately $75 million (15%) during the nine months ended May 31, 1999 compared to the same period in 1998. This decrease is primarily attributable to a decline in processing volume of 43 thousand tons and a $63 per ton reduction in the average sales price of soymeal in addition to a reduction of approximately $2.79 per hundred-weight for milled wheat products partially offset by a 1.2 million hundred-weight volume increase. Feed and farm supply sales of approximately $384 million decreased approximately $31 million (7%) during the nine months ended May 31, 1999 compared to the same period in 1998. The decrease in the current nine-month period is primarily attributable to a 10% decline in volume due to wet weather conditions. Wholesale agronomy product sales declined approximately $126 million (21%) during the nine months ended May 31, 1999 compared to the same period in 1998. This was primarily the result of a 15% decline in plant food volume at an average price of $16 per ton less than that of a year ago. Patronage dividends received decreased approximately $31.5 million (80%) during the nine months ended May 31, 1999 compared to the same period in 1998. This decline in patronage dividends was the primarily the result of reduced earnings generated by the Company's primary fertilizer supplier. Other revenues of $82.2 million increased $3.7 million (5%) for the nine months ended May 31, 1999 compared to the same period in 1998. Increases in the Company's share of income from its consumer products packaging joint venture and grain marketing joint ventures of approximately $1.1 million and $2.0 million, respectively, during the current nine-month period were the most significant factors affecting this change. Cost of goods sold of approximately $4.7 billion decreased approximately $1.4 billion (23%) during the nine months ended May 31, 1999 compared to the same period in 1998. During the nine months ended May 31, 1999, the average cost per bushel for all grains and oilseed procured by the Company though it's grain marketing and country elevator system decreased $1.12 compared to the same period ended in 1998. The average cost per gallon for refined fuels decreased 9 cents during the nine-month period ended May 31, 1999 compared to 1998, in addition to an 8% decline in volume for refined fuels. Fertilizer costs declined an average of approximately $16 per ton, and volume for that product line declined 15% compared to activity during the nine months ended May 31, 1998. In the Company's food processing operations, the average cost of wheat and soybeans declined $1.47 and $1.50 per bushel, respectively. Marketing, general, and administrative expenses of $119.4 million increased $10.2 million (9%) for the nine months ended May 31, 1999 compared to the same period in 1998. Approximately $1.8 million of the increase is within the Wheat Milling Defined Business Unit operations from the recognition of $1.1 million of uncollectable accounts receivable and also increased costs at the new mill at Mount Pocono. Within the energy operations approximately $3.0 million of this increase is due to commission expense related to Country Energy, LLC, a 50/50 joint venture with Farmland Industries, Inc. that started operations in September 1998. This commission expense includes marketing programs and expenses which had previously been included in cost of goods sold. Approximately $1.5 million of the change is from credits to expenses produced as a result of the divestiture of a petroleum exploration project during the nine-month period ended May 31, 1998. During the nine-month period ended May 31, 1999, the Company has recorded one-time costs related to the consolidation of the business units pursuant to the merger of Cenex, Inc. and Harvest States Cooperatives of approximately $1.9 million. In addition, the Company has expended approximately $1.3 million during the nine-month period ended May 31, 1999 for the purpose of assessing and remediating issues related to Year 2000 computer compliance. Interest expense of $31.5 million increased $3.0 million (10%) during the nine months ended May 31, 1999 compared to the same period in 1998. Long-term borrowings since May 31, 1998 to finance the acquisition of property, plant and equipment generated most of this additional expense. 10 Minority interests in operations for the nine-month period ended May 31, 1999 increased approximately $3.5 million compared to the same period in 1998. Substantially all of the minority interest is in NCRA, which operates a refinery near McPherson, Kansas. The Company owns approximately 75% of NCRA. This change in minority interests during the current nine-month period is reflective of more profitable operations within the partially owned subsidiaries compared to the same period of a year ago. Income tax expense of $5.4 million and $13.9 million for the nine months ended May 31, 1999 and 1998, respectively, resulted in effective tax rates of 8.8% and 10.8%. The reduced 1999 effective tax rate is reflective of reduced nonpatronage earnings in several operations of the Company. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FROM OPERATIONS Operating activities of the Company provided net cash of $54.3 million and $127.3 million for the three months ended May 31, 1999 and 1998, respectively. For the period ended in 1999, net income of $38.6 million and decreased working capital requirements of approximately $26.1 million were offset by net non-cash income and expenses of approximately $10.4 million. For the three-month period ending May 31, 1998, net cash provided by operating activities comprised of net income of $52.2 million, net non-cash income and expenses of approximately $3.7 million and decreased working capital requirements of approximately $71.4 million. Operating activities of the Company used net cash of $155.9 million and provided net cash of $100.4 million for the nine months ended May 31, 1999 and 1998, respectively. For the period ended in 1999, net income of $55.6 million and net non-cash income and expenses of approximately $27.6 million were offset by increased working capital requirements of approximately $239.1 million. For the nine-month period ended May 31, 1998, net income of $114.4 million and net non-cash income and expenses of $30.6 million were offset by increased working capital requirements of approximately $44.6 million. CASH FLOWS FROM INVESTING Investing activities of the Company used net cash of $12.0 million during the three-month period ended May 31, 1999. Expenditures for the acquisition of property, plant and equipment of $23.8 million and the net changes in notes receivable were partially offset by proceeds from the disposition of property, plant and equipment, the net change in investments of $6.7 million and proceeds from the redemption of prior investments. The Company projects total expenditures for the acquisition of property, plant and equipment for the fiscal year ending August 31, 1999 to be approximately $196 million. Investing activities of the Company used net cash of $36.2 million during the three-month period ended May 31, 1998. Expenditures for the acquisition of property, plant and equipment of $42.9 million, and $7.1 million net changes in notes receivable were partially offset by proceeds from the disposition of property, plant and equipment, the net change in investments and proceeds from the redemption of prior investments of $11.4 million. Investing activities of the Company used net cash of $81.3 million during the nine-month period ended May 31, 1999. Expenditures for the acquisition of property, plant and equipment of $94.7 million and additional investments of $4.5 million were partially offset by proceeds from the disposition of property, plant and equipment of $6.3 million, proceeds from the redemption of prior investments of $9.1 million and net changes of notes receivable. Investing activities of the Company used net cash of $72.2 million during the nine-month period ended May 31, 1998. Expenditures for the acquisition of property, plant and equipment of $101.1 million and additional investments of $5.7 million, were partially offset by proceeds from the disposition of property, plant and equipment of $19.6 million, proceeds from the redemption of prior investments of $15.3 million and net changes of notes receivable. The single largest source of cash partially offsetting capital expenditures and investments was the proceeds of a sale-leaseback transaction for equipment within the Oilseed Processing and Refining Defined Business Unit. CASH FLOWS FROM FINANCING The Company finances its working capital needs through short-term lines of credit with the banks for cooperatives and commercial banks. In June 1998, the Company established a 364-day credit facility 11 of $400 million and a five-year revolving facility of $200 million, all of which is committed. This facility was renewed as of May 31, 1999. In addition to these credit lines, the Company has a 364-day credit facility dedicated to NCRA, a subsidiary of which the Company owns 75%, with the St. Paul Bank for Cooperatives in the amount of $52 million, all of which is committed, and a 364-day credit facility dedicated to Swiss Valley Cooperative, a subsidiary of which the Company owns 60%, with CoBank in the amount of $0.75 million, all of which is committed. On May 31, 1999 the Company had total short-term indebtedness on these various facilities totaling $170 million. On August 31, 1998 and May 31, 1998, respectively, the Company had $0.5 million and $53.5 million outstanding on its short-term lines of credit. The increase in short-term borrowings in the nine-month period ended May 31, 1999 is primarily attributable to the cash grain activity and the payment of deferred grain contracts after the beginning of the new tax year starting January 1999, and also receivables related to crop inputs during the spring season. The Company has financed its long-term capital needs in the past, primarily for the acquisition of property, plant and equipment, with long-term loan agreements through the banks for cooperatives. On May 31, 1998, the Company had total indebtedness related to these long-term lines of credit of $373.8 million, of which approximately $36.0 million represented long-term borrowings by NCRA. In June 1998, the Company established a new long-term credit agreement through the banks for cooperatives whereby the Company repaid $279.6 million of the loan balance, and borrowed $134 million on the new long-term facility with the banks for cooperatives. This facility committed $200 million of long-term borrowing capacity to the Company, with repayments through the year 2009. On May 28, 1999, the company borrowed an additional $30 million on this facility, which expired on May 31, 1999. The amount outstanding on this credit agreement was $134 million on August 31, 1998 and $164 million on May 31, 1999. Also in June 1998, as part of the refinancing program for the merged operations, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $225 million. Repayments will be made in equal installments of $37.5 million each in the years 2008 through 2013. In addition, the Company had long-term indebtedness on August 31, 1998, May 31, 1998 and May 31, 1999, of $39.8 million, $41.0 million and $32.2 million, respectively, in the form of Industrial Revenue Bonds, capitalized leases and other notes and contracts. The Company incurred additional long-term debt of $30.0 million during the three months ended May 31, 1999. During that same period, the Company repaid long-term debt totaling approximately $4.5 million. During the three months ended May 31, 1998 the Company incurred additional long-term debt of $45.0 million, and repaid $7.0 million of long-term debt. During the nine-month periods ended May 31, 1999 and 1998, the Company incurred additional long-term debt of $40.6 million and $68.6 million, respectively. Repayments of long-term debt totaled $11.8 million and $20.1 million during the nine months ended May 31, 1999 and 1998, respectively. In accordance with the bylaws and by action of the Board of Directors, annual net income from patronage sources are distributed to consenting patrons following the close of each year and are based on amounts reportable for federal income tax purposes as adjusted in accordance with the bylaws. In September 1998, the Company distributed patronage dividends to patrons based upon the operating results of the former Harvest States portion of the business for its year ended May 31, 1998. The cash portion of this distribution, deemed by the Board of Directors to be 80% for Equity Participation Units and 30% for regular patronage, was approximately $15.1 million. In January 1999, the Company distributed the patronage income generated by the former Cenex portion of the business for the period ended May 31, 1998, and the patronage income resulting from the combined operations of the Company for the three months ended August 31, 1998. The cash portion of that distribution, deemed by the Board of Directors to be 80% for Equity Participation Units and 30% for regular patronage, was approximately $28.6 million. Beginning June 1, 1998, inactive direct members and patrons and active direct members and patrons age 61 and older on that date continue to be eligible for patronage certificate redemptions at the age of 72 or death. For active direct members and patrons who were age 60 or younger on June 1, 1998, and 12 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 equity redemptions, related to the May 31, 1998 fiscal year end of the former Harvest States operating units, the eight-month reporting period of the former Cenex operating units ended on May 31, 1998, and the three-month period ended August 31, 1998 for the combined operations of Cenex Harvest States Cooperatives, is expected to be approximately $24.3 million, of which approximately $4.5 million was redeemed during the three months ended August 31, 1998. Redemptions made during the three months ended May 31, 1999 and 1998 were approximately $4.5 million and $20.1 million, respectively. During the nine months ended May 31, 1999 and 1998, respectively, the Company redeemed approximately $15.1 million and $39.2 million of equity. EFFECT OF INFLATION AND FOREIGN CURRENCY TRANSACTIONS The Company believes that inflation and foreign currency fluctuations have not had a significant effect on its operations. 13 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 AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- --------- --------- (DOLLARS IN THOUSANDS) (UNAUDITED) CURRENT ASSETS: Receivables ...................................... $28,703 $32,585 $28,915 Inventories ...................................... 18,569 23,759 17,221 Other current assets ............................. 185 ------- ------- ------- Total current assets ............................ 47,272 56,529 46,136 PROPERTY, PLANT AND EQUIPMENT ..................... 35,596 34,953 38,345 ------- ------- ------- $82,868 $91,482 $84,481 ======= ======= ======= LIABILITIES AND DEFINED BUSINESS UNIT EQUITY CURRENT LIABILITIES: Due to Cenex Harvest States Cooperatives ......... $15,071 $22,890 $17,270 Accounts payable ................................. 7,547 8,868 4,478 Accrued expenses ................................. 1,773 1,660 4,256 ------- ------- ------- Total current liabilities ....................... 24,391 33,418 26,004 COMMITMENTS AND CONTINGENCIES ..................... DEFINED BUSINESS UNIT EQUITY ...................... 58,477 58,064 58,477 ------- ------- ------- $82,868 $91,482 $84,481 ======= ======= =======
The accompanying notes are an integral part of the financial statements (unaudited) 14 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, --------------------- ---------------------- 1998 1999 1998 1999 -------- ------- -------- -------- (DOLLARS IN THOUSANDS) REVENUES: Processed oilseed sales ....................... $105,412 $93,021 $324,037 $279,794 Other revenues ................................ 41 160 542 232 -------- ------- -------- -------- 105,453 93,181 324,579 280,026 -------- ------- -------- -------- COSTS AND EXPENSES: Cost of goods sold ............................ 98,544 88,801 296,811 265,688 Marketing, general and administrative ......... 848 1,435 3,482 4,084 Interest ...................................... 70 100 371 694 -------- ------- -------- -------- 99,462 90,336 300,664 270,466 -------- ------- -------- -------- INCOME BEFORE INCOME TAXES ..................... 5,991 2,845 23,915 9,560 INCOME TAX EXPENSE ............................. 925 50 1,150 325 -------- ------- -------- -------- NET INCOME ..................................... $ 5,066 $ 2,795 $ 22,765 $ 9,235 ======== ======= ======== ========
The accompanying notes are an integral part of the financial statements (unaudited) 15 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, ---------------------- ----------------------- 1998 1999 1998 1999 --------- -------- --------- -------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................................. $ 5,066 $ 2,795 $ 22,765 $ 9,235 --------- -------- --------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .............................................. 616 388 1,549 1,500 Gain on disposal of property, plant and equipment ......... (202) Changes in operating assets and liabilities: Receivables .............................................. (1,258) 318 (5,349) (212) Inventories .............................................. 6,626 9,210 (15,161) 1,348 Other current assets ..................................... 373 2,504 Accounts payable and accrued expenses .................... 1,363 (4,947) (130) (586) --------- -------- --------- -------- Total adjustments ...................................... 7,720 4,969 (16,789) 2,050 --------- -------- --------- -------- Net cash provided by operating activities .............. 12,786 7,764 5,976 11,285 --------- -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment ................ (1,255) (752) (5,726) (4,252) Proceeds from disposition of property, plant and equipment .................................................. 10,267 3 --------- -------- --------- -------- Net cash (used in) provided by investing activities .................................. (1,255) (752) 4,541 (4,249) --------- -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in due to Cenex Harvest States Cooperatives .......... (11,138) (4,217) 7,575 2,199 Defined business unit equity distributed .................... (393) (2,795) (18,092) (9,235) --------- -------- --------- -------- Net cash used in financing activities .................. (11,531) (7,012) (10,517) (7,036) --------- -------- --------- -------- 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) 16 OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. ACCOUNTING POLICIES The unaudited statements of operations and cash flows for the three and nine months ended May 31, 1998 and 1999, reflect, in the opinion of management of Cenex Harvest States Cooperatives (the Company), all normal, recurring adjustments necessary for a fair statement of the results of operations and cash flows for the interim periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. The balance sheet data as of May 31, 1998 and August 31, 1998 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. 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 May 31, 1998, and for the three months ended August 31, 1998, which are included in the Cenex Harvest States Cooperatives Report on Form 10-K and Transition Report on Form 10-Q previously filed with the Securities and Exchange Commission on August 27, 1998 and October 14, 1998, respectively. NOTE 2. RECEIVABLES
AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- --------- --------- (DOLLARS IN THOUSANDS) Trade ........................................ $29,098 $32,980 $29,310 Less allowance for doubtful accounts ......... 395 395 395 ------- ------- ------- $28,703 $32,585 $28,915 ======= ======= =======
NOTE 3. INVENTORIES
AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- --------- --------- (DOLLARS IN THOUSANDS) Oilseed ...................................... $ 712 $ 6,926 $ 5,418 Processed oilseed products ................... 17,857 16,833 11,803 ------- ------- ------- $18,569 $23,759 $17,221 ======= ======= =======
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives (Harvest States) combined through merger on June 1, 1998 (the Combination) with Harvest States the surviving corporation. In accordance with the Plan of Combination, the Articles of Incorporation and Bylaws of Harvest States Cooperatives were restated and the name Harvest States Cooperatives was changed to "Cenex Harvest States Cooperatives" (the Company). In addition, the Company changed its fiscal year end to August 31, and is filing this Quarterly Report on Form 10-Q representing the first nine months and third quarter of the Company's new fiscal year. See management's discussion for the Company in regard to new accounting pronouncements and also the Year 2000. RESULTS OF OPERATIONS Patronage refunds to the Oilseed Processing and Refining Defined Business Unit holders are calculated on the basis of tax earnings per bushel. Because of this, the Company believes that the calculation below is an important measure of the Defined Business Unit's performance.
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, --------------------- ----------------------- 1998 1999 1998 1999 --------- --------- ---------- ---------- (IN THOUSANDS EXCEPT PER BUSHEL INFORMATION) Income before income taxes ............... $5,991 $2,845 $ 23,915 $ 9,560 Income from purchased oil ................ (583) (523) (1,336) (1,396) Book to tax differences .................. (384) 1 (384) 5 ------ ------ -------- -------- Taxable income ........................... $5,024 $2,323 $ 22,195 $ 8,169 ------ ------ -------- -------- Bushels processed ........................ 8,917 9,166 28,019 26,784 Income per bushel ........................ $ 0.56 $ 0.25 $ 0.79 $ 0.30 ------ ------ -------- --------
Certain operating information pertaining to the Oilseed Processing and Refining Defined Business Unit is set forth below, as a percentage of processed oilseed sales.
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, ---------------------- ---------------------- 1998 1999 1998 1999 ---------- --------- ---------- --------- Gross margin ............................. 6.52% 4.54% 8.40% 5.04% Marketing, general and administrative .... 0.80% 1.54% 1.07% 1.46% Interest ................................. 0.07% 0.11% 0.11% 0.25%
COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998 The Oilseed Processing and Refining Defined Business Unit net income of $2.8 million for the three months ended May 31, 1999 represents a $2.3 million decrease (45%) compared to the same period in 1998. This decrease is primarily attributable to lower gross margins for soymeal and other processed soybean products. The average gross margin for such products declined approximately $12 per ton during the three months ended May 31, 1999 compared to the same three-month period of a year ago. Processed oilseed sales of $93.0 million for the three-month period ended May 31, 1999 decreased by $12.4 million (12%) compared to the same period in 1998. A reduction in the sale price for processed soybean products, primarily soymeal, of approximately $19 per ton and a decline of about $.06 per pound for refined oil, partially offset by a 12% increase in refining volume produced this change in sales dollars. Other revenues increased $0.1 million during the three months ended May 31, 1999 compared to the same period in 1998. During the 1999 period, the Defined Business Unit received a patronage refund from a cooperative soymeal customer totaling approximately $0.1 million, accounting for most of this increase. 18 Cost of goods sold of $88.8 million for the three months ended May 31, 1999 decreased $9.7 million (10%) compared to the same period in 1998. A reduced cost for soybeans of $1.28 per bushel during the three months ended May 31, 1999 compared to the same period in 1998 reduced cost of goods sold by approximately $11.8 million. This price variance was partially offset by a 3% increase in crush volume compared to the same three months of a year ago, which had the affect of increasing cost by approximately $1.6 million. A decline in the price of crude soybean oil of approximately $.06 per pound was almost entirely offset by an increase in volume refined during the three month period of 1999 compared with the same three month period ended on May 31, 1998. Marketing, general and administrative expenses of $1.4 million for the three months ended May 31, 1999 increased approximately $0.6 million (69%) compared to the same period ended in 1998. Most of this change is attributable to adjustments to expense accruals during the 1998 period. Prior to the Harvest States Cooperative's merger with Cenex, Inc. on June 1, 1998, the Defined Business Unit operated on a May 31 fiscal year end. For year-end closing, various expenses were adjusted from estimated accruals to accruals that were calculated based upon actuarial or other more precise measurements. Interest expense for the three months ended May 31, 1999 was $0.1 million, compared with approximately $0.07 million for the same period of a year ago. This increase is primarily attributable to capital expenditures made since the 1998 period. Income tax expense of $0.05 million and $0.9 million for the three-month periods ended May 31, 1999 and 1998, respectively, resulted in effective tax rates of 1.8% and 15.4%. The significantly higher effective tax rate during the 1998 period recognized actual non patronage soybean purchases, as recorded for the patronage distribution, exceeding the volume projected for the tax provision of the prior quarters. COMPARISON OF NINE MONTHS ENDED MAY 31, 1999 AND 1998 The Oilseed Processing and Refining Defined Business Unit's net income of $9.2 million for the nine months ended May 31, 1999 represents a $13.5 million decrease (59%) compared to the same period in 1998. This decrease is attributable to reduced gross margins for both soymeal and other processed soybean products. The average gross margin for such products declined approximately $18 per ton during the nine months ended May 31, 1999 compared to the same nine-month period of a year ago. Processed oilseed sales of $279.8 million for the nine-month period ended May 31, 1999 decreased $44.2 million (14%) compared to the same period in 1998. A decline in processing volumes of approximately 43,000 tons, a reduction in sales price of approximately $63 per ton for such products and a decrease in the average sales price for refined oil of approximately $.01 per pound was partially offset by a 6% increase in refining volumes. Other revenues declined $0.3 million (57%) during the nine months ended May 31, 1999 compared to the same period in 1998. During the 1998 period, the Oilseed Processing and Refining Defined Business Unit recognized gains on disposal of replaced equipment sold at salvage value of approximately $0.2 million, and also received insurance proceeds related to a business interruption claim of approximately $0.3 million. During the 1999 period the Oilseed Processing and Refining Defined Business Unit received a patronage refund from a cooperative soymeal customer totaling $0.1 million. Cost of goods sold of $265.7 million for the nine months ended May 31, 1999 decreased $31.1 million (10%) compared to same period ended in 1998. During the 1999 period, a decline in soybeans processed of approximately 1.2 million bushels reduced such costs almost $8.1 million. A reduced cost for soybeans of $1.50 per bushel during the nine months ended May 31, 1999 compared to the same period in 1998 resulted in a decline cost of goods sold by approximately $40.3 million. These reductions were partially offset by a 1.1 cent per pound increase in the cost of crude soybean oil, as well as by a 13% increase in crude soybean oil purchases. Marketing, general, and administrative expenses of $4.1 million for the nine months ended May 31, 1999 increased approximately $0.6 million (17%) during the nine months ended May 31, 1999 compared to the same period in 1998. Most of this change is attributable to adjustments of expense accruals during the period ended on May 31, 1998. 19 Interest expense for the nine months ended May 31, 1999 was $0.7 million compared with $0.4 million for the same period of a year ago. This increase of $0.3 million (87%) is primarily attributable to capital expenditures made since the 1998 period. Income tax expense of $0.3 million and $1.2 million for the nine-month periods ended May 31, 1999 and 1998, respectively, resulted in effective tax rates of 3.4% and 4.8%. The decrease in the effective tax rate in the 1999 period is the result of reduced non-patronage earnings as a percentage of total earnings. 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 additional inventories and receivables based on increased 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, 1999 provided net cash of $7.8 million. Net income of $2.8 million, non-cash expenses of $0.4 million and a reduction in working capital requirements of $4.6 million generated this net cash. For the same three-month period of a year ago, net income of $5.1 million, non-cash expenses of approximately $0.6 million and decreased working capital requirements of approximately $7.1 million provided net cash of approximately $12.8 million. Operating activities for the nine months ended May 31, 1999 provided net cash of $11.3 million. Net income of $9.2 million, non-cash expenses of $1.5 million and decreased working capital requirements of approximately $0.6 million generated this net cash from operating activities. For the same nine-month period a year ago, net income of $22.8 million and non-cash expenses and income of approximately $1.3 million were offset by increased working capital requirements totaling approximately $18.1 million, thereby providing net cash from operating activities of $6.0 million. CASH FLOWS FROM INVESTING The Oilseed Processing and Refining Defined Business Unit used cash of approximately $0.8 million and $1.3 million during the three-month periods ended May 31, 1999 and 1998, respectively, for the acquisition of property, plant and equipment. During the nine-month period ended May 31, 1999, the Oilseed Processing and Refining Defined Business Unit used approximately $4.3 million for the acquisition of property, plant and equipment. During the nine-months ended May 31, 1998, the Oilseed Processing and Refining Defined Business Unit received cash of approximately $10.3 million from the sale of soybean processing equipment and entered into a sale / leaseback transaction for such equipment. During the same period, the Oilseed Processing and Refining Defined Business Unit expended approximately $5.7 million for the purchase of property, plant and equipment. Total expenditures for the acquisition of property, plant and equipment for the fiscal year ending August 31, 1999 are projected to be approximately $6.3 million. 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 all of the Company'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 has a zero cash position. Financing is available from the Company to the extent of the Company's working capital position and corporate loan agreements with various banks, and cash requirements of all other Company operations. Working capital requirements for each division and 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 $17.3 million as of May 31, 1999 compared with $15.1 million as of August 31, 1998 and $22.9 million as of May 31, 1998. These interest bearing balances reflect working capital and fixed asset financing requirements. 20 In July 1998, the Company announced its site selection for the construction of a new soybean processing and refining plant in southwestern Minnesota. The facility, to be constructed near the city of Fairmont, Minnesota, is expected to cost between $60.0 million and $90.0 million. The precise configuration and size of the facility has yet to be determined. Since that announcement, the Company has acquired the plant site at a cost of approximately $1.3 million with construction tentatively scheduled to begin in the year 2001. The new facility may be financed with debt, open membership equity, additional equity participation units, or a combination of these financing alternatives. 21 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 AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- ---------- --------- (DOLLARS IN THOUSANDS) (UNAUDITED) CURRENT ASSETS: Receivables ...................................... $ 35,228 $ 35,757 $ 32,579 Inventories ...................................... 18,895 13,785 15,910 Other current assets ............................. 430 394 93 -------- -------- -------- Total current assets ............................ 54,553 49,936 48,582 INTANGIBLE ASSETS ................................. 10,481 10,748 9,681 PROPERTY, PLANT AND EQUIPMENT ..................... 97,428 85,627 111,254 -------- -------- -------- $162,462 $146,311 $169,517 ======== ======== ======== LIABILITIES AND DEFINED BUSINESS UNIT EQUITY CURRENT LIABILITIES: Due to Cenex Harvest States Cooperatives ......... $ 33,238 $ 16,739 $ 45,597 Accounts payable ................................. 11,003 8,836 12,236 Accrued expenses ................................. 1,667 1,569 2,447 Current portion of long-term debt ................ 10,005 10,005 10,005 -------- -------- -------- Total current liabilities ....................... 55,913 37,149 70,285 LONG-TERM DEBT .................................... 38,516 41,204 31,199 COMMITMENTS AND CONTINGENCIES DEFINED BUSINESS UNIT EQUITY ...................... 68,033 67,958 68,033 -------- -------- -------- $162,462 $146,311 $169,517 ======== ======== ========
The accompanying notes are an integral part of the financial statements (unaudited) 22 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, ------------------------ ------------------------ 1998 1999 1998 1999 ---------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) REVENUES: Processed grain sales ......................... $52,825 $44,528 $160,861 $129,565 Other revenues ................................ 1,451 1,533 ------- ------- -------- -------- 54,276 44,528 162,394 129,565 ------- ------- -------- -------- COSTS AND EXPENSES: Cost of goods sold ............................ 50,079 43,356 149,044 125,193 Marketing, general and administrative ......... 2,042 3,580 6,430 8,259 Interest ...................................... 225 1,522 2,043 3,601 Other ......................................... 162 162 ------- ------- -------- -------- 52,508 48,458 157,679 137,053 ------- ------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES ......................................... 1,768 (3,930) 4,715 (7,488) INCOME TAX EXPENSE (BENEFIT) ................... 100 (325) 350 (600) ------- ------- -------- -------- NET INCOME (LOSS) .............................. $ 1,668 ($ 3,605) $ 4,365 ($ 6,888) ======= ======= ======== ========
The accompanying notes are an integral part of the financial statements (unaudited) 23 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, -------------------------- ------------------------- 1998 1999 1998 1999 ---------- ---------- ----------- ---------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .......................................... $ 1,668 ($ 3,605) $ 4,365 ($ 6,888) -------- ------- --------- -------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ............................ 1,056 1,528 3,499 4,146 Loss on impairment ....................................... 162 162 Changes in operating assets and liabilities: Receivables ............................................. (1,271) 186 2,522 2,649 Inventories ............................................. 1,698 7,227 (235) 2,985 Other current assets .................................... (61) 72 (89) 337 Accounts payable and accrued expenses ................... (938) (842) (7,464) 2,013 -------- ------- --------- -------- Total adjustments ..................................... 646 8,171 (1,605) 12,130 -------- ------- --------- -------- Net cash provided by operating activities ............. 2,314 4,566 2,760 5,242 -------- ------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment ............... (9,107) (1,937) (18,017) (17,172) -------- ------- --------- -------- Net cash used in investing activities ................. (9,107) (1,937) (18,017) (17,172) -------- ------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in due to Cenex Harvest States Cooperatives ......... 9,540 (3,795) 25,578 12,359 Principal payments on long-term debt ....................... (2,439) (2,439) (7,316) (7,317) Defined business unit equity distributed ................... (308) 3,605 (3,005) 6,888 -------- ------- --------- -------- Net cash provided by (used in) financing activities ................................. 6,793 (2,629) 15,257 11,930 -------- ------- --------- -------- 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) 24 WHEAT MILLING DEFINED BUSINESS UNIT (A DEFINED BUSINESS UNIT OF CENEX HARVEST STATES COOPERATIVES) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. ACCOUNTING POLICIES The unaudited statements of operations and cash flows for the three and nine months ended May 31, 1998 and 1999, reflect, in the opinion of management of Cenex Harvest States Cooperatives (the Company), all normal, recurring adjustments necessary for a fair statement of the results of operations and cash flows for the interim periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. The balance sheet data as of May 31, 1998 and August 31, 1998 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. 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 May 31, 1998, and for the three months ended August 31, 1998, which are included in the Cenex Harvest States Cooperatives Report on Form 10-K and Transition Report on Form 10-Q previously filed with the Securities and Exchange Commission on August 27, 1998 and October 14, 1998, respectively. NOTE 2. RECEIVABLES
AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- --------- --------- (DOLLARS IN THOUSANDS) Trade ........................................ $34,825 $35,703 $33,471 Other ........................................ 1,074 738 1,088 ------- ------- ------- 35,899 36,441 34,559 Less allowance for doubtful accounts ......... 671 684 1,980 ------- ------- ------- $35,228 $35,757 $32,579 ======= ======= =======
NOTE 3. INVENTORIES
AUGUST 31, MAY 31, MAY 31, 1998 1998 1999 ---------- --------- --------- (DOLLARS IN THOUSANDS) Grain ........................................ $17,003 $11,618 $12,903 Processed grain products ..................... 1,270 1,395 2,114 Other ........................................ 622 772 893 ------- ------- ------- $18,895 $13,785 $15,910 ======= ======= =======
25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to a Plan of Combination dated May 29, 1998 (the Plan of Combination), CENEX, Inc. (Cenex) and Harvest States Cooperatives (Harvest States) combined through merger on June 1, 1998 (the Combination) with Harvest States the surviving corporation. In accordance with the Plan of Combination, the Articles of Incorporation and Bylaws of Harvest States Cooperatives were restated and the name Harvest States Cooperatives was changed to "Cenex Harvest States Cooperatives" (the Company). In addition, the Company changed its fiscal year end to August 31, and is filing this Quarterly Report on Form 10-Q representing the first nine months and third quarter of the Company's new fiscal year. See management's discussion for the Company in regard to new accounting pronouncements and also the Year 2000. RESULTS OF OPERATIONS Patronage refunds to the Wheat Milling Defined Business Unit holders are calculated on the basis of tax earnings per bushel. Because of this, the Company believes that the calculation below is an important measure of the Defined Business Unit's performance.
FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, -------------------------- ------------------------- 1998 1999 1998 1999 ----------- ----------- ---------- ----------- (IN THOUSANDS EXCEPT PER BUSHEL INFORMATION) Income (loss) before income taxes ............. $ 1,768 $ (3,930) $ 4,715 $ (7,488) Book to tax differences ....................... 689 96 689 289 ------- -------- -------- -------- Taxable income (loss) ......................... $ 2,457 $ (3,834) $ 5,404 $ (7,199) ======= ======== ======== ======== Bushels processed ............................. 8,446 9,719 24,264 26,278 Income (loss) per bushel ...................... $ 0.29 $ (0.39) $ 0.22 $ (0.27) ======= ======== ======== ========
Certain operating information pertaining to the Wheat Milling Defined Business Unit is set forth below, as a percentage of processed grain sales.
THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, ----------------------- ----------------------- 1998 1999 1998 1999 ---------- ---------- ---------- ---------- Gross margin .................................. 5.20% 2.63% 7.35% 3.37% Marketing, general and administrative ......... 3.87% 8.04% 4.00% 6.37% Interest ...................................... 0.43% 3.42% 1.27% 2.78%
COMPARISON OF THREE MONTHS ENDED MAY 31, 1999 AND 1998 The Wheat Milling Defined Business Unit incurred a net loss of $3.6 million for the three months ended May 31, 1999 compared to net income of $1.7 million for the same period in 1998, for a decrease of $5.3 million. Approximately $2.0 million of this decrease was due to a volume reduction at the Huron mill. In June 1998, the Wheat Milling Defined Business Unit began a conversion at the Huron mill of a semolina flour line to hard wheat bakery flour. During February 1999, production of bakery flour commenced at Huron and the Wheat Milling Defined Business Unit has attempted to grow its share of the bakery flour market in that region. Despite those efforts, volume from the Huron mill during the three months ended May 31, 1999 declined 25% compared to the same period of a year ago, with essentially the same fixed costs applied against the lower volume. In addition, during the three-month period ended May 31, 1999, the Wheat Milling Defined Business Unit received notification that two customers, with outstanding accounts receivable balances totaling approximately $1.1 million, had filed for bankruptcy. It is management's assessment that any recovery of this amount is unlikely, and therefore recognized a bad debt expense for the full amount due during the quarter ended May 31, 1999. The 26 balance of the decline in income is primarily attributable to a decline in average gross margins of approximately $0.33 per hundred-weight for all products, and increased marketing, administrative and interest expense. Processed grain sales for the three-month period ended May 31, 1999 of $44.5 million decreased $8.3 million (16%) compared to the same period in 1998. A reduction in the average sales price of $2.85 per hundred weight, partially offset by a 829,000 hundred weight volume increase resulted in the decline in sales revenue. Cost of goods sold of $43.4 million for the three months ended May 31, 1999 decreased $6.7 million (13%) compared to the same period in 1998. This decrease was due primarily to a $1.51 per bushel decline in the cost of raw material during the three months ended May 31, 1999, compared to that same period in 1998. This price variance was partially offset by an increase in volume of approximately 1.2 million bushels. The mill expense component of cost of goods sold increased approximately $1.6 million, of which approximately $1.0 million was incurred at the Mount Pocono mill, which commenced operations in January 1999. Marketing, general and administrative expenses of $3.6 million for the three months ended May 31, 1999 increased approximately $1.5 million (75%) compared to the same period in 1998. $1.1 million of this increase is attributable to the loss recognized on uncollectable accounts receivable. Interest expense of $1.5 million during the three months ended May 31, 1999 increased $1.3 million compared to the same period in 1998. During the three-month period ended May 31, 1998, the Wheat Milling Defined Business Unit received credit for cooperative bank patronage refunds received by Cenex Harvest States attributable to the Wheat Milling Defined Business Unit's borrowing which totaled approximately $0.6 million. The comparable amount received during the three months ended May 31, 1999 was $0.1 million. On June 1, 1997, the Company contributed $38.8 million of additional capital to the Wheat Milling Defined Business Unit for the purpose of constructing the Mount Pocono mill. Throughout the construction phase of this project, the unexpended balance of this cash contribution reduced borrowing requirements to finance inventories and receivables, and consequently reduced interest expense. As cash has been expended for Mount Pocono construction, additional borrowings have been required to finance working capital. The balance of the increase in interest expense during the three-month period ended May 31, 1999 compared to the same period ended in 1998 is primarily attributable to this activity. Other expenses of $0.2 million during the period ended on May 31, 1998 represents the recognition of a loss on certain equipment. An income tax benefit of $0.3 million for the three months ended May 31, 1999 is based upon an effective tax rate of 8.3% applied to the pretax operating loss of $3.9 million for the period. For the three months ended May 31, 1998, income tax expense of $0.1 million resulted in an effective tax rate of 5.7%. COMPARISON OF NINE MONTHS ENDED MAY 31, 1999 AND 1998 The Wheat Milling Defined Business Unit incurred a net loss of $6.9 million for the nine months ended May 31, 1999 compared to net income of $4.4 million for the same period in 1998, for a decrease of $11.3 million. Approximately $4.5 million of this decrease was due to a reduction in production at the Huron mill, where the conversion of a semolina flour line to a hard wheat bakery flour line reduced volumes by 30% compared to the same period in 1998, with essentially the same fixed costs applied against the lower volumes. The Huron conversion was operational in February 1999 and the Wheat Milling Defined Business Unit is currently attempting to grow its share of the bakery flour market from this mill's production. A general deterioration in gross margins of approximately $0.52 per hundred-weight for all products, along with increased marketing, administrative and interest expenses of $3.4 million caused the remaining decline in income. Processed grain sales for the nine-month period ended May 31, 1999 of $129.6 million decreased $31.3 million (19%) compared to the same period in 1998. A reduction in the average sales price of $2.79 per hundred weight, partially offset by a 1.2 million hundred weight volume increase resulted in the decline in sales revenue. 27 Cost of goods sold of $125.2 million for the nine months ended May 31, 1999 decreased by $23.9 million (16%) compared to the same period in 1998. This decrease was due primarily to a $1.47 per bushel decline in the cost of raw material during the nine months ended May 31, 1999, compared to the same period in 1998. This price variance was partially offset by an increase in volume of approximately 2,000,000 bushels and a $3.5 million increase in plant expenses, primarily attributable to the Mount Pocono mill which commenced operations in January 1999, the Houston mill, which was operating in a startup phase during much of the 1998 period, and Rush City, where 1999 volume exceeded 1998 volume by 23%. Marketing, general and administrative expenses of $8.3 million for the nine months ended May 31, 1999 increased approximately $1.8 million (28%) compared to the same period in 1998. $1.1 million of this increased expense is attributable to the recognition of uncollectable accounts receivable during the current three-month period. The balance of the increase is primarily related to additional administrative costs incurred at the new mill at Mount Pocono. Interest expense of $3.6 million during the nine months ended May 31, 1999 increased $1.6 million (76%) compared to the same period in 1998. During the nine-month period ended May 31, 1998, the Wheat Milling Defined Business Unit received credit for cooperative bank patronage refunds received by Cenex Harvest States attributable to the Wheat Milling Defined Business Unit's borrowing totaling approximately $0.6 million. The comparable amount received during the nine months ended May 31, 1999 was $0.1 million. On June 1, 1997, the Company contributed $38.8 million of additional capital to the Wheat Milling Defined Business Unit for the purpose of constructing the Mount Pocono mill. Throughout the construction phase of this project, the unexpended balance of this cash contribution reduced borrowing requirements to finance inventories and receivables, and consequently reduced interest expense. As cash has been expended for Mount Pocono construction, additional borrowings have been required to finance working capital. The balance of the increase in interest expense during the nine-month period ended May 31, 1999 compared to the same period ended in 1998 is primarily attributable to this activity. Other expenses of $0.2 million during the period ended on May 31, 1998 represents the recognition of loss on certain equipment. An income tax benefit of $0.6 million for the nine months ended May 31, 1999 is based upon an effective tax rate of 8.0% applied to the pretax operating loss of $7.5 million for the period. For the nine months ended May 31, 1998, income tax expense of $0.4 million resulted in an effective tax rate of 7.4%. LIQUIDITY AND CAPITAL RESOURCES The Wheat Milling Defined Business Unit's cash requirements relate primarily to capital improvements and a need to finance additional inventories and receivables based on increased raw material costs and levels. In September 1997, the Wheat Milling Defined Business Unit began construction of a mill at Mount Pocono, Pennsylvania. As committed in the registration statement for the original equity participation unit offering, this mill is to be financed with equity from the Company. The total anticipated cost of construction is $41.4 million, of which $37.7 million has been expended through May 31, 1999. This mill began partial operations during the second quarter of the current fiscal year. The Cenex Harvest States Cooperatives Board of Directors has authorized the purchase of land near Orlando, Florida as the site for a new mill. The Board has authorized expenditures up to $1.8 million for the cost of the land and an access road. The land was purchased during the second quarter of 1999 at a cost of approximately $1.2 million. Plans for this mill are subject to due diligence, routine regulatory review and cost verification. The total anticipated costs for this mill are approximately $35.0 million, and may be financed with debt, open member equity, additional equity participation units, or a combination of these financing alternatives. No determination has been made at this time as to when construction will commence. Commencement of operations at a particular facility involves increased working capital to fund required inventories and receivables related to increased sales. New facilities may not be immediately profitable, which would then have a negative impact on cash flows and, as a result, may require 28 additional financing. In addition, increased carrying value of inventories and receivables due to higher prices, increased receivables due to slow collections or increased inventories above historical levels require additional financing. CASH FLOWS FROM OPERATIONS Operating activities for the three months ended May 31, 1999 provided net cash of approximately $4.5 million. Non-cash expenses of $1.5 million and reduced working capital requirements of approximately $6.6 million offset the net loss of $3.6 million. For the same three-month period ended a year ago, net income of $1.7 million and non-cash expenses of $1.2 million were partially offset by increased working capital requirements of approximately $0.6 million, thereby providing cash from operating activities totaling approximately $2.3 million. Operating activities for the nine months ended May 31, 1999 provided net cash of approximately $5.2 million. Non-cash expenses of $4.1 million and reduced working capital requirements of approximately $8.0 million offset the net loss of $6.9 million for that period. For the same nine-month period ending in 1998, net income of $4.4 million and non-cash expenses of $3.7 million were partially offset by increased working capital requirements of $5.3 million, thereby providing net cash from operating activities of approximately $2.8 million. CASH FLOWS FROM INVESTING Cash expended for the acquisition of property, plant and equipment during the three-month periods ended May 31, 1999 and 1998, totaled approximately $1.9 million and $9.1 million, respectively. During the nine month periods ended May 31, 1999 and 1998, the Wheat Milling Defined Business Unit expended approximately $17.2 million and $18.0 million, respectively, for the acquisition of property, plant and equipment. Total expenditures for the acquisition of property, plant and equipment for the fiscal year ending August 31, 1999 are projected to be approximately $21.9 million, most of which is related to the construction of the Mount Pocono mill. CASH FLOWS FROM FINANCING The Wheat Milling Defined Business Unit's financing activities are coordinated through the Company's cash management department. Cash from all of the Company's operations is deposited with the Company's cash management department and disbursements are made centrally. As a result, the Wheat Milling Defined Business Unit has a zero cash position. Financing is available from the Company to the extent of the Company's working capital position and corporate loan agreements with various banks, and cash requirements of all other Company operations. Working capital requirements for each division and Defined Business Unit of the Company are reviewed on a periodic basis, and could potentially be restricted based upon management's evaluation of prevailing business conditions and availability of funds. Short-term debt outstanding and payable to the Company on May 31, 1999 was $45.6 million compared to $33.2 million and $16.7 million as of August 31, 1998 and May 31, 1998, respectively. This increase is primarily due to payments for Mount Pocono capital expenditures, for which the Company had contributed $38.8 million of capital to this account on June 1, 1997. On May 31, 1999 the Wheat Milling Defined Business Unit had long-term debt of $41.2 million which was incurred for the acquisition, expansion and construction of its various plants since 1990. The balance of such long-term debt was $48.5 million and $51.2 million as of August 31, 1998 and May 31, 1998 respectively. Approximately $10.0 million of the amount outstanding as of May 31, 1999 is payable within the next twelve months. 29 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT DESCRIPTION - ------- --------------------------------------------------------------------- 10.28 Employment Agreement between Cenex Harvest States and Noel Estenson 10.29 Employment Agreement between Cenex Harvest States and John D. Johnson 10.30 First Amendment to Credit Agreement (Term Loan), effective as of May 31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives 10.31 First Amendment to Credit Agreement (Revolving Loan), effective as of May 31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB, NationsBank, N.A. and St. Paul Bank for Cooperatives 10.32 Benefit Plan dated June 9, 1999 99 Cautionary Statement 27.1 Financial Data Schedule (EDGAR filing only) 27.2 Restated Financial Data Schedule due to the merger of Harvest States Cooperatives and Cenex, Inc. accounted for as a pooling of interests, and also the change in fiscal year end from May 31 to August 31 (EDGAR filing only) (b) Reports on Form 8-K Form 8-K filed May 7, 1999 referencing the press release issued to the public on May 6, 1999 relating to the discussions between Cenex Harvest States Cooperatives and Farmland Industries, Inc. for establishing a timetable and framework for the combination of the respective assets and business operations of each entity into a single entity. 30 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 Senior Vice-President--Chief Financial Officer July 13, 1999 - ---------------- John Schmitz 31 EX-10.28 2 EMPLOYMENT AGREEMENT EXHIBIT 10.28 EMPLOYMENT AGREEMENT This Employment Agreement is made effective as of June 1st, 1999 between Cenex Harvest States Cooperatives, a Minnesota cooperative corporation (together with all affiliates, the "Company") and Noel Estenson, who is presently the Chief Executive Officer of the Company, ("Executive"). WHEREAS; A. Executive is the principal officer of the Company and an integral part of its management. B. The Company is contemplating the possible full consolidation of its business with the business of Farmland Industries, Inc. ("Farmland") through a merger or other similar transaction (the "Consolidation") and desires to assure both itself and Executive of continuity in the event of the Consolidation. C. This Employment Agreement is intended to provide to Executive either a severance benefit in the event that his employment terminates under certain circumstances, as described herein, prior to December 31, 2000 or a transaction incentive payment if the Company successfully completes the Consolidation on or before December 31, 2000. NOW THEREFORE, it is hereby agreed by and between the parties as follows: 1. Employment. The Company hereby employs Executive and Executive hereby accepts employment with the Company, subject to the terms and conditions hereinafter provided. 2. Term. The employment of Executive hereunder will be for the period commencing on the effective date of this Agreement and ending on December 31, 2000, provided, however, that either party may terminate the employment relationship prior to the expiration date as hereinafter provided. In the event of the Consolidation, Executive hereby agrees to tender his written resignation effective December 31, 2000. 3. Position, Duties, Responsibilities. Executive shall be employed as the Chief Executive Officer or, in the event of the Consolidation, may be employed as a co-Chief Executive Officer of the Consolidated Company. Executive shall exercise such authority and perform such duties and services, consistent with such position, as may be assigned to him from time to time by the Board of Directors (the "Board"). 4. Devotion of Time and Best Efforts. Except for vacations and absences due to temporary illness, Executive shall devote his full time, best efforts and undivided -1- attention and energies during his employment to the performance of his duties and to advance the Company's interests, as determined by the Board. During his employment, Executive shall not, without the prior approval of the Board be engaged in any other business activity which conflicts with the duties of Executive hereunder, whether or not such business activity is pursued for gain, profit or other pecuniary advantage. 5. Early Termination. a. Death. Executive's employment shall terminate upon Executive's death. b. Termination by the Company. (1) Without Cause. The Company, by action of the Board, may terminate Executive's employment, at any time and for any reason whatsoever, without cause, effective upon delivery of written notice of termination to Executive. (2) For Cause. The Company, by action of the Board, may terminate the Executive's employment at any time for Cause, effective upon delivery of written notice of termination to Executive. If such termination by the Company is asserted to be for Cause, such termination notice shall state the grounds that the Board claims constitute Cause. As used herein, "Cause" shall mean (a) willful misconduct by Executive which is damaging or detrimental to the business and affairs of the Company, monetarily or otherwise, as determined by the Board in the exercise of its good faith business judgment; (b) a material breach of this Agreement by Executive, (c) chronic alcoholism or any other form of substance addiction on the part of Executive, (d) the commission by Executive of any act involving fraud or dishonesty or moral turpitude, (e) the indictment for, being bound over for trial following a preliminary hearing, or the conviction of Executive of any felony in either a state or federal court proceeding, or (f) willful refusal to implement policies promulgated by the Board. (3) Disability. The Company, by action of the Board, may terminate the Executive's employment if Executive sustains a disability which is serious enough that Executive is not able to perform the essential functions of Executive's job, with reasonable accommodations, as defined and required by applicable state and federal disability laws. Executive shall be presumed to have such a disability for purpose of this Agreement if Executive qualifies, because of illness or -2- incapacity, to begin receiving disability income insurance payments under the long-term disability income insurance policy that Company maintains for the benefit of Executive. If there is no such policy in effect at the date of Executive's potential disability, or if Executive does not qualify for such payments, Executive shall nevertheless be presumed to have such a disability if Executive is substantially incapable of performing Executive's duties for a period of more than twelve (12) weeks. c. Termination by Executive. (1) Voluntary Resignation. Executive may terminate the Employment Period and Executive's employment at any time and for any reason whatsoever, effective upon delivery of written notice of termination to the Company. (2) Good Reason Resignation. Executive may terminate the Employment Period and Executive's employment at any time for Good Reason, effective upon delivery of written notice of termination to the Company. If such termination by Executive is asserted to be for "Good Reason", such termination notice shall state the grounds that Executive claims constitute Good Reason. As used herein, "Good Reason" shall mean a material breach of this Agreement by the Company. A demotion such that Executive does not serve as the Chief Executive Officer, or Co-Chief Executive Officer of the Company shall constitute "Good Reason". 6. Compensation. a. Base Salary. During his employment, the Company shall pay Executive an initial "Base Salary" at the rate of Five Hundred Twenty Thousand Dollars ($520,000) per year, commencing on the effective date of this Agreement, payable in accordance with the Company's regular payroll practices and policies which are in effect from time to time. The Board shall annually review the amount of Base Salary and shall increase the amount of Base Salary for each year at a rate of not less than four percent (4%) per annum. Any such upward adjustment shall not require a written amendment to this Agreement and shall not affect any other provisions of this Agreement, which shall remain in effect unless changed by a written amendment to this Agreement or terminated by either party as provided herein. b. Annual Variable and Long-Term Incentive Compensation. During his employment, Executive shall be entitled to receive compensation under the annual Variable Compensation Plan and the Management Long-Term Incentive Plan, payable within the current customary time frame, which is -3- at least equal to amounts payable pursuant to the terms of the Executive Compensation Plan currently in effect for the Company. In calculating the amount of incentive compensation under the Executive Compensation Plan, it shall be assumed that the Company has met the projected earnings in the Cenex Long Range Business Plan in effect on January 1, 1998. In the event that either of these plans is discontinued or amended effective during his employment, and the amount of variable compensation due Executive under the replacement or amended plans is less than Executive would have received under the current plans, the Executive shall be entitled to receive the amount of variable compensation that would have been payable under the current plans. 7. Benefit Plans. a. General. During the Employment Period, Executive shall be eligible to participate in all executive compensation and employee benefit plans or programs generally applicable to senior management employees of the Company pursuant to the terms and conditions of such plans and programs. Nothing contained in this Agreement shall preclude the Company from terminating or amending any such plan or program. b. Qualified Plans. Executive shall be entitled to Company contributions and benefits with respect to Base Salary under the Company's qualified pension plans determined in the same manner as for other participants in those plans, subject to any contribution or benefit limitations. However, if such plans as in effect on the date of execution of this Agreement are modified in a manner, which will reduce future benefits under those plans for Executive, then, as a means to make up for those reductions, the Company shall establish a new nonqualified plan or amend an existing nonqualified plan which shall provide for any lost benefits under the Company's pension plan. c. Nonqualified Plans. (1) Deferred Compensation Plan. Executive shall continue to be eligible to participate in the Deferred Compensation Plan. If this plan should be amended or terminated prior to the end of the Employment Period, the terms of the plan will be maintained with respect to Executive, unless Executive agrees to accept the modified provisions of a revised plan or a new plan intended to replace the plan. (2) Supplemental Executive Retirement Plan. Executive will be entitled to benefits under this plan on terms no less favorable than those set forth in the restatement of the plan effective January 1, 1997; -4- however, if this plan should be amended or terminated prior to the completion of payments under it to Executive, the terms of the plan will be maintained with respect to Executive, unless Executive agrees to accept the modified provisions of a revised plan or a new plan intended to replace that restatement. 8. Post-Termination Payments by the Company. a. Terminations Without Cause or Resignation for Good Reason. In the event that Executive's employment is terminated prior to December 31, 2000 by the Company without Cause or by Executive for Good Reason, and the Executive signs (and does not rescind, as allowed by law) a Release of Claims in a form satisfactory to the Company which assures, among other things, that Executive will not commence any type of litigation or other claims as a result of the termination, and honors all of Executive's other obligations as required by this Agreement, the Company will continue to pay Executive all of the compensation provided for in Paragraph 6 of this Agreement as if he had remained employed through December 31, 2000. In addition, Executive will be entitled to a Severance Payment ("Severance Pay") in an amount equal to 2.99 x Executive's average annual income from the Company included in Executive's gross income for the five calendar years ending December 31, 1999. The Severance Pay shall be paid on or before January 31, 2001. In no event will the Severance Pay be of such magnitude as to cause Executive to incur an excise tax, and the Severance shall be reduced in such event to the extent necessary to avoid the incurring of excise tax. Severance Pay shall not be considered as income or compensation in determining Executive's benefits under any non-qualified benefit plan, including the Supplemental Executive Retirement Plan. In no event will Executive be entitled to both a Severance Pay and a Transaction Incentive. b. Termination For Cause, or Voluntary Resignation. If Executive's employment is terminated prior to December 31, 2000 by the Company for Cause or by Executive as a Voluntary Resignation, Executive shall be entitled only to his rights (a) to receive the unpaid portion of his Base Salary, prorated to the date of termination, (b) to receive reimbursement for any ordinary and reasonable business expenses for which he had not yet been reimbursed, (c) to receive payment for accrued and unused vacation days, (d) to receive his incentive compensation for each full or partial (on a pro rata basis) year during which he was employed, to the extent earned and accrued, pursuant to the terms and conditions of the applicable incentive compensation plan(s), (e) to receive payments under the Company's pension, profit sharing, deferred compensation or other benefit plans in which the Executive has participated, all to the extent and in -5- accordance with the terms of such plans, and (f) to continue certain health insurance at his expense pursuant to COBRA. c. Transaction Incentive. If the Company and Farmland complete the Consolidation prior to December 31, 2000 and Executive remains actively employed through December 31, 2000, Executive shall become entitled to an incentive payment of 2.99 x his average annual income from the Company includable in Executive's gross income for the five calendar years ending December 31, 1999 (the "Transaction Incentive"). In no event will the Transaction Incentive be of such magnitude as to cause Executive to incur an excise tax, and the Transaction Incentive shall be reduced in such event to the extent necessary to avoid the incurring of excise tax. In the event that Executive's employment is terminated by death or disability after the Consolidation, Executive or Executive's estate shall be paid the full Transaction Incentive. In the event that Executive's employment is terminated by death or disability prior to the Consolidation, Executive, Executive's estate or any beneficiary designated by Executive shall be entitled to a partial Transaction Incentive, prorated for the period of his employment between May 1, 1999 and the closing of the Consolidation. (For example, if Executive is terminated for one of these reasons on November 30, 1999 and the Consolidation occurs on June 1, 2000, Executive or Executive's estate would be entitled to 7/13 of Transaction Incentive.) The Transaction Incentive shall be paid on or before January 31, 2001. The Transaction Incentive shall not be considered as income or compensation in determining Executive's benefits under any non-qualified benefit plan, including the Supplemental Executive Retirement Plan. 9. Other Executive Obligations. Executive agrees that the following provisions will apply throughout Executive's period of active or inactive employment, and will continue to apply even if Executive's employment and the Employment Period are terminated under Paragraph 5, regardless of the reason for termination: a. Nondisclosure of Confidential Information. Except to the extent required in furtherance of the Company's business in connection with matters as to which Executive is involved as an employee, Executive will not, during the term of his employment and for an unlimited period thereafter, directly or indirectly: (1) disclose or furnish to, or discuss with, any other person or entity any confidential information concerning the Company or its business or employees, acquired during the period of his employment by the Company; (2) individually or in conjunction with any other person or entity, employ or cause to be employed, any such confidential information in any way whatsoever or (3) without the written consent of the Company, publish or deliver any copies, abstracts or summaries of any papers, documents, lists, plans, specifications or drawings containing any such confidential information. -6- b. Non-Interference. Executive will not, during the term of his employment and for an unlimited period thereafter, directly or indirectly attempt to encourage, induce or otherwise solicit any employee or other person or entity to breach any agreement with the Company or otherwise interfere with the advantageous business relationship of the Company with any person or entity. Executive specifically agrees not to solicit, on Executive's own behalf or on behalf of another, any of the Company's employees to resign from their employment with the Company in order to go to work elsewhere. Executive further specifically agrees not to make any disparaging remarks of any sort or otherwise communicate any disparaging remarks about the Company or any of its members, equity holders, directors, officers or employees, directly or indirectly, to any of the Company's employees, members, equity holders, directors, customers, vendors, competitors, or other people or entities with whom the Company has a business or employment relationship. c. Non-Competition. Executive agrees that during the term of his employment and thereafter for a period of two (2) years, Executive will not directly or indirectly engage in or carry on a business that is in direct competition with any significant business unit of the Company as conclusively determined by the Board of Directors. Further, Executive agrees that during this same period of time he will not act as an agent, representative, consultant, officer, director, independent contractor or employee of any entity or enterprise that is in direct competition with any significant business unit of the Company as conclusively determined by the Board of Directors. d. Consulting. Executive agrees to make himself generally available to the Company as needed for consulting, on terms to be separately agreed upon between the parties, through December 31, 2001. e. Cooperation in Claims. During the term of his employment and for an unlimited period thereafter, at the request of the Company, Executive will cooperate with the Company with respect to any claims or lawsuits by or against the Company where Executive has knowledge of the facts involved in such claims or lawsuits. Executive shall be entitled to reasonable compensation for Executive's time and expense in rendering such cooperation. Further, Executive will decline to voluntarily aid, assist or cooperate with any party who has claims or lawsuits against the Company, or with their attorneys or agents. The Company and Executive both acknowledge, however, that nothing in this paragraph shall prevent Executive from honestly testifying at an administrative hearing, arbitration, deposition or in court, in response to a lawful and properly served subpoena in a proceeding involving the Company. -7- f. Remedies. The parties recognize and agree that, because any breach by Executive of the provisions of this Paragraph 9 would result in damages difficult to ascertain, the Company shall be entitled to injunctive and other equitable relief to prevent a breach or threatened breach of the provisions of this Paragraph 9. Accordingly, the parties specifically agree that the Company shall be entitled to temporary and permanent injunctive relief to enforce the provisions of this Paragraph 9, that such relief may be granted without the necessity of proving actual damages. The parties further agree that the right to such relief shall be in lieu of any right to recover money damages for any such breach. g. Enforceability. Executive agrees that considering Executive's relationship with the Company, and given the terms of this Agreement, the restrictions and remedies set forth in Paragraph 9 are reasonable. Notwithstanding the foregoing, if any of the covenants set forth above shall be held to be invalid or unenforceable, the remaining parts thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts have not been included therein. In the event the provisions relating to time periods and/or areas of restriction shall be declared by a court of competent jurisdiction to exceed the maximum time periods or areas of restriction permitted by law, then such time periods and areas of restriction shall be amended to become and shall thereafter be the maximum periods and/or areas of restriction which said court deems reasonable and enforceable. Executive also agrees that the Company's action in not enforcing a particular breach of any part of Paragraph 9 will not prevent the Company from enforcing any other breaches that the Company discovers, and shall not operate as a waiver by the Company against any future enforcement of a breach. 10. Notices. Notices hereunder shall be in writing and shall be delivered personally or sent return receipt requested and postage prepaid, addressed as follows: If to Executive: Noel Estenson Cenex Harvest States Cooperatives 5500 CENEX Drive Inver Grove Heights, MN 55077 If to the Company: Chairman of the Board Cenex Harvest States Cooperatives 5500 CENEX Drive -8- Inver Grove Heights, MN 55077 With a Copy to: General Counsel Cenex Harvest States Cooperatives 5500 CENEX Drive Inver Grove Heights, MN 55077 11. Assignment. This Agreement is personal in its nature and the parties hereto shall not, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided, however, that the provisions hereof shall inure to the benefit of, and be binding upon each successor in a change of control of the Company, whether by merger, consolidation, transfer of all or substantially all assets, sale or otherwise (and such successor shall thereafter be deemed the "Company" for purposes of this Agreement). 12. Binding Agreement. The provisions of this Agreement shall be binding upon, and shall inure to the benefit of, the respective heirs, legal representatives and successors of the parties hereto. 13. Minnesota Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota, unless otherwise preempted by federal law. 14. Captions and Section Headings. Captions and paragraph headings used herein are for convenience only and are not a part of this Agreement and shall not be used in construing it. 15. Invalid Provisions. If any provision of this Agreement shall be unlawful, void, or for any reason unenforceable, it shall be deemed severable from, and shall in no way affect the validity or enforceability of, the remaining provisions of this Agreement. 16. Waiver of Breach. The failure to enforce at any time any of the provisions of this Agreement, or to require at any time performance by the other party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement or any part hereof or the right of either party thereafter to enforce each and every provision in accordance with the terms of this Agreement. 17. Entire Agreement. Except as provided in paragraph 9(d), this Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, representations and understandings of the parties with respect thereto. No modification or amendment -9- of any of the provisions of this Agreement shall be effective unless in writing specifically referring hereto and signed by Executive and a member of the Board upon authorization of the Board to do so. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. EXECUTIVE CENEX HARVEST STATES COOPERATIVES By: /s/ Noel K. Estenson By: /s/ Elroy Webster --------------------------------- ---------------------------------- Noel K. Estenson Office of the Chair By: /s/ Gerald Kuster ---------------------------------- Office of the Chair -10- EX-10.29 3 EMPLOYMENT AGREEMENT EXHIBIT 10.29 EMPLOYMENT AGREEMENT THIS AGREEMENT is made effective as of June 16, 1999 by and between John D. Johnson (hereafter "Johnson") and Cenex Harvest States Cooperatives, a Minnesota cooperative corporation (together with all affiliates, the "Company"). WHEREAS, Johnson is an integral part of the Company's management; and WHEREAS, the Company is contemplating the possible full consolidation of its business with the business of Farmland Industries, Inc. through a merger or other similar transaction (the "Consolidation") and desires to assure both itself and Johnson of continuity in the event of the Consolidation; NOW, THEREFORE, it is hereby agreed to by and between the parties as follows: 1. Employment The Company hereby agrees to and does hereby employ Johnson as President and General Manager, and Johnson hereby agrees to accept employment with the Company as President and General Manager, for the period set forth in Paragraph 2 below (the period of employment) upon the other terms and conditions set forth in this Agreement. It is understood that the Company or its successor may appoint Johnson to a different position, and that Johnson may accept such a position, subject to the other terms and conditions set forth in this Agreement. 2. Period of Employment; Termination of Agreement The period of employment shall commence on the date of this Agreement and, subject to the provisions of Paragraphs 5 and 6 below, shall continue for a rolling three (3) year period, provided that Johnson's employment may be earlier terminated by either party subject to the rights and obligations of the parties set forth herein. 3. Performance Throughout the period of employment, Johnson agrees to devote his full time and attention during normal business hours to the business of the Company, except for earned vacations and except for illness or incapacity. 4. Compensation (a) For all services to be rendered by Johnson in any capacity during the period of employment, Johnson shall be paid as annual compensation a base salary of at least $575,000. The Board will annually review Johnson's annual compensation and 1 determine what is appropriate for a cost of living increase, merit increase, and/or increase in responsibilities or duties. (b) During the term of his employment hereunder, Johnson shall be eligible to participate in all of the Company's variable pay programs. Johnson shall further be entitled to any additional employee benefits separately made available to him from time to time by the Board in its discretion. (c) The Company shall bear such ordinary and necessary business expenses incurred by Johnson in performing his duties hereunder as the Company determines from time to time, provided that Johnson accounts promptly for such expenses to the Company in the manner prescribed from time to time by the Company. 5. Termination with Severance Allowance (a) Termination by the Company Not for Cause. In the event of termination of the employment of Johnson by the Company during the period of employment for any reason other than for cause, as defined in paragraph 6(a), death or disability, the Company shall: (i) pay Johnson a severance allowance in the amount of 2.99 times the greater of (A) his then-current base salary plus short-term and long-term target bonus ("Target Bonus"), or (B) the amount payable in base salary plus Target Bonus for calendar year 1999; (ii) continue his family health insurance for one (1) year; (iii) continue his family health insurance thereafter up to age 65 (or any revised age for Medicare eligibility), upon Johnson's payment of the retiree premium rate, except for any period during which Johnson is eligible for coverage, without any exclusions for preexisting conditions, through another employee group plan; and (iv) continue his existing executive perquisites for a period of three (3) years. Said severance allowance shall be in lieu of all other severance payable to Johnson under Company severance policies. (b) Termination by Johnson if the Consolidation is closed on or before December 31, 2000. If the Consolidation is closed on or before December 31, 2000; and if (i) Johnson is not offered the position of Chief Executive Officer of the Company or its successor on or before June 1, 2001, or (ii) the Company or its successor names 2 someone other than Johnson as its new Chief Executive Officer; and if Johnson thereafter resigns his employment on or before June 1, 2002, the Company shall: (i) pay Johnson a severance allowance in the amount of 1.99 times the greater of (A) his then-current base salary plus Target Bonus, or (B) the amount payable in base salary plus Target Bonus for calendar year 1999; (ii) continue his family health insurance for one (1) year; (iii) continue his family health insurance thereafter up to age 65 (or any revised age for Medicare eligibility), upon Johnson's payment of the retiree premium rate, except for any period during which Johnson is eligible for coverage, without any exclusions for preexisting conditions, through another employee group plan; and (iv) continue his existing executive perquisites for a period of two (2) years. Said severance allowance shall be in lieu of all other severance payable to Johnson under Company severance policies. (c) Termination by Johnson if the Consolidation is not closed on or before December 31, 2000. If the Consolidation is not closed on or before December 31, 2000 and Johnson is not offered the position of Chief Executive Officer of the Company on or before December 31, 2000, this shall be deemed an event of termination without cause. In that event, the Company shall: (i) pay Johnson a severance allowance in the amount of 2.99 times the greater of (A) his then-current base salary plus Target Bonus, or (B) the amount payable in base salary plus Target Bonus for calendar year 1999; (ii) continue his family health insurance for one (1) year; (iii) continue his family health insurance thereafter up to age 65 (or any revised age for Medicare eligibility), upon Johnson's payment of the retiree premium rate, except for any period during which Johnson is eligible for coverage, without any exclusions for preexisting conditions, through another employee group plan; and (iv) continue his existing executive perquisites for a period of three (3) years. 3 Said severance allowance shall be in lieu of all other severance payable to Johnson under Company severance policies. (d) Additional Payments. In the event that Johnson becomes entitled to payments under paragraph 5(a), 5(b), or 5(c) of this Agreement, the Company shall cause its independent auditors promptly to review, at the Company's sole expense, the applicability of Section 4999 of the Code to such payments. If such auditors shall determine that any payment or distribution of any type by the Company to Johnson or for his benefit, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the "Total Payments"), would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), then Johnson shall be entitled to receive an additional cash payment (a "Gross-Up Payment") within 30 days of such determination equal to an amount such that after payment by Johnson of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Johnson would retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. For purposes of the foregoing determination, Johnson's tax rate shall be deemed to be the highest statutory marginal state and Federal tax rate (on a combined basis) (including Johnson's share of F.I.C.A. and Medicare taxes) then in effect. If no determination by the Company's auditors is made prior to the time a tax return reflecting the Total Payments is required to be filed by Johnson, he will be entitled to receive a Gross-Up Payment calculated on the basis of the Total Payments reported by Johnson in such tax return, within 30 days of the filing of such tax return. In all events, if any tax authority determines that a greater Excise Tax should be imposed upon the Total Payments than is determined by the Company's independent auditors or reflected in Johnson's tax return pursuant to this Section 6, Johnson shall be entitled to receive the full Gross-Up Payment calculated on the basis of the amount of Excise Tax determined to be payable by such tax authority from the Company within 30 days of such determination. (e) Request and Release. In order to obtain the severance allowance provided for in this Agreement, Johnson must submit a request for severance and must sign a complete release of all claims. The Company shall have no obligation to pay any severance allowance unless and until Johnson shall have submitted the request for severance and signed a full and complete release of all claims, to be drafted by Legal Counsel for the Company. 6. Termination without Severance Allowance (a) Termination by the Company for Cause. The Company may terminate Johnson's employment for cause without incurring further obligation. For the purpose of this Agreement, termination of Johnson's employment shall be deemed to have been for cause only: 4 (i) if termination of Johnson's employment shall have been the result of an act or acts of fraud, theft or embezzlement on the part of Johnson which, if convicted, would constitute a felony and which results or which is intended to result directly or indirectly in gain or personal enrichment of Johnson at the expense of the Company; or (ii) if termination of Johnson's employment results from Johnson's willful and material misconduct, including willful and material failure to perform his duties, and Johnson has been given written notice by the Board of Directors with respect to such and Johnson does not cure within a reasonable time; or (iii) if there has been a breach by Johnson during the period of employment of the provisions of Paragraph 3 above, relating to the time to be devoted to the affairs of the Company, and with respect to any alleged breach of Paragraph 3 hereof, Johnson shall have substantially failed to remedy such alleged breach within thirty days from Johnson's receipt of notice from the Board of Directors. (b) Nonrenewal of Agreement. Except as otherwise provided in paragraph 5(b) and/or 5(c) above, the Company may elect not to renew this Agreement, and thereby to terminate Johnson's employment hereunder without any severance obligations, upon at least three (3) years' prior written notice to Johnson. (c) Termination by Johnson. Johnson shall have the right to terminate his employment in his sole discretion, with or without cause, by providing thirty (30) days notice of his intent to resign. Except as otherwise provided in paragraph 5(b) and/or 5(c) above, Johnson shall in that event receive no further compensation or severance allowance. (d) Death. In the event of Johnson's death during the period of employment, the legal representative of Johnson shall be entitled to the base or fixed salary provided for in Paragraph 4(a) above for the month in which death shall have occurred, at the rate being paid at the time of death, and the period of employment shall be deemed to have ended as of the close of business on the last day of the month in which death shall have occurred but without prejudice to any benefits, such as life insurance, otherwise due in respect of Johnson's death. (e) Disability (i) In the event of Johnson's disability during the period of employment, Johnson shall be entitled to an amount equal to the base or fixed salary provided for in Paragraph 4(a) above, at the rate being paid at the time of the commencement of disability, for the period of such disability but not in 5 excess of twelve (12) months from the beginning of the period that establishes such disability, as described in Paragraph 6(e)(iii) below. (ii) The amount of any payments due under Paragraph 6(e)(i) shall be reduced by any payments to which Johnson may be entitled for the same period because of disability under any disability or pension plan of the Company or of any division, subsidiary, or affiliate thereof, or as the result of workers' compensation or nonoccupational disability payments received from any government entity. (iii) The term "Disability" as used in this Agreement, shall mean an illness or accident occurring during the period of employment which prevents Johnson from performing the essential functions of his job under this Agreement, with reasonable accommodations (as defined by federal and Minnesota disability laws), for a period of six consecutive months. The period of employment shall be deemed to have ended as of the close of business on the last day of such six-month period but without prejudice to any payments due Johnson from any disability policy or disability insurance. 7. Transaction Incentive If the Company and Farmland Industries, Inc. complete the Consolidation prior to December 31, 2000, and Johnson has not by then resigned or been terminated for cause, Johnson shall become entitled to a Transaction Incentive payment in the amount of his base salary plus Target Bonus for calendar year 1999. In the event that Johnson's employment is terminated by death or disability after the Consolidation, Johnson or his estate shall be paid the full Transaction Incentive. In the event that Johnson's employment is terminated by death or disability prior to the Consolidation, Johnson, his estate or any beneficiary designated by Johnson shall be entitled to a partial Transaction Incentive, prorated for the period of his employment between May 1, 1999 and the closing of the Consolidation. (For example, if Johnson is terminated for one of these reasons on November 30, 1999 and the Consolidation occurs on June 1, 2000, Johnson or his estate would be entitled to 7/13 of Transaction Incentive.) The Transaction Incentive shall be paid on or before January 31, 2001. 8. Noncompetition Executive agrees that during the term of his employment and thereafter for a period of two (2) years, Executive will not directly or indirectly engage in or carry on a business that is in direct competition with any significant business unit of the Company as conclusively determined by the Board of Directors. Further, Executive agrees that during this same period of time he will not act as an agent, representative, consultant, officer, director, independent contractor or employee of any entity or enterprise that is in direct competition with any significant business unit of the Company as conclusively determined by the Board of Directors. If Johnson's employment with the Company terminates 6 pursuant to paragraph 5(b), the foregoing restrictions shall extend only for a period of one (1) year thereafter. 9. Successor in Interest This Agreement and the rights and obligations hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, and shall also bind and inure to the benefit of any successor of the Company by merger or consolidation or any purchaser or assignee of all or substantially all of its assets, but, except to any such successor, purchaser, or assignee of the Company, neither this Agreement nor any rights or benefits hereunder may be assigned by either party hereto. 10. Construction Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11. Governing Laws This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota. 12. Notices Any notice required or permitted to be given under this Agreement shall be sufficient if in writing, sent by Certified Mail, Return Receipt Requested: If to Johnson: John D. Johnson 10 Echo Lake Blvd. Mahtomedi, MN 55115 If to the Company: Chairman of the Board Cenex Harvest States Cooperatives 5500 CENEX Drive Inver Grove Heights, MN 55077 With a copy to: General Counsel Cenex Harvest States Cooperatives 5500 CENEX Drive Inver Grove Heights, MN 55077 13. Entire Agreement 7 This Agreement shall constitute the entire agreement between the parties, superseding all prior agreements, and may not be modified or amended and no waiver shall be effective unless by written document signed by the Chairman of the Board and Johnson. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above. CENEX HARVEST STATES COOPERATIVES /s/ John D. Johnson By: /s/ Noel K. Estenson - ------------------------------------- ---------------------------------- John D. Johnson Its: Chief Executive Officer --------------------------------- 8 EX-10.30 4 FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.30 FIRST AMENDMENT TO CREDIT AGREEMENT (TERM LOAN) THIS FIRST AMENDMENT TO CREDIT AGREEMENT (Term Loan) ("AMENDMENT AGREEMENT") is made as of the Effective Date by and among Cenex Harvest States Cooperatives, a Minnesota cooperative corporation ("BORROWER"), CoBank, ACB ("COBANK") as Co-Lead Arranger (f./k/a Co-Syndication Agent), and as the Administrative Agent for the benefit of the present and future Syndication Parties (in that capacity "ADMINISTRATIVE AGENT"), St. Paul Bank for Cooperatives ("ST. PAUL BANK"), as Co-Lead Arranger (f./k/a Co-Syndication Agent), and the Syndication Parties signatory hereto, including CoBank and St. Paul Bank is such capacity (each a "SYNDICATION PARTY" and collectively, the "SYNDICATION PARTIES"). RECITALS A. Borrower, CoBank, St. Paul Bank, and the Syndication Parties entered into a Credit Agreement (Term Loan) ("CREDIT AGREEMENT") dated as of June 1, 1998. B. The parties hereto desire to amend the Credit Agreement to change the Administrative Agent from St. Paul Bank to CoBank and to otherwise 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 Each reference in the Credit Agreement, including references in the introductory paragraph on page 1 thereof, in Subsection 1.144, and on certain signature pages, to the "Co-Syndication Agents" or to a "Co-Syndication Agent" shall be changed to a reference to the "Co-Lead Arrangers" or to a "Co-Lead Arranger". 2.2 The amount of the Fin-Ag, Inc. loan exception set forth in Section 10.6(d) is increased from $50,000,000 to $60,000,000. 2.3 Subsection 14.4.2 is amended in its entirety to read as provided below in Section 3.4 of this Amendment Agreement. 3. RESIGNATION AND REPLACEMENT OF ADMINISTRATIVE AGENT. 3.1 As of the Effective Date St. Paul Bank hereby resigns its position as Administrative Agent under the Credit Agreement. 3.2 The Syndication Parties, acting unanimously, and the Borrower hereby waive the requirements of Section 13.21 of the Credit Agreement that the Administrative Agent must provide at least sixty (60) days' prior written notice of its intention to resign from such position, and they hereby accept St. Paul Bank's resignation. 3.3 The Syndication Parties hereby unanimously appoint CoBank to serve as Successor Agent commencing as of the Effective Date, and CoBank hereby accepts such appointment as contemplated by, and subject to the provisions of, Section 13.21 of the Credit Agreement. 3.4 In accordance with Section 13.21 of the Credit Agreement, CoBank hereby advises Borrower of the information required by Subsection 14.4.2 of the Credit Agreement, as follows: 14.4.2 ADMINISTRATIVE AGENT: CoBank, ACB 5500 S. Quebec Street Englewood, CO 80111 FAX: 303/694-5830 Attention: Mary Lee Dennis 4. BORROWER'S REPRESENTATIONS. Borrower hereby represents and warrants that, after giving effect to this Amendment Agreement and the transactions contemplated hereby, no 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 31, 1999 ("EFFECTIVE DATE"), so long as on or before that date the Administrative Agent receives an original copy of this Amendment Agreement (or original counterparts thereof) duly executed by each party hereto. Upon the satisfaction of all conditions precedent hereto, the Administrative Agent will notify each party hereto in writing and will provide copies of all documentation in connection herewith. 6. 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. 2 7. GENERAL PROVISIONS. 7.1 Borrower agrees to execute such additional documents as the Administrative Agent may require, including, without limitation, restated promissory notes, to carry out or evidence the purposes of this Amendment Agreement. 7.2 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 herein, 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. 8. GOVERNING LAW. This Amendment Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 9. 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. IN WITNESS WHEREOF, the parties hereto have caused this First 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: /s/ T. F. Baker ------------------------------------- Name: T. F. Baker Title: Executive Vice President Finance and Administration 3 ADMINISTRATIVE AGENT: COBANK, ACB By: /s/ Greg Somerhalder ------------------------------------- Name: Greg Somerhalder Title: Vice President SYNDICATION PARTIES: COBANK, ACB By: /s/ Greg Somerhalder -------------------------------------- Name: Greg Somerhalder Title: Vice President Contact Name: Greg Somerhalder Title: Vice President Address: 245 North Waco Wichita, KS 67202 Phone No.: 316/290-2052 Fax No.: 316/290-2006 Payment Instructions: CoBank, ACB ABA No.: 307088754 Acct. Name: CoBank, ACB Account No.: 22274433 Attn: Marshall Allen Reference: Cenex Harvest States 4 ST. PAUL BANK FOR COOPERATIVES By: /s/ Jeff Swanhorst -------------------------------------- Name: Jeff Swanhorst Title: Associate Vice President Contact Name: Jeff Swanhorst Title: Associate Vice President Address: 375 Jackson Street St. Paul, MN 55101-1849 Phone No.: 612/282-8205 Fax No.: 612/282-8249 Payment Instructions: St. Paul Bank for Cooperatives ABA No.: 296090471 Acct. Name: Cenex Harvest States Account No.: 271998 Reference: Scott Malm EX-10.31 5 FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.31 FIRST AMENDMENT TO CREDIT AGREEMENT (REVOLVING LOAN) THIS FIRST AMENDMENT TO CREDIT AGREEMENT (Revolving Loan) ("AMENDMENT AGREEMENT") is made as of the Effective Date by and among Cenex Harvest States Cooperatives, a Minnesota cooperative corporation ("BORROWER"), CoBank, ACB ("COBANK") as Co-Lead Arranger (f/k/a Co-Syndication Agent), as the Bid Agent, and as the Administrative Agent for the benefit of the present and future Syndication Parties (in that capacity "ADMINISTRATIVE AGENT"), NationsBank, N. A. ("NATIONSBANK"), as Co-Lead Arranger, St. Paul Bank for Cooperatives ("ST. PAUL BANK"), as former Co-Syndication Agent, and the Syndication Parties signatory hereto, including CoBank, NationsBank, and St. Paul Bank in such capacity, (each a "SYNDICATION PARTY" and collectively, the "SYNDICATION PARTIES"). RECITALS A. Borrower, CoBank, St. Paul Bank, and certain of the present Syndication Parties entered into a Credit Agreement (Revolving Loan) ("CREDIT AGREEMENT") dated as of June 1, 1998. The Credit Agreement provided for a 364-Day Facility and a 5-Year Facility. B. 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. C. All of the Syndication Parties have provided the Administrative Agent with written notice of their agreement to renew their respective Individual 364-Day Commitments at the previous amounts (with the exception of St. Paul Bank for Cooperatives, which has agreed to renew in the reduced 364-Day Individual Commitment amount of $23,333,333.33). D. The Bank of Nova Scotia, which was not originally a Syndication Party, has agreed to become a Syndication Party with an Individual 364 Day Commitment of $20,000,000.00. E. The parties hereto desire to amend the Credit Agreement to renew the 364-Day Facility and to otherwise 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. RENEWAL OF INDIVIDUAL 364-DAY COMMITMENTS. The Syndication Parties hereby agree to renew their respective Individual 364-Day Commitments in the amounts set forth beneath their names and signatures on the signature pages 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 Each reference in the Credit Agreement, including references in the introductory paragraph on page 1 thereof, in Subsection 1.144, and on certain signature pages, to the "Co-Syndication Agents" or to a "Co-Syndication Agent" shall be changed to a reference to the "Co-Lead Arrangers" or to a "Co-Lead Arranger", and NationsBank, N.A. shall replace St. Paul Bank for Cooperatives as a Co-Lead Arranger and shall function as such along with CoBank, ACB. 3.2 Subsection 1.156 shall be amended in its entirety to read as follows: 1.156 364-DAY MATURITY DATE: May 25, 2000. 3.3 Subpart (e) of Section 4.3 shall be amended in its entirety to read as follows: (e) the proposed maturity dates for such Bid Advances ("BID MATURITY DATE") which must be Banking Days and which must not extend (i) more than 30 days beyond the 364-Day Maturity Date or (ii) beyond the 5-Year Maturity Date, as applicable. 3.4 A new Section 4.11 shall be added reading as follows: 4.11 364-DAY FACILITY BID RATE LOANS - BID MATURITY DATE BEYOND 364-DAY MATURITY DATE. Notwithstanding any other provision in this Credit Agreement that may be construed to the contrary, in the event that a Syndication Party, at its sole discretion, makes a 364-Day Bid Advance to Borrower with a Bid Maturity Date later than the 364-Day Maturity Date; and (a) the 364-Day Maturity Date is subsequently extended by amendment to this Credit Agreement; and (b) such Syndication Party does not renew its Individual 364-Day Commitment at a level at least equal to the outstanding amount of such 364-Day Advance, then, in each such case, such outstanding amount will be repaid by Borrower, and accepted by such Syndication Party, on the 364-Day Maturity Date (as in effect prior to such extension thereof) without any liability for Funding Losses on such amount. 3.5 The 364-Day Facility Fee as set forth in Section 6.5.1 shall be increased from 2 0.10% of the Aggregate 364-Day Commitment in effect on the date of such calculation to 0.20% of the Aggregate 364-Day Commitment in effect on the date of such calculation. 3.6 The reference in Section 6.6 to "52.5 basis points" shall be changed to "100 basis points". 3.7 The amount of the Fin-Ag, Inc. loan exception set forth in Section 13.6(d) is increased from $50,000,000 to $60,000,000. 3.8 Subsection 17.4.2 shall be amended in its entirety to read as follows: 17.4.2 ADMINISTRATIVE AGENT: CoBank, ACB 5500 S. Quebec Street Englewood, CO 80111 FAX: 303/694-5830 Attention: Mary Lee Dennis 3.9 Schedule 1 is replaced in its entirety by Schedule 1 attached hereto. 3.10 Schedule 2 is replaced in its entirety by Schedule 2 attached hereto. 4. EFFECTIVE DATE. This Amendment Agreement shall become effective on May 28, 1999 ("EFFECTIVE DATE"), so long as on or before that date the Administrative Agent receives an original copy of (a) this Amendment Agreement (or original counterparts thereof) duly executed by each party hereto, (b) each required Syndication Acquisition Agreement, and (c) each required replacement Promissory Note. Upon the satisfaction of all conditions precedent hereto, the Administrative Agent will notify each party hereto in writing and will provide copies of all 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 Borrower agrees to execute such additional documents as the Administrative Agent may require, including, without limitation, restated promissory notes, to carry out or evidence the purposes of this Amendment Agreement. 6.2 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 herein, and each other Loan 3 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. IN WITNESS WHEREOF, the parties hereto have caused this First 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: /s/ T. F. Baker ------------------------------------- Name: T. F. Baker Title: Executive Vice President Finance and Administration ADMINISTRATIVE AGENT, BID AGENT, AND CO-LEAD ARRANGER: COBANK, ACB By: /s/ Greg Somerhalder ------------------------------------- Name: Greg Somerhalder Title: Vice President CO-LEAD ARRANGER: NATIONSBANK, N.A. By: /s/ Tom F. Scharfenberg ------------------------------------- Name: Tom F. Scharfenberg ----------------------------------- Title: S.V.P. ---------------------------------- 4 SYNDICATION PARTIES: COBANK, ACB By: /s/ Greg Somerhalder ------------------------------------- Name: Greg Somerhalder Title: Vice President Contact Name: Greg Somerhalder Title: Vice President Address: 245 North Waco Wichita, KS 67202 Phone No.: 316/290-2052 Fax No.: 316/290-2006 Individual 364-Day Commitment: $96,666,666.64 Payment Instructions: CoBank, ACB ABA No.: 307088754 Acct. Name: CoBank, ACB Account No.: 22274433 Attn: Marshall Allen Reference: Cenex Harvest States 5 SYNDICATION PARTIES: ST. PAUL BANK FOR COOPERATIVES By: /s/ Jeff Swanhorst ------------------------------------- Name: Jeff Swanhorst Title: Vice President Contact Name: Jeff Swanhorst Title: Vice President Address: 375 Jackson Street St. Paul, MN 55101-1849 Phone No.: 612/282-8205 Fax No.: 612/282-8249 Individual 364-Day Commitment: $23,333,333.33 Payment Instructions: St. Paul Bank for Cooperatives ABA No.: 296090471 Acct. Name: Cenex Harvest States Account No.: 271998 Reference: Scott Malm 6 SYNDICATION PARTIES: CARIPLO-CASSA DI RISPARMIO DELLE PROVINCIE LOMBARDE SPA By: /s/ Anthony F. Giobbi ------------------------------------- Name: Anthony F. Giobbi ----------------------------------- Title: F.V.P ---------------------------------- By: /s/ Maria Elena Greene ------------------------------------- Name: Maria Elena Greene ----------------------------------- Title: A.V.P. ---------------------------------- Contact Name: Anthony Giobbi Title: First Vice President Address: 10 East 53rd Street, 36th Floor New York, NY 10022 Phone No.: 212/527-8737 Fax No.: 212/527-8777 Individual 364-Day Commitment: $16,666,666.67 Payment Instructions: Citibank - New York ABA - 021000089 For account of Cariplo - New York Account No.: 36022295 Attn: M. Greene Ref: Cenex Harvest States Cooperatives 7 SYNDICATION PARTIES: CREDIT AGRICOLE INDOSUEZ By: /s/ illegible ------------------------------------- Name: illegible ----------------------------------- Title: First Vice President & Deputy Chief Credit Officer - USA ---------------------------------- By: /s/ Theodore D. Tice ------------------------------------- Name: Theodore D. Tice ----------------------------------- Title: Senior Relationship Manager ---------------------------------- 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: $33,333,333.33 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 8 SYNDICATION PARTIES: SUNTRUST BANK, ATLANTA By: /s/ Michel A. Odermatt ------------------------------------- Name: Michel A. Odermatt ----------------------------------- Title: Vice President ---------------------------------- By: /s/ F. Steven Parrish ------------------------------------- Name: F. Steven Parrish ----------------------------------- Title: Vice President ---------------------------------- Contact Name: Michel A. Odermatt Title: Vice President Address: 303 Peachtree Street N.E. Third Floor Atlanta, GA 30308 Phone No.: 404/532-0232 Fax No.: 404/230-5305 Individual 364-Day Commitment: $16,666,666.67 Payment Instructions: SunTrust Bank, Atlanta ABA - 061000104 Acct. Name: Corporate Banking Operations General Ledger Account Account No.: 9088000112 Ref: Cenex Harvest States Cooperatives 9 SYNDICATION PARTIES: BANQUE NATIONALE DE PARIS By: /s/ Arnaud Collin du Bocage ------------------------------------- Name: Arnaud Collin du Bocage ----------------------------------- Title: Executive Vice President and General Manager ---------------------------------- Contact Name: Cathleen F. Schaede Title: Assistant Vice President Address: 209 South LaSalle Street Chicago, IL 60604 Phone No.: 312/977-1383 Fax No.: 312/977-1380 Individual 364-Day Commitment: $26,666,666.67 Payment Instructions: Banque Nationale de Paris - New York ABA - 0260-0768-9 Acct. Name: Banque Nationale de Paris - Chicago Account No.: 14119400189 10 SYNDICATION PARTIES: COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. "RABOBANK NEDERLAND", NEW YORK BRANCH By: /s/ Ian Reece ------------------------------------- Name: Ian Reece ----------------------------------- Title: Senior Credit Officer ---------------------------------- By: /s/ Michiel V.M. Van Der Voort ------------------------------------- Name: Michiel V.M. Van Der Voort ----------------------------------- Title: Vice President ---------------------------------- Contact Name: David Nelson Title: Vice President Address: 300 South Wacker Drive Suite 3500 Chicago, IL 60606 Phone No.: 312/408-8207 Fax No.: 312/408-8240 Individual 364-Day Commitment: $26,666,666.67 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: Debra Rivers Ref: Cenex Harvest States 11 SYNDICATION PARTIES: THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH By: /s/ Jeffrey R. Arnold ------------------------------------- Name: Jeffrey R. Arnold ----------------------------------- Title: Vice President and Manager ---------------------------------- Contact Name: Jeffrey R. Arnold Title: Assistant Vice President Address: 90 South Seventh Street 5100 Norwest Center Minneapolis, MN 55402 Phone No.: 612/333-0505 Fax No.: 612/333-3735 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: $16,666,666.67 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 12 SYNDICATION PARTIES: NATIONSBANK, N.A. By: /s/ Tom F. Scharfenberg ------------------------------------- Name: Tom F. Scharfenberg ----------------------------------- Title: Managing Director ---------------------------------- Contact Name: Laurie Haugh Title: Associate Vice President Address: 231 South La Salle Street Chicago, IL 60697 Phone No.: 312/828-2256 Fax No.: 312/987-1276 Individual 364-Day Commitment: $63,333,333.34 Payment Instructions: NationsBank, N.A. ABA - 11100012 A/C #: 1292000883 Acct. Name: Corporate Loans Attention: Lenor Manhard Ref: Cenex Harvest States 13 SYNDICATION PARTIES: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: /s/ Ann C. Pifer ------------------------------------- Name: Ann C. Pifer ----------------------------------- Title: Vice President ---------------------------------- Contact Name: Anne C. Pifer Title: Vice President Address: Sixth and Marquette Minneapolis, MN 55479-0085 Phone No.: 612/667-2893 Fax No.: 612/667-4145 Individual 364-Day Commitment: $16,666,666.67 Payment Instructions: Norwest Bank Minnesota ABA - 091000019 Acct. Name: Commercial Loan Clearing Account Account No.: 840165 Ref: Cenex Harvest States 14 SYNDICATION PARTIES: DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, AG, CAYMAN ISLAND BRANCH By: /s/ Mark K. Connelly ------------------------------------- Name: Mark K. Connelly ----------------------------------- Title: Vice President ---------------------------------- By: /s/ Lynne McCarthy ------------------------------------- Name: Lynne McCarthy ----------------------------------- Title: Asst. Vice President ---------------------------------- 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: $26,666,666.67 Payment Instructions: (1) DG Bank via Chips System DG Bank ABA #845 (2) Federal Reserve Bank of New York Routing/Account # 026008455 15 SYNDICATION PARTIES: U.S. BANK NATIONAL ASSOCIATION By: /s/ Thomas W. Cherry ------------------------------------- Name: Thomas W. Cherry ----------------------------------- Title: ---------------------------------- Contact Name: Thomas W. Cherry Title: Vice President Address: 601 Second Avenue South Minneapolis, MN 55402-4302 Phone No.: 612/973-0555 Fax No.: 612/973-0825 Individual 364-Day Commitment: $16,666,666.67 Payment Instructions: U.S. Bank National Association ABA - 091000022 Acct. Name: Commercial Loans Account No.: 30000472160600 Attn: Karen Johnson Ref: Cenex Harvest States Cooperatives 16 SYNDICATION PARTIES: THE BANK OF NOVA SCOTIA By: /s/ F.C.H. Ashby ------------------------------------- Name: F.C.H. Ashby ----------------------------------- Title: Senior Manager Loan Operations ---------------------------------- Contact Name: Vicki Gibson Title: Address: 600 Peachtree Street Atlanta, GA 30308 Phone No.: 404/877-1557 Fax No.: 404/888-8998 Individual 364-Day Commitment: $20,000,000.00 Payment Instructions: The Bank of Nova Scotia ABA - 026002532 Acct. Name: Atlanta Agency Account No.: 0606634 Attn: Chicago Team Ref: Cenex Harvest States 17 SCHEDULE 1 TO CREDIT AGREEMENT SYNDICATION PARTIES AND INDIVIDUAL COMMITMENTS - -------------------------------------------------------------------------------- SYNDICATION PARTY INDIVIDUAL INDIVIDUAL NAME/ADDRESS 364-DAY COMMITMENT 5-YEAR COMMITMENT - -------------------------------------------------------------------------------- CoBank, ACB $96,666,666.64 $48,333,333.36 245 North Waco St. Wichita, Kansas 67202 - -------------------------------------------------------------------------------- St. Paul Bank for Cooperatives $23,333,333.33 $21,666,666.67 375 Jackson St. St. Paul, MN 55101-1849 - -------------------------------------------------------------------------------- NationsBank, N.A. $63,333,333.34 $31,666,666.66 231 South LaSalle Street Chicago, IL 60697 - -------------------------------------------------------------------------------- Banque Nationale de Paris, Chicago Branch $26,666,666.67 $13,333,333.33 209 S. LaSalle Street, Fifth Floor Chicago, IL 60604 - -------------------------------------------------------------------------------- Cariplo Bank $16,666,666.67 $8,333,333.33 190 South LaSalle Street, Suite 2890 Chicago, IL 60603 - -------------------------------------------------------------------------------- Credit Agricole Indosuez $33,333,333.33 $16,666,666.67 55 East Monroe Street, Suite 4700 Chicago, IL 60603 - -------------------------------------------------------------------------------- Deutsche Genossenschaftsbank $26,666,666.67 $13,333,333.33 609 Fifth Avenue New York, NY 10017-1021 - -------------------------------------------------------------------------------- Norwest Bank Minnesota, N.A. $16,666,666.67 $8,333,333.33 Sixth and Marquette Minneapolis, MN 55479-0085 - -------------------------------------------------------------------------------- Rabobank Nederland, Chicago Branch $26,666,666.67 $13,333,333.33 300 South Wacker Drive, Suite 3500 Chicago, IL 60606 - -------------------------------------------------------------------------------- SunTrust Bank, Atlanta $16,666,666.67 $8,333,333.33 303 Peachtree Street N.E., 3rd Floor Atlanta, GA 30308 - -------------------------------------------------------------------------------- The Bank of Tokyo - Mitsubishi, Ltd. $16,666,666.67 $8,333,333.33 5100 Norwest Center 90 South Seventh Street Minneapolis, MN 55402-4122 - -------------------------------------------------------------------------------- U.S. Bank National Association $16,666,666.67 $8,333,333.33 MPFP 0607 601 Second Avenue South Minneapolis, MN 55402-4302 - -------------------------------------------------------------------------------- The Bank of Nova Scotia $20,000,000.00 -0- 600 Peachtree Street Atlanta, GA 30308 - -------------------------------------------------------------------------------- SCHEDULE 2 TO CREDIT AGREEMENT APPLICABLE MARGINS The determination of the Applicable Margin will be made effective 5 Banking Days after the Administrative Agent receives quarterly financial statements from the Borrower; however, no adjustments will be made to the LIBO Rate applicable to LIBO Rate Loans then outstanding until the end of their then current LIBO Period.
- --------------------------------------------------------------------------------------------- RATIO OF CONSOLIDATED 364-DAY MARGIN 5-YEAR MARGIN FUNDED DEBT TO CASH FLOW - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Less than or equal to 1.00 50.0 basis points 20 basis points - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Greater than 1.00 Less than or equal to 1.50 62.5 basis points 25 basis points - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Greater than 1.50 Less than or equal to 2.00 75.0 basis points 30 basis points - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Greater than 2.00 Less than or equal to 2.50 87.5 basis points 35 basis points - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Greater than 2.50 100.0 basis points 50 basis points - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
EX-10.32 6 BENEFIT PLAN EXHIBIT 10.32 BENEFIT PLAN JUNE 9, 1999 Certain management employees are eligible to participate in a plan providing an opportunity to receive a bonus based on Annual Compensation (base and target bonus) if the unification of Cenex Harvest States and Farmland takes place prior to 12/31/00. The plan requires continued employment through the date of unification. The plan also provides a severance arrangement tied to Annual Compensation if employment is terminated under certain circumstances, within two years after the unification. EX-99 7 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, forecast, 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 substitution of commodities. The current monetary crises in Asia have impacted, and are expected to continue to impact, exports of U.S. agricultural products. Demand may also be affected by changes in eating habits, by population growth and increased or decreased per capita consumption of some products. The Freedom to Farm Act of 1996, enacted in April of 1996, may affect crop production in several ways. The Act more narrowly defines what will qualify as environmentally sensitive acreage for purposes of the conservation reduction program, with the result that 3 to 4 million acres may be put back into agricultural production in the future from a present enrollment of 36.4 million acres. The Act also removes restrictions on the type of crops planted (other than fruit and vegetables), allowing farmers to plant crops having favorable prices and thereby increasing the production of those crops. Increased production may lower prices of certain crops but increase the amount available for export. However, the Act also reduces Export Enhancement Program subsidies, which may adversely affect the ability of 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. 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 inventory and purchase contracts at a fixed or partially fixed price, in the event market prices decrease. The Company is also exposed to risk of loss on its fixed price or partially fixed price sales contracts in the event market prices increase. To reduce the price change risks associated with holding fixed price positions, the Company generally takes opposite and offsetting positions by entering into 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 grain and 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. 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. Competitors are adding new plants and expanding capacity of existing plants. Media newsletters and other publications indicate that new crush plants and refinery operations are being constructed or under strong consideration. The Company estimates that U.S. crushing capacity has increased by about 30% to 35% between 1994 and 1998. 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. MILLING BUSINESS COMPETITIVE TRENDS. Certain major 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. YEAR 2000. Although the Company's management believes that the Company has in place an effective program to address the Year 2000 issue in a timely manner, it also recognizes that failure to sufficiently resolve all aspects of the Year 2000 issue in a timely fashion presents substantial risks for the Company, including disruption of normal business processes and additional costs or loss of revenue. Considerable work remains to be accomplished and unforeseen difficulties could arise which might adversely affect the Company's ability to complete its program on schedule. Furthermore, there is no guarantee that the systems of other companies on which this Company's relies will be remediated in a timely fashion to avoid having a material adverse effect on the Company's operations or its financial results. 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. 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. EX-27.1 8 FINANCIAL DATA SCHEDULE
5 9-MOS AUG-31-1999 MAY-31-1999 44,759,579 0 689,534,981 23,244,410 513,814,855 1,323,768,319 1,724,097,716 768,030,025 2,761,628,721 1,034,512,878 655,908,616 0 0 0 1,118,253,180 2,761,628,721 4,839,773,940 4,929,948,668 4,717,476,840 0 0 2,028,918 31,480,982 60,954,908 5,375,000 55,579,908 0 0 0 55,579,908 0 0
EX-27.2 9 RESTATED FINANCIAL DATA SCHEDULE
5 9-MOS AUG-31-1998 MAY-31-1998 83,531,702 0 564,737,263 24,187,392 523,019,559 1,207,732,602 1,601,762,789 708,231,731 2,543,962,336 979,779,768 468,247,804 0 0 0 1,058,266,381 2,543,962,336 6,275,301,705 6,393,272,534 6,127,149,472 0 0 3,073,910 28,498,897 128,299,352 13,865,000 114,434,352 0 0 0 114,434,352 0 0
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